Cap and Trade ....

CAP & TRADE = LESS CO2

The term cap and trade describes a set of environmental laws and regulations that aim to reduce greenhouse gasses and other pollutants. They combine a “cap” on emissions with the ability to “trade” emissions permits.

The idea is to give companies a certain amount of flexibility: You can invest in new, energy-efficient technology, and you won’t get fined for exceeding the cap. Or, you can buy permits on the open market and keep right on emitting as much as you want.

A Cap and Trade system is a market-based policy tool usually used by a state or central government to reduce the overall carbon dioxide or other greenhouse gas emissions. It is one of two major market-based options to lower emissions, the other being a carbon tax. In a cap and trade system a central authority sets a limit, or a cap, on the overall amount of pollutants that are allowed to emit in one certain area and allocates permits representing the right to emit a specific amount of pollutants to companies. Companies then can trade permits on a created market. Over time, the limit or the cap becomes stricter, allowing less and less pollutions, until the final reduction goal is met.

The development of the concept can be divided into four phases:

1. Gestation: Theoretical articulation of the instrument by Coase, Dales, Montgomery etc and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency (EPA).
2. Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.
3. Prototype: Launching of a first "cap and trade" system as part of US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network building effort to bring together environmental and industrial interests in the US.
4. Regime Formation: branching out from US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the "carbon industry".

Alternative energy companies (solar, wind) are the obvious picks to benefit from cap and trade if you believe that their products will be more attractive as pollutants from traditionalsources (oil, coal, natural gas) become more costly. But the whole solar thing depends heavily on the cost of alternatives. The dollar per watt of a solar panel has to make economic sense to individuals and larger users. And cap and trade won’t necessarily affect the price of oil and coal.

The technology that utilities, for example, may use to clean their emissions to slide under the cap probably won’t have anything to do with solar. The big engineering firms could get some contracts out of this. And if the utilities become more efficient at producing power, they’ll use less coal, for example, and the price could come down.

How about the big, consolidated oil companies? Cap and trade is tougher to analyze there. Under the plans being discussed, the government will hand out permits to companies that produce the emissions, but not evenly. Utilities will get more of them; the oil companies, much less. Each company will be affected differently because of its different operations and the different sources of oil. Companies whose operations are concentrated in the U.S. will likely be hit hardest by the regulations.

More Information on EPA Website Here