What's Cap-and-Trade?

Cap-and-trade programs aim to limit the amount of carbon dioxide, which is a greenhouse gas that contributes to man-made global warming, that factories and power plants release.
CREDIT: sh0dan | sxc.hu

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In 1995, the Intergovernmental Panel on Climate Change (IPCC) recommended that global climate change driven by pollutants and heat-trapping gases in the atmosphere, including carbon dioxide, could be monitored and decreased using strict emissions policies and financial restrictions. This recommendation evolved into what we now know as "cap-and-trade."

Carbon dioxide, which is released by vehicles, power plants, factories and other sources , is a greenhouse gas that greatly contributes to man-made global warming. Also known as emissions trading, cap-and-trade sets a limit that's the "cap" part on how much carbon industries can release into the atmosphere. Not everyone will reach that cap, though, and this is where the "trade" comes in: The proposed legislation would allow companies that didn't hit that maximum level to trade "pollution credits" to industries that exceeded it. Each credit, also known as a permit, entitles a power plant or factory to emit one ton of carbon dioxide.

Similar systems have seen some success in the U.S. In 1990, the Acid Rain Program of the United States Environmental Protection Agency's (EPA) Clean Air Act, a system of selling and regulating pollutant levels that works similarly to cap-and-trade, helped reduce the acid rain problem in the U.S.

Setting the cap and figuring out the number of credits that industry should hold, however, are tied up in both economics and politics. In 2007, the U.S. Supreme Court decided to allow the EPA to regulate carbon as a pollutant under the Clean Air Act. The EPA is planning to do so by beginning to regulate the greenhouse gases emitted by power plants and oil refineries early next year.

Despite strong opposition to such jurisdiction, on the grounds that cap-and-trade will stall economic growth, the bill, called the American Clean Energy and Security Act, narrowly passed in June 2009. However, with the 2010 midterm elections radically changing the balance of power, a stronger Republican presence in the House of Representatives may prevent the EPA from moving ahead with cap-and-trade.

President Barack Obama, who was previously a strong supporter of cap-and-trade, has begun to look into designing pollution-control programs that are more Republican-friendly after the bill didn't make it through the Senate earlier this year.

"Cap-and-trade was just one way of skinning the cat; it was not the only way," Obama said during a news conference in Washington, D.C., on Nov. 3, 2010. "One of the things that's very important for me is not to have us ignore the science, but rather to find ways that we can solve these problems that don't hurt the economy, that encourage the development of clean energy in this country, that, in fact, may give us opportunities to create entire new industries and create jobs."

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