Back to Basics: Climate Legislation Vocab

This week's climate fact

Posted: 28-May-2008; Updated: 29-May-2008

Policymakers, businesses, and non-profit organizations have embraced "cap and trade" as the best way to address global warming because, unlike command and control, cap and trade allows the market to find the cheapest solutions while guaranteeing the environmental goal of the program.¹

Below are some key terms to know.

Cap - A cap is a mandatory limit on greenhouse gas emissions - the emissions of CO₂ and other gases that cause global warming. The cap is the single most important aspect of climate policy. From an environmental point of view, the cap will ensure that the U.S. achieves the emissions reductions necessary to avoid the worst consequences of global warming. From an economic point of view, the cap will create a market for greenhouse gas pollution that will drive investment in clean technology development and spark innovation. The cap is typically expressed as emission reduction "targets" and "timetables."

Trade - Some companies are likely to find they can cut emissions cheaply, while for others it may prove more expensive. Trading - the ability for companies to sell allowances if they reduce emissions more than they need to or to buy allowances if they cannot reduce their emissions cheaply - provides flexibility and is key to keeping compliance costs low.

Allowances - An "allowance" is essentially a permit to emit one ton of CO₂ (or an equivalent amount of another greenhouse gas). To maintain the cap, the government creates a limited number of allowances each year. Emitters (like utilities, oil and gas companies, and large manufacturers) are required to monitor their emissions and present enough allowances to account for their total emissions at the end of each compliance period.

Free allocation - Once the government creates allowances, it must make them available to regulated entities. One way is to give them to emitters free of charge. This is how Congress distributed allowances under the capand- trade program it established for acid rain. Free allocation can reduce compliance costs for companies or buffer competitive pressures that could result if other countries are slow to cut emissions themselves.

Auction - Another way the government can distribute allowances is to sell them at auction. Auction revenues, which could total $50 - $300 billion annually, according to a CBO report², could fund research and development in clean technologies, assist workers and low-income families, and fulfill other public purposes.

Offsets - Some sources of greenhouse gas emissions may not be covered by the cap. To encourage emission reductions wherever they may be found, climate policy could allow emitters to purchase offsets - verified emission reductions from sources outside the cap - and use them for compliance. For example, a utility could pay a farmer to adopt conservation tillage methods, which helps the soil hold more carbon, or to capture methane emissions from livestock. Offsets can be environmentally effective because what matters to the climate isn't the source of emissions, only that emissions are reduced.