How cap and trade works

Cap and trade reduces emissions, such as those from power plants, by setting a limit on pollution and creating a market.

Cap and trade is a powerful approach to reducing pollution in our atmosphere.

It's our best shot, environmentally and economically, for curbing emissions that drive global warming.

The cap on greenhouse gas emissions is a limit backed by science. Companies pay penalties if they exceed the cap, which gets stricter over time.

The trade part is a market for companies to buy and sell allowances that permit them to emit only a certain amount. Trading gives companies a strong incentive to save money by cutting emissions.

Caps limit harmful emissions

The government sets the cap across a given industry, or ideally the whole economy. It also decides the penalties for violations.

Carbon dioxide and related pollutants that drive global warming are main targets of such caps. Other pollutants that contribute to smog can also be capped.

In carbon dioxide's case, the heat-trapping greenhouse gas mixes into the upper atmosphere and has a global effect. Reducing emissions locally lowers levels around the world.

Companies are allowed to emit set amounts

The total amount of the cap is split into allowances, each permitting a company to emit one ton of emissions. (You'd have to drive 2,400 miles, roughly the distance between New York and Las Vegas, to emit that much carbon dioxide.)

The government distributes the allowances to the companies, either for free or through an auction.

The cap typically declines over time, providing a growing incentive to become more and more efficient.

Trade gets results at the lowest cost

Companies that cut their pollution faster can sell allowances to companies that pollute more, or "bank" them for future use.

This market – the "trade" part of cap and trade – gives companies flexibility. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation.

Cap and trade lets the market find the cheapest way to cut emissions.

Nat Keohane
Nathaniel Keohane, Vice President, Global Climate

Because there are only so many allowances available, total pollution drops as the cap falls.

As companies use established techniques to lower emissions, such as adopting energy-efficient technology, entrepreneurs see opportunity.

Where cap and trade works – and doesn't

sign warning of mercury contamination

Joey Rozier / Flickr

Some pollutants, such as mercury, are not well-suited for cap and trade, in part because of the health risks they pose.

Ever wonder why you don't hear about acid rain anymore? Thank cap and trade, which slashed levels of sulfur dioxide to solve the problem – at a fraction of the projected cost.

Cap and trade makes sense for pollutants that spread out into the atmosphere, such as sulfur dioxide and carbon dioxide.

It doesn't make sense for toxins like mercury, which lingers where it's emitted and leads to poisonous concentrations locally.

Cap and trade is lowering emissions globally

Governments around the world have adopted or are seriously considering cap and trade.

In the United States, California is pioneering its own system, which has led to a steady decline of the state's carbon dioxide pollution in the last 10 years.

The state's efforts include a cap-and-trade program – which EDF has helped design and implement – that launched in 2013. From that launch to 2015, California's emissions from sources under the cap declined 4 percent.

Through the European Union's Emissions Trading System, capped emissions in the European Union were 15 percent lower in 2015 than when the program started in 2005.

Pilot programs in China, which have included elements of cap and trade, now cover more than 2,600 companies in regions with a population of more than 258 million people.

China, the world's largest greenhouse gas emitter, launched a national emission trading system in 2017 with help from EDF, based on the lessons learned from those pilots.