The concept of emissions trading is straightforward: Government sets a total cap on emissions of a pollutant from a group of sources such as power plants or factories.
Each source then gets emission "allowances" to cover most of its current emissions. Each allowance typically is worth one ton of emissions. Some emissions allowances retained by the government agency can be auctioned instead of given away.
During each compliance period, a source must hold enough emissions allowances to equal its actual emissions. If a source needs additional allowances to "cover" its actual emissions, it must acquire them from another source. Conversely, if a source can reduce its emissions below its allowances, it can trade the extras to other sources.
The following is a case study of how the system worked to the gain of the active players and incidental beneficiaries. The example also illustrates how quickly businesses internalize the concepts of emissions trading and identify market opportunities that might never be realized under strict command-and-control regulation.
The previous study is just one example of emissions trading working where the program is grounded on accountability, accuracy of measurement and monitoring, and strict enforcement.
Contact: Megan Susman, Center for Innovation & the Environment, Progressive Policy Institute. Tel: 202-546-4482; E-mail: firstname.lastname@example.org