Credit: Craig Miller

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California recently implemented a cap-and-trade program in order to cut carbon emissions. Would a carbon tax be better or worse? What do you think about cap-and-trade? How can companies be best regulated to reduce greenhouse gas pollution?

Introduction

Since the Industrial Revolution, there has been a substantial increase in carbon dioxide emissions in the U.S. and countries around the world. The increase is due to human activities, namely the burning of fossil fuels for energy and transportation, industry processes and land-use changes. The additional carbon dioxide (and other greenhouse gases) in the atmosphere trap heat and cause the Earth's surface temperatures to rise, also known as the greenhouse effect. To combat climate change, scientists have said that we need to cut our greenhouse gas emissions.

Last month, California launched its cap-and-trade program. In this program, the government sets a limit on the total amount of allowable carbon emissions from businesses, refineries, manufacturers and power plants. This limit will decline 2-3% each year. Major emitters of greenhouse gases must get permits, known as allowances, for each ton of carbon they emit. Initially, businesses receive most of the allowances from the state for free. Over time, the state also auctions allowances to the highest bidders. As the overall cap on emissions is lowered each year, businesses must continue to obtain allowances equal to their emissions. They can buy unused emission allowances from other companies, or they can sell emission allowances that they may have leftover. So, a company that isn't ready to cut its carbon emissions enough to meet its allowance can buy emissions from other companies that can reduce their emissions.

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