Making Cap-and-Trade Work: Lessons from the European Union Experience

Abstract

With a new administration in Washington and a new consensus that carbon dioxide emissions are causing catastrophic climate change, it is becoming clear that the United States will soon adopt some form of market-based regulation scheme. Though many would argue that the United States should have instituted a regulatory scheme years ago, the country will reap one distinct advantage from having a late start: the ability to learn from the European Union's ambitious efforts to tackle the problem of industrial carbon emissions for nearly five years. There are many ways that governments and other regulating bodies can regulate and control industrial carbon emissions, but two of the main methods are the traditional “command and control” strategy in which government sets unwavering limits on how much carbon each business can emit, and a system of “tradable emissions permits”—sometimes called cap and trade—in which a government sets an emissions limit, or cap, for each business or industry and issues permits that correspond to the allowed emissions amounts. Businesses within the system can buy and sell emissions permits to each other, enabling those who need and can afford to emit more carbon to do so without the overall limit being exceeded.