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What is Cap and Trade?

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USA, Florida, Industrial smokestacks
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Question: What is Cap and Trade?
Answer: “Cap and trade” is a term that describes a market-based approach to pollution control. The idea behind cap-and-trade systems is to steadily and cost-effectively reduce widespread pollution or greenhouse-gas emissions, by creating not only regulatory requirements but also economic incentives for large-scale polluters to cut their emissions.

How Does the “Cap” in Cap-and-Trade Systems Work?
A carbon cap-and-trade system would place strict emission limits on every company or power plant that releases large volumes of carbon dioxide into the atmosphere. Such businesses would need an emissions permit, or allowance, for every ton of carbon dioxide it emits. Over time, the limits would become more restrictive, allowing less pollution at every stage until the ultimate goal is achieved.

How Does the “Trade” in Cap-and-Trade Systems Work?
Some companies will find it easier and less expensive to reduce their emissions below their required limits. The “trade” part of cap-and-trade allows more efficient companies, which release less carbon dioxide than their allowance, to sell their extra emissions permits to companies that have a harder time coming in below their limits.

Cap-and-trade systems are designed to reduce overall emissions by rewarding the most efficient companies and providing less efficient companies with incentives to work toward greater efficiency over time, while ensuring that nationwide emission limits can be met at the lowest economic cost.

How Cap-and-Trade Systems Can Benefit the Public
In addition to reducing pollution or greenhouse-gas emissions that contribute to global warming, many cap-and-trade proposals call for the federal government to auction emission permits to companies that are required to reduce their emissions, which would create an ongoing revenue stream worth billions of dollars. The federal revenue generated by the cap-and-trade system could be used to finance social services, economic development and environmental initiatives, and to help communities cope with the effects of climate change.

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