Reply #6: Cap & Trade vs Command & Control [View All]

[XemaSab]

Cap and trade regulation can theoretically be an effective way of fighting pollution.

Under the cap and trade system, the government sets a total amount of pollution (such as sulfur dioxide, which causes acid rain) that can be released in a management area, or in the whole country. They then issue a set number of pollution "credits" that can be bought by industries or by citizens. The credits are basically a license to release a certain amount of pollution. Credits are usually purchased for the year.

These credits are traded in a market and are subject to market forces, so their price can fluctuate according to supply and demand.

If it's cheaper for a factory to clean up their smokestack then buy a credit, they'll clean up their smokestack, but if it's cheaper to buy a credit, then they'll continue to pollute. If a factory doesn't have the credits but keeps polluting, then they'll get fined more than what it would have cost to buy the credits to pollute.

Sometimes, after a set amount of time, the government comes in and removes some of the credits from the market, so where there was a government limit of 100,000 tons, there's now a limit of 90,000 tons and some of the credits are no longer in play.

The cost of the remaining credits then rises, because the demand for the remaining credits is greater.

Again, if it's cheaper for a factory to stop polluting than to buy credits, they'll do so, and if it's cheaper to buy credits, they'll do that.

If you tell *every* factory to cut pollution by 10%, then that's the "command and control" system, versus the "cap and trade" of the pollution credits system.

The idea behind it is that if you use market forces to clean up the cheapest smokestacks to fix, you can achieve the same amount of reduction in pollution overall than if you had gone in and told every factory to reduce pollution by 10%, only cheaper.

The beauty of "cap and trade" is that citizens can also bid for the credits. Each credit not sold to industry equals less pollution in the environment.

So it's not a totally bogus idea.

http://www.epa.gov/airmarkets/trading/buying.html