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cap-and-trade mechanism
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Side-by-side diagrams compare command-and-control and cap-and-trade approaches to pollution control. The left shows both Plant A and Plant B each reducing emissions by 50 tons, resulting in higher total costs. The right shows cap-and-trade, where Plant A reduces emissions by 75 tons and Plant B by 25 tons, with Plant B paying Plant A for extra reductions, leading to lower overall costs. Emission levels, reduction amounts, and costs are labeled for both methods.
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cap-and-trade mechanism

environmental policy
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Side-by-side diagrams compare command-and-control and cap-and-trade approaches to pollution control. The left shows both Plant A and Plant B each reducing emissions by 50 tons, resulting in higher total costs. The right shows cap-and-trade, where Plant A reduces emissions by 75 tons and Plant B by 25 tons, with Plant B paying Plant A for extra reductions, leading to lower overall costs. Emission levels, reduction amounts, and costs are labeled for both methods.
emissions trading How emissions trading works

Assume two emitting plants, A and B. Each plant emits 100 tons of pollutants (for a total emission of 200 tons), and the requirement is that these emissions be cut in half, for an overall reduction of 100 tons.

(Left) In a traditional command-and-control system, each plant might be required to reduce by 50 percent, or 50 tons, to meet the overall reduction of 100 tons. Plant A might be able to reduce at only $100 a ton, for a total expenditure of $5,000. Plant B might have to spend $200 a ton, for a total of $10,000. The cost for both plants to reach the overall reduction of 100 tons would therefore be $15,000.

(Right) In a cap-and-trade system, each plant might be given allowances for only half its previous emissions. Plant A, where reduction costs only $100 a ton, might be able to reduce emissions to as little as 25 tons, leaving it with unused allowances for 25 tons of pollutants that it is not emitting. Plant B, where reduction costs $200 a ton, might find it less costly to reduce to only 75 tons and then buy Plant A's unused allowances, effectively paying Plant A to make the 25 tons of reductions that Plant B cannot afford. The overall reduction of 100 tons would still be reached but at a lower overall cost ($12,500) than under the command-and-control system.

A cap-and-trade mechanism is an environmental policy that limits the total amount of a specific pollutant, such as carbon emissions, that can be released. Companies are given a certain number of allowances, and they can buy or sell these allowances to each other.12

This system creates a market for emissions, encouraging polluters to find the most cost-effective ways to reduce their output. If a company can reduce its emissions below its allowance, it can sell the unused allowances to another company that needs more. This approach has been used successfully to control pollutants like sulfur dioxide, which causes acid rain, and is now being applied to manage greenhouse gas emissions. The goal is to achieve environmental targets efficiently by making pollution a financial consideration.23

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3 Britannica Sources
  1. cap-and-trade
  2. emissions trading
  3. environmental policy

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