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What is the Story of Cap & Trade ?

What is the story of Cap and Trade?

It all started with the Kyoto Protocol in 1997, where worldwide nations gathered together to agree on limits and following actions aimed at reducing greenhouse gas (GHG) emissions. The so-called “ Cap and Trade “ scheme was also proposed and now tends to be associated with the carbon trading systems.  Put in brief, it was believed that the Cap and Trade mechanism could be the winning solution to fight climate change and reduce CO2 emissions. More than 20 years after the Kyoto Protocol, more and more economists have started doubting the efficiency of the Cap and Trade system, arguing that it doesn’t solve the problem, it just slows down the final climate disaster.

On your side, now you may ask yourself: so why was it thought to be valuable and how does it work?

Let’s put it simply: The “ Cape and Trade “ scheme consists of two main parts:

  • the cap → which is the maximum amount of emissions that can be produced. The objective is to stay under the desired cap number, no matter who emits GHGs, where and how. The only key matter is to stay below the cap, which usually is set on a government level and agreed upon globally. The cap decreases yearly.

  • the trade → It functions as every exchange market we know nowadays. Companies are given permits that allow them to emit a certain amount of GHGS/year. These permits are released by governmental authorities and may vary depending on the sector. If company 1 emits less GHGs than the ones it was accredited with, company 1 can sell the extra credits to Company 2, which emitted more GHGs than allowed. This way, the GHGs emission will be balanced between the two companies and the set cap can still be respected.

The outcome is straightforward: even if there are companies that keep polluting more and companies that clearly put the effort into reducing GHG emissions, as long as the cap is respected, we all smile and there will be no climate disasters!

As of now, many institutions believe that this could lead to a false sense of progress as the Cap and Trade system could be evaluated as controversial.

Why the more a company pollutes the more credits it is assigned? Shouldn’t it be the opposite?

These questions may rise as there are still some unclear criteria on how to manage the Cap and Trade system. Actors at multiple levels have started analyzing more in-depth who should set the cap, to what extent permits can be given for free and if there should be a maximum of exchanged credits per company.

Aside from this Cap and Trade system, multiple other options are under analysis, examples are the Clean Development Mechanism (CDM) and the Joint Implementation. In both cases, the key component is still a credit-based system. Even the Cap and Trade’s ideator itself has mentioned that this shouldn’t be the only approach and that potentially a Carbon Tax could have a more significant result.

Regardless of the type of trading system that is put in place, the most discussed topics refer to which countries or industries should be charged with more responsibilities and consequently, increased effort.

Have you ever heard of the Ecological Debt?

The Ecological Debt refers to the exceeding consumption and waste of resources that each country is producing, meaning that the bigger the debt is the more unsustainable a country’s production has been in the years that went by.

Ideologically, we all equally have a fair share of Earth’s resources. However, as history can prove, the richest countries have exploited the s.c. third world, impacting differently the consequent emission of GHGs. The raised problem is that not all countries emit the same amount of GHGs and thus, it would be unfair to require the same commitment and effort from all of them. 

Underdeveloped countries, with volatile economies and unsafe governments, tend to be exploited by the richest countries, which try not to bring unsafe conditions to their own environment (extractions, polluted waste, …). Indeed, the richest countries will still look clean.

To sum up, many policies that are in place now do not lead to an equally divided Earth’s ecological debt. On top, it’s argued that carbon trading systems like Cap and Trade, firstly adopted in California, it’s keeping creating a bigger and bigger gap between rich and poor countries, ending up in an unfair scheme. 

What’s your take on Carbon Trading Systems?
Is it a concept that has potential and should be reviewed or a whole new approach should be adopted instead?


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