Marketplace Whiteboard®

How a ‘Cap and Trade’ system will work

Sarah Gardner May 20, 2009
Marketplace Whiteboard®

How a ‘Cap and Trade’ system will work

Sarah Gardner May 20, 2009


Kai Ryssdal: Democratic leaders in the House have been promising a vote on climate change legislation by the end of the week. According to a Reuters poll out today, they’ve got enough votes to get the package to the floor anyway. If it does pass — and if it makes it by the Senate — the bill would gradually cut greenhouse gas emissions over the next decade or so. The centerpiece of the whole thing is a business model, really, that’s known as cap and trade. It’s a term we hear all the time, but one that doesn’t make much sense without some explanation. So Sarah Gardner’s here from the Marketplace Sustainability Desk to help us understand. Hey Sarah.


Ryssdal: All right, let’s start with the beginning of this thing, the cap part. What is being capped under cap and trade?

GARDNER: Well the idea is to reduce the amount of carbon dioxide we put out into the atmosphere. So, Congress would cap or limit the total amount of greenhouse gas emissions every year.

Ryssdal: All right, and trade?

GARDNER: The trade part. What’s traded are the rights to emit those greenhouse gases under the legal limits.

Ryssdal: OK, how do you trade a right, though? You can trade oil, you can trade stocks, trading a right, I don’t get it.

GARDNER: Ok, well, you can think of that right as say a license to pollute. And then you just turn that license into a tradeable commodity, like you said, just like oil or pork bellies. And major polluters will receive some of these carbon permits for free, but they’ll also have to buy some of them at auction. So they’ll have these permits in hand and then they’ll be able to start trading them. They’ll trade them depending on their emissions needs from year to year.

Ryssdal: What’s the point though of trading them?

GARDNER: Instead of a top-down government mandate, the idea is to let the market work and find the cheapest, most efficient way to get to these reductions. Here’s how it might work. Say you’ve got Joe’s Power and Light Company. And Joe has a fairly new coal-fired power plant, and he needs to run it full-steam. He needs more carbon permits.

Ryssdal: Because he needs to pollute more.

GARDNER: That’s right. He needs to find them on the market. He can then go to the market and buy more carbon permits from say Sam’s Power and Light, because Sam is perhaps already investing in solar, he’s emitting less, and he has permits to spare.

Ryssdal: What’s the incentive, though, for polluters to eventually clean things up?

GARDNER: OK, this is key. The emissions cap is going to get tighter and tighter as the years go on. There are fewer in circulation, supply shrinks and theoretically these permits are getting more expensive. If you’re still out there polluting like crazy, it’s going to take a lot of money to keep that up. So there’s your incentive to clean up your act.

Ryssdal: You know, we are treating this, or Congress is I suppose, like it’s never been done before. Is that true?

GARDNER: No, we have some experience with this. We have a national cap and trade program for sulfur dioxide, which causes acid rain. We’ve had it since the mid-90s, and it’s been very successful. Having said that, the sulfur dioxide problem has been a little simpler. Reducing greenhouse gases involves transitioning to whole new technologies, it’s not just adding scrubbers to existing plants. But, Kai, no cap and trade program is going to work unless politicians are willing to enforce it, and let permit prices get high enough, so that it changes consumer behavior and corporate behavior. So stay tuned. We’ll see what happens.

Ryssdal: All right, Sarah Gardner, from our Sustainability Desk on cap and trade. Sarah, thanks a lot.

GARDNER: Thank you.

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