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Cap-and-Trade
A cap-and-trade program is an emissions-trading system designed to reduce emissions. Under a cap-and-trade program, a national limit on GHG emissions is established and, over time, that “cap” is lowered. Meeting this declining cap requires increasing emissions reductions by regulated facilities.
To implement the program, the federal government would create credits, known as “allowances,” for regulated facilities, adding up to the total emissions allowed under the cap. An allowance is a permit to release a certain amount of GHGs. Facilities that reduce their emissions below their required limit can sell (or “trade”) their excess allowances to other facilities, or hold (or "bank") them for future use or sale.
There may be wide variations in the price of allowances under this system—caused by changes in the weather, economic output, technology, and trading strategies. The carbon market promises to be one of the world’s largest trading markets. It is important to assure that carbon prices are stable—not volatile—and free from manipulation.
Cost-containment measures to protect consumers are essential for a cap-and-trade program to succeed. A smart climate policy should include allowance allocations, a price collar on the cost of allowances, and the wide and robust use of offsets.
Carbon Tax
A carbon tax is a price that regulated facilities must pay for their CO2 and other GHG emissions. Many economists say a carbon tax is a straight-forward approach that eliminates price volatility and market uncertainty, and leads to the most cost-effective GHG reductions. Critics say that it would not guarantee specific reductions in GHG emissions.
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