Under a “cap and trade” emission reduction regime, a regional authority first sets a maximum amount of emissions that all companies of a certain type within its jurisdiction can release in designated compliance periods, then it either grants or sells “emission allowances” to companies within its jurisdiction based on various criteria. Companies that reduce emissions below their allowance amount can sell their excess allowances, while companies that fail to do so have to purchase allowances from other companies. A third route available is for companies to fund clean development projects and earn reduction credits.
Generally, allowances are distributed based on a baseline year below which emissions must fall by a certain date, but a growing number of participants advocate distributing allowances based on absolute performance criteria such as kilowatt hours in the energy sector.
The first successful cap and trade program implemented in the United States is the Acid Rain Program, which was applied to sulfur dioxide and nitrous oxide emissions from electric utilities beginning in 1995. Not only had the program successfully cut sulfur dioxide emissions by half within the first 10 years, but a study by the Journal of Environmental Management estimates that the related health care savings attributable to sulfur reductions reached by the $3 billion program amount to be more than $100 billion.
