Cap and Trade

What is it?

Ethan ElkindBank of America Climate Change Research Fellow

UC Berkeley/UCLA Schools of Law

Why Cap-and-Trade?

• Seemed to work with acid rain

• Certainty of overall emissions

• Flexibility for businesses (“free market environmentalism”)

• Alternatives: regulation and carbon taxes

• Happening around the world

The Cap

• Who falls under the cap? • Upstream vs. downstream sources • Limit on total emissions from regulated sources• Declining over time• Setting the cap: gather emissions data

Allowances

• Divide capped emissions into allowances

• Allowances (or Credits) = right to pollute

• Distributing: grandfathering vs. auction

• Auction revenue: – dividend or investment– Price floor/ceiling

Trading

• Buying/selling allowances among sources• Seller: make more $ selling allowances than

reducing emissions• Buyer: cheaper to buy than reduce emissions

Tightening the Cap

• Removing allowances: – Retire credits after compliance periods– Percentage removed per trade– Donation– Purchase & retire

Offsets

• Credits for carbon reductions by:- Unregulated sources- Agriculture/forestry sector carbon sequestration

• Domestic (ag/forestry) or international (developing countries)

• Additional, verifiable, quantifiable, real• Compliance and voluntary markets

Are we experienced?

• Acid Rain• RECLAIM• European Union• RGGI

• Pending: – California (AB 32)– United States (Waxman-Markey)– Western Climate Initiative

Common Challenges

• Cap is too high

• Price fluctuations

• Market gaming

• Windfall profits

• Monitoring, enforcement, and verification

www.legalplanet.wordpress.comEelkind@law.berkeley.edu