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What Is Emissions Trading?

Emissions trading, sometimes referred to as “cap and trade” or “allowance trading,” is an approach to reducing pollution that has been used successfully to protect human health and the environment. Emissions trading programs have two key components: a limit (or cap) on pollution, and tradable allowances equal to the limit that authorize allowance holders to emit a specific quantity (e.g., one ton) of the pollutant. This limit ensures that the environmental goal is met and the tradable allowances provide flexibility for individual emissions sources to set their own compliance path. Because allowances can be bought and sold in an allowance market, these programs are often referred to as “market-based.”

Effectively designed emissions trading programs provide:

  • Environmental certainty, established by the overall pollution limit.
  • Flexibility for individual emissions sources to tailor their compliance path to their needs.
  • Incentives for efficiency and innovation that lower implementation costs.
  • Incentive for early pollution reductions as a result of the ability to bank surplus allowances.
  • Low administrative costs.
  • Accountability for reducing, tracking and reporting emissions.

Emissions trading programs are best implemented when:

  • The environment and/or public health concerns occur over a relatively large geographic area.
  • A significant number of sources are responsible for the pollution problem.
  • Emissions can be consistently and accurately measured.

Under the right circumstances, emissions trading programs have proven to be extremely effective.  They can achieve substantial reductions in pollution while providing accountability and transparancy by making the data available through systems such as EPA’s Air Markets Program Data (AMPD).

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