Explaining "Cap And Trade"

By: Jill Cordes
By: Jill Cordes

Imagine you're the head of an energy intensive company that makes steel or cement. And you're required to reduce your greenhouse gas emissions. How do you make the same product at a competitive price, while reducing your carbon footprint? Cap and trade might be a way.

Here's how it works. The government puts a limit, or cap, on how much you can pollute. If your emissions go over that limit, you can buy credits from companies that pollute less. The transfer of these credits is the "trade."

So what prevents you from buying a bunch of credits without reducing your pollution? Or simply moving your plant overseas? Effective climate change policy can help.

A study from the Pew Center on Global Climate Change finds that climate legislation similar to that being considered in Congress would not cause companies that use a lot of energy to move overseas or lose major market share to foreign competitors. The study finds that, on average, these big companies would adjust by moving towards less emissions-intensive products.


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