The “cap-and-trade” strategy for reducing greenhouse gases isn’t a new idea. But that doesn’t mean it’s easy to understand. Even after reading numerous articles on it, the concept of an emissions market where companies can trade shares of pollution still makes my head spin. But in “The (Very Profitable) Economics of Emissions” in the Jan.-Feb. issue of Mental Floss (article not available online), writer Sam Kean makes sense of an abstract idea:
Instead of looking for ways to dump pollution, companies “own” their emissions output and can trade it like a commodity. For instance, if a business has 25,000 permits but only needs 20,000, then it can sell the extra shares for cash. Or, if a company unexpectedly exceeds its pollution limit, it can buy extra permits to cover itself.
The result is a “cap-and-trade” market, which allows the government to screw down maximum emissions levels and lessen pollution by taking shares out of circulation. When shares disappear, the supply goes down, and the remaining shares become more expensive. Eventually, it costs companies too much to simply buy extra permits and prompts them to invest in cleaner technology.