You Asked:

How does cap and trade work? — Joan, Mobile, Ala.

Marshall Brain Answers:

The idea behind “cap and trade” legislation is to try to control something, usually a pollutant. So in the United States we are trying to cut the amount of carbon dioxide that we, as a nation, send into the atmosphere. Say that, as a nation, we decide that we will allow ourselves to emit X billion tons of carbon dioxide per year. And assume that X is less than we emit now. And assume that over time we hope to lower X.

How would we decide who gets to emit carbon dioxide and who doesn’t, or how much carbon dioxide anyone gets to emit? There are many ways to solve this problem. We could, for example, give each person in the United States an amount of carbon he or she can emit per year (it would be the same for every person). Whenever a person buys something, the product would have a money price and a “carbon price”. The “carbon price” would be deducted from the consumer’s “carbon bank account”. Some consumers would have “carbon” left over at the end of the year (e.g. people who walk to work). Others would run out (e.g. people who commute 60 miles a day in SUVs). So those who ran out would buy “carbon” from those with too much. Everyone would now have an incentive to lower the amount of carbon they use when they buy products.

That would be a fun and interesting way to solve the problem, but it would be fairly difficult to implement it. Every product would need two prices (the money price and the carbon price), every cash register would need to print two receipts, etc. It is possible to imagine a scenario where we all have to carry around “money cash” and “carbon cash” and pay for everything twice. It just gets a little messy.

So instead, the United States is proposing to do the same kind of thing with all the companies. Companies will be given carbon credits. Some companies will be able to lower their carbon emissions (by cutting the power they consume, for example). Others will have a lot more trouble cutting. So those that need carbon credits will buy them from companies that have too many. This way, the “carbon price” gets automatically converted and added into a product’s money price when the product is sold. If two companies are producing shoes, and the first company uses a lot less carbon than the second, then the price of the first company’s shoes will be lower.

Obviously there is some argument over how the carbon credits will get distributed to companies. This video talks about that and several other issues with cap and trade:

Some people do not like this idea. Here Warren Buffet voices dissent:

Here Rep. Joe Barton voices his dissent:

Keep in mind, when listening to the dissent, what the first video points out about sulfur dioxide’s cap and trade system.

See also: How Carbon Trading Works and How Carbon Footprints Work