What is Cap and Trade or Emissions Trading?

Emissions trading is also known as allowance trading, or cap and trade refer to the approach that is used to reduce pollution and has been confirmed to protect the environment and human health successfully. An emission trading system (SCE) refers to an instrument of the market the developed to minimize the emission of greenhouse gas (GHG). This model is based on the principle of "cap and trade". The government played an important role in this model by setting the maximum cap or limit on the amount of emission of sectors in the economy. For the companies to operate in the economy, they must have permits that allow the emit gas to the environment. These permits can be received or bought by trading with other companies. Currently, the four continents have 17 emission trading systems. Besides, the current major world economic country such as China seeks to adopt a national system.

How Does Cap and Trade Work?

 The government plays an important role in determining the limit of emission allowed in the SCE - that is the "cap" dimension of the "cap and trade." This cap must be determined in advance to allowed the traders to comply with the regulations for the specified periods. The government`s provision conforms with the objective of reduction of emissions from the jurisdiction. This informs the market in the long-run and allows the investors to plan and make their investments in the consequence.

Emission Permits

The government distributes tradable permits of the caps set to the companies immediately they are set. One permit allows the company the emit one ton of GHG emissions. The granting of the permit depends on the government whereby the government can decide to give the permits free or auction them to the traders. The method of permit allocation affects the management of the company`s emission.

 Who is Affected by Cap and Trade?

The government decides the sectors the economy and which GHG to be regulated under the system. Hypothetically, an SCE that has wide coverage of gases and sectors will be more effective. Nonetheless, in reality, the use of such a system makes it difficult to monitor or measure the amount of emission in some sectors. The current system includes even the electricity sector. One of the most common gases covered under GHG is Carbon dioxide (CO 2). Other gases covered under the model include nitrous oxide (N 2 O), methane (CH 4), and other gases fluorinated (SF 6, HFC s and PFC s)

Managing Company Emissions

The regulation provides that every company must present their emission report to the government and other related authorities at the end of every year. Achieving this requires companies to choose or more of the options below: 

Reduce the emissions this can be achieved when the company improve the efficiency in their production or resort to using energy that produces less carbon. 

Use compensation credits ('Offset credits) - International and national Trading systems permit companies to cover some of their emission by using project credit from the reduction authorities or sectors that are not regulated by SCE. Some of the effective credits come from projects that use renewable energy. 

Building additional periods this applies to the companies that have surplus permits and reduced their emission.

The effectiveness of Cap and Trade Regulation

The companies must monitor and report their emission to the authority to help in ensuring effective conservation by SCE. The reports must be verified and certified by an independent authority to ensure accuracy. Sanctions should also be imposed to ensure business compliance. The authority should also monitor the permits transactions between SCE participants. The permits must have the elements of registry security to minimize the risk of fraud and manipulation.