Under a cap-and-trade (C&T) emissions control program, a regulator sets an overall cap on greenhouse gases, creates emissions allowances (which permit the holder to emit greenhouse gases) reflecting the cap, and then allows trading of allowances, while gradually ratcheting down the cap and allowances to reach an emission reduction objective. The initial allowance allocation or auction process is, of course, a topic of intense debate in pending climate change legislation, as are two other features:
- whether international credits or offsets may be used as allowances, and to what extent, and
- whether and to what extent banking and borrowing of allowances will be permitted.
The climate legislation that passed the House summer of 2009 (H.R. 2454) would amend the Clean Air Act to create a C&T system that would reduce greenhouse gases from covered entities 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. Covered entities are phased in during a four year period, and once complete, the cap applies to entities that account for 84.5% of total U.S. greenhouse gas emissions. Generally, an absolute cap would be set on emissions from covered sectors and trading of emissions allowances would be allowed among covered and non-covered entities. An entity is covered under H.R. 2454 if it produces or imports more than the greenhouse gas equivalent of 25,000 metric tons of CO2 annually.
This definition was provided by Dickstein Shapiro, LLC.
