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Apparently most Americans don't know what Cap and Trade is (or they forgot somewhere along the way.) So this is EcoGeek's intro to cap and trade, what it means for the country, for global warming, for the environment and for green technology.

Yes, It's Complicated, the EDAF offered $10,000 to the person who could best briefly illustrate and explain cap and trade

And Maybe We Can Start Selling CO2 EBay!
I just ran across a rather disturbing statistic. Apparently Americans have no idea what Cap and Trade is. When Rasmussen asked Americans what Cap and Trade was most of them had no idea, and 29% of them said that it had something to do with regulatory reform on Wall Street. Only 24% said that it had anything to do with environmental issues. I thought maybe this EcoGeek could be of some service.

Now you probably know what Cap & Trade is, but maybe you need a refresher course. And maybe you just want to share with your friends and family. So they too can have some idea about the most important environmental legislation ever.

So Cap & Trade, in it's simplest form: basically the government says to all of the companies in the country, "We can only have this much of a certain pollutant." That's the cap. "We simply cannot have more than that much pollution. And if we do, we're going to fine the crap out of all of you."

Then the government distributes "credits" for the release of those pollutants to all of the companies that produce those pollutants. Ideally, they give the companies credits for less pollution than they're already polluting with, so then the companies either have to reduce their pollution or buy credits from someone else.

If the company is able to reduce its pollution below its current credit level, then it can sell, or "trade away" those credits to companies that are having a harder time. So basically the government creates an artificial economic market in pollution.

So then the amount of money that the companies are willing to spend decreasing their pollution is directly proportional to the amount of money it would cost them to buy the credits if they weren't able to reduce their pollution. Success! We have a new economic market and everyone wants to reduce their pollution!

Oh wait, there are problems.

We run into the first problem when we say that the credits are "distributed". How are they distributed?

There are two ways. Basically there's grandfathering, in which you get credits based on how much pollution you're already producing which seems kind of lame to me. I mean, it's like, "Oh, you're the biggest polluter! Here, have the largest number of credits!"

Or, two, they can be auctioned off. That's the way that the Obama administration is looking at doing it. They're actually hoping to have huge amounts of money generated by the auctioning off of these carbon credits. But economists are kind of like, "Wait a second. So you've created an artificial market, and you're selling nothing for billions of dollars." Also the polluting corporations don't like it at all. But to me, it seems like a fairly fair way to do things.

The second problem with cap & trade is that yes, the money has to come from somewhere. So whatever sectors of the economy are doing all that pollution, the prices of their services are going to go up, so yes, gasoline prices and energy prices would increase. And if gasoline and energy prices are increasing, what we have is not a cap & trade system, it's a tax! It's a tax! Boo taxes! Rah rah rah! I like my money! Don't take my money away!

But it's certainly more popular than a straight carbon tax and with good reason.

First, we don't have to call it a "tax", and people like that.

Second, say there's one coal power plant that can reduce its emissions relatively easily, and there's another in which it would be extremely expensive to reduce its emissions. The coal plant that has an easy time can reduce its emissions twice over, and the coal plant that's having a hard time doesn't have to do it. So you get the same amount of reduction in the end, but the costs are much lower.

Cap & trade systems have actually been used in America for a long time, mostly on sulfur dioxide, which is the stuff that causes acid rain. And since cap & trade legislation went into place on sulfur dioxide, energy prices have not increased substantially but the emission of sulfur dioxide has gone down, like, 50% despite huge increases in power generation.

So yes, it works! Well, it works for sulfur dioxide. The question is, will it work for greenhouse gasses? Hopefully, we will find out soon. The Obama administration hopes to have cap & trade legislation on the books by 2012. And from then on the government can continually lower the cap. And that strong market in carbon credits should spur innovation in wind power, carbon sequestration, solar power, electric cars, and who knows what else!

And that, my friends, is why I, as an EcoGeek, am excited about cap & trade, and why America should, yeah, have some idea what I'm talking about.

This is Hank Green from