ABSTRACT

Cap-and-trade programs place an overall limit on emissions allowed from a specified set of covered entities, and issue tradable emission allowances (or rights to emit) that these entities can use for compliance. Allowances, which typically authorize an entity to emit a metric or a short ton of CO2e, can be auctioned or freely distributed to covered entities or other parties. At the end of a program’s compliance period, covered entities must submit an allowance for every ton of CO2e they emitted during that period. Every greenhouse cap-and-trade program established to date has also allowed covered entities to submit offsets in lieu of allowances for compliance purposes, generally with a limit on the fraction of compliance obligations that offsets can cover. A covered entity in a capand-trade program, therefore, has several options for achieving compliance: using emission allowances it has received or purchased, acquiring offsets, and/or reducing its own emissions.