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Critical Principles
Critical features to consider when designing and implementing environmentally effective and economically efficient trading programs include:
Cap on Emissions
A cap on emissions is the central element of an effective and efficient cap and trade program. A mandatory cap on emissions is critical to protecting public health and the environment and to sustaining that protection into the future. The cap also serves to provide stability and predictability to the allowance trading market and certainty for the regulated sources. The level of the cap and timing of emission reductions are fundamental decisions underpinning the environmental goals of the program.
Accountability
Accurate measurement and reporting of emissions, along with the rigorous and consistent enforcement of penalties for fraud or noncompliance, ensures accountability. Closely related is the importance of transparency, such as public access to source-level emission and allowance data. The coupling of stringent monitoring and reporting requirements with the power of the Internet makes it possible for EPA to offer complete, unrestricted data on trading, emissions, and compliance. This promotes public confidence in the environmental integrity of the program and business confidence in the financial integrity of the allowance market. It also provides an additional level of scrutiny to verify enforcement and encourage compliance. Finally, accountability requires ongoing evaluation and environmental monitoring of the cap and trade program to assess progress toward achieving its environmental goal.
Additional Resources
- Fundamentals of Successful Monitoring, Reporting, and Verification under a Cap and Trade Program (PDF) (8 pp., 100 K, About PDF)
Simplicity of Design and Operation
To the greatest extent possible, simplicity should be incorporated into all elements of the program, including applicability (coverage and point of regulation), trading rules, reporting requirements, and penalty provisions. Program operation for both emission sources and regulating authorities is more certain and effective and less costly and time-consuming if the rules are not overly complex and burdensome. Markets function better and transaction costs are lower when rules are simple and readily understood by all participants. Moreover, the environment is easier to protect when rules are clear and consistently enforced.
Additional Resources
- "The U.S. Acid Rain Program: Key Insights from the Design, Operation, and Assessment of a Cap-and-Trade Program." (PDF) (12 pp., 1.4 M, About PDF) The Electricity Journal, Vol. 20 Issue 7, August-September 2007
- Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control (PDF) (78 pp., 1.1 M, About PDF )