By Dani Thompson ’12
All definitions below are based on usage in terms of U.S. climate change policy…
Market-based approach: A way to control and/or regulate carbon emissions via the economic system. This approach is used in contrast to traditional regulations such as those imposed by the Environmental Protection Agency.
Cap-and-trade: A market-based approach to lower CO2 emissions by distributing carbon “pollution permits”. These permits can be bought, traded, and sold among all parties involved. The number of permits available will be limited so that a “cap” of total carbon emissions will be established. This cap can be lowered to further minimize emissions in the future. In this approach amount of emissions is certain, but cost of permits is not. (Keohane)
Safety valve: An optional addition to the cap-and-trade approach which would allow for an unlimited amount of additional permits to be sold. These permits would be sold at a pre-set and likely very high price. The safety valve essentially creates a “cap within cap-and-trade” to set a maximum permit price and acts almost as a hybrid between cap-and-trade and carbon tax approaches by including a known price.
Carbon Tax: Another market based approach to lower CO2 emissions by placing a pre-set tax on each ton of CO2 emitted. The level of taxation can be changed as time goes on to promote further lowering of emissions. In this approach the cost of emissions is known, but the amount of carbon emitted is not.
Volatility:A measure of how market prices vary over time.
Abatement cost: A cost associated with removing unwanted byproducts formed during production. Example: requiring facilities to build better filtration systems on their power plants in order to emit less carbon.
“Upstream” and “Downstream”: Regulating “upstream” focuses policy changes on larger corporations and industries who are the originators of the emissions/pollution. “Downstream” regulation would concentrate on regulating things like household energy use. This site gives a very easy to understand version of how to understand the two. (Kopp-Pitzer)
Performance standards: Can be used in traditional regulation to promote or require clean(er)-energy-use technology. Example: Requiring more fuel-efficient vehicles. Although this approach can be effective in some ways, we can not expect it to create enough emission reductions alone. Example: Fuel-efficient vehicles still use fuel and people may simple choose to drive them more than normal! (Parry-Pitzer)
Keohane, Nat. 2009. Clean Energy Works. The Facts of Cap-and-Trade. http://vimeo.com/8847746?hd=1
Kopp and Pizer. 2007. “Overview,” in Assessing U.S. Climate Policy Options. Resources for the Future. Washington DC. pp. 8-20.
Parry, W. and W. Pizer. 2007. “Emissions Trading versus CO2 Taxes versus Standards,” in R. Kopp and W. Pizer eds. Assessing U.S. Climate Policy Options. Resources for the Future. Washington, D.C., pp. 80-86.