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Cap and trade

Cap and trade is a trading-based approach to pricing carbon. In this system, a mandatory cap is placed on the amount of greenhouses that can be released by some or all emitters or producers or importers of fuels that can release greenhouse gases. Based on the cap, a certain number of permits are issued each year, such as one permit or allowance per ton of CO 2 or CO 2 equivalent GHG gases. The cap would be tightened each year by reducing the number of permits issued each year. To enable trading, a market place is set up where permits can be traded.1


Firms are required to hold permits that are equivalent to their emissions. If a firm wants to increase emissions, it can acquire these permits from other emitters through the trading marketplace. The short video clip below describes California’s cap and trade system.



Essential elements of a cap and trade system include :1–4

1. Stringent cap of emissions with firm emissions reduction goals

2. Broad-based to include as many economic sectors as possible

3. Cover all major GHG gases

4. Auctioning of allowances or permits i.e. no giving them away for free

5. Use of auction revenues for public good including investment in renewable energy and energy efficiency, protection of low-income families, assistance to communities towards climate change adaptation

6. No loopholes or maximum price “safety valves”

7. Establishing strict criteria for cost-containment measures such as offsets and allowance burrowing

8. Establishing strong institutions with consultation between regulatory agencies and, scientists and policy makers

9. Linking Ontario cap-and-trade system with other systems.


Features to improve the cap and trade system have been proposed including a floor and ceiling price for permits to counter volatility in prices, and limited banking of permits.5,6



Cap and trade systems in place currently:

a. European Union Emissions Trading System (ETS)

b. Western Climate Initiative (WCI) – California and Quebec

c. Regional Greenhouse Gas Initiative (RGGI)

d. Tokyo Cap and Trade Program

Other cap and trade systems are being proposed or piloted.



Ontario and Cap and Trade

The Government of Ontario has recognized “emissions trading as a cost-effective approach to reducing greenhouse gas emissions” and, in 2008, Ontario joined the Western Climate Initiative.6

In 2009, the Ontario legislature passed Bill 185, The Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), which provides the legislative framework for a cap and trade system.7 Prior to this, the Ministry of the Environment produced a discussion paper, “A greenhouse gas cap-and-trade system for Ontario,” which outlined key principles that will guide the design of the system.8 These include the requirement for absolute reduction; simple and transparent trading rules; equitable treatment of all capped sectors, and accurate emissions measurement, monitoring and reporting. In 2013, the Ministry of the Environment released another discussion paper, “Greenhouse Gas Emissions Reductions in Ontario. A discussion paper” further outlining principles and goals, potential elements, scope and targets for the program.9 Following this, the government sought comments from the public, industry stakeholders, non-governmental organizations and Ontario’s Aboriginal communities. In 2015, the Ontario government announced that it would introduce carbon pricing in the province, released a discussion paper "Ontario's Climate Change Discussion Paper 2015," and sought input from the public and other stakeholders. And, on April 13, 2015, the government announced that it will join Quebec and California in implementing a cap and trade system. Details of the implementation are yet to be announced.


1.      Durning, A. Cap and Trade 101: A Climate Policy Primer . (Sightline Institute, 2009). at

2.      Greenpeace New Zealand. Emissions Trading-essential elements. GREENPEACE N. Z. (2007). at

3.      Goulder, L. H. Markets for Pollution Allowances: What Are the (New) Lessons? J. Econ. Perspect. 27, 87–102 (2013).

4.      Cleetus, R. We need a well-designed cap-and-trade program to fight global warming . (Union of Concerned Scientists, 2009). at

5.      Pricewatercoopers. Carbon taxes vs carbon trading. Pros, cons and the case for a hybrid approach . (Pricewatercoopers, 2009). at

6.      Pizer, W. A. in RFF Guide Clim. Change Econ. Policy (Routledge, 2001).

7.      Government of Ontario, M. of the E. Climate Change - Participating In Emissions Trading - Ministry of the Environment. Minist. Environ. - Ont Bill 185, Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 (2009) at

8.      Ontario Ministry of the Environment. A greenhouse gas cap-and-trade system for Ontario. Discussion paper . (Ontario Ministry of the Environment, 2008). at

9.    Ontario Ministry of the Environment. Greenhouse Gas Emissions Reduction In Ontario. A discussion paper . (Ontario Ministry of the Environment, 2013). at