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The History of Cap and Trade

cap and trade

Anyone who calls "cap-and-trade" a new concept doesn't know their history. Cap-and-trade did not originate with the carbon market. In fact, the kernel of this concept can be traced as far back as the early 20th century. That's when British economist Arthur Cecil Pigou turned his attention to finding a way for polluting industries to pay for the damage done by said carbon emissions. But because he proposed taxes and fees, it failed to catch on. It wasn't until the late 1960s that the idea of emissions trading was born. With the help of a Republican administration, emissions trading proved to be one of the most successful environmental solutions in American history.


Economist John Dales suggests the idea of tradable permits or "allowances" as a means of controlling pollution.


  • Power plants release so much sulfur dioxide into the air that it's forming clouds in the atmosphere, falling back down to the Earth in the form of acid rain.
  • During the Reagan administration (1980-1988), 70 bills are written to address the acid rain problem, and every single one is shot down. The concept of "command-and-control" is considered, in which power plants would have been required to install "scrubbers" that remove sulfur dioxide from their emissions. However, the impact on utilities is deemed too costly and the regulation it would require impractical.
  • C. Boyden Gray, a lawyer in the Reagan administration, suggests to a friend the idea of letting people buy the right to pollute as a means of cleaning up the environment.
  • The Environmental Defense Fund explores marketplace solutions to the acid rain problem.


George H. W. Bush is elected the 41st President of the United States, stating his goal of becoming the "environmental President."


  • Environmental Defense Fund (EDF) President Fred Krupp calls White House Counsel C. Boyden Gray and suggests emissions trading as a means of solving the acid rain problem. Enter "cap-and-trade," a means by which utilities could actually make money by limiting emissions, which would be tracked via a simple device installed on power plants. Utilities would be allowed a certain amount of emissions. Those who came under the limit could sell their leftover allowances to other utilities that exceeded the limit. Gradually, the cap would be lowered, thus giving tradable emissions allowances more value.
  • EPA policy maker Brian McLean proposes letting the cap-and-trade market operate on its own.
  • Bush approves a 10-million-ton cap on emissions.
  • Global warming makes its first appearance as front page news. Behind the scenes, both EDF and the White House reportedly recognize that cap-and-trade may eventually help address carbon emissions too.


Emissions trading becomes law as part of the Clean Air Act of 1990.


TVA (Tennessee Valley Authority), a federally-owned electricity company, strikes the first emissions trading deal at $250/ton.

Carbon Advice Group


Cap-and-trade takes effect, the term appearing in print for the first time. Acid rain emissions fall by 3 million tons.


The United Nations Framework Convention on Climate Change (UNFCC) proposes the Kyoto Protocol, a cap-and-trade agreement by industrialized nations to reduce their emissions of greenhouse gases (carbon dioxide among them) by at least 5% below 1990 levels by 2012.


The Kyoto Protocol goes into effect. The United States infamously chooses not to participate. U.S. cities, however, are free to do as they please, many choosing to "ratify" the Kyoto Protocol themselves.


During his campaign for President, Barack Obama says dealing with the issue of climate change is essential to a national energy policy.


Representatives Henry A. Waxman (D-CA) and Edward J. Markey (D-MA) introduce a climate change bill built largely around the idea of cap-and-trade - the American Clean Energy and and Security Act. But there are so many exemptions made for coal companies, utilities, refiners, heavy industry and agribusinesses that it fails to win widespread support. Opponents labeling it a tax-and-redistribution scheme. C. Boyden Gray agrees, stating that the the Waxman-Markey bill could potentially be a $3 trillion tax, as so many of the pollution allowances are given away to industry rather than allocated based on past emissions.


Senator John Kerry (D-MA), Senator Lindsey Graham (R-SC) and Senator Joseph Lieberman (I-CT) introduce the Climate Change Plan that would cap greenhouse gas emissions from U.S. utilities, with industries to be phased in later. But the day before they are set to formally introduce the bill, Senator Graham pulls his support, reportedly convinced it won't go anywhere anyway, as Congress plans to take up the issue of immigration before climate change. Rumor has it Graham has been wavering on climate change for some time anyway, feeling pressure from his fellow Republicans who are climate change skeptics.

In the wake of Senator Graham pulling his support of their Climate Change Plan, Senator Kerry (D-MA) and Senator Lieberman (I-CT) regroup and unveil the American Power Act, aimed at reducing carbon emissions to 17 percent below 2005 levels by 2020 and 80 percent by mid-century. They couldn't get enough Republican support so it failed to pass in Congress.

Republicans gain seats in Congress, essentially killing any chance of climate change legislation for two years. President Obama backs away from cap-and-trade, saying we will have to find other ways of addressing climate change.