Working Paper

Lessons Learned from Three Decades of Experience with Cap-and-Trade

Nov 17, 2015 | Richard Schmalensee, Robert N. Stavins

Summary

Experience can offer some guidance to the conditions under which cap-and-trade approaches are most likely to work well, and when they may face the greatest difficulties.

Key Findings

  • Cap and trade has proven to be environmentally effective and economically cost-effective relative to traditional command-and-control approaches.
  • Cap-and-trade instruments are now considered for a wide range of environmental problems, ranging from endangered species preservation to global climate change.
  • Cap and trade merits serious consideration when regions, nations, or subnational jurisdictions seek to develop policies to reduce greenhouse gas emissions.
  • Thirty years of experience with cap-and-trade systems with a variety of designs has implications for future applications.

Abstract

This essay provides an overview of the major emissions trading programs of the past thirty years on which significant documentation exists, and draws a number of important lessons for future applications of this environmental policy instrument. References to a larger number of other emissions trading programs that have been implemented or proposed are included.