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The EPA uses "allowance trading" or "cap and trade" as a market-based
mechanism for reducing pollution. An emissions "cap" is a limit on the
total amount of pollution that can be released. An "allowance" is an authorization
to release a fixed amount of a pollutant.
The EPA allocates emission allowances for SO2 and NOx to each state
and states distribute allowances to those affected sources. Sources have
the flexibility to choose how to comply. This may include installing pollution
control equipment, switching fuels or buying excess allowances from other
sources on the open market. At the end of each compliance period, each
source must own at lest as many allowances as its emissions. The limited
number of allowances available ensures that the required reductions are
achieved through limiting the amount of NOx and SO2 being emitted in the
environment.
According to the EPA cap and trade is effective because:
- The cap always protects the environment. As the economy grows, sources
must find ways to keep emissions beneath the cap
- Complete and consistent emissions measurement and reporting by all
sources guarantees that total emissions do not exceed the cap and
that individual sources' emissions are no higher than their allowances
- The design and operation of the program are relatively simple which
helps keep compliance and administrative costs low
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