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Cap and Trade, Market Regulation, and Economic Factors Involved in Climate Change

Anne E. Smith, Climate Change Law and Regulations: Planning for a Carbon-Constrained Regulatory Environment

This paper provides a non-technical overview of the fundamental elements of market-based pollution regulation, and describes the similarities and differences between the two core alternative forms of market-based regulation: cap-and-trade and emissions taxes. This section is general to any form of pollution control. The paper then focuses on the specific case of greenhouse gas (GHG) regulation using market-based measures. The mechanisms by which GHG pricing filters through the economy are traced, with the purpose of providing the reader with a heightened understanding of how market-based regulation for GHGs works, and also why it is an especially challenging issue for policy makers to resolve. The paper then describes the evolution of the policy discussion in the US around cap-and-trade. It starts with an overview on the history of cap-and-trade for emissions other than GHGs, and how this failed to continue into an application to GHGs in the US. Current variants of quasi market-based approaches that have emerged for controlling GHGs are characterized, explaining how they work, and their limitations relative to pure market-based approaches. This section includes an overview of regulation of GHGs under the Clean Air Act. The paper concludes with a few thoughts on what companies in the minerals and mining sector should prepare themselves for as the drive towards US GHG policy c