Cap-and-invest systems

Cap-and-invest (previously known as cap-and-trade) systems require major polluters to submit permits equal to the pollution they emit. The government auctions off a limited number of these permits that decreases yearly, called a “cap”. This offers the government certainty over resulting emissions by controlling the number of permits available over time, and raises significant revenue via the auctioning of permits.

Carbon fees

Carbon fees require major polluters to submit direct payments according to their emissions, rather than permits. The price of pollution is typically scheduled to predictably rise over time, and can be structured as a tax or fee, typically depending on the desired use of revenue. This approach provides more stable revenue than cap-and- invest, but with less certainty over resulting emissions.

Key Strategies

• Ensuring effectiveness by scheduling an emissions cap or fee trajectory that will deliver sufficient contributions to climate goals.

• Designing adjustment mechanisms and review periods to maintain a stable program over time.

• Ensuring the system is equitable and doesn’t concentrate pollution in vulnerable communities and benefits in already healthy neighborhoods. Highlighting this need, one study on California’s cap-and- invest found that the companies that purchased allowances to pollute were disproportionately located in front-line communities.

• Establishing equitable investment principles to maximize environmental and socioeconomic benefits in disadvantaged communities.

• Protecting low- and moderate-income households from economic strain by returning revenue directly to vulnerable households.