Applications of Cap-and-Trade and Recent Debates

Since 1970s, US Environmental Protection Agency (EPA) started using Cap-and-Trade (CAT)  to regulate the emission of 6 categories of air pollution, mainly SO2 and NOx. After 1997 Tyoko Protocol was signed, carbon emission began drawing government's attention, and carbon trade system is gradually being adopted by many countries, lead by the European Union and Australia.

EPA launched a national-wide acid rain program in 1990s, controlling the industrial stationary point emission of SO2 and NOx, which are main contributors to the formation of acid rain. Here is a report from EPA about 2009 progress and results of this program: http://www.epa.gov/airmarkets/progress/ARP09_2.html
Other EPA programs are mostly regional, such as NOx budget trading program, Regional Greenhouse Gas Initiative and Assembly 32 for California only. In 2009, President Obama pushed a new bill to the Congress for adopting national-wide carbon trade regime. However, it failed to pass. Moreover, in 2011, the Chicago Carbon Exchange, started by an active environmental economist, was forced to close.

On the other hand, the EU carbon trade was functioning well. The most effective way to control carbon is is trading within the system. However, the price fluctuations concern some economists:

High price levels are necessary for motivating businesses to improve their carbon control technologies. The sensitivity of the market to present environmental political events would compromise the efficiency of the system.

Finally, the most debatable policy within the regime is the setoff program between developed and developing nations. Some argue that it would encourage developing nations to build more pollution sources, i.e. firms, to profit from selling carbon credits.