Cap and Trade vs Baseline and Credit: What’s the Difference?

Cap and Trade vs Baseline and Credit: What’s the Difference?

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Grace Smoot

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Cap and trade and baseline and credit systems are two forms of carbon pricing, which aim to reduce global carbon emissions and maintain a sustainable planet for future generations. Because they are two different systems with different methodologies, it is important to understand their differences. So, we had to ask: What’s the difference between cap and trade and baseline and credit?

Cap and trade is a mechanism to control carbon emissions that sets an upper limit on total emissions, allowing entities to trade credits according to their usage. Baseline and credit sets a baseline on total emissions; reducing emissions below this level generates credits that can be sold to others.

In the fight against climate change, how can we tell the difference between cap and trade and baseline and credit? Below we will define both terms, identify the key advantages and differences of each, explore how they operate and what impact they have on carbon emissions, and discuss why they are important.

How Are Cap and Trade and Baseline and Credit Defined

Cap and trade and baseline and credit are two sustainability tools that can help individuals and organizations lower their carbon footprints. Each is used to accomplish specific tasks, but their overall goal is to reduce global carbon emissions.

What Does the Dictionary Say About Cap and Trade and Baseline and Credit

Carbon emissions already have a price tag attached to them, but it is our environment that pays the price, not the emitters. Carbon pricing seeks to resolve this issue and make emitters pay for their carbon emissions. Under carbon pricing, there are two main types of emission trading systems (ETS): cap and trade and baseline and credit systems.

Both cap and trade and baseline and credit utilize tradable allowances called carbon credits, certificates, or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2 or the equivalent amount of a different greenhouse gas (GHG). Carbon credits are a form of climate currency, meaning they are subject to supply and demand. 

Cap and trade systems set an upper limit on the amount of emissions entities are allowed to emit. The amount of total emissions reduction is predetermined with cap and trade, but the price of emissions is not. 

Cap and Trade: a system for controlling carbon emissions and other forms of pollution by setting a limit on the amount any business or organization may produce while allowing them to buy extra capacity from other organizations which have not used their full limit”

Cambridge Dictionary

Each entity operating under a cap-and-trade program is issued a certain number of carbon credits each year for use on the cap-and-trade market. Cap-and-trade markets became established after the Kyoto Protocol, an international treaty, set a maximum amount of GHG emissions that could be released into the atmosphere, both globally and nationally. In this market, unused carbon credits can be sold to entities that have exceeded the cap.

On the other hand, baseline and credit systems set a standard level for carbon emissions. 

Baseline and Credit: baseline emissions levels are defined for individual regulated entities and credits are issued to entities that have reduced their emissions below this level.”

The World Bank

If an entity reduces their emissions below the baseline, more than they are otherwise obliged to, they generate carbon credits which can be sold to others looking to stay below their baselines. Those emitting more than their baseline do not necessarily face penalties, but they would also not generate carbon credits.

What Are the Differences Between and Advantages of Cap and Trade and Baseline and Credit

Both cap and trade and baseline and credit represent ways in which we can mitigate carbon emissions and global warming. But they are also different methods of climate action, making it important to understand their differences.

The main difference between cap and trade and baseline and credit is that cap and trade sets an upper limit on carbon emissions, and entities must buy extra credits if they exceed this limit. Baseline and credit sets a standard level of carbon emissions, and entities reducing their emissions below this level can earn carbon credits to then sell to others. 

Also, cap and trade systems are based on emissions, whereas baseline and credit systems are based on emission intensity. Unlike cap and trade, there is no certainty that targets will be met with baseline and credit.

The following are key advantages of cap and trade:

  • Caps on carbon emissions can be set strictly 
  • Unused carbon credits can be traded to other entities
  • Incentivizes companies to invest in greener technologies 

The following are key advantages of baseline and credit:

  • Generated credits can be sold to other entities
  • No pressure to buy credits if the baseline is exceeded
  • Incentivizes the switch to low-carbon alternatives 

How Do Cap and Trade and Baseline and Credit Impact Your Carbon Footprint

Choosing either cap and trade or baseline and credit is great if you are looking to lower your carbon footprint. Knowing their similarities and differences is essential when making a decision on which to use. 

Cap and TradeBaseline and Credit
How are carbon emissions reducedCarbon credits cap how much CO2 can be emitted by an entity. This cap on emissions can be gradually reduced over time, leading to less and less overall emissions.Carbon credits are generated when entities reduce their carbon emissions below the set baseline. The monetary incentive prompts the emission reductions.
Impact on own carbon emissionsCap and trade does not directly reduce your carbon footprint. Baseline and credit does not directly reduce your carbon footprint. 
Impact on global carbon emissionsCap and trade mitigates the problem, but it does not work at the core issue of reducing overall CO2 emissions.Baseline and credit mitigates the problem, but it does not work at the core issue of reducing overall CO2 emissions.
Environmental benefitsCap and trade facilitates the switch to greener energy sources and promotes energy independence. Cap and trade facilitates the switch to greener energy sources and promotes energy independence. 
Overall effectiveness in reducing carbon emissionsImproper reporting and discrepancies in maximum GHG levels between countries limits cap and trade effectiveness on a global scale. Establishing accurate baselines and the inherent incentive limits baseline and credit effectiveness on a global scale.

How Do Cap and Trade and Baseline and Credit Reduce Carbon Emissions

The goal of both cap and trade and baseline and credit is to reduce carbon emissions in order to mitigate climate change.

  • Cap and trade: Cap and trade represents indirect emission reductions. Putting a cap on emissions and decreasing this cap over time reduces carbon emissions over time, preventing CO2 from entering the atmosphere.
  • Baseline and credit: Baseline and credit represents indirect emission reductions. Entities reducing their emissions below the set baseline generate carbon credits which can be sold to other entities. This monetary incentive prompts the emission reductions.

When you hear the term “cap and trade”, think about the term “allowance”. Carbon credits in this system represent the maximum amount of CO2 an entity is allowed to emit. This cap on CO2 emissions slowly decreases over time, forcing entities to emit less and less CO2 to stay within the boundaries of the cap. Companies with high levels of emissions can continue to operate, but only at an increased cost.

When you hear the term “baseline and credit” think about the term “standard”. Carbon credits in this system represent emission reductions below the set standard. The goal is to incentivize entities to emit less so that they generate more carbon credits. The more carbon credits generated, the more entities they can sell off, resulting in monetary gains. 

What Impact Do Cap and Trade and Baseline and Credit Have on Your Own Carbon Emissions

One of the best ways we can aid in the fight against global climate change is to reduce our carbon footprint. And to do this we first have to reduce our own carbon emissions. 

  • Cap and trade: Cap and trade does not directly reduce your carbon footprint. 
  • Baseline and credit: Baseline and credit does not directly reduce your carbon footprint.

Cap and trade does not directly reduce your own carbon emissions. Setting a limit on the amount of carbon emissions allowed is an indirect method of emission reduction because companies can continue to emit as long as they pay the price.

Baseline and credit does not directly reduce your own carbon emissions. There is no pressure to buy permits for emissions in excess of the set baseline. Because entities can choose whether or not they emit below or above the baseline, reduction is not guaranteed. 

Coupled with direct measures of emission reductions, such as reducing individual energy usage and consumption, cap and trade and baseline and credit can become more effective. 

What Impact Do Cap and Trade and Baseline and Credit Have on Global Carbon Emissions

Every year we pump over 36 billion tons of CO2 into the atmosphere, fueling climate change. This causes temperature and sea-level rise, melting of sea ice, changing precipitation patterns, and ocean acidification. Cap and trade and baseline and credit aim to reduce global emissions and mitigate these negative environmental effects.

  • Cap and trade: Cap and trade mitigates the problem, but it doesn’t work at the core issue of reducing overall CO2 emissions. 
  • Baseline and credit: Baseline and credit mitigates the problem, but it doesn’t work at the core issue of reducing overall CO2 emissions. 

Cap and trade and baseline and credit does not have a significant impact on global carbon emissions. Although they may incentivize companies to reduce their CO2 emissions, the immediate effect of reducing emissions under both systems is to benefit a company’s bottom line. The direct goal of carbon credits is not to reduce greenhouse emissions or support sustainable energy projects, but rather for companies to make more money. 

The COVID-19 pandemic triggered the largest decrease in energy-related carbon emissions since World War II, a decrease of 2 billion tons. However, emissions rebounded quickly at the end of 2020, with levels in December ending 60 million tons higher than those in December 2019. This indicates that the earth is still warming at an accelerated rate, and not enough is being done to implement clean energy practices. 

Illustration of annual CO2 emissions globally
Our World in Data: Annual total CO2 emissions

What Are the Environmental Benefits of Cap and Trade and Baseline and Credit

Using cap and trade and baseline and credit can reduce our consumption of fossil fuels which, in turn, reduces our carbon footprint. But their benefits go beyond reducing your overall carbon emissions to balance off your personal carbon footprint. They also come with various environmental benefits.

  • Baseline and credit: Baseline and credit facilitates the switch to greener energy sources and promotes energy independence. 

Cap and trade and baseline and credit incentivize companies to switch to greener energy sources including solar, wind, hydro, and geothermal energy. They do not emit CO2, nitrogen oxides, sulfur dioxides, or mercury into the atmosphere, soil, or water. And these pollutants are known to contribute to the thinning of the ozone layer, global sea-level rise, and the melting of our world’s glaciers.

Switching from fossil fuels to green energy also promotes energy independence. Being able to produce your electricity without the aid of foreign countries is an important step in becoming more self-sufficient. 

How Effective Are Cap and Trade and Baseline and Credit in Reducing Carbon Emissions

Cap and trade and baseline and credit can be effective at reducing carbon emissions if they are used correctly.

  • Baseline and credit: Establishing accurate baselines and the inherent incentive limits baseline and credit effectiveness on a global scale.

Cap and trade has faced criticism because most industries lack the technology that monitors and determines their amount of CO2 emissions. This makes it easier for companies to cheat on their emissions reports and say they are emitting less than they actually are. Also, different countries have different standards and caps for CO2 emissions. If the cap is set too high, then companies are not incentivized to reduce emissions. But set the cap too low, and companies will be overly burdened to reduce emissions. And the extra cost will be passed down to consumers as a result.

Baseline and credit is complex to implement because baselines for each emitting activity (emission intensities) must be established. These intensities are often not well documented or even known. Also, depending on the criteria, there can be no pressure to buy permits for emissions in excess of the baseline. Entities can choose whether or not they emit below or above the baseline without consequence. The only incentive is to generate carbon credits to sell, but that is not a guarantee.

Why Are Both Cap and Trade and Baseline and Credit Important to Fight Climate Change

Cap and trade and baseline and credit are important to fight climate change because they are both ways to reduce your carbon footprint. Reducing your carbon footprint is important because it mitigates the effects of climate change, which has a positive cascade effect on public health and plant and animal diversity. In addition, this boosts the global economy and leads to innovative, more environmentally-friendly solutions.

However, we can’t let these two methods be a guilt-free way to reduce carbon emissions. Cap and trade and baseline and credit must be used in conjunction with direct carbon reduction measures until the industry has time to invest, develop, and refine more sustainable innovations. 

In the long term, direct methods of carbon footprint reduction are much more effective. Reducing your household, travel, and lifestyle carbon footprint can go a long way in the fight against climate change!

What are Better Alternatives to Cap and Trade and Baseline and Credit

If used correctly, cap and trade and baseline and credit can provide environmental, economic, and social benefits that go beyond reducing carbon emissions. They have the potential to instigate meaningful environmental change and begin to reverse some of the effects of climate change. 

However, we can’t let these two methods be a guilt-free way to reduce carbon emissions. Cap and trade and baseline and credit must be used in conjunction with direct carbon reduction measures until the industry has time to invest, develop, and refine more sustainable innovations. 

These reduction measures don’t have to involve drastic changes either. Actions that may seem small can have a big impact because those small changes add up! You can reduce your carbon footprint in three main areas of your life: household, travel, and lifestyle. 

Reduce your household footprint:

Reduce your travel footprint:

  • Walk or bike when possible: The most efficient ways of traveling are walking, bicycling, or taking the train. Using a bike instead of a car can reduce carbon emissions by 75%. These forms of transportation also provide lower levels of air pollution.

Reduce your lifestyle footprint:

  • Switch to Renewable Energy Sources: The six most common types of renewable energy are solar, wind, hydro, tidal, geothermal, and biomass energy. They are a substitute for fossil fuels that can reduce the effects of global warming by limiting global carbon emissions and other pollutants.
  • Recycle: Recycling uses less energy and deposits less waste in landfills. Less manufacturing and transportation energy costs means less carbon emissions generated. Less waste in landfills means less CH4 is generated.
  • Eat less meat and dairy: Meat and dairy account for 14.5% of global greenhouse gas emissions, with beef and lamb being the most carbon-intensive. Globally, we consume much more meat than is considered sustainable, and switching to a vegan or vegetarian diet could reduce emissions. 
  • Take shorter showers: Approximately 1.2 trillion gallons of water are used each year in the United States just for showering purposes, and showering takes up about 17% of residential water usage. The amount of water consumed and the energy cost of that consumption are directly related. The less water we use the less energy we use. And the less energy we use, the less of a negative impact we have on the environment.

Final Thoughts

In short, cap and trade and baseline and credit are different systems. Both use carbon credits as tradable certificates or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2. However, cap and trade sets an upper limit on emissions and forces entities to purchase credits if they exceed the cap. Baseline and credit sets a standard level of emissions and awards credits to entities that reduce their emissions below this level. Those credits can then be sold to others. 

Both are tools in our sustainability toolbox that can reduce carbon emissions and mitigate climate change. But we should not rely on either or both to be a cure-all for our environmental problems. Direct measures of carbon emission reduction are much more effective at reducing emissions both in the short term and the long term.

Stay impactful,

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Grace Smoot

Grace loves to research and write about all things related to climate action and sustainability. She holds a Bachelor’s degree in Environmental Biology and works as an Environmental Survey Technician. Outside of work, she loves to work out, play soccer, and take her dog for long walks.

Did you know that the internet is a huge polluter of the environment? But fortunately not this site. This site is powered by renewable energy and all hosting-related CO2 emissions are offset by three times as many renewable energy certificates. Find out all about it here.

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