Case Study #1:  Reducing Acid Rain in the United States (cont.)
What are "surplus pollution allowances?"

The cap and trade program gave plant operators an incentive to cut pollution more than required. If a plant  was emitting 10,000 tons of SO2 per year when the program started, for example, it would receive only 5,000 allowances (an allowance equaling one ton of sulfur dioxide). At the end of each year, the plant would either have to reduce its emissions to 5,000 tons or acquire additional allowances to cover emissions above the 5,000 ton limit. On the other hand, if the plant reduced its emissions to 4,000 tons per year, it would conserve 1,000 allowances. These "surplus allowances" could be banked for future use or traded to other plants that needed to cover overages of their own.

The example below shows how cap and trade works when plants meet the required lower level, exceed it, and fail to meet it.

Plants A, B and C emit 30,000 tons (representing all
SO2 emissions in this sample universe.) Under the cap,
total emissions must drop 50% to 15,000 tons, which is
distributed as 5,000 allowances per plant.

• Plant A installs "scrubbers" on its smokestacks, cutting emissions to 2,000 tons. Plant A has 3,000 surplus allowances.
• Plant B shifts to cleaner burning fuel. Emissions are cut to 5,000 tons - right on target: 1 ton for each allowance.
• Plant C expanded operations and was only able to reduce emissions to 6,000 tons. Plant C is 1,000 allowances over the limit.