No. 357 · Fixing problems · Economics
Cap and Trade
Fix the total you can afford, then let people trade to meet it as cheaply as possible.
In the Almanac
“Lead out of petrol”, 1982–1987 · “ArcelorMittal”, 2005–2012
Both stories in full, three ways to use it and where it misleads.
Get the AlmanacListen · Watch
Questions
What is Cap and Trade?
Cap and Trade fixes a total limit, such as on emissions, and issues permits adding up to it. Those who can cut cheaply sell spare permits; those who can't, buy them. The total stays put, but the effort goes where it costs least. The US used it to phase lead out of gasoline in the 1980s.
How do you use Cap and Trade?
Use it for any shared limit: meeting hours, spending, screen time. Fix the ceiling, allow trades, and make sure the cap is tight enough to change behavior.
When does Cap and Trade matter?
Cap and Trade is one of the 40 mental models for fixing problems, the situations where you ask: Why does this keep going wrong, and how do I fix it for good? Within that, it belongs to “Rewards and rules”, alongside Coase Theorem, Goodhart’s Law and Government Failure.
What is an example of Cap and Trade?
Two stories show it at work: Lead out of petrol (1982–1987) and ArcelorMittal (2005–2012). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.
Which mental models are related to Cap and Trade?
Tragedy of the Commons, Cost-Benefit Analysis and Supply and Demand. Cap and Trade itself comes from economics.