Cap and Trade

Cap and trade is a market-based approach to controlling pollution by setting an upper limit, a cap, on the total amount of emissions that can be released by regulated entities, such as industries and businesses. Emission allowances are distributed among these entities, which can buy, sell, or trade them as needed so that, for example, a business which has not used up its allowance can sell it to another which needs to increase its own. This creates an economic incentive for companies to reduce their emissions, as they can profit from selling unused allowances. Cap and trade systems aim to achieve environmental goals in a cost-effective and flexible manner.