What is the purpose of a cap and trade system?

The primary purpose of a cap-and-trade system is to sell emission permits among organizations. This system establishes a cap on the total level of greenhouse gas emissions allowed from sectors such as industry and energy generation. Companies are given a specific number of permits, which represent the right to emit a certain amount of pollutants.

Organizations that reduce their emissions below their allotted cap can sell their excess permits to other companies that are unable to meet their emissions targets. This trading creates a financial incentive for companies to invest in cleaner technologies and practices, as they can profit from selling their unneeded permits. The overall goal is to limit total emissions by gradually reducing the number of available permits over time, fostering an environment where businesses are motivated to innovate in order to comply with the emission reduction targets set by regulators.

This system is an effective market-based approach to environmental regulation, promoting efficiency and adaptability in how companies react to environmental policies. It leverages market dynamics to help combat climate change while allowing businesses flexibility in how they manage their emissions.