What is a cap and trade system?
A cap and trade system is a market-based regulatory system in which a government entity caps the total emissions from a group of sources (typically of some type of air pollutant). Each source is given or allowed to purchase a number of allowances with the total number of allowances issued being equal to the cap. The number of allowances issued declines each year. The sources are then permitted to trade among themselves. Those that have made deeper reductions can sell their allowances to other sources that have made fewer reductions. In some cap and trade systems, the sources are also allowed to purchase reductions that are made by projects in unregulated sources outside of the system.
