What is emissions trading?

Emissions trading, also known as cap-and-trade, is a market-based system for reducing greenhouse gas emissions. Under an emissions trading system, a government sets a limit or "cap" on the total amount of emissions that can be produced by a particular sector or region. This cap is then divided into a certain number of allowances, each of which represents the right to emit a certain amount of greenhouse gases. These allowances can be bought and sold on a market, allowing companies that can reduce their emissions at a lower cost to sell their excess allowances to companies that find it more expensive to reduce their emissions.

The goal of emissions trading is to create an economic incentive for companies to reduce their emissions, as they can sell any unused emissions allowances to other companies that need them. This allows for the most cost-effective emissions reductions to take place, as companies will naturally reduce their emissions where it is cheapest to do so. Emissions trading systems can be used to regulate emissions from specific sectors, such as power plants or factories, or from an entire country or region.