You have to be able to reduce emissions somewhere enough that an industry will be enticed to “buy” the permit to emit as much as you’ve reduced emissions by. So, for instance, the Regional Greenhouse Gas Initiative (RGGI) is the first mandatory, market-based effort in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states will cap and then reduce CO2 emissions from the power sector 10% by 2018. These states will then sell emission allowances (i.e. permits to emit as much as they’ve cut back from emitting) through auctions and invest proceeds in consumer benefits: energy efficiency, renewable energy, and other clean energy technologies.
Under a cap and trade system, companies are allocated a number of carbon credits by the government. The number of credits they get are designed to challenge them to reduce their carbon emissions. If the company is able to lower their emissions below what they are permitted, then they can sell their extra credits. A company that does not reduce their emissions would be required to buy these credits. Thus, credits are designed to be an economic incentive to reduce emissions.
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