A cap and trade system is a method of managing pollution, with the end goal of reducing the overall pollution in a nation, region, or industry. Under the system, the government decides on how much total pollution will be allowed (cap). Then companies are issued liscences to produce pollution depending on how big they are, what industry they are in, etc. Next, if the company uses less pollution that is allowed they can give those pollution ‘credits’ to another company (trade).
Cap and trade also known as emission trading is an administrative way to control pollution economic incentives for those who achieve reducing their emissions. It is a kind of economic motivator to use clean energy sources. It works the following way, a governing body sets the limit for emissions (cap) and no one should go above this limit. If this happens the company or country must buy so called carbon credits from other companies or countries to counterbalance their emissions (trade). Thus the countries that are clean get rewarded for being clean.
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