In places where cap & trade for carbon dioxide (CO2) has been made law, only a certain amount of carbon can be released into the atmosphere by businesses every year (this is the “cap”). Businesses are allocated “carbon credits” by the government, each representing an amount of carbon they can emit. However, if a business wants more credits, or doesn’t need that many, they can buy and sell carbon credits among each other (the “trade”).
This is a really brilliant way to reduce emissions of a harmful gas while letting market economics do their work. Businesses can get more credits if they really need them, and those businesses that have managed to reduce their emissions are rewarded with the extra money they make from selling their credits. Every year, the cap is lowered gradually.
Cap and trade has worked fantastically well in the U.S. in the past, in particular the cap and trade program to reduce sulfur emissions that cause acid rain.
Sarahtonin did a good job of explaining the concept of carbon trading and the cap & trade. I just wanted to point out that carbon exchanges exist, such as the link below.
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