Cap and trade is a method or approach used to control greenhouse gas emissions. These emissions are the primary cause of global warming.
The cap and trade operates by putting a â€œcapâ€ and by creating â€œtradeâ€.
There is a cap or ceiling on the allowable emissions. The goal is to lower the cap over time to decrease the pollutants that go into air.
The trade concepts happen when a market has been created to make allowances for carbon which in turn help firms to meet the required cap. Firms are given incentives (mostly they are asked to pay less) to entice these companies to lessen their pollutants.
Cap and trade explained
The cap, as mentioned, is a ceiling for the allowed pollution level. Firms that go over the cap or allowed emission level face penalties.
The amount or level of pollution is measured annually in tons of carbon dioxide (in billion). There is a science attached to how the pollution amount is measured.
The cap takes into consideration all big sources of pollution. The cap covers, natural gas, electric power generation, transportation, natural gas and even large manufacturers.
The cap is reduced each year so firms can plan ahead on how to stay within the allowable range of emissions. The goal is to reduce the amount of pollutants that join the atmosphere and as such there is a need to lower the cap each year.
There are economic benefits or incentives given out to firms that are able to stay within their cap. For example, a company can avail of allowances when they are able to reduce their pollutants. These allowances can even be sold to other companies.
Some companies have difficulties reducing the amount of pollution they produce and as such they may need to buy more allowances from other firms.