Cap and trade

A cap-and-trade system is a market-based policy tool used to reduce greenhouse gas emissions by setting a limit (cap) on the total amount of emissions allowed for regulated entities. Within this cap, emission allowances (each typically representing one ton of CO₂ equivalent) are either allocated for free or auctioned. Companies can trade allowances—buying if, they emit above their free allocation or selling if they emit less—. This creates a financial incentive to reduce emissions cost-effectively. The cap is usually reduced over time, lowering total emissions and encouraging investment in cleaner technologies.