A Cap-and-Trade system sets a limit on the amount of emissions, or greenhouse gases, that can be released. A government agency sets the limit and issues permits, called allowances, to companies that want to release emissions. Companies that need more permits must buy them from those who have extra permits.The idea is that companies will not be able to emit more than their allocated amount of greenhouse gases because they will not have enough allowances. They will also need to buy extra permits if they want to increase their emissions level in the future. The total number of permits is reduced over time so that eventually the cap is met and there are no more allowances left for sale.The idea behind cap and trade is to create a market for the trading of emissions permits. A permit gives the holder the right to emit one ton of CO2 into the atmosphere. The more permits that are in circulation, the more difficult it will be for companies to increase their emissions beyond a certain level without purchasing additional permits from other companies who have reduced their own emissions below their permit levels.
