Cap and trade is a particular kind of trading policy which is designed to help environmental purposes within the society implementing a cap and trade system. The cap and trade system incorporates a cap on emissions, which is why the term “cap” is used in the system’s title.
This cap, in a cap and trade system, is entirely non-negotiable and is enforced by the government. This means that manufacturers and corporations cannot operate and own plants which would produce emissions beyond the level of the cap in the cap and trade system. The government also would have to give out a limited authorization to any given company in order to produce emissions up to the level of the cap.
One of the most important parts of the cap and trade system is that these allowances can actually be retained and banked, or they can be traded to other companies. Thus, the cap and trade system would create a new market for trading in the ability to produce emissions for companies. Any given company would then have to hold as many allowances as are necessary in order to cover the emissions produced by its plants, according to the cap and trade system.
This means that a company would have to decide to either produce emissions at a lower level than its allowances, thereby freeing up allowances to trade or sell, or it would need to purchase more allowances to produce at higher levels. The cap on emissions in the cap and trade system would never move and would ensure relative emissions safety.