Cap-and-trade policies

Cap-and-trade policies are environmental programs designed to reduce pollution by setting a maximum limit (cap) on emissions. Authorities distribute or auction off emission permits to companies, who must hold enough permits to cover their emissions. Companies can trade permits—selling excess allowances if they emit less or buying more if they need to emit more. This creates a financial incentive to reduce emissions, as lower emissions mean fewer permits needed, saving money. Over time, the cap is lowered, encouraging continued pollution reduction while allowing market flexibility.