Cap-and-Trade Theory

Cap-and-trade is an environmental policy where a government sets a limit (cap) on the total amount of pollution that industries can produce. They issue permits or allowances equal to this cap, which companies can buy and sell. If a company produces less pollution than its permit allows, it can sell the extra permits to others. This creates a financial incentive for companies to reduce emissions, as they can profit from selling permits. Over time, the cap is gradually lowered to decrease overall pollution, making the system both environmentally effective and economically flexible.