How does cap and trade work?

Can you explain how cap and trade works?

Sure! Cap and trade is an environmental policy tool that limits total greenhouse gas emissions. Governments set a cap on emissions and issue permits that allow companies to emit a certain amount. Companies that reduce their emissions can sell their extra permits to others.

What happens if a company exceeds its cap?

If a company exceeds its cap, it must purchase additional permits from other companies or face penalties. This creates a financial incentive to stay within the limits.

How does this system help the environment?

By capping emissions, the system encourages companies to innovate and reduce their carbon footprint, ultimately leading to lower overall emissions and a healthier environment.

Are there any criticisms of cap and trade?

Yes, some critics argue that it can lead to market manipulation and that it may not reduce emissions as effectively as direct regulations.