Emissions trading (or cap and trade) is an
administrative approach used to control
pollution by providing
economic incentives for achieving reductions in the emissions of
pollutants. In such a plan, a central authority (usually a
government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit are required to hold an equivalent number of credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a
trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.
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The creation of surplus emission reductions at certain stacks, vents or similar emissions sources and the use of this surplus to meet or redefine pollution requirements applicable to other emissions sources. This allows one source to increase emissions when another source reduces them, maintaining an overall constant emission level. Facilities that reduce emissions substantially may "bank" their "credits" or sell them to other facilities or industries.
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