Cap & Trade

Consensus definition: An emissions trading system where total emissions of specific pollutants are limited or ‘capped’. Permits are allocated to participants up to the set cap, and a market allows those participants emitting less than their quota to sell their excess permits to emitters needing to buy extra to meet their cap. In effect, the buyer is paying a charge for exceeding the cap, while the seller is being rewarded for having reduced emissions by more than was needed. Most current and proposed systems have a gradual reduction of the cap built in.