Cap and trade

A market-based system designed to reduce greenhouse gas (GHG) emissions by setting a fixed limit (cap) on total allowable emissions. A central authority, such as a government or regulatory body, distributes or auctions a limited number of emissions permits, each allowing the holder to emit a specific amount of GHGs over a set period. Companies that reduce their emissions below their allocated amount can sell excess permits to others, while companies that exceed their limits must buy additional permits. Over time, the central authority progressively lowers the cap, thereby reducing total emissions and incentivising the adoption of cleaner technologies and practices.