What is a key feature of a cap and trade system?

A key feature of a cap and trade system is the flexibility it affords businesses in trading emissions credits. Under this system, a government sets a cap on the total level of greenhouse gas emissions allowed from regulated entities, such as factories and power plants. Each entity is assigned a certain number of emissions allowances, which represent the right to emit a specific amount of pollution.

One of the main advantages of this system is that it allows businesses to buy and sell these allowances or credits. If a company reduces its emissions below its allowance, it can sell its excess credits to another company that may be struggling to meet its emissions target. This trading mechanism creates a financial incentive for companies to invest in cleaner technologies, thereby promoting overall environmental goals while still allowing for economic activity.

The flexibility in trading fosters a market-driven approach to emissions reductions, enabling companies to determine the most cost-effective way to decrease their carbon footprint. This flexibility is significant compared to strictly enforced quotas that do not allow for such trading, which could stifle economic growth and innovation.