Cap and trade, or emissions trading, is a system designed to reduce greenhouse gas emissions.
Companies are allowed to emit a certain amount of carbon dioxide and no more (the cap). If a company wants to emit more, it has to buy permits, issued by the government, representing units of emissions. Companies are free to buy and sell these permits (the trade). The idea behind the system is to put a price on emissions, thereby encouraging companies to reduce them. However, the price of these permits has always been too low (partly through over-issuance), so companies can simply buy them to avoid making meaningful emissions reductions. For the system to work effectively, the price of the permits (often referred to as the carbon price) needs to rise.
