What is cap and trade? Under cap and trade schemes, governments or intergovernmental bodies set an overall legal limit on emissions in a certain time period (“a cap”) and then grant industries a certain number of licenses to pollute (“carbon permits” or “emissions allowances”). Companies that do not meet their cap can buy permits from others that have a surplus (“a trade”).
The goal of the system is to help polluters meet “reduction” targets in the cheapest way possible. But what is cheap in the short-term does not translate to an environmentally effective or socially just outcome over the long-term, and the system is wide open to gaming by industry and traders.