Cap and Trade, also known as Emissions Trading, is a cost-effective way of reducing greenhouse gas (GHG) emissions. Governments set caps on the maximum level of emissions to achieve various climate goals, the cap on GHG emissions is then divided in tradable emission permits for each unit of emissions allowed under this cap. Entities in this system may then trade allowances and emission credits with each other, since some will pollute more than others, creating an incentive for lower GHG emissions.
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