Question

1) How does emissions trading (cap-and-trade) work and what is the benefit of its approach?

Answer 1

It is a system designed to reduce our atmosphere's pollution. A firm limit on pollution is the ceiling on greenhouse gas emissions that causes global warming. With time, the limit is tighter. The trade aspect is a market where businesses buy and sell licenses that allow them to produce only a certain amount, as the price is set by supply and demand. Trading gives companies a strong incentive to save money through the most cost-effective way of reducing pollution.

The government is setting the ceiling on a given industry or, preferably, the entire economy. It also determines the violation fines. The main targets of such caps are carbon dioxide and associated emissions, which cause global warming. It is also possible to limit certain contaminants that lead to smog. The heat-trapping greenhouse gas blends into the upper atmosphere in the case of carbon dioxide and has a global effect. Locally reducing emissions lowers worldwide levels.

The government distributes the allowances either free of charge or through an auction to the companies. Typically, the cap declines over time, providing industry and businesses with a growing incentive to reduce their emissions more efficiently while keeping down production costs. Companies that reduce their emissions more quickly will sell credits for future use to companies that pollute more, or "farm" them. This sector, the cap and trade "trade" element, offers flexibility to companies. It increases the pool of available capital to make reductions, encourages companies to cut pollution faster and rewards innovation.