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What is a cap and trade system?

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Quick Answer

A cap and trade system is an economic approach to controlling pollution by providing economic or monetary incentives for the reduction of emission of pollutants. The "cap" in cap and trade refers to the legal or agreed upon limit of a certain type of chemical an economy or entity can emit every year. This limit is represented by a number of permits that indicate the entity is allowed to emit so much of one pollutant.

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Full Answer

The "trade" in cap and trade refers to the transfer of permits from one entity to another, indicating the holding entity is allowed to emit that quantity of pollutant. This system is beneficial to the environment because it encourages entities to reduce the amount of pollution they release, else they are required to purchase a permit from a company at a price of the company's choosing. Some companies find it cheaper to simply reduce the amount of pollution they release as a by product of their business.

Cap and trade systems require extensive data collection and monitoring. Because these systems are designed to reduce the greenhouse gas emissions, it is essential to monitor global greenhouse gas levels and confirm reduction of the gases. The system also requires oversight of the polluting companies and confirmation of the pollutants released by each company.

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