Cap-and-trade is an environmental and economical approach to reducing greenhouse gas (GHG) emissions, the primary driver of global warming. The approach rewards California companies that figure out ways to reduce carbon pollution below levels set by policy.
The companies affected include oil refineries, power plants and large factories.
The Cap-and-trade program sets a firm limit (or a cap) on GHGs from California companies. The limit is lowered over time to reduce the amount of pollutants released into the atmosphere.
The affected companies must obtain permits known as “allowances” for every ton of carbon dioxide and other GHGs they emit. The State sells allowances in auctions held four times a year and provides free allowances to ensure production remains in California.
Companies still must decide how to address their emissions as the cap decreases. Trading creates a market for carbon allowances, allowing companies to purchase allowances from another company.
Companies may also choose methods to operate more efficiently and pollute less by investing in cleaner technologies and energy. As companies become more energy efficient they will have excess allowances to sell.