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How does cap-and-trade work in an attempt to reduce pollution?

How does cap-and-trade work in an attempt to reduce pollution?

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Answer #1

It involves two mechanism here, it provides an incentive to the industry that is producing less and act as a penalty for the industry that is heavily polluting.

For example, there are two different firms, they will be given permits i.e. allowance to pollute on the basis of their past records. if they polluted less than what they use to do before they will get credits for that, Now the firm that has polluted less can sell those credits in the market for a price, this will incentivise the firm polluting less and firms who have to pollute more than the permits will have to buy those credits i.e. the cost of polluting will increase, This will decrease the pollution in the coming time.

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