A cap-and-trade system is a market-based environmental policy that places a limit on harmful pollutants and establishes a market-based price on emissions. Companies must hold permits to cover their emissions; these permits, often called “allowances,” can be bought or sold at prices determined by supply and demand. The European Union is in the process of extending and strengthening its carbon dioxide (CO2) cap-and-trade system; California has extended and strengthened its own system; and nine New England and Mid-Atlantic US states have extended and strengthened the Regional Greenhouse Gas Initiative (RGGI), a program that sets a cap on CO2 emissions from the electricity sector. In addition, it is expected that before the end of this year, New Jersey will join RGGI, and Oregon will launch its own CO2 cap-and-trade system. And, most important, perhaps, after years of preparation and pilot operations, China is expected to launch the world’s largest CO2 emissions trading system nationwide in 2020.
Stavins, Robert N., and Richard Schmalensee. "Learning From 30 Years of Cap and Trade." Resources (May 2019).