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as the name suggests a cap-and-trade system has two parts the first part is the cap the government sets a maximum amount of emissions the second part is the trade the government sells or issues permits to emitters of greenhouse gases and every emitter needs a permit for every tonne of GHGs that they emit the trade part is that they can trade among themselves and in that market for permits a price is established facing that carbon price everyone has an incentive to reduce emissions lets look at an example imagine two companies lets call them company a and Company B based on the market price of carbon company a and B determine what investments they can make that will reduce their emissions at a lower cost than paying the carbon price they then must ensure their permits equal their remaining emissions Company A identified many low cost opportunities to reduce emissions as a result it has more permits than it needs Company B on the other hand mostly has expensive options for reducing GHG
