Cap-and-trade is best described as:

• A. A direct ban on emissions from all sources.
• B. A policy that requires emissions reductions without market mechanisms.
• C. A cap on total pollution with trading of emission allowances.
• D. A subsidy program for renewable energy only.

Answer: (C)

Cap-and-trade works by setting an overall limit on how much pollution can be emitted and then allowing the right to emit to be bought and sold among emitters. Each allowance lets a company emit a certain amount of pollution, and firms must hold enough allowances to cover their emissions. If a company can reduce emissions cheaply, it can lower its pollution and sell its extra allowances for profit; if reductions are expensive, it can buy allowances instead of cutting further. Over time, the total cap can be tightened to reduce pollution further, while the trading market helps achieve those reductions at the lowest cost across the economy. This is different from a direct ban on emissions, which would prohibit emissions without any market-based incentive, and from a policy that imposes reductions without market trading, which removes the cost-saving mechanism. It’s also not a subsidy program for renewables, which would provide targeted financial support rather than a market-based limit with trading.