Q: What is Cap-and-Trade?

A: In a cap-and-trade carbon market, governments place a cap on GHG emissions that may apply to the whole economy or to specific segments such as refineries or power plants. In such compliance markets, the cap often declines yearly since the goal is to reduce emissions over time. One example is the California Cap-and-Trade Program which is part of the state’s overall strategy to reduce total GHG emissions to pre-1990 levels. About 450 businesses that are responsible for 85 percent of the state’s total GHG emissions are required to comply, including large electric power plants, large industrial plants, and distributors of fuels such as natural gas and petroleum.