Which option describes cap and trade as a climate policy?

• A. The government sets a cap on emissions, and businesses can trade credits for emissions reductions
• B. A fixed fee on carbon emissions to fund public goods
• C. Subsidies for fossil fuels to lower energy costs
• D. Electric vehicles reduce emissions regardless of electricity source

Answer: (A)

Cap and trade uses a market mechanism built around a fixed emissions limit. The government sets a cap on total greenhouse gas emissions and issues a limited number of emission allowances equal to that cap. Companies must hold enough allowances to cover their emissions, but they can buy or sell allowances on an emissions market. If a company reduces its emissions below its allowance, it can sell the surplus credits; if it needs more, it can buy credits. Over time the cap is lowered, driving overall emissions down. This system creates a financial incentive to cut emissions where it’s cheapest, while ensuring the total amount released to the atmosphere does not exceed the set limit. The other descriptions describe different approaches: a carbon tax sets a price on emissions without a cap, subsidies for fossil fuels undermine emissions goals, and electric vehicles reduce emissions depending on the electricity source rather than operating as a cap-and-trade mechanism.