The Cap and Trade system involves trading of emission allowances, where the total amount of allowances is strictly limited or 'capped' by a regulatory authority.
Allowances are created to account for the total allowed emissions.
At the end of each compliance period each entity must surrender sufficient allowances to cover its emissions during that period.
Trading occurs when an entity can reduce units of emission at a lower cost than another entity and then sells the allowance.
A Cap and Trade system is generally based on those entities included in the cap.
(CAEP, ICAO, 2006)
=> Glossary