Emissions trading (also known as cap and trade, emissions trading scheme or ETS) is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants.A central authority (usually a governmental body) allocates or sells a limited number of permits that allow a discharge of a specific quantity of a specific pollutant over a set time period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them. Financial derivatives of permits can also be traded on secondary markets.Cap and trade (CAT) programs are a type of flexible environmental regulation that allows organizations and markets to decide how best to meet policy targets. This is in contrast to command-and-control environmental regulations (such as best available technology (BAT) standards and government subsidies).
A 2020 study found that the European Union Emissions Trading System successfully reduced CO2 emissions even though the prices for carbon were set at low prices.