What is a cap-and-trade system?

Most carbon credits are part of cap-and-trade systems, which involve a cap on the amount of carbon dioxide companies can emit and a market system through which companies can buy, sell and trade their credits. 

Companies involved in these systems receive carbon credits, so they can participate in economies that monitor and regulate carbon emissions. Usually, the government sets the emissions caps for each industry and determines the penalties for exceeding the maximum emissions levels. 

Companies receive carbon credits, which allow them to emit carbon dioxide, as their allowance toward the cap, or they can sometimes purchase carbon credits at auction. The cap is the number of carbon dioxide emissions the industry is not to exceed, and the allowance is each company's share of permitted emissions.