Written by the Fiveable Content Team • Last updated September 2025
Verified for the 2026 exam
Verified for the 2026 exam•Written by the Fiveable Content Team • Last updated September 2025
Definition
An emissions trading system is a market-based approach that allows companies to buy and sell permits for greenhouse gas emissions. It aims to reduce overall emissions by creating economic incentives for companies to lower their pollution levels.
Related terms
Cap-and-Trade: Cap-and-trade is a specific type of emissions trading system where a government sets an overall limit (cap) on the amount of pollutants that can be emitted and allows companies to trade allowances within that limit.
Carbon Offsetting: Carbon offsetting involves compensating for one's carbon footprint by investing in projects that reduce or remove greenhouse gas emissions, such as reforestation or renewable energy initiatives.
Kyoto Protocol: The Kyoto Protocol is an international agreement aimed at reducing global greenhouse gas emissions. It introduced binding targets for industrialized countries and established mechanisms like emissions trading to achieve these goals.