Under a cap-and-trade program for a pollutant, government se…
Under a cap-and-trade program for a pollutant, government sets a total emissions cap and issues tradeable permits equal to that cap. Firms with low abatement costs cut emissions and sell permits; firms with high abatement costs buy permits and cut less. Compared to a command-and-control rule that requires every firm to cut by the same percentage, cap-and-trade typically: