Under a 'cap-and-trade' emissions trading scheme, how is the cost of emitting greenhouse gases created?

Correct answer: A) A limit is set on total emissions, allowances are issued up to that limit, and companies that emit more than their allowances must buy more from those that emit less

Explanation

Cap-and-trade sets an overall cap on emissions and creates tradeable allowances. The market price of allowances puts a cost on emissions and rewards companies that cut emissions cheaply, as they can sell surplus allowances. A fixed charge per tonne without a cap describes a carbon tax instead.