Cap and trade is a term that refers to government regulation programs that cap the emissions of certain chemicals, especially carbon monoxide. Cap and trade is an alternative to a carbon tax. The regulation is meant to be designed in such a way that it doesn’t do adverse damage to the industries being regulated. Part of cap and trade is that it provides companies an incentive to begin switching to cleaner, alternative forms of energy.
Cap and trade involve issuing emissions credits to companies. Those companies that emit dangerous chemicals use up credits. If all of their available credits are used, they are taxed. Those with leftover credits can sell them to other companies. The total number of credits declines over time, pushing companies towards cleaner alternatives.