Emissions trading is a market-based scheme for environmental improvement that allows parties to buy and sell permits for emissions or credits for reductions in emissions of certain pollutants.
Emissions trading allows established emission goals to be met in the most cost-effective way by letting the market determine the lowest-cost pollution abatement opportunities.
Under such a scheme, the Environment Protection Authority (EPA) first determines total acceptable emissions and then divides this total into tradeable units (often called credits or permits). These units are then allocated to scheme participants.
Participants that emit pollutants must obtain sufficient tradeable units to compensate for their emissions. Those that reduce emissions may have surplus units that they can sell.