What is the term for the market-based approach where the EPA sets total allowable annual emissions for a pollutant and divides this into tradable units?

• A. Emissions tax
• B. Tradable emission allowance
• C. Cap-and-trade program
• D. Pollution offset

Answer: (B)

Cap-and-trade program. In this approach, a governing body sets a cap on total emissions for a pollutant and then issues emissions allowances up to that cap. Those allowances are tradable, letting companies buy or sell them to meet the cap at the lowest overall cost. The tradable emission allowances are the instruments used, but the overall framework is cap-and-trade. An emissions tax would set a price per unit rather than a hard cap, and pollution offsets are a separate mechanism used to compensate for emissions rather than the core market-based allocation.