It is a system of offsetting environmental issues as explained below: A cap and trade system is a method for managing pollution, with the end goal of reducing the overall pollution in a nation, region, or industry. Many proponents of pollution control support the concept of cap and trade systems, arguing that they are extremely effective, and that they make sense economically as well. Such a system is only one option among many for reducing the emission of pollutants, most notably carbon dioxide, a greenhouse gas which has attracted a great deal of attention due to its environmental impacts. Under a cap and trade system, a government authority first sets a cap, deciding how much pollution in total will be allowed. Next, companies are issued credits, essentially licenses to pollute, based on how large they are, what industries they work in, and so forth. If a company comes in below its cap, it has extra credits which it may trade with other companies. For companies which come in below their caps, a cap and trade system is great, because they can sell their extra credits, profiting while reducing their pollution. For companies which cannot get their pollution under control, a cap and trade system penalizes them for their excess pollution while still bringing overall pollution rates down. In a sense, the need to purchase credits acts as a fine, encouraging companies to reduce their emissions. http://www.wisegeek.com/what-is-cap-and-trade.htm Hope this helps