Green Climate International

Emissions cap and allowances are key components of a cap-and-trade system used to reduce greenhouse gas (GHG) emissions.

• Emissions Cap: This is the overall limit set on the total amount of emissions that can be produced by all entities (such as companies or industries) within a certain region or sector. The cap is typically set by the government or regulatory body and is reduced over time to encourage gradual decreases in emissions.

• Allowances: These are permits or credits that give entities the right to emit a specific amount of GHGs. Each allowance typically represents one metric ton of carbon dioxide (CO2) or its equivalent in other GHGs. Entities are given or auctioned a set number of allowances, and they can trade these allowances with others if they do not need all of them.

In a cap-and-trade system, the total number of allowances is equal to the emissions cap, and the market for buying and selling these allowances creates financial incentives for companies to reduce their emissions. If a company can reduce its emissions below its allowance, it can sell the surplus allowances to other companies that may have exceeded their emissions limit.

(https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/eu-ets-emissions-cap_en)