A cap-and-trade system is an environmental policy tool designed to reduce greenhouse gas emissions. It sets a limit, or "cap," on the total amount of emissions that can be released by all participating entities, such as companies or industries. Each entity receives or buys a certain number of allowances, which permit them to emit a specific amount of pollutants. If they emit less than their allowance, they can sell the surplus to others. This system encourages companies to innovate and reduce emissions, as those that lower their emissions can profit from selling their extra allowances. The overall goal is to gradually lower the cap over time, leading to reduced emissions and a healthier environment. By creating a market for emissions allowances, cap-and-trade systems aim to find the most cost-effective ways to achieve environmental goals.