Cap-and-trade mechanisms as a form of carbon pricing.

• A. Cap-and-trade programs place a cap on emissions and allow trading permits.
• B. Cap-and-trade is a subsidy program for renewable energy.
• C. Cap-and-trade sets a fixed price on carbon and does not limit emissions.
• D. Cap-and-trade eliminates all carbon emissions.

Answer: (C)

Cap-and-trade combines a limit on total emissions with a market for emissions allowances. The government sets an overall cap and issues a limited number of permits that let companies emit a certain amount. Emitters must hold enough permits to cover their emissions, and they can buy or sell those permits with other players. Because the total number of permits is fixed by the cap, overall emissions cannot exceed the cap, but the price of emitting—reflected in the cost of permits—varies with supply and demand in the market. That variability is what makes cap-and-trade a form of carbon pricing, since the cost to emit is determined by market price rather than a fixed fee.

The statement that cap-and-trade sets a fixed price and does not limit emissions describes a different approach (a carbon tax) where the price per ton is set and emissions are not capped by a hard limit unless other rules apply. Cap-and-trade directly limits emissions through the cap, while allowing trading to find the most cost-effective reductions. It is not a subsidy program, and it does not aim to eliminate all emissions on its own.