Cap and trade policy instrument – UGC NET Question

In a cap and trade system, the government sets an overall “cap” on allowable emissions and allocates or auctions permits that add up to this cap. Firms that can reduce emissions cheaply may sell surplus permits to others,creating a market price for pollution. The stem describes this type of system with a limit and tradable permits,so the missing word is cap. Hence Option C is correct.

Option A:
Tax and trade is not a standard phrase. Pollution taxes operate differently by charging a fee per unit of emissions rather than fixing a quantity cap and allowing trading within that cap.

Option B:
An offset typically refers to a project or activity that compensates for emissions made elsewhere,for example through tree planting. While offsets can sometimes be linked to trading schemes,they are not the defining word in the cap and trade expression.

Option C:
Cap emphasises that the total quantity of emissions is limited to a specified level,ensuring an environmental outcome. Trading then allows flexibility in how reductions are distributed. This two part mechanism is exactly what the question refers to.

Option D:
Ratio and trade is not a recognised policy term in environmental economics. It would not convey the core idea of a fixed overall limit on emissions,so it is not an appropriate answer.