Which option describes a core principle of the EU Emission Trading System?

• A. A cap-and-trade system with trading of allowances
• B. A direct emissions tax with no trading
• C. A subsidy program for fossil fuels
• D. Fixed prohibition on emissions trading

Answer: (A)

At the heart of the EU Emission Trading System is a cap-and-trade approach: a limit is set on the total amount of greenhouse gases that can be emitted, and companies receive or buy emission allowances that add up to that cap. Because these allowances are tradable, firms that can cut emissions more cheaply can sell their extra allowances to others, while those facing higher abatement costs must buy allowances. This creates a market price for emissions and drives reductions where they’re most cost-effective, while the overall cap tightens over time to achieve stricter emission targets. The other options describe different policies: a direct emissions tax imposes a price on carbon without trading; subsidizing fossil fuels would encourage more emissions; and a fixed prohibition on trading would eliminate the efficiency benefits of a market-based approach.