In theory, those who reduce emissions most cheaply will do so at the lowest.

             cost to society (US EPA). For example, there are two companies that.

             pollute. "Company A" can reduce their emissions cheaply and easily, but at.

             first has little incentive to do so. "Company B" on the other hand cannot.

             easily reduce their emissions, so they initially do not. Under a cap and.

             trade system, both companies are allotted a certain amount of emissions.

             permits. Because "Company A" can reduce their emissions more easily, they.

             can sell their extra emission permits to "Company B" who may pollute more.

             than their emissions permits allow. Overtime, the amount of emissions.

             allowed for an emissions permit is reduced, which decreases the cost of.

             innovation while increasing the cost to pollute, encouraging energy.

             efficiency.

             .

             Cap and trade often gets confused with two similar policy methods,.

             command and control and environmental taxes, whose goals are similar, but.

             whose means of reaching those goals are different. First, under command and.

             control legislation, for example, the government sets a cap on emissions.

             and simply penalizes anybody who does not meet set standardized goals,.

             without any trading component. Command and control is better for more local.

             health issues, since implementing command and control on a wider scale is.

             much costlier. Second, under environmental taxes, the government taxes a.

             set percentage per unit of emissions in hopes that emissions will go down.

             However, under environmental taxes, imperfect information makes it.

             difficult to determine what the price of the tax should be. Cap and trade,.

             on the other hand, allows the market to determine the most efficient price.

             According to a 2003 U.S. EPA Report, cap and trade offers more certainty.

             for total emissions under a defined set of sources and has costs less to.

             regulate than other forms of regulation.

             .

             Since the market controls cap and trade, a few important factors of.