Certified Production & Operations Manager (POM) Practice Exam

The "cap-and-trade" principle within environmental regulation primarily allows companies to buy and sell what?

1. Resource allocations

2. Emission allowances

3. Government subsidies

4. Tax credits

The correct answer is: Emission allowances

The "cap-and-trade" principle within environmental regulation focuses specifically on emission allowances. Under this system, government sets a cap on the total level of greenhouse gas emissions that can be emitted by all participating companies. Each company is allocated a certain number of allowances, which represent the right to emit a certain amount of emissions. If a company can reduce its emissions below its allowance, it can sell its excess allowances to other companies that may need to exceed their limits. This creates a market for emission allowances, incentivizing companies to reduce their emissions while providing financial flexibility to those that may need to emit more in order to maintain production levels. This mechanism aims to ensure that overall emissions remain within the established cap while allowing for economic trading of allowances, which can lead to cost-effective emissions reductions across the industry.