Final answer:
Cap and trade is best described as a system of tradeable licenses that allows entities to emit a specific amount of pollutants, which incentivizes companies to reduce emissions through market mechanisms. The correct answer to describe cap and trade is option (d).
Step-by-step explanation:
The example that BEST describes cap and trade is a system of licenses that can be bought and sold and that enable holders to pollute up to a specified amount during given periods. This method sets a limit, or cap, on the amount of a pollutant that can be emitted. Companies or groups are issued emission permits and are required to hold an equivalent number of allowances, which represent the right to emit a specific amount. If they do not use all of their allowances, they can sell them to other companies or entities who need them. Cap and trade programs are market-oriented environmental policies that seek to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
Another common policy is the pollution charge or tax, which is different from cap and trade. It imposes a tax on the quantity of pollution that a firm emits, encouraging firms to reduce their emissions voluntarily due to the cost associated with the tax. However, a cap and trade system directly controls the amount of pollution by providing a certain number of permits to pollute which can be traded in the market. Moreover, correctly functioning cap and trade systems ensure that the social cost of pollution is factored into economic decisions. This financial incentive pushes companies toward implementing cleaner technologies or methods of operation to maintain profitability.
Therefore, the correct option describing cap and trade is option (d): a system of licenses that can be bought and sold and that enable holders to pollute up to a specified amount during given periods.