In cap-and-trade systems, which statement is true?

• A. Banking allows saving allowances for later use.
• B. Borrowing allows using future allowances now.
• C. Banking allows saving allowances for later use; borrowing allows using future allowances now.
• D. Neither banking nor borrowing affects price stability.

Answer: (C)

The main idea is how time-flexibility tools in cap-and-trade help smooth the price of emissions allowances. Banking lets a firm save unused allowances for future periods, creating a buffer if future costs rise or if emissions are easier to meet now but harder later. This stored supply can reduce price pressures in tight future periods because some of the demand can be met with saved allowances.

Borrowing, on the other hand, allows using allowances that would be allocated in a future period in the present period. This pulls future supply into today, which can ease current-year compliance costs and dampen near-term price spikes, though it means future periods will have to catch up by reducing or otherwise accounting for those borrowed allowances.

Because these two mechanisms alter the effective supply of allowances across time, they influence price stability and the ability to meet caps smoothly. The statement that describes both banking and borrowing together is the best answer, since it captures how these tools provide flexibility over time. The other options are incomplete or ignore the stabilizing role these time-shifting features play.