Can someone explain Cap and Trade in laymans terms?

In simple terms: the government imposes a limit on CO2 emissions and sells the rights to emit CO2 to firms. Some firms will find it cheaper to reduce emissions while others will find it cheaper to buy emission rights from those firms rather than make the necessary investments.

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Its about setting a threshold for the maximum pollutants that a single manufacturer/producer can emit lets say annually. So lets say its 1000 units of pollutant annually, if the company emits 600 units, it can trade 400 to another manufacturer who emits 1400 of the pollutant. This is a crude basic look at it, but its just do the math on excess or short fall relative to a standard.

In the absence of the cap = 1000, then manufacturers may not take the initiative to clean up the environment and may have dirtier production facility.

It's the most ridiculous proposal I've ever heard. As it is. the car manufacturers have moved to Mexico and Canada, because of ridiculous pollution laws. Years ago, it was the steel mills that were the bad guys, then it was hair spray, put every woman with hair on a guilt trip. Then it was cars: another backfire, Volvo, Honda, Mercedes fixed that in one year, we still haven't. Then it became cigarettes; suddenly people are buying nicotine gum for $50 a box. Nicotine is addictive, let's all chew nicotine. So now it must be CO2. Inhale all you want... but don't exhale. The biggest pocket of cancer in the US is in Staten Island, just down wind from Mobil/Exxon plant in Linden NJ, When do they get capped.

cap the emissions, trade "permits" that "allow" you to emit so much pollution, trade the permits in a market.

very very simple...like all economics

See http://en.wikipedia.org/wiki/Emissions_trading

Bottom line, it's a tax on production according to how much "pollutant" is produced. Congress seems to think CO2 is a pollutant, so technically you could be taxed for exhaling.