The "cap" is the limit placed on the amount of greenhouse gases a commercial entity is allowed to produce.

The "trade" is a financial market mechanism where a commercial entity which has emissions under that limit can then earn money by selling that underuse credit to another commercial entity.

This legislaton has not yet been passed in the United States. If passed it would become a law which mandates that commercial entities could only surpass their greenhouse emmissions "cap" or assisgned limit if they buy a permission. That's the trade aspect.

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Note added at 1 hr (2010-06-16 11:10:46 GMT)
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The following is from a website which has much more on this:

Included in Cap and Trade 101:

What is Cap and Trade?
In short, the “cap” is a legal limit on the quantity of greenhouse gases that a region can emit each year and “trade” means that companies may swap among themselves the permission – or permits – to emit greenhouse gases.

Cap and trade commits us to responsible limits on global warming emissions and gradually steps down those limits over time. Setting commonsense rules, cap and trade sparks the competitiveness and ingenuity of the marketplace to reduce emissions as smoothly, efficiently, and cost-effectively as possible

http://www.sightline.org/research/energy/res_pubs/cap-and-tr...