Bottom Line on Cap-and-Trade

The document defines cap-and-trade as a market-based system that sets a maximum limit on greenhouse gas emissions, creating a carbon price through the supply and demand of emission allowances. It details the differences between upstream and downstream regulation, compares cap-and-trade to carbon taxes, and lists existing programs such as the EU-ETS and RGGI.

• A cap-and-trade program functions by setting a maximum limit, or "cap," on greenhouse gas emissions for covered sectors. Emitters must monitor their emissions and hold enough allowances—permits for specific emission amounts—to cover their reported totals. This scarcity creates a market price, allowing companies that can reduce emissions cheaply to sell allowances to those for whom reductions are more expensive, thereby lowering overall compliance costs.
• Regulation can occur at different points: "upstream" regulation targets energy producers, suppliers, and transporters (such as oil and gas companies and refineries), while "downstream" regulation targets emissions at the point of combustion or use. Due to administrative complexity, downstream regulation is typically limited to large-scale emitters like energy-intensive industrial sources and fossil fuel-fired power plants.
• While both cap-and-trade and carbon taxes are market-based tools that create a financial incentive to reduce emissions, they differ in their mechanism: cap-and-trade sets a limit on emissions and lets the market determine the price, whereas a carbon tax sets a direct fee on fuels based on emissions without establishing a limit on the total amount of emissions.
• Several cap-and-trade programs are currently in operation. The European Union Emissions Trading Scheme (EU-ETS) regulates carbon dioxide emissions from 11,500 installations across 25 countries. In the United States, the Northeast Regional Greenhouse Gas Initiative (RGGI) involves 10 states targeting the electric power sector. Other initiatives include the Western Climate Initiative (seven states and three Canadian provinces) and the Midwest Regional GHG Reduction Accord (six states and one Canadian province).

APA

World Resources Institute (n.d.). Bottom Line on Cap-and-Trade. https://www.wri.org/research/bottom-line-cap-and-trade

Chicago

World Resources Institute. Bottom Line on Cap-and-Trade. n.d. https://www.wri.org/research/bottom-line-cap-and-trade.

Wikipedia

{{cite report |author=World Resources Institute |title=Bottom Line on Cap-and-Trade |url=https://www.wri.org/research/bottom-line-cap-and-trade |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{worldresourcesinstitutendbottom, author = {{World Resources Institute}}, title = {{Bottom Line on Cap-and-Trade}}, institution = {World Resources Institute}, url = {https://www.wri.org/research/bottom-line-cap-and-trade}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }