Bottom Line on Cap-and-Trade

This World Resources Institute fact sheet explains cap-and-trade programs, which limit greenhouse gas emissions by creating a market for emission allowances. It details the difference between upstream and downstream regulation, contrasts cap-and-trade with carbon taxes, and highlights existing examples such as the EU-ETS and the U.S. Northeast Regional Greenhouse Gas Initiative (RGGI). The document notes that the U.S. EPA is the proposed administrator for most federal U.S. legislative proposals.

• A cap-and-trade program functions by setting a maximum limit, or "cap," on greenhouse gas (GHG) emissions for covered sectors. Emitters are required to measure, monitor, and report their emissions and must hold enough allowances—permits allowing a specific amount of emissions—to cover their reported totals at the end of each compliance period. The scarcity of these allowances creates a market price based on supply and demand, allowing companies that can reduce emissions cheaply to sell allowances to those for whom reductions are more expensive, thereby lowering overall compliance costs.
• Regulation in cap-and-trade programs can be applied at different points: "upstream" regulation targets energy producers, suppliers, and transporters (such as coal mining operations, petroleum refineries, and oil and gas companies), 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.
• Cap-and-trade programs differ from carbon taxes in how they establish prices and control emissions. While both are market-based and provide financial incentives for GHG reduction, a cap-and-trade system sets a hard limit on emissions and lets the market determine the price of allowances. In contrast, a carbon tax sets a direct fee on fuels based on their GHG emissions but does not impose a limit on the total amount of emissions.
• Several cap-and-trade programs exist globally and regionally. The European Union Emissions Trading Scheme (EU-ETS) regulates carbon dioxide emissions from 11,500 energy-intensive 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).
• For a potential national cap-and-trade program in the United States, most federal legislative proposals designate the U.S. Environmental Protection Agency as the administering body, though the specific regulatory authority and implementation flexibility may vary by proposal.

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} }