CLEAN AIR
MARKET PROGRAMS
Cap and trade is an environmental policy tool that
delivers results with a mandatory cap on emissions
while providing emission sources flexibility in how they
comply. Successful cap and trade programs provide strict
environmental accountability without inhibiting
economic growth, and reward innovation, efficiency,
and early action.
What Is Cap and Trade?
Cap and trade is a policy approach for controlling large
amounts of emissions from a group of sources. The
approach first sets an overall cap, or maximum amoun t of
emissions per compliance period, for all sources under the
program. The cap is chosen in order to achieve a desired
environmental effect. Authorizations to emit in the form of
emission allowances are then allocated to affected sources,
and the total number of allowances cannot exceed the
cap. Individual control
requirements are not specified
for sources; instead, sources
report all emissions and then
surrender the equivalent
number of allowances at the
end of the compliance period.
Allowance trading enables
sources to design their own
compliance strategy based on
their individual circumstances
while still achieving the
overall emissions reductions
required by the cap. Affected
units can tailor their compliance plans to each source.
Compliance strategies in well-designed cap and trade
programs require no prior approval, allowing sources to
respond quickly to market conditions and government
regulators to remain focused on results. Sources must
The remarkable efficiency
and reduced costs of a cap and trade
program should not overshadow the
purpose of the cap - that is,
to yield public health and
environmental results.
also accurately measure and report all emissions in a timely
manner to guarantee that the overall cap is achieved.
When Is Cap and Trade Effective?
In EPA's experience, cap and trade programs have proven
highly successful in the context for which they are best
suited: reducing emissions on a regional or larger scale
from multiple sources that exhibit a range of control
costs. While achieving significant reductions on a
regional scale, cap and trade programs can deliver
substantial air quality improvements. As effective as these
programs are, however, they may not be the solution to
every problem. For example, eliminating localized
concentrations of pollution is not their primary purpose.
The cap and trade approach is best used when:
• the environmental and/or public health concern
occurs over a relatively large area;
•	a significant number of
sources are responsible for
the problem;
•	the cost of controls varies
from source to source; and
emissions can be
consistently and
accurately measured.
Power Generation SO2 Emissions
With and Without the
Acid Rain Program


Allowable
Emissions

t missions
SO2 emissions have been reduced dramatically under the Acid
Rain Program. Early reductions under the first phase of the
program were banked to provide a gradual transition into the
more stringent second phase.
Source: www.epa.gov/airmarkets
Under the right circumstances,
cap and trade programs have
proven extremely effective,
providing substantial emission reductions, complete
accountability and unprecedented data quality and
access. Existing cap and trade programs — the Acid Rain
Program and the NOx Budget Program — have the force
of federal and state standards behind them, including
national health-based air quality standards. This ensures
that local public health needs are met in conjunction with
achievement of regional or national emission reductions.
Guiding Principl es for
Program Design
Three features critical to designing and implementing
environmentally effective and economically efficient trading
programs are 1) the cap on emissions, 2) accountability,
and 3) simplicity of design and operation.
Cap on Emissions. The cap on emissions is the central
element of an effective and efficient cap and trade
program. A mandatory cap on emissions is critical to
protect public health and the environment and to sustain
that protection into the future. The cap also serves to
provide stability and predictability to the allowance
trading market.

-------
www.epa.gov/airmarkets
Accountability. The accurate measurement and reporting of emissions
is essential, along with the rigorous and consistent enforcement of
penalties for fraud or noncompliance. Also critical is transparency,
such as public access to source-level emissions and allowance data.
The coupling of stringent monitoring and reporting requirements
and the power of the Internet makes it possible for EPA to provide
access to complete, unrestricted data on
trading, emissions, and compliance.
This promotes public confidence in the
environmental integrity of the program
an d business confidence in the fin ancial
integrity of the allowance market. It also
provides an additional level of scrutiny
to verify enforcement and encourage
compliance^ Finally, accoun tability requires
ongoing evaluation of the cap and trade
program to ensure that it is making
progress toward achievement of its
environmental goal.
Allowance trading enables sources
to design their own compliance
strategy based on their individual
circumstances while still achieving
the overall emissions reductions
required by the cap.
Simplicity. Rules should be clear and easily enforced. Markets
function better and transaction costs are lower when rules are
simple and easily understood by all participants. Moreover, the
environment is more likely to be protected when rules are clear and
consistently enforced. To the greatest extent possible, simplicity should
be applied to all elements of the program, including applicability
thresholds (determining which sources are affected), trading rules,
reporting requirements and penalty assessments. Program operation
for both emission sources and regulating authorities is more Certain,
more effective, and less costly and time-consuming if the rules are
not overly complex and burdensome.
A well-designed cap and trade program delivers:
•	Greater environmental protection at lower cost
•	Broad regional reductions, facilitating state efforts to
address local impacts
•	Early reductions, a result of allowance banking and
market incentives
Continued Accountability
As the cap and trade mechanism is applied to new environmental
problems, EPA is very cognizant of the im portance of ongoing
assessment to ensure diat environmental and public health goals are met.
The remarkable efficiency and reduced costs of a cap and trade
program should not overshadow the purpose of the cap — that is, to
yield public health and environmental
results. Whether the cap has been set at
a level adequate to achieve the desired
public health and environmental protec-
tions is an issue that warrants study and
evaluation. The Acid Rain Program and
the NOx Budget programs have been
highly effective in reducing emissions.
Though long-term environmental
monitoring has affirmed the programs'
effectiveness, studies have shown that
further reductions in emissions beyond
the current caps are necessary to protect
public health and the environment.
EPA continues to closely monitor and publish results, and is
pursuing additional analyses of localized impacts under cap and
trade programs in order to help inform ongoing evaluation and
policy making.
For more information, see "Tools of the Trade: A Guide to Designing
and Operating a Cap and Trade Program for Pollution Control"
http://www.epa.gov/airmarkets/international/tools.pdf
•	Environmental integrity and transparent operations
and results
•	Fewer administrative costs to government and industry
•	Efficiency and innovation incentives
•	Incentives for doing better and consequences
for doing worse
•	Accounting for all emissions
•	Partnership with existing requirements to ensure
protection of the local population and environment.

-------