Allowance Trading Basics
Cap and trade programs use emission allowances as the currency to comply with emission reduction requirements. These programs display the following key features:
- An emissions "cap": A limit on the total amount of pollution that can be emitted (released) from all regulated sources (e.g., power plants); the cap is set lower than historical emissions in order to reduce emissions.
- Allowances: An authorization to emit a fixed amount of a pollutant.
- Measurement: Accurate tracking of all emissions.
- Flexibility: Sources can choose how to reduce emissions, including whether to buy additional allowances from other sources that reduce emissions.
- Allowance trading: Sources can buy or sell allowances on the open market. Because the total number of allowances is limited by the cap, emission reductions are assured.
- Compliance: At the end of each compliance period, each source must own at least as many allowances as its emissions.
For more information on cap and trade programs in general, visit the Cap and Trade site.
For more information on the market-based sulfur dioxide (SO2) allowance trading component of the Acid Rain Program, see the SO2 Allowances Fact Sheet.
For more information on the nitrogen oxides (NOx) allowance trading component of the NOx Budget Trading Program, see the NOx Budget Trading Program/NOx SIP Call page.