Cap and Trade Basics
- Regionwide Cap: The cap is intended to protect public health and the environment and to sustain that protection into the future, regardless of growth in the sector. For the Acid Rain Program, the cap is a nationwide total of emissions established by Title IV of the 1990 Clean Air Act Amendments. For CAIR, the cap is the sum of state emission budgets developed to address the interstate transport of pollution and to help downwind states meet their air quality goals to protect human health and the environment.
- Limited Allowances: Authorizations to emit, known as allowances, are allocated to affected sources. The allowance market enables sources to trade (buy and sell) allowances throughout the year.
- Compliance Alternatives: Sources have the flexibility to choose among several options to reduce SO2 and NOx emissions, such as adding emission controls, replacing existing controls with more advanced technologies, optimizing existing controls, switching fuels, using banked allowances, or buying allowances from the market.
- Allowance Market and Banking: If a source has excess allowances because it reduced emissions beyond required levels, it could sell the unused allowances or bank (save) them for use in a future ozone season.
- Stringent, Complete Monitoring: To accurately monitor and report emissions, sources use continuous emission monitoring systems (CEMS) or other approved monitoring methods under EPA’s stringent monitoring requirements (40 CFR, Part 75).
- Compliance Determination: At the end of every compliance period, each source must hold enough allowances to cover their emissions (each allowance represents one ton of SO2 or NOx emissions). This process is called annual reconciliation.
- Automatic Penalties: If a source does not have enough allowances to cover its emissions, EPA issues an automatic penalty. Under the ARP, sources must pay a fine ($xx/ton) and for CAIR, allowances from the following year’s allocation are deducted.
See our Emissions Trading Resources website for more information.