---
title: "Cap and Trade"
type: Legal Term
source: https://casebriefly.com/legal-terms/cap-and-trade
---

# Cap and Trade

Cap and trade is a market-based regulatory mechanism that sets an aggregate limit (cap) on total emissions of a pollutant within a defined jurisdiction and distributes tradable allowances representing the right to emit a specified quantity, allowing regulated entities to buy and sell allowances to achieve compliance at the lowest overall cost. The seminal U.S. example is Title IV of the 1990 Clean Air Act Amendments, which established a sulfur dioxide (SO2) trading program to address acid rain; the program is widely regarded as having achieved emission reductions faster and at far lower cost than traditional command-and-control regulation. Under this system, firms that can reduce emissions cheaply will do so and sell surplus allowances to firms facing higher abatement costs, theoretically driving emissions reductions to their economically efficient level. Cap-and-trade programs have since been applied to greenhouse gases, most notably in the European Union Emissions Trading System and California's AB 32 program.

## Related Terms

- clean-air-act
- polluter-pays-principle
- best-available-technology

## Related Cases

- american-electric-power-co-v-connecticut
- american-trucking-associations-v-epa

## Example

Under a regional cap-and-trade program, a power plant that invested in scrubber technology reduced its SO2 emissions below its allowance allocation and sold its excess permits to a neighboring plant that found it cheaper to buy credits than install new equipment.

---
Source: [Cap and Trade — CaseBriefly](https://casebriefly.com/legal-terms/cap-and-trade)