"Cap and trade" refers to a system in which a market-based approach is used to implement restrictions on the emissions of greenhouse gases. As a policy tool, it seeks to protect the environment by creating a market in which emission allowances can be bought and sold.
The first task of a cap and trade program is to set a maximum limit on gas emissions. The sources of emissions covered by the program are then authorized to emit greenhouse gases within the limits of their allowances. To conform to the restrictions, a source of emission employs pollution-control measures and acquires additional allowances from sources that are selling them. A cap and trade system requires every source to measure their emissions accurately and report the findings to a regulatory body.
The targeted cap for a source of emission is established in accordance with its total amount of GHG emissions within a year and the final date of target achievement. The cap seeks to reduce emissions while allowing the sources to remain competitive in their markets. The possibility of additional revenue through the sale of emission allowances provides a financial incentive to reduce emissions.
As of 2014, the U.S. Environmental Protection Agency has employed a variety of cap and trade programs, including the Clean Air Interstate Rule, which seeks to reduce the emissions of sulfur dioxide and nitrogen oxides, in addition to the Clean Air Visibility Rule and the Acid Rain Program.