cap and invest

States can develop impactful and equitable regulatory programs that utilize market mechanisms to reduce greenhouse gas emissions while generating revenue for necessary climate and clean energy investments.

Table Of Contents
  1. Why This Matters
  2. Policy Solution
  3. Model Policy Features
  4. Potential Limitations & Pitfalls
  5. Complementary Policies
  6. Additional Information
  7. Examples
  8. Resources
COMMUNITY BENEFITAffordability, Decarbonization
KEYWORDSDecarbonization, Funding, Resilience
REGIONRegional, State
AFFORDABILITY STRATEGYFunding/Financing
OVERSIGHTVarious 
POLICY MECHANISMLegislation, Regulation

Why This Matters

To achieve economy-wide greenhouse gas emissions reductions, we need broadly applied, economically effective emissions reduction policies. But we also need to generate significant revenue for investments in the clean energy future.1 Cap-and-invest is a solution that potentially links these two challenges in an integrated program.

Policy Solution

State (or regional) cap-and-invest policies can potentially meet the dual challenge of reducing greenhouse gas emissions while raising money to support the transition to clean energy. The policy typically works by setting a statewide or sectoral emissions limit or “cap” and requiring greenhouse emissions sources to reduce their emissions in line with the cap, over time, with the help of market mechanisms that incentivize the necessary reductions.2 Program revenues must be reinvested in clean energy projects and other needs or solutions to help advance the transition to a low-carbon economy, mitigate the impacts of fossil fuels, or increase resilience in the face of climate change. Currently, cap-and-invest is not widespread in the U.S., but momentum is growing, especially at the state level. 

Model Policy Features

  • An initial statewide or regional (economy-wide or sector-wide) greenhouse gas emissions limit (or “cap”) is set as a baseline for required emissions reductions to be achieved over time through regulated program mechanisms. The overall emissions cap is reduced over time and greenhouse gas pollution sources must reduce or pay for their emissions accordingly. 
  • Covered sources of emissions—primarily stationary sources such as power plants, refineries, and manufacturers, as well as fuel suppliers—are required to hold allowances for their share of emissions as measured against the total emissions cap. These allowances are periodically auctioned by the state, thus putting a “price” on emissions; no-cost allowances are allocated to certain competitive industries that could relocate out of state to avoid program costs (this is sometimes termed “carbon leakage”).    
  • Allowances are traded within the auction market, typically between lower-emitting and higher-emitting covered sources.   
  • The initial cap is ratcheted down over time toward an overall emissions reduction goal, driving up the price of allowances and incentivizing covered sources to cost-effectively reduce emissions. 
  • The revenue from allowance auctions is put into a special fund for investing in clean energy solutions; spending of cap-and-invest revenues is typically structured to require a minimum share of investments targeted for the benefit of disadvantaged communities (DACs) and populations, for example supporting pollution control programs, affordable green housing, and public transit improvements. States can codify community investment mandates to ensure that a significant share of cap-and-invest revenue is directed for the benefit of the most overburdened and socially-vulnerable communities and populations; a process for mapping and designating which communities should qualify as disadvantaged should also be required. New York’s Climate Leadership and Community Protection Act (2019), Section 75-0117, established a cross-agency mandatory DAC investment floor of 35-40% of total climate and energy funding, a provision that would apply to any future cap-and-invest revenue.3  

Potential Limitations & Pitfalls

  • Generally, critics of cap-and-invest argue that this approach is often riddled with loopholes and easily manipulated to allow continuing pollution without much cost to polluters.4 Especially with weaker caps, extended timelines, and low allowance burdens, participants can cost-effectively “pay to pollute,” with continuing or even increasing greenhouse gas emissions as well as adding more health-damaging local co-pollutants from burning fossil fuels, including particulate matter, nitrogen oxides (NOx), and hazardous air pollutants.
  • Weak points include cost-free allowances for select covered source categories, including, generally, utilities (typically justified as a ratepayer protection measure) but also certain heavy industries (oil and gas, petrochemicals, cement, and steel) in order to prevent “carbon leakage” via out-of-state operation-shifting to avoid regulation. In California’s program, roughly half of allowances are allocated cost-free, and oil refiners alone have enjoyed an estimated windfall of $4.3 billion in foregone allowance costs since 2017.5  Advocates argue that carbon leakage is an uncertain or hollow threat and free allowances unfairly subsidize the worst polluters.6    
  • Cap-and-trade in California has been associated with increases in local co-pollutant emissions affecting disadvantaged communities (DACs) and particularly those with higher proportions of people of color.7 DACs are home to an estimated 60% of covered facilities with more than 50% of covered emissions, even though they are made up of only approximately 25% of census tracts.8 The high concentration of facilities and emissions in DACs and the evidence of unequal emissions reductions program-wide has led to a recommendation from the state’s Environmental Justice Advisory Committee that DACs should be designated as “no-trading” zones, within which covered facilities should be subject to direct emissions reduction requirements.9
  • Disentangling the effects of cap-and-trade from other policies or larger economic forces is challenging, which makes it difficult to evaluate program performance for purposes of improving it.10 
  • Cap-and-invest “flexibility” often includes extensive use of carbon offsets, replacing direct, in-state emissions reductions with potentially ineffective emissions reductions elsewhere.11 Offsets are particularly egregious for environmental justice reasons as well, because opportunities for local emissions reductions are foregone if polluters can purchase offsets instead of reducing their own emissions. 
  • Cap-and-invest-funded projects sited in DACs may not always directly or significantly benefit community residents. No consistent methodology has been applied for qualifying, quantifying, or otherwise assessing community benefits and impacts of cap-and-trade funded investments.12 
  • Cap-and-invest policies typically cap in-state emissions, but this cap may not reflect lifecycle emissions associated with fossil fuels or biofuels, such as the leakage of methane throughout the methane gas supply chain;13 such omissions may mean that allowances provided to methane gas users may actually be enabling a much larger share of lifecycle greenhouse gas emissions. Similar methane leakage likely also occurs throughout the biomethane lifecycle process, for example, but is poorly characterized.
  • Cap-and-invest policies, alone, may be insufficient to meet greenhouse gas emission reduction targets in many sectors without complementary policies and additional funding, such as transportation electrification and urban planning measures, to further ensure continued emission reductions. 

Complementary Policies

A number of policies can support the equitable implementation of cap-and-invest policies:

  • Utility rate impacts associated with utilities’ compliance costs under cap-and-invest can be offset by bill credits financed by cap-and-invest program revenues. 
  • Cap-and-invest is at best a partial solution and, as a pollution trading program that does not require mandatory, facility-specific emissions reductions in DACs, it is also controversial among environmental justice advocates. Thus, it is important to combine such a program with other, non-market policies, for example establishing legal mandates for electrifying transportation and buildings on specific timelines, or codifying cumulative impacts laws that prevent state environmental agencies from permitting new or expanded polluting facilities in already overburdened communities.14
  • Cap-and-invest funding can be used to support a wide range of clean energy investments, including but not limited to pre-weatherization and weatherization programs, residential solar (+storage), community solar, electrification readiness andefficient residential electrification programs, and other clean energy measures.

Additional Information

As of 2025, there are three operating cap-and-invest programs in the U.S. Two are established in law at the state level, in California (2006) and Washington (2021). The third is a regional regulatory compact for the power sector–the Regional Greenhouse Gas Initiative or RGGI (2009), including the New England states and New York, New Jersey, Maryland, and Delaware. New York has also established a cap-and-invest program through its 2024 state budget, but regulations required to implement the program were more than 18 months late as of the Fall of 2025. Cap-and-invest legislation is also under serious consideration in Oregon, but did not pass in 2025.

Examples

 1. California’s Cap-and-Trade Program – AB 32: Global Warming Solutions Act (2009)

Details:

  • AB 32 established mandatory state-wide greenhouse gas emissions reduction goals relative to 1990 levels and required development of a Scoping Plan to achieve the goals, leading to adoption of the state’s cap-and-trade program. 
  • The program’s cornerstone is a greenhouse gas emissions reduction target of 40% below 1990 levels by 2030. 
  • The program covers approximately 80% of California greenhouse gas emissions, including approximately 400 large facilities with minimum carbon dioxide equivalent (CO2e) emissions of 25,000 metric tons annually, including utilities, oil and gas facilities, manufacturers, and fuel suppliers.15 
  • Owners of covered sources must obtain allowances equal to their greenhouse gas emissions; allowances are traded between covered sources through the auction market or directly through secondary markets.  
  • On a limited basis, covered source owners can purchase carbon offsets in lieu of direct emissions reductions. 
  • Revenue from allowance purchases flows to the Greenhouse Gas Reduction Fund, which is a funding source for programmatic investments as directed by the legislature under guidelines developed by the California Air Resources Board. Specific investment mandates for disadvantaged communities were established through SB 535 (2012),16 which required identification/mapping of DACs and established minimum funding requirements, and AB 1550 (2016),17 which required official designation of DACs and increased minimum funding levels. The California Climate Credit, financed by cap-and-invest revenue and applied semi-annually, is a direct utility bill credit for electric and gas customers of the state’s investor-owned utilities.18   
  • To date, according to the state, emissions reduction targets have been met and the program has generated $32 billion in revenues, 75% of which, it is claimed, have been invested for the benefit of what are termed “priority populations,” including disadvantaged communities and low-income households.19 
  • In September 2025, the program was renewed and its timeline extended to 2045. Among others, a key policy change is eliminating gas utilities from the cap-and-trade-funded climate change bill credit program, instead merging the gas credit funding into a now larger pool for electricity bill credits and thus promoting electrification of space and water heating and household appliances. 

LIMITATIONS:

  • As noted above, in the first three years of the program, 2013–2015, impacts on local pollution from covered sources were unequal between whiter, more affluent communities and disadvantaged communities with more residents of color, with the latter actually experiencing increases in local pollution. Further research focusing on subsequent years of the program (2016–2017) confirmed a pattern of inequitable local pollution impacts affecting disadvantaged communities.20 
  • Extensive allowance banking (i.e. holding onto unused credits for future use) has resulted in a glut of unused credits that could be an escape valve for heavier polluters to avoid costly pricing of their emissions as the total emissions cap is lowered and allowance prices rise.21 
  • While California appears to have met its 2020 goal of reducing emissions to 1990 levels, ahead of schedule, the 2030 goal (40% below 1990 levels) is clearly at risk; in 2023, it was estimated that emissions reductions needed to accelerate to an average of 4.4% annually as compared to 1.6% between 2016–2021.22
  • California has adopted the federal 100-year global warming potential of methane as equal to 28 CO2e,23 which is less than the most recent value reported by the Intergovernmental Panel on Climate Change of 29.8 CO2e over 100 years and, more importantly, masks the very high near-term (20-year) warming potential of methane of 82.5.24 This, combined with the omission of lifecycle emissions for methane gas, distorts the allowance distribution, market, and measure of true greenhouse gas emissions and reductions.

2. New York Cap-and-Invest Program – NY Cap-and-Invest: Pre-Proposal Stage (2023)

Details:

  • New York State has a mandatory target of net-zero greenhouse gas emissions, economy-wide, by 2050 (this includes direct and indirect emissions reductions in a ratio of 85% to 15%, respectively).
  • To help achieve this target, Governor Kathy Hochul introduced an economywide cap-and-invest program (NYCI) in the state’s FY24 budget, including a cap-and-trade revenue investment program with a one-third carveout for household cost subsidies, and the remaining two-thirds targeted for clean energy and climate investments, with priority given to projects benefiting disadvantaged communities.25 
  • The New York State Energy Research and Development Authority (NYSERDA) issued its “pre-proposal” outline of the program in December 2023,26 including considerations for determining, among other things, the overall emissions cap and allowance budget, obligated sectors and sources, allowance pricing mechanisms, and development of a new greenhouse gas reporting protocol tailored for NYCI program compliance.
  • Also in 2023, Assemblymember Anna R. Kelles introduced “cap-and-invest guardrails” legislation (A8469), reflecting environmental justice concerns of community stakeholders, including the NY Renews Coalition,27 although it did not make it out of committee. Key provisions include the following:
    • Allowance trading is eliminated.
    • Lower emissions caps are required for covered sources in DACs or within a five-mile radius. Location-specific caps should ensure that the program disproportionately improves air quality and accelerates such improvements in DACs as compared to non-DACs. 
    • Bars “false solution” technologies such as “low-carbon” fuels and carbon capture schemes as eligible for purposes of compliance with NYCI emissions reduction obligations. 

LIMITATIONS:

  • A rulemaking proposal necessary for implementing the NYCI program was due by early 2024 but has been delayed by more than eighteen months as of the Fall of 2025. Advocates brought a lawsuit in the Spring of 2025 to force the state to move forward with the program, pursuant to broader rulemaking requirements established by the Climate Leadership and Community Protection Act of 2019.28 
  • It is well-understood that political concern about rising household costs has been behind the state’s backpedaling on NYCI. However, a 2025 report by Resources for the Future and the New York City Environmental Justice Alliance found that a well-designed and regionally well-targeted reinvestment program, including household cash payments and electrification investments, would result in net economic benefits for a large share of New Yorkers, and net economic gains would actually increase with higher allowance prices because this would generate more revenue for the household payments and investments.29

Resources

  • For a good cap-and-invest “primer,” see:
  • For a comprehensive critical analysis of cap-and-trade systems in theory and practice, see:
        1. Seven states currently have ambitious economy-wide clean energy mandates, most with a deadline of 2050. ↩︎
        2. Cap-and-invest is a market-based alternative to so-called “command and control” regulation. Whereas command-and-control would set industry-specific standards for emissions reductions at the facility level and even specific technological requirements applied uniformly, cap-and-invest is a more flexible approach that employs pollution allowance trading to incentivize cost-effective emissions reductions. It should be noted that what is now typically described as “cap-and-invest” policy has traditionally been termed “cap-and-trade.” California’s policy—the leading state example—was long termed cap-and-trade but, upon renewal in 2025, the term cap-and-invest was adopted in place of cap-and-trade. ↩︎
        3. New York State. (2019). S6599: The Climate Leadership and Community Protection Act. ↩︎
        4. Flaws and loopholes in the California program are dissected in Song, L. (2019). Cap and Trade is Supposed to Solve Climate Change, but Oil and Gas Company Emissions Are Up. Pro Publica. ↩︎
        5. Lim, L. (2024). Investing in Communities, Not Polluters: Reforming Cap-and-Trade to Deliver. Greenlining Institute. ↩︎
        6. Kassar, G. (2021). Exposing False Solutions: How Washington’s Cap and Trade Program Gives Industrial Polluters a Free Pass. In California, an estimated 61-72% of free allowances go to the oil and gas industry and principally oil refiners, according to the 2024 report of the Independent Emissions Market Advisory Committee. ↩︎
        7. Cushing, L., Blaustein-Rejto, D., Wander, M., et. al. (2018). Carbon Trading, Co-pollutants, and Environmental Equity: Evidence from California’s Cap-and-Trade Program (2011-2015). PLoS Med 15(7). ↩︎
        8. Burtraw, D., and Roy, N. (2023).  How Would Facility-Specific Emissions Caps Affect the California Carbon Market. Resources for the Future. ↩︎
        9. Environmental Justice Advisory Committee. (2022). 2022 Scoping Plan Recommendations. ↩︎
        10. State of California Legislative Analyst’s Office. (2017). The 2017-2018 Budget: Cap-and Trade. ↩︎
        11. California’s program allows offsets equal to an estimated 22% of direct emissions reductions between 2021 and 2030. See Haya, B.K. and Lezak, S. (2025). California Sends Millions of Dollars Out of State for Carbon Offsets of Dubious Quality. UC Berkeley Goldman School of Public Policy. ↩︎
        12. The issue of benefits and impacts assessment is addressed in the landmark, generally positive 10-year assessment of California’s cap-and-trade reinvestment program: Lim, L. and Fahnestock, V.C. (2024). A Call to Invest in Community Power: Lessons from 10 Years of California Climate Investments for the State and the Nation. Greenlining Institute and USC Dornsife Equity Research Institute. ↩︎
        13.  Alvarez, R. A., Zavala-Araiza, D., Lyon, D. R., Allen, D. T., Barkley, Z. R., Brandt, A. R., … & Hamburg, S. P. (2018). Assessment of methane emissions from the US oil and gas supply chain. Science, 361(6398), 186-188. ↩︎
        14. Daly, L. and Vaquero, I. (2024). Where EPA Falls Short, States Lead the Way on Pollution Burden in Disadvantaged Communities. Just Solutions Collective. ↩︎
        15. California Air Resources Board. Cap-and-Trade Program Fact Sheet. Accessed October 1, 2025. ↩︎
        16. CA SB 535 (2012) ↩︎
        17. CA AB 1550: Greenhouse gases: investment plan: disadvantaged communities (2016) ↩︎
        18. California Public Utilities Commission. California Climate Credit. Accessed November 20, 2025. ↩︎
        19. California Air Resources Board. Cap-and-Trade Program Fact Sheet. Accessed October 1, 2025. ↩︎
        20. Pastor, M., Ash, M., Cushing, L., et. al. (2022) Up in the Air: Revisiting Equity Dimensions of California’s Cap-and-Trade System. USC Dornsife Equity Research Center. This paper also responds to related research challenging environmental justice advocates’ concerns with unequal benefits of the cap-and-trade program. ↩︎
        21. Cart, J. (2020). Checking the Math on Cap and Trade, Some Experts Say It’s Not Adding Up. Cal Matters. ↩︎
        22. Next 10. (2023). California Green Innovation Index 15th Edition. ↩︎
        23. 40 C.F.R. § 98 Subpart A, Table A–1 (2024). ↩︎
        24.  Forster, P., T. Storelvmo, K. Armour, W. Collins, J.-L. Dufresne, D. Frame, D.J. Lunt, T. Mauritsen, M.D. Palmer, M. Watanabe, M. Wild, and H. Zhang, 2021: The Earth’s Energy Budget, Climate Feedbacks, and Climate Sensitivity. In Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Masson-Delmotte, V., P. Zhai, A. Pirani, S.L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L. Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T.K. Maycock, T. Waterfield, O. Yelekçi, R. Yu, and B. Zhou (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 923–1054. (Section 7.6.1.1) ↩︎
        25. New York State Energy Research and Development Authority. FY24 Budget Highlights Energy Affordability, Sustainable Buildings, and Clean Energy. Accessed September 18, 2025. ↩︎
        26. New York State Energy Research and Development Authority. (2023). New York Cap-and-Invest: Preproposal Outline. ↩︎
        27. NY Renews. Cap-and-Invest Guardrails. Accessed: October 1, 2025. ↩︎
        28. Kinniburgh, C. (2025). Climate Groups Sue Hochul Administration Over Climate Law Backtracking. NY Focus. ↩︎
        29. Robertson, M., Krupnick, A., Look, W., et. al. (2025). Analyzing Affordability: Supporting Households Under New York’s Cap-Trade-and-Invest Policy. Resources for the Future and New York City Environmental Justice Alliance. ↩︎