In 1968, the late Canadian economic historian John Dales elaborated the theory of cap-and-trade in his prescient book, Pollution, Property, and Prices [University of Toronto Press, 1968]. [note: Dales was not the first economist to recommend tradable permitting. Two years earlier, Thomas D. Crocker of the University of Wisconsin – Milwaukee suggested the idea. Dales, however, was the first to actually describe how such an approach might be structured.] Dales envisioned a ‘market’ in ‘pollution rights’ created by the government. First, the government would impose a quota limit on allowable emissions, as it regularly does in ordinary regulation. This quota limit, often referred to as a ‘cap,’ must be set administratively in order to render available emissions units scarce; otherwise, no market for them would develop. With the cap in place, the government would then issue pollution rights (usually referred to as ‘allowances’ or ‘credits’) equal in number to the cap. Each pollution right would be equal to one unit (usually, a ton) of pollution.
In practice, emissions trading evolved, almost entirely, in the context of air pollution control under the 1970 Clean Air Act and its amendments. That statute did not make any provision for the kind of transferable pollution rights system Dales envisioned. As early as 1974, however, the Environmental Protection Agency was experimenting with transferable pollution rights programs. By 1980 the agency had approved four distinct emissions trading schemes