In April 2010 the Tokyo Metropolitan Government launched the Tokyo Cap-and-Trade Program to reduce energy consumption-related CO2 emissions at the city level. This is the world's first cap-and-trade programme to cover buildings in the commercial, industrial and public sectors. Its main aim is to reduce CO2 emissions from energy consumption in existing buildings in urban areas; therefore, it is called an ‘urban cap-and-trade programme’. The appropriateness and effectiveness of this demand-side mechanism are examined, as well as the key policy and strategy components for introducing this new mechanism. Crucial factors for the successful introduction of this programme include the implementation of a mandatory reporting programme prior to the cap-and-trade programme and a consultation process involving open discussions among stakeholders for creating a consensus. Actual outcomes of the programme will take several years to assess; however, given the significant impact of growing carbon emissions from existing urban buildings, an urban cap-and-trade mechanism can be a worthwhile action at the level of local governance. Based on these lessons, other cities can consider this urban cap-and-trade scheme as a viable policy instrument.