We exploit the heterogeneity in pollution permits allocation and the variation in the permits price to identify a new channel by which cap-and-trade programs can affect firm decisions: they may affect investment through the impact of free pollution permits on the firms cash flow. A firm with a permit allocation higher than its emissions will have a higher cash inflow if the price of permits increases, whereas a firm whose emissions are higher than its permit allocation will have a higher cash outflow if the price of permits increases. In the margin they are both paying the same for pollution but the cash flow consequences of the change in permit prices differ. Using data from investor-owned utilities participating in the US SO2 program, we find that for smaller firms the permit cash flow is positively related to capital expenditures. Small firms with a high permit cash flow invest more tan small firms with a lower permit cash flow. This effect is consistent with smaller firms in this industry facing financial constraints.