This paper proposes a framework for climate policy instruments for local governments to reduce greenhouse gas (GHG) emissions from cities. The proposal put forth is that local governments would be assigned a city carbon budget, and would be required to keep annual GHG emissions from local transport and buildings within this allocated budget. The paper identifies and evaluates options for creating an effective and acceptable institutional structure, allocating emission targets to localities, measuring emissions, providing flexibility, and incentives to local governments, and assuring compliance. The authors argue for a mandatory but flexible climate policy framework that would empower local governments to take responsibility for their future emission patterns. Given that local governments have very limited resources, the authors oppose financial penalties as it may draw fierce opposition from local governments, and support financial rewards or incentives to assure compliance in the proposed framework. The framework suggests that the responsibility of selecting and implementing actions should be with local governments. However, for methodological consistency in both budget setting and emissions measurement across cities, it is important for national governments to step in. In terms of allocation of budget, the paper proposes per capita emissions reduction targets which achieve the environmental goal of emissions reduction by all local governments without affecting economic growth.