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AN EVALUATION OF CAP-AND-TRADE PROGRAMS FOR REDUCING U.S. CARBON EMISSIONS
 
 
June 2001
 
 
Preface

Climate change has emerged as an important public policy issue, although the prospects for an international agreement on climate policy are unclear. Several Members of Congress and public interest groups have proposed plans to encourage or require cuts in the United States' emissions of carbon dioxide, which affect the Earth's climate. This Congressional Budget Office (CBO) study--prepared at the request of the Senate Committee on Environment and Public Works--examines four proposals for reducing those emissions. Each proposal is a variant of a "cap-and-trade" program, in which policymakers would set a mandatory cap on emissions of carbon dioxide and provide companies with economic incentives to reach that cap at the lowest possible cost.

This study evaluates the four proposals using various criteria, including ease of implementation, degree of certainty about achieving the target level of emissions, cost-effectiveness, and distributional effects. The analysis shows how key decisions in the design of cap-and-trade programs affect their performance relative to those criteria. No single proposal stands out in terms of all the criteria considered. Which option policymakers might prefer, if they chose to take action at all, would depend on how they weighed the various performance criteria.

The study was written by Terry Dinan of CBO's Microeconomic and Financial Studies Division, which is directed by Roger Hitchner. Barbara Edwards, Arlene Holen, Deborah Lucas, Robert Shackleton, and Tom Woodward of CBO provided valuable comments and assistance, as did Roberton Williams III of the University of Texas at Austin, Tim Hargrave of the Center for Clean Air Policy, and Dallas Burtraw and Carolyn Fischer of Resources for the Future.

Christian Spoor edited the study, and Christine Bogusz proofread it. Rae Wiseman produced the initial drafts, and Kathryn Quattrone prepared the study for publication. Lenny Skutnik printed the initial copies, and Annette Kalicki prepared the electronic versions for CBO's Web site.
 

Dan L. Crippen
Director
June 2001
 
 

Contents

SUMMARY

ONE - INTRODUCTION

TWO - THE IMPLICATIONS OF DESIGN DECISIONS FOR THE PERFORMANCE OF CAP-AND-TRADE PROGRAMS

THREE - EVALUATION OF FOUR CAP-AND-TRADE PROPOSALS

TABLES
 
S-1. How Various Cap-and-Trade Options Measure Up Against CBO's Evaluation Criteria
1. U.S. Fossil-Fuel-Related Emissions of Carbon Dioxide, by Sector, 1998
2. How Various Cap-and-Trade Options Measure Up Against CBO's Evaluation Criteria
 
FIGURE
 
1. Composition of Total U.S. Emissions of Greenhouse Gases, 1998
 
BOXES
 
1. How Much Would the Cost of a Cap-and-Trade Policy Decline If the Allowances' Value Was Used to Cut Taxes?
2. The Budgetary Treatment of Different Types of Federal Programs to Limit Carbon Emissions
3. Estimates of Companies' Windfall Gains from Receiving Allowances for Free
4. Early-Reduction Crediting

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