Monday, November 15, 2010

Managing Allowance Prices in a Cap-and-Trade Program -- CBO

This report from the Congressional Budget Office (Pub. No. 4081), dated November 2010, finds that the accumulation of greenhouse gases in the atmosphere--particularly carbon dioxide released as a result of deforestation and the use of fossil fuels--could create costly changes in regional climates throughout the world.

Concern about the damage from such changes has led policymakers and analysts to consider policies designed to reduce emissions of those gases. Many proposals have focused on cap-and-trade programs, which would limit the number of tons of greenhouse gases emitted into the atmosphere over several decades from certain sectors of the U.S. economy. Under such a program, lawmakers would set gradually tightening annual caps on greenhouse gas emissions that together would imply a cumulative limit over the duration of the policy. Rights to emit the gases, referred to as allowances, would then be distributed to businesses or other entities, such as state governments, in amounts that corresponded to those limits. (One allowance would permit one ton of emissions.) The government could distribute the allowances by either selling them, possibly in an auction, or giving them away. Once the allowances were distributed, they could be bought and sold in the secondary market for them that would develop....

[This report] examines the potential effects of features that would help manage allowance prices, and thus the cost of complying with a cap-and-trade program, by altering the number of allowances available to firms at various prices."

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