Title: Carbon Emission Trading Costs and Allowance Allocations: Evaluating the Options
Abstract:Although the Bush administration declined to participate in the Bonn agreement that addressed international reductions in carbon dioxide (CO2) emissions, the president has repeatedly acknowledged the ...Although the Bush administration declined to participate in the Bonn agreement that addressed international reductions in carbon dioxide (CO2) emissions, the president has repeatedly acknowledged the severity of the climate change problem. The preponderance of scientific evidence suggests that greenhouse gas emissions are warming the planet’s atmosphere. Carbon dioxide emissions are primary contributors to the buildup of greenhouse gases, and the United States accounts for 24% of global carbon dioxide emissions. President Bush has ordered a cabinet-level review of U.S. climate change policy and spoken about the need for market-based approaches to reducing emissions. It is possible the president’s carbon policy will be similar to one of his father’s significant environmental initiatives, which included a sulfur dioxide (SO2) emission trading program as part of the 1990 Clean Air Act Amendments. If Bush proposes a similar trading program for CO2, one of the biggest issues will be how to initially allocate the emission allowances. The approach to allocating emission allowances for CO2, which we measure in equivalent units of carbon, is important for two reasons. The first is that the potential transfer of wealth within the economy under a carbon trading program is tremendous and is likely to far outstrip the magnitude of any previous trading program. The market value of emission allowances that are allocated, bought and sold, and potentially reflected in electricity prices can be as much as 10 times greater than the actual cost of compliance with an emission reduction target. This is because every ton of carbon emission would require an allowance. For example, if the United States were to reduce its emissions by 5%, the marginal cost per ton of those reductions would be expected to determine the price of an emission allowance, and this would be the value per ton for each of the remaining 95% of emissions. The second reason the allocation of carbon emission allowances is important is its effect on the economic cost of achieving emission reductions. This may come as a big surprise to many advocates of emissions trading. For the most part, the economics literature has either ignoredRead More
Publication Year: 2001
Publication Date: 2001-01-01
Language: en
Type: article
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Cited By Count: 7
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