Cap-and-Trade Can Cut Emissions Without Major Economic Hit
A cap-and-trade system can be effective in reducing greenhouse gas emissions, without having a significant negative economic impact, according to researchers at MIT’s Center for Energy and Environmental Policy Research.
The European experience confirms much of what has been learned from similar U.S. systems for other emissions, namely, that cap-and-trade systems can be constructed, that markets emerge to facilitate trading, that emissions are reduced efficiently, and that the effects on affected industries are less than predicted.
The report, Cap-and-Trade: Contributions to the Design of a U.S. Greenhouse Gas Program, found that the most controversial aspect of the European program was how to allocate the permitted emissions levels to different producers. Initial free allocation of allowances, they found, was the necessary price for gaining political acceptance, as it has been in U.S. systems. Over time, the clearly established trend in the E.U. is to phase out the free allocation of permits in favor of auctioning them.
The report also looked at mechanisms that can be used to control the costs that will be imposed on power producers as a result of implementing a cap-and-trade system. Several alternatives were analyzed, including such things as a “safety valve,” banking and borrowing of allowances, and renewable portfolio standards. Rather than a single best choice, the study found that different mechanisms work best for addressing uncertainties associated with long-term, short-term and start-up costs.
The report also examines the relationship between state and federal regulations on greenhouse gas emissions. Differences in the abatement costs among states can create economic inefficiencies that make achievement of the climate goal more costly than it need be, the report found. “This inefficiency can be avoided by either federal preemption of duplicative state programs, the authors found, or by a “carve out” of more demanding state programs from the federal cap with linkage.”
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