Designing a U.S. Cap-and-Trade System

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Presentation transcript:

Designing a U.S. Cap-and-Trade System Jason Bordoff, Policy Director Hamilton Project, Brookings Institution April 23, 2008 11/30/2019

Economic Impact of Market Climate Policy 11/30/2019 2

Source: Fischer and Newell (2007) Economic Cost of Various Climate Policies Electricity-sector specific policies resulting in 5% emissions reductions Source: Fischer and Newell (2007) 11/30/2019 3

Cost Containment Mechanisms Safety Valve: unlimited additional allowances at specified price (possibly with symmetric removal at price floor). Reserve (quantity-limited safety valve): automatic movement of a fixed quantity of emissions from future caps to current cap as price exceeds specified level. Borrowing: individuals can borrow future allowances but must repay with interest. Triggered mechanisms: if prices exceed X then more Y allowed. CMEB: independent board has ability to intervene if costs are high (more governance than mechanism) Source: Pizer (2008) 11/30/2019 4

SO2 Allowance Price Volatility 11/30/2019 5

Source: Congressional Budget Office 11/30/2019 6

CBO Scores ACSA as Tax Expenditure “The value of … allowances created and then given away at no charge should also be recorded in the budget as revenues and outlays…. The government is essential to the existence of the allowances and is responsible for their readily realizable monetary value through its enforcement of the cap on emissions. The allowances would trade in a liquid secondary market since firms or households could buy and sell them, and thus they would be similar to cash. … Therefore, CBO considers the distribution of such allowances at no charge to be functionally equivalent to distributing cash. “That type of scoring approach best illuminates the trade-offs between different policy choices. Distributing allowances at no charge to specific firms or individuals is, in effect, equivalent to collecting revenue from an auction of the allowances and then distributing the auction proceeds to those firms or individuals. In other words, the government could either raise $100 by selling allowances and then give that amount in cash to particular businesses and individuals, or it could simply give $100 worth of allowances to those businesses and individuals, who could immediately and easily transform the allowances into cash through the secondary market….” --Congressional Budget Office, April 10, 2008 (emphasis added) 11/30/2019 7

Electricity prices respond regardless of auction vs allocation 11/30/2019 8

Distributional Impact of Carbon Tax Source: Metcalf (2007) Source: Metcalf (2007) 11/30/2019 9

Distributional Impact of Carbon Tax and Rebate Source: Metcalf (2007) 11/30/2019 10