Emissions Cap and Trade Systems: Design Options and Implications

  Monday, July 30, 2001

3:00 – 5:00 pm, 2168 Rayburn House Office Building

              The Environmental and Energy Study Institute (EESI) sponsored a briefing exploring design options for “cap-and-trade” systems to reduce carbon emissions or other air pollutants. A national emissions trading program for sulfur dioxide (SO2) already is in operation pursuant to the 1990 Clean Air Act Amendments, and many policymakers and other experts favor greater use of such market-based emissions trading systems.  Various emissions trading proposals for the electricity sector currently are under consideration on Capitol Hill.  Emissions trading may be limited to a particular economic sector or implemented on an economy-wide basis.

  At Monday’s briefing, a panel of experts described key decisions regarding the design of emissions trading systems, the implications of various design choices, and related tradeoffs.  Key decisions with respect to emissions trading mechanisms include whether emissions allowances are held “upstream” or "downstream” and the method for allocating allowances.  Possible allocation methods for emissions allowances include auctioning, auctioning with a safety valve, using a generation performance standard (GPS), grandfathering and hybrid approaches, such as auctioning a portion of the allowances and using GPS for the remainder.  The presentations included explanations of important technical terms.  

The speakers at the briefing discussed how design decisions will affect a cap and trade program’s performance and why policymakers will have to make tradeoffs in choosing among design options, dependent on how they weigh various performance criteria. Speakers also discussed the implications of such approaches for renewable energy and energy efficiency technologies.

The briefing presentations drew on two recent studies:  “An Evaluation of Cap-and-Trade Programs for Reducing U.S. Carbon Emissions” (Congressional Budget Office, June 2001) and  “The Effect of Allowance Allocation on the Cost and Efficiency of Carbon Emission Trading” (Resources for the Future, July 2001). The CBO study evaluates four cap-and-trade proposals in terms of their design decisions and related implications for program performance, using five evaluation criteria:  ease of implementation, the certainty that the emissions reduction target will  be met, incremental cost certainty, cost effectiveness, and distributional effects. The Resources for the Future study analyzes how emissions allowance allocation decisions will affect the cost-effectiveness and distributional effects of a cap-and-trade program for the electricity sector.

  Speakers at the briefing included:            

  Dr. Terry Dinan, Senior Analyst for Environmental Issues, Congressional Budget Office

  Dallas Burtraw, Senior Fellow, Resources for the Future

  Karl Gawell, Executive Director, Geothermal Energy Association

  Steven Nadel, Executive Director, American Council for an Energy-Efficient Economy