Assessment of U.S. cap-and-trade proposals
In this paper, the MIT Emissions Prediction and Policy Analysis (EPPA) model is applied to an assessment of a set of cap-and-trade proposals considered by the US Congress in spring 2007.
The term ‘cap-and-trade’ is used to describe a policy that identifies greenhouse-gas-emitting entities covered by the system, sets caps on their emissions and allows trading in the resulting emissions allowances.
The bills specify emissions reductions to be achieved through 2050 for the standard six-gas basket of greenhouse gases. They fall into two groups: one specifies emissions reductions of 50% to 80% below 1990 levels by 2050; the other establishes a tightening target for emissions intensity and stipulates a time-path for a ‘safety valve’ limit on the emission price that approximately stabilizes US emissions at the 2008 level.
A set of three synthetic emissions paths are defined that span the range of stringency of these proposals, and these ‘core’ cases are analyzed for their consequences in terms of emissions prices, effects on energy markets, welfare cost, the potential revenue generation if allowances are auctioned and the gains if permit revenue were used to reduce capital or labor taxes.