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Congress analyzes cap-and-trade system for carbon dioxide

A program to control carbon dioxide emissions through a cap with an emissions-allowance trading program that includes a "safety valve" would be "significantly more efficient" than an inflexible annual cap on CO2, the Congressional Budget Office said in a new study in February.

A cap-and-trade program that includes a price ceiling for emission allowances -- also known as a "safety valve" -- could be relatively easy to implement and link with other GHG emission reduction programs set up by other developed countries, CBO said in the report, "Policy Options for Reducing CO2 Emissions."

Price volatility in the allowance market could make it difficult for policymakers to know when to alter the supply of allowances and would mean that no particular price outcome could be guaranteed.
--Congressional Budget Office study

But the report also said a tax on CO2 -- something that so far has proven to be politically unpalatable -- would be the easiest to implement and would offer "significant advantages" over other options.

"If policymakers chose to specify a long-term target for cutting emissions, a tax could be set at a rate that could meet that target at a lower cost than a comparable cap," CBO said.

The report also said that "if policymakers set the tax rate at a level that reflected the expected benefits of reducing a ton of emissions (which would rise over time), a tax would keep the costs of emission reductions in balance with the anticipated benefits, whereas a cap would not."

The CBO report said that under a tax, policymakers would levy a fee for each ton of CO2 emitted or for each ton of carbon contained in fossil fuels. The tax would motivate entities to cut back on their emissions if the cost of doing so was less than the cost of paying the tax.

"As a result," the report said, "the tax would place an upper limit on the cost of reducing emissions, but the total amount of CO2 that would be emitted in any given year would be uncertain."

As policymakers mull how best to control GHG emissions, the CBO was asked to explore various incentive-based schemes for businesses and individuals to reduce carbon emissions.

CBO concluded that an inflexible cap on carbon to be the "least efficient option" although it would be easy to implement. Such an option would be difficult to link with international emissions trading programs, the report said.

Another option discussed in the CBO study -- a cap-and-trade program with banked and borrowed allowances -- would be even more difficult to implement than would a standard emissions trading program with a safety valve.

"Price volatility in the allowance market could make it difficult for policymakers to know when to alter the supply of allowances and would mean that no particular price outcome could be guaranteed," CBO said.

The CBO was asked to look at these proposals by Senate Energy and Natural Resources Committee Chairman Jeff Bingaman, a Democrat from New Mexico, who introduced a bill to create a GHG emissions cap-and-trade program with a $12/ton safety valve.

While CBO said it found a tax on GHG emissions would be the most efficient and easiest incentive-based option, lawmakers, utility executives and environmental groups have dismissed the idea of such a tax, saying policymakers are unwilling to consider such a plan and that a tax could not guarantee that GHG emissions actually would be reduced.

Created: March 4, 2008

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