Who Gains and Who Pays under Carbon-Allowance Trading? The Distributional Effects of Alternative Policy Designs
Abstract
Scientists have known for more than a century that rising concentrations of carbon dioxide (CO2) in the atmosphere affect the Earth's climate. Nevertheless, agreement on whether to reduce in man-made CO2 emissions-which are caused mainly an by the combustion of fossil fuels-has been elusive as because of uncertainty about the potential size and effects of climate change, the costs associated with lowering emissions, and the distribution of those costs. This study focuses on the last issue: how the costs of U.S. government policies to reduce CO2 emissions (referred to here as carbon emissions) would ultimately be distributed among U.S. households. If the government decided to curb carbon emissions, one cost-effective way to achieve that goal might be through an allowance-trading policy. Under such a policy, rather than mandating specific pollution limits for each source of carbon in the nation, the government could set an overall limit on emissions and require U.S. firms to hold rights (or allowances) to those emissions. Some analysts advocate an "upstream" program, in which producers and importers of fossil fuels would be required to hold allowances. Such a design would probably be easier to implement than a "downstream" program, in which the requirement was placed on the millions of users of fossil fuels. After an initial distribution, companies would be free to buy and sell allowances. Similar trading programs have been used for U.S. emissions of sulfur dioxide, which contributes to acid rain; for lead in leaded gasoline; and for various chemicals that are thought to deplete the ozone layer of the atmosphere. The ultimate distributional effects of a trading program for carbon allowances would depend on two key decisions that the government would need to make in designing the program: how to allocate the allow- ances and how to use the additional revenue it received as a result.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jun 01, 2000
- Accession Number
- ADA379006
Entities
People
- Diane L. Rogers
- Terry Dinan
Organizations
- Congressional Budget Office