Whether through an economy-wide cap-and-trade system, sector-specific regulations, a carbon tax or top down regulation from the EPA, a federal plan to curb greenhouse gas (GHG) emissions will likely emerge in 2010. With the House endorsing cap-and-trade, finding the most efficient and cost effective approach to regulation is now in the hands of the Senate.
Testifying before the Senate Energy and Natural Resources Committee RFF Senior Fellow Raymond Kopp said any approach to GHG emissions regulation should address four attributes:
- The goals of the regulation
- Technology available to reach those goals
- The scale of the regulation
- The costs of any regulatory plan
During his testimony, Kopp highlighted that meeting the four central goals listed above could be achieved through a cap-and-trade system. He explained that in setting an emissions price and limiting quantities, cap and trade provides the kind regulatory certainty investors and industry need to plan for future expenses and builds in measures to ensure an equitable distribution cost:
When combined with allowance trading, economic efficiency is achieved meaning that at any point in time those most able to reduce emissions at the lowest cost are motivated to do so. When the program allows for banking of allowances economic efficiency is gained over time into the distant future.
The scope of the program, that is, the sources that can be regulated under the cap, is limited only by the ability to effectively and efficiently monitor emissions, therefore, the program can be truly economy-wide.
Given an economy-wide program, the price signal tells all sources to deploy existing mitigation technology options and provides incentives to develop and deploy new technology.
Emissions caps can be set decades into the future serving to alter household and business expectations, thereby affecting current and near-term investment decisions, and accelerating the transformation of the economy.
Allowances have value and allocating allowances moves wealth around in the economy. This is a desirable for two reasons. First, a portion of that wealth can be used to deal with the equity and distributional issues, and second, a portion can be used finance long-term government support for R&D.
Kopp’s testimony concluded by saying that whatever the approach is taken it should be adaptable, aim to cover as many sources as possible in a hyper-efficient manner, incentivize technological development and work to correct systemic inequities.
Tiffany Clements is managing editor of Weathervane.
