CO2 cap & trade

Congressional Budget Office (CBO) Director Peter Orzsag testified before the House Committee on Ways and Means on designing a cap-and-trade program to reduce carbon dioxide emissions. Under cap-and-trade, policymakers would set a cap on total emissions for a certain period and regulated firms would have allowances of the emissions; after initial distribution, firms could buy and sell the allowances among themselves. Among the testimony's key points:

• Emission allowances would have substantial value. Under the cap-and-trade proposal that went to the Senate floor in June, allowances would be worth around $112 billion once the cap took effect in 2012.
• The ultimate effect of a policy decision to sell or give away allowances could be either progressive or regressive on high-income or low-income households, respectively.
• The rise in prices for energy and energy-intensive goods and services would impose a larger burden, relative to income, on low-income than on high-income households.
• Energy-intensive U.S. industries that face foreign competition could lose sales to countries with less stringent emission policies.

Issues in Designing a Cap-and-Trade Program for Carbon Dioxide Emissions (pdf, 22pp/172kB), September 18, 2008