Assessment of U.S. Cap-and-Trade Proposals

Joint Program Report
Assessment of U.S. Cap-and-Trade Proposals
Paltsev, S., J. Reilly, H. Jacoby, A. Gurgel, G. Metcalf, A. Sokolov and J. Holak (2007)
Joint Program Report Series, April, 66 p.

Report 146 [Download]

Abstract/Summary:

[Executive Summary: 150 kB] [Appendix C: 1 MB] [Appendix D: 650 kB] [Data Tables: 500 kB]

The MIT Emissions Prediction and Policy Analysis model is applied to an assessment of a set of cap-and-trade proposals being considered by the U.S. Congress in spring 2007. 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 U.S. 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.

Initial period prices for the first group of proposals, in carbon dioxide equivalents, are estimated between $30 and $50 per ton CO2-e depending on where each falls in the 50% to 80% range, with these prices rising by a factor of four by 2050. Welfare costs are less than 0.5% at the start, rising in the most stringent case to near 2% in 2050. If allowances were auctioned these proposals could produce revenue between $100 billion and $500 billion per year depending on the case. Emissions prices for the second group, which result from the specified safety-valve path, rise from $7 to $40 over the study period, with welfare effects rising from near zero to approximately a 0.5% loss in 2050. Revenue in these proposals depends on how many allowances are freely distributed.

To analyze these proposals assumptions must be made about mitigation effort abroad, and simulations are provided to illuminate terms-of-trade effects that influence the emissions prices and welfare effects, and even the environmental effectiveness, of U.S. actions. Sensitivity tests also are provided of several of the design features imposed in the "core" scenarios including the role of banking, the specification of less than complete coverage of economic sectors, and the development of international permit trading. Also, the effects of alternative assumptions about nuclear power development are explored. Of particular importance in these simulations is the role of biofuels, and analysis is provided of the implications of these proposals for land use and agriculture.

Finally, the U.S. proposals, and the assumptions about effort elsewhere, are extended to 2100 to allow exploration of the potential role of these bills in the longer-term challenge of reducing climate change risk. Simulations using the MIT Integrated System Model show that the 50% to 80% targets are consistent with global goals of atmospheric stabilization at 450 to 550 ppmv CO2 but only if other nations, including the developing countries, follow.

Appendix D (added February 2008) [PDF: 416 kB]
Since this report was completed there has been an effort in the Senate to draft legislation that would unify support behind common legislation. One result is the Climate Security Act (S. 2191) sponsored by Senators Lieberman and Warner. In this appendix we provide an analysis of the Act's provisions as they relate to key features governing the cap-and-trade system, comparing results with the analysis in the body of the report. The analysis does not consider other features of the bill, such as the effects of how auction revenue is used, which could affect the overall cost estimates. Some of these other features are discussed, but not quantitatively analyzed, in Section D4. Also, as noted in the body of the report many uncertainties exist in projecting policy costs of an emissions constraint, including the rate of economic and emissions growth, the evolution of conditions abroad, the potential cost and availability of new technology, and different ways of interpreting the provisions of the legislation. The body of the report investigates the effects of varying some of these conditions, but we do not attempt in this short appendix to re-investigate the sensitivity of the results to key assumptions. Thus, the results presented here are based on one representation of the future conditions in a particular model.

Citation:

Paltsev, S., J. Reilly, H. Jacoby, A. Gurgel, G. Metcalf, A. Sokolov and J. Holak (2007): Assessment of U.S. Cap-and-Trade Proposals. Joint Program Report Series Report 146, April, 66 p. (http://globalchange.mit.edu/publication/16766)
  • Joint Program Report
Assessment of U.S. Cap-and-Trade Proposals

Paltsev, S., J. Reilly, H. Jacoby, A. Gurgel, G. Metcalf, A. Sokolov and J. Holak

Joint Program Report Series

Report 

146
April, 66 p.
2007

Abstract/Summary: 

[Executive Summary: 150 kB] [Appendix C: 1 MB] [Appendix D: 650 kB] [Data Tables: 500 kB]

The MIT Emissions Prediction and Policy Analysis model is applied to an assessment of a set of cap-and-trade proposals being considered by the U.S. Congress in spring 2007. 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 U.S. 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.

Initial period prices for the first group of proposals, in carbon dioxide equivalents, are estimated between $30 and $50 per ton CO2-e depending on where each falls in the 50% to 80% range, with these prices rising by a factor of four by 2050. Welfare costs are less than 0.5% at the start, rising in the most stringent case to near 2% in 2050. If allowances were auctioned these proposals could produce revenue between $100 billion and $500 billion per year depending on the case. Emissions prices for the second group, which result from the specified safety-valve path, rise from $7 to $40 over the study period, with welfare effects rising from near zero to approximately a 0.5% loss in 2050. Revenue in these proposals depends on how many allowances are freely distributed.

To analyze these proposals assumptions must be made about mitigation effort abroad, and simulations are provided to illuminate terms-of-trade effects that influence the emissions prices and welfare effects, and even the environmental effectiveness, of U.S. actions. Sensitivity tests also are provided of several of the design features imposed in the "core" scenarios including the role of banking, the specification of less than complete coverage of economic sectors, and the development of international permit trading. Also, the effects of alternative assumptions about nuclear power development are explored. Of particular importance in these simulations is the role of biofuels, and analysis is provided of the implications of these proposals for land use and agriculture.

Finally, the U.S. proposals, and the assumptions about effort elsewhere, are extended to 2100 to allow exploration of the potential role of these bills in the longer-term challenge of reducing climate change risk. Simulations using the MIT Integrated System Model show that the 50% to 80% targets are consistent with global goals of atmospheric stabilization at 450 to 550 ppmv CO2 but only if other nations, including the developing countries, follow.

Appendix D (added February 2008) [PDF: 416 kB]
Since this report was completed there has been an effort in the Senate to draft legislation that would unify support behind common legislation. One result is the Climate Security Act (S. 2191) sponsored by Senators Lieberman and Warner. In this appendix we provide an analysis of the Act's provisions as they relate to key features governing the cap-and-trade system, comparing results with the analysis in the body of the report. The analysis does not consider other features of the bill, such as the effects of how auction revenue is used, which could affect the overall cost estimates. Some of these other features are discussed, but not quantitatively analyzed, in Section D4. Also, as noted in the body of the report many uncertainties exist in projecting policy costs of an emissions constraint, including the rate of economic and emissions growth, the evolution of conditions abroad, the potential cost and availability of new technology, and different ways of interpreting the provisions of the legislation. The body of the report investigates the effects of varying some of these conditions, but we do not attempt in this short appendix to re-investigate the sensitivity of the results to key assumptions. Thus, the results presented here are based on one representation of the future conditions in a particular model.

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