The Overallocation Problem in Cap-and-Trade: Moving Toward Stringency

Abstract:     
Cap-and-trade regulation is viewed by many as the most promising policy tool for reducing the emission of traditional air pollutants as well as greenhouse gases that cause climate change. But if the caps set by a cap-and-trade program are not adequately stringent, these programs may not be environmentally effective even when the caps are met. This article shows that caps in major existing cap-and-trade programs have been "overallocated," with caps often set at levels that require few if any reductions from business-as-usual emissions. The Article argues that caps should be set to require emissions reductions at least as great as those that would be achieved by mandating the use of feasible emissions control technologies and that mechanisms should be incorporated into programs to ensure that the caps continue to be stringent throughout the program's lifetime.

Number of Pages in PDF File: 51

Keywords: cap and trade, environmental law, overallocation, climate change, Acid Rain Program, RECLAIM, Chicago ERMS, EU Emissions Trading Scheme, low allowance prices, stringency, banking, feasibility, cap adjustment, ratchet

JEL Classification: K32, K23

Accepted Paper Series