Intertemporal Regulatory Tasks and Responsibilities for Greenhouse Gas Reductions

Abstract:     
Jurisdictions are in the process of establishing regulatory systems to control greenhouse gas emissions. Short-term and sometimes long-term emissions reduction goals are established, as California does for 2020 and 2050, but little attention has yet been focused on annual emissions targets for the intervening years. We develop recommendations for how these annual targets - which we collectively term a “compliance pathway” - can be set, as well as what flexibility sources should have to adjust in light of cost uncertainties. Environmental effectiveness, efficiency, equity, adaptability, and encouraging global participation are appropriate criteria by which these intertemporal policy alternatives should be judged. Limited but useful knowledge about costs leads us to recommend a compliance pathway characterized by increasing incremental reductions along it. This can be approximated by discrete linear segments, which may fit better with global negotiations. While the above conclusion applies to any long-term GHG regulatory program, many jurisdictions will rely heavily on a cap-and-trade system and the same pathway recommendation applies to its time schedule of allowances. Furthermore, borrowing constraints in cap-and-trade systems can impose substantial unnecessary costs. To avoid most of these costs, we recommend that sources be allowed early use of limited percentages of allowances intended for future years. We also find that a three-year compliance period can have substantial benefit over a one-year period.

Keywords: climate change, cap-and-trade program, environmental regulation, emissions trading, greenhouse gases, carbon emissions markets

JEL Classifications: L51, L98, Q48, Q54, Q58, H23

Working Paper Series