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

77 Pages Posted: 27 Jun 2007  

Sergey Paltsev

Massachusetts Institute of Technology (MIT)

John M. Reilly

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Henry D. Jacoby

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Angelo C. Gurgel

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Andrei P. Sokolov

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Jennifer F. Holak

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Date Written: June 2007

Abstract

The MIT Emissions Prediction and Policy Analysis model is applied to synthetic policies that match key attributes of a set of cap-and-trade proposals being considered by the U.S. Congress in spring 2007. The bills 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. Initial period prices are estimated between $7 and $50 per ton CO2-e with these prices rising by a factor of four by 2050. Welfare costs vary from near zero to 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. Outcomes from U.S. policies depend on mitigation effort abroads, 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 key design features. 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 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 suit.

Suggested Citation

Paltsev, Sergey and Reilly, John M. and Jacoby, Henry D. and Gurgel, Angelo C. and Metcalf, Gilbert E. and Sokolov, Andrei P. and Holak, Jennifer F., Assessment of U.S. Cap-and-Trade Proposals (June 2007). NBER Working Paper No. w13176. Available at SSRN: https://ssrn.com/abstract=994225

Sergey Paltsev

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

John M. Reilly

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

E19-429
77 Massachusetts Ave
Cambridge, MA 02139
United States
617-253-8040 (Phone)

Henry D. Jacoby

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-444
Cambridge, MA 02142
United States
617-253-6609 (Phone)
617-258-6855 (Fax)

Angelo C. Gurgel

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

E19-429
77 Massachusetts Ave
Cambridge, MA 02139
United States

Gilbert E. Metcalf (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrei P. Sokolov

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

E19-429
77 Massachusetts Ave
Cambridge, MA 02139
United States

Jennifer F. Holak

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

E19-429
77 Massachusetts Ave
Cambridge, MA 02139
United States

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