This brief describes issues involved in choosing the set of greenhouse gases (GHGs), emission sources, and sectors of the economy included in a cap-and-trade program. Trade-offs between three primary criteria determine whether a source should be included in a cap-and-trade program: broader coverage, measurability of emissions, and ease of administration. Policymakers also face choices in determining which entity in each sector must hold allowances at the conclusion of each compliance period (the point of regulation)—either upstream, where the carbon dioxide or GHGs first enter the economy, or downstream at the location where GHGs are emitted, or somewhere in between. The choice of upstream or downstream depends partly on measurability and concerns about administration, and could have important impacts on the economic incentives for emission reductions. Additional choices include whether to regulate small sources, to expand program scope over time by “phasing in” additional sectors or GHGs, and whether to pursue complementary policies that can provide additional emission reduction opportunities. Special considerations are also important in defining the scope for each sector of the economy. The power sector requires special treatment to ensure proper incentives for carbon capture and storage and to avoid double-counting emissions from natural gas use. The transportation sector may be difficult to regulate downstream, but fuels can be included upstream and complementary policies play a particularly important role in this sector. High global warming potential gases are generally easier to include upstream, but adjustments may be necessary depending on the category of industrial use. Residential and commercial use of natural gas can be covered upstream or through those delivering natural gas, or can be addressed through efficiency standards.
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