Containing the Costs of Climate Policy

Containing the Costs of Climate Policy

Updated: June 2017

Download (PDF)

This policy brief outlines various options for containing costs under a cap-and-trade program to reduce greenhouse gas (GHG) emissions. Although cap and trade is generally considered a more cost-effective approach than traditional regulation, excessive allowance prices are a concern. High allowance prices could mean high compliance costs for regulated firms and high energy prices for consumers. A number of the design elements of a cap-and-trade policy including the stringency of the emission reduction targets and the distribution of allowance value will influence the cost of the policy for consumers. However, uncertainty regarding allowance prices, and in particular, short-term price volatility and persistently high prices, are of concern to stakeholders. Policy options to address these concerns include allowing facilities to bank allowances, permitting firms or the government to borrow allowances from future allocations, allowing (or expanding) the use of offsets, allowing the use of multi-year compliance periods, setting a ceiling on allowance prices, or even relaxing the cap or emission targets associated with the policy in times of high prices. Each of these options has strengths and weaknesses and their desired results must often be weighed against the reduced certainty of meeting the environmental objective. To ensure the viability of any cap-and-trade program, policymakers will likely want to include a variety of cost-containment mechanisms.