cap&trade_miller_fukudome pp 15-30

Cap&trade_mi - A U.S Cap-and-Trade System to Address Global Climate Change(pgs 15-30 ESM 286 Environmental Risk Marie Fukudome Jennifer

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A U.S. Cap-and-Trade System to Address Global Climate Change (pgs 15-30) ESM 286: Environmental Risk February 25, 2008 Marie Fukudome Jennifer Miller
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Background Under cap & trade CO2 allowances become a new commodity with value due to their scarcity Impact of Climate Change policy likely to result in disproportionate affects Firms may experience a decrease in profits and will pass this on to the consumer : “scientifically sound, politically feasible, economically rational approach to reducing greenhouse gas emissions by adopting an upstream , economy wide CO2 system with a gradual trajectory to reduce emission over time.”
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Issue 1: Increase Trajectory of Emissions Reductions over time Climate change is long term problem, affords flexibility but immediate action Benefits of gradual trajectory: advanced technologies reduce overall cost reduce political challenge Trajectory 1 : stabilize CO2 emissions at 2008 level over 2012- 2050 (less ambitious) Trajectory 2 : reduce CO2 emissions 50% below 1990 levels over 2012-2050 (more ambitious) Cap is based on sum of capped emissions over time
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Issues 2: Allowance Allocation: Free vs. Auction Cost Considerations Allocation method does not affect emission targets but affects cost of policy 1. Auctions generate revenue for socially beneficial programs Reduce distortionary taxes (income taxes that hinder economic activity) Hinder future tax increases Reduce federal debt Could offset economy-wide social costs of policy itself CONS: May not be feasible for political reasons Would not work for tax deductions or fixed tax credits Possible that government would spend this money less efficiently than if left in private sector 1. Free allocations may not cost-effectively reduce electricity demand in regulated cost-of-service electricity markets Auction vs. free depends on end-use of revenue
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Issues 2: Allowance Allocation:
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This note was uploaded on 08/06/2008 for the course ESM 286 taught by Professor Cerf during the Winter '08 term at UCSB.

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Cap&trade_mi - A U.S Cap-and-Trade System to Address Global Climate Change(pgs 15-30 ESM 286 Environmental Risk Marie Fukudome Jennifer

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