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The Role of Emission Trading in Domestic Climate Policy

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  • Michael Hanemann

Abstract

This paper focuses on two specific issues in the design of a domestic cap and trade program for GHGs - whether the cap should be located upstream or downstream, and whether trading alone will suffice to achieve the desired reduction in GHGs or will need to be supplemented with additional regulatory measures. The paper argues for a downstream cap accompanied by measures such as a renewable portfolio standard, efficiency standards for vehicles, appliances and buildings, and a low carbon fuel standard. For this argument, it is necessary to address both the theory and the empirical evidence of emission trading. After reviewing the theory, the paper examines the actual experience in the U.S. with emission trading for SO2, to see whether the assumptions used in the theory actually applied in practice. What actually happened deviated in several important respects from what was supposed to happen according to the conventional theorizing. The design of a cap and trade program for GHG is then discussed, first considering the similarities between the past regulation of air pollutants and the challenge posed by GHGs, and then making the case for a downstream cap and complementary policies.

Suggested Citation

  • Michael Hanemann, 2009. "The Role of Emission Trading in Domestic Climate Policy," The Energy Journal, , vol. 30(2_suppl), pages 79-114, December.
    • Handle: RePEc:sae:enejou:v:30:y:2009:i:2_suppl:p:79-114
    DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI2-5
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    2. Curtis Carlson & Dallas Burtraw & Maureen Cropper & Karen L. Palmer, 2000. "Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1292-1326, December.
    3. Rodney Stevenson, 1982. "X-Inefficiency and Interfirm Rivalry: Evidence from the Electric Utility Industry," Land Economics, University of Wisconsin Press, vol. 58(1), pages 52-66.
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