Global Climate Change: Market-Based Strategies to Reduce Greenhouse Gases

Publication Date: October 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Environment

Type:

Abstract:

The possibility that human activities are releasing gases, including carbon dioxide (CO2), at rates that could affect global climate has resulted in proposals for national programs to curtail emissions. An international framework for specific reductions in greenhouse gases was negotiated at a meeting in Kyoto in December 1997. Concern about costs has encouraged consideration of CO2 reduction proposals that employ market-based mechanisms. The passage in 1990 of a tradeable allowance system for sulfur dioxide (SO2) control in the United States to reduce acid rain provides a precedent for such mechanisms.

The two mechanisms receiving the most attention are a tradeable permit program (similar to the acid rain program) and carbon taxes. Proposed CO2 reduction schemes present large uncertainties in terms of the perceived reduction needs and the potential costs of achieving those reductions. Tradeable permit programs would reduce CO2 emissions to a specific level with the control cost handled efficiently, but not at a specific cost level. Carbon taxes would effectively cap marginal control costs at the specific tax level, but the precise level of CO2 reduction achieved would be less certain. Hence, a major policy question is whether one is more concerned about the possible cost of the program and therefore willing to accept some uncertainty about emission reduction in order to have some limits on costs (i.e., carbon taxes) or whether one is more concerned about achieving a specific emission reduction level with costs handled efficiently, but not capped (i.e., tradeable permits).

The specific effects of both a carbon tax and tradeable permit program would depend on the specific levy (carbon tax) or allocation scheme (tradeable permit) chosen, the scope of the program, the timing of the reductions, and the recycling of any revenues.

In addition, many tradeable permit proposals include provisions allowing countries to accumulate permits by reducing emissions in other countries. This scheme, called joint implementation, was approved in principle at the Kyoto conference in December 1997.

The climate change issue and CO2 control raise numerous equity issues. In one sense, climate change is a concern about intergenerational equity -- i.e., the well-being of the current generation versus generations to come. On a global level, the issue also involves the North-South debate. At the domestic level, equity questions include the regional distribution of costs under a tradeable permit or carbon tax scheme. For example, an important impact of either a carbon tax based on the carbon content of fossil fuels or a tradeable permit program would be the pressure for fuel shifts away from coal and toward gas. Regions such as fast-growing areas in need of more energy and owners of "all electric" homes, among others, would likely be disproportionately hit by a CO2 control scheme. In addition, people may be affected differently according to income class. These issues, however, have not been sufficiently analyzed at the current time to be sure of how various sectors would be affected.