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The European Union’s CO₂ Emissions Trading Scheme (EU ETS) has shown that cap-and-trade systems can work in a highly decentralized multinational setting, but that experience has also revealed some issues in governance that threaten the feasibility of cap-and-trade in an international setting. These issues are captured in the conflicting demands for differentiation and harmonization. This chapter examines the experience of the EU ETS and of cap-and-trade systems in the USA in resolving this conflict with particular attention to the governance institutions and their potential applicability on a broader global scale.

This chapter offers a guide to the key legal issues presented by national and sub-national greenhouse gas (GHG) regulatory initiatives in the United States. Section 2 provides an overview of sub-national trading schemes at the regional and state level, where mandatory regulations creating carbon trading regimes are most advanced in the United States. Section 3 surveys a number of legal issues that will play an essential role in the design and implementation of any cap-and-trade scheme in the United States, whether at the national or sub-national level. Section 4 addresses a series of constitutional challenges specific to state or regional programs that may limit the scope and perhaps the viability of these non-federal programs. Section 5 highlights a number of prospective legal issues that are likely to arise in designing a new federal climate change statute, such as the relationship between an emissions trading market and existing US environmental laws and trade policy. It also identifies the legal issues that may arise in the event that there is no new climate change-specific federal statute adopted, in which case the US Environmental Protection Agency (US EPA) may instead seek to generate a market for emissions trading through regulations adopted under the existing Clean Air Act.

As the United States moves forward from voluntary efforts to the establishment of mandatory cap-and-trade programmes for greenhouse gas (GHG) emissions, offsets have become a central issue of policy. Offsets can help minimize the total costs associated with GHG regulation; offsets can also provide other benefits, such as economic development and reduced pollution. However, incorporation of offsets into a cap-and-trade programme requires careful attention to policy design. This chapter begins with a brief background on offsets, including a discussion of their value within a cap-and-trade programme, the use of offsets in various policy contexts, and different types of offset projects. It then discusses the most important design issues for an offset project programme: additionality of GHG emission reductions made, quantitative limits on offsets, addressing the risk of reversal of sequestered emissions, providing credit for early action offset projects, incorporating international offset projects, and projects aiming to reduce emissions from deforestation and forest degradation. Each section highlights how leading proposals for US federal cap-and-trade legislation have addressed these issues. The final section discusses the use of offsets in state and regional cap-and-trade programmes.

This chapter estimates the welfare costs of the main medium‐term options for significantly reducing US energy‐related carbon dioxide (CO₂) emissions, including carbon taxes and cap‐and‐trade systems applied economy‐wide and to the power sector only, and an emissions rate standard for power generation. The key theme is that welfare costs depend importantly on how policies interact with distortions in the economy created by the broader fiscal system. Economy‐wide cap‐and‐trade systems, or carbon taxes, where allowance rent or tax revenue is not used to increase economic efficiency, perform the worst on cost‐effectiveness grounds. In contrast, the costs of economy‐wide carbon taxes or auctioned allowance systems may be (slightly) negative, if revenues are used to substitute for distortionary income taxes (either directly, or indirectly through deficit reduction). The bottom line is that revenue/rents created under economy‐wide, market‐based carbon policies must be used to increase economic efficiency to ensure that these instruments are more cost‐effective than regulatory or sectoral approaches.

This chapter addresses the following question: ‘Can offset mechanisms help promote a low-carbon economy at a reasonable cost?’ The answer to this question is, yes. They are not the entirety of the solution — regulation and economy-wide incentives are needed — but as an addition to cap-and-trade, an essential component. Reforms will go a long way toward making offset mechanisms an integral and effective part of the global climate architecture. The first section of this chapter covers existing cap-and-trade systems and progress toward a global system. The second section identifies the building blocks needed to design an effective globally linked emissions trading system. Finally, a vision for a post-2012 climate treaty incorporating project mechanisms is outlined and the policies needed to increase global emission reductions and achieve the target of limiting temperature increase to 2°C are discussed.

This chapter focuses on state-level implementation of climate policy via a climate change community benefits fund. Describes how activists helped institutionalize the country’s first program to redistribute action proceeds from a cap and trade program to socially and environmentally overburdened communities.

After RGGI’s implementation in 2008, a series of political set backs led some to declare cap and trade “dead.” This chapter rejects the asserted demise of cap and trade, arguing that the public benefit model for climate policies offers the best hope for political progress. The chapter reviews post-2008 climate policies, noting thatdespite a few prominent failures,cap and trade with auction has become the most common approach to addressing climate change. In addition, the chapter documents how three policies—the EU ETS, California’s cap and trade program, and RGGI—used the public benefit frame to resist political challenges and strengthen their emissions goals. The chapter then describes additional potential applications for the public benefit model, including carbon tax policies and the new Clean Power Plan regulations promulgated by the U.S. EPA in 2015. As uses of the public benefit frame expand, the chapter notes, a key question for the future will be what types of policy designs will be perceived as “fitting” with the norms that constitute the frame. Finally, the chapter discusses how normative framing could improve the ability to understand and predict other sudden policy changes beyond the topic of climate change.

This chapter examines, in the context of the European Union's new Emissions Trading Scheme under the Kyoto Protocol, the issues surrounding the aborted attempt by the International Accounting Standards Board (IASB) in early 2005 to regulate the accounting for ‘cap-and-trade’ schemes. It argues that the features that made this model attractive to governments were precisely the ones that accountants found difficult to capture under existing standards. After showing why the challenge has to be faced, the chapter suggests a possible way forward that the IASB might consider when it revisits the subject, as it is now doing.

This chapter examines the effects of combining an international cap-and-trade scheme with national carbon taxes. We consider a two-country stochastic partial equilibrium model with log-normally distributed uncertainty. The situation is analogous to the situation where European countries impose national carbon taxes in addition to the EU emissions trading. The allowance price in the joint cap-and-trade scheme depends on the tax rate, the relative size of countries and abatement options, the magnitude of uncertainty, and correlation of abatement costs. In most cases, the additional tax will not lead to additional production of the public good beyond the fixed targets. The additional tax results in higher costs of abatement to the country introducing the additional tax, and higher costs overall.

This chapter examines how a comprehensive cap-and-trade system implemented in the United States can address climate change. It first considers previous cap-and-trade systems used in the United States to help comply with the Montreal Protocol and to regulate carbon dioxide and greenhouse gas emissions. It then describes a comprehensive carbon dioxide cap-and-trade system in the United States, including its key elements: a gradual trajectory of emissions reductions; tradable allowances; up-stream regulation with economy-wide effects; mechanisms to reduce cost uncertainty; allowance allocations that combine auctions with free distribution; availability of offsets for underground and biological carbon sequestration; supremacy over state and regional systems; and linkage with international emission-reduction credit and cap-and-trade systems and climate policies in other countries. It also analyses the economics of the US cap-and-trade system before concluding with a comparison of the system with alternative approaches to the same policy goal.

While Lovins addressed fossil fuels, renewables, and a carbon tax as a consultant and public intellectual, Jim Rogers, until recently the chief executive officer of Duke Energy, the nation’s largest electric utility, did so as a shrewd pragmatist and soldier in the trenches of legislative conflict. A facile lawyer who served as a FERC litigator, Rogers once ran the gas pipeline business of Houston Natural Gas, an Enron predecessor. Later he took the helm at PSI Energy, a coal-fired utility, where he reached an accommodation with environmental opponents on cleaning up his company’s SO₂ emissions, then the subject of cap-and-trade amendments to the Clean Air Act. Rogers defied industry logic and supported the new program just as other utility executives lobbied against it. Rogers saw the SO₂ cap-and-trade program as a smart and creative compromise that allocated generous allowances to utilities in coal-dependent states and enabled them to modernize their plants to meet emissions targets without price spikes. In the conservative utility industry, Rogers was an outlier whose environmental credentials generated favorable publicity but at the same time drew skepticism. In 2006, after a series of acquisitions, Rogers headed Duke Energy, just in time to participate as a key player in shaping forthcoming climate change legislation that proposed CO₂ cap-and-trade methodology modeled on the successful SO₂ program of almost twenty years before. Rogers wanted Duke Energy to receive enough free allowances to make the transition to clean energy affordable and avoid rate shock for its customers. Environmentalists saw free allowances as a giveaway to polluters and demanded they be auctioned, but Rogers objected to according the government free rein to spend revenues raised from selling allowances. In his first State of the Union message President Obama proposed legislation that placed a market cap on carbon pollution. Coal-fired utilities, with Duke Energy in the forefront, saw a looming threat. Eager to shape the debate, Rogers urged that the power sector receive 40 per cent of all allowances for free as a bridge to a decarbonized economy and got most of what he wanted in the Waxman-Markey bill that narrowly passed the House in 2009 but later failed in the Senate, the victim of polarized politics. In negotiations with Congress, Rogers had used his pivotal position to extract the accommodation he required only to see cap and trade blown away by hard economic times, extreme partisan division, and effective right-wing opposition. Given the threat of legislation, he tried to mitigate the risks to his company. “When you see a parade form on an issue in Washington,” he said, “you have two choices: you can throw your body in front of it and let Washington walk over you, or you can jump in front of the parade and pretend it’s yours.”

This chapter describes how, for four decades, California has been at the forefront of national efforts to improve energy efficiency and reduce greenhouse gas emissions. These initiatives began with policies to reduce energy use in order to avoid the construction of additional power plants and went on to include progressively more stringent energy efficiency standards and renewable energy mandates, additional curbs on automotive emissions, and a cap-and-trade program designed to reduce statewide greenhouse gas emissions. The emergence and expansion of these efforts demonstrates the importance of the factors that have shaped environmental policy innovations in other areas. At the same time, these policies are also distinct from those described in the previous chapters. First, they developed more incrementally, with some backsliding, much conflict, and frequent compromises. Second, some of their policy triggers—most notably, the 1973 energy crisis and California's 2000–2001 energy deregulation fiasco—were unrelated to environmental risks or threats. Third, their scope, diversity, and economic impact have been more substantial than those of the state's regulations protecting land use, coastal areas, and automotive emissions. Finally, and perhaps most importantly, in marked contrast to the state's other environmental policy threats, California cannot protect itself from the risks of global climate change. This means that the state has a critical stake in promoting a “California effect” that will encourage other political jurisdictions both in and outside the United States to also restrict their greenhouse gas emissions.

This chapter describes the “old” model of cap-and-trade policy design that largely controlled emissions trading policy from its origins in the 1970s through the 1990s, under which emissions trading programs were adopted reluctantly, and “grandfathered” emissions allowances to current emitters at no cost. It also describes some important events starting in the 1990s that helped lay the groundwork for the sudden switch to auctions in RGGI, including: greater attention to allocation rules by political actors, new precedents such as spectrum rights auctions and severance taxes on some nature resources, new political and economic pressures from electricity deregulation, and the emergence of “public benefit” charges and programs to improve energy efficiency for consumers. In addition, this period saw the emergence of new polluter pays and public ownership normative frames in the context of emissions allowances. At the same time, the chapter documents how these initial changes were insufficient to successfully promote allowance auctions in the development of two prominent cap and trade programs: the initial phase of the EU ETS from 1998-2005, and the NOx Budget emissions trading program from 1994-2005.

This chapter examines nearly two decades of experience (1997-2015) in federal and sub-federal governments in the United States and Canada but also European and Asian nations in attempting to adopt carbon pricing. It explores various stages of the policy life-cycle and concludes that there are many points that challenge the adoption and durability of these policies. Even in cases where a policy is approved, its launch process, survival through a subsequent election and change of leadership, and management over the longer term can pose great challenges, frequently resulting in an erosion of support and reversal of policy. Enduring those stages of the life cycle is no guarantee that a surviving policy actually succeeds in reducing emissions in a cost-effective manner.

Cap-and-trade has also faced numerous political challenges but also includes some more successful cases. Some of the experience of the American sulfur dioxide emissions trading program has been replicated for carbon in the case of the Regional Greenhouse Gas Initiative. This alliance among nine Northeastern states has retained political support for more than a decade and also pioneered a system to auction allowances to generate revenue. These funds are then concentrated on expansion of energy efficiency and renewable energy in the region, thereby further addressing climate change and also building a broader base of political support.

The classical approach to external costs is to levy corrective taxes. An alternative, the cap and trade system, builds on the idea that external effects arise from inadequately-defined property rights. Historically most societies have regulated external effects, passing laws limiting externality-generating actions: this practice dates back at least to the Middle Ages. The US practices a legal approach to externality-management, giving damaged parties the right to sue for damages. Finally we are now seeing the emergence of an approach based on activism by civil society and consumers and by the investor community. Some of these approaches seem better than others – taxes and cap and trade, for example, are capable of correcting external effects at minimum cost.

This chapter reviews another way to put a price on pollution: establishing a cap and trade program. It describes what cap and trade is, how it puts a price on pollution, and its use around the world. The chapter then goes on to make a case for why a carbon tax is a better approach than cap and trade for pricing carbon pollution in the United States. While either cap and trade or a carbon tax is preferable to the other options discussed in chapter 4, a carbon tax still has significant advantages over cap and trade.

This chapter presents the assessment methods available for moving from the previously constructed growth model to an understanding of the concrete conditions for the transition to a green economy. This transition is still only in its infancy, with the first moves to introduce the value of natural capital into the economy now being taken. With regard to the climate system, the value collectively attributed to its preservation is measured by the costs associated with greenhouse gas emissions, more commonly termed the “carbon price.” The methods for introducing this price into the economic system are now well known, but both nationally and internationally.

California may be on the way toward replicating the experience of the Regional Greenhouse Gas Initiative, as it moves beyond early stages into full operation as a cap-and-trade system. It formally partners with one Canadian province, Quebec, and has begun to expand beyond its original focus on electricity. The program has experienced a number of significant challenges to longer-term operations but has retained a strong base of political support and could be poised to become a leading example of cap-and-trade effectiveness.

This chapter examines the interactions among different climate policy regulations. It focuses on the interactions between tradable greenhouse gas emissions permit systems (cap and trade) and the more traditional regulatory standards. The combination of tradable permit schemes with traditional standards has been called the belts-and-suspenders approach. The chapter also explains two rationales used to justify this approach for local air pollutants: other market failures and administrative complexity.