Cap-and-Trade: The New Climate Policy for the United States

“The worst impacts of climate change would occur if greenhouse gas (GHG) levels in the atmosphere go higher than 550 ppm CO2 equivalent. The current level is 430 ppm today, and it is rising at more than 2ppm each year. The global emission level needs to be at least 25 percent below current levels by 2050 to avoid the harmful GHG level going past the threshold.”

-Nicholas Stern from Stern review on the Economics of Climate Change

The estimates from economic models developed by economists and scientists suggest that the United States should reduce emissions levels to at least 80 percent below 2000 levels by 2050. To meet this minimum target, the United States must reduce its emissions an average of 4 percent per year starting in 2010. In reality, the total emission level from the United States even rose by 3.2% from 2009 to 2010 according to the Environmental Protection Agency.

Hence, what should the United States do to reduce emissions? What should economists, policymakers and the scientists recommend to the Congress in its attempt to ironing out a new Climate legislation? Currently, several approaches were recommended, such as more stringent emission standards, cap-and-trade, and carbon taxes. Among them, I would like to argue in my paper that cap-and-trade approach is the best suited for the United States.

Cap-and-trade approach has three distinct advantages. First is the certainty over the emission level. Second is the low regulatory cost because the government does not need to investigate each firm, so long as the emission level and allowance permits are consistent. Third is the extra government revenue because the allowances that are auctioned under the proposed program would generate revenue that could be used for public purposes, such as compensations for low-income customers or spending on green technology research and development. In addition, I also made a few recommendations for changes to the basic cap-and-trade policies in my white paper.


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