Flexibility in the Timing of Emission Reductions Under a Cap-and-Trade Program
Source: Congressional Budget Office

Chairman Rangel, Ranking Member Camp, and Members of the Committee, thank you for the invitation to discuss ways to reduce the economic cost of a cap-and-trade program for greenhouse-gas emissions. That cost would depend importantly on firms’ flexibility in the timing of their emission reductions. Analysts have developed a num­ber of options for increasing timing flexibility, and this testimony reviews the advan­tages and disadvantages of leading options.

Accumulating evidence about the pace and potential extent of global warming has heightened policymakers’ interest in cost-effective ways to achieve substantial reduc­tions in emissions of greenhouse gases. Although the potential damage from climate change is large, the potential cost of avoiding change is large as well. Meaningfully reducing the risk of damage would require that the United States and other nations make fundamental changes in the way that energy is produced and used. Those changes could include replacing carbon dioxide-emitting fossil fuels with appropriate renewable fuels or nuclear power; reducing energy use, perhaps through major gains in energy efficiency; and capturing and storing greenhouse gases on a large scale.

Many analysts agree that the most cost-effective way to spur significant changes in the production and use of energy is to put a price on carbon emissions. By establishing such a price—rather than by dictating specific technologies or changes in behav­ior—the government would encourage households and firms to reduce emissions in the least costly ways. Either a carbon tax or a cap-and-trade program would effectively put a price on carbon emissions and lead to emission reductions where and how it was least costly to achieve them.

Statement of Douglas W. Elmendorf, CBO Director, before the Committee on Ways and Means, U.S. House of Representatives

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