Emissions trading to reduce greenhouse gas emissions in the United States : the McCain-Lieberman Proposal

The Climate Stewardship Act of 2003 (S. 139) is the most detailed effort to date to design an economy-wide cap-and-trade system for U.S. greenhouse gas emissions reductions. The Act caps sectors at their 2000 emissions in Phase I of the program, running from 2010 to 2015, and then to their 1990 emissions in Phase II starting 2016. There is a strong incentive for banking of allowances, raising the costs in Phase I to achieve savings in Phase II. Use of credits from outside the capped sectors could significantly reduce the cost of the program, even though limited to 15% and 10% of Phase I and II allowances respectively. These credits may come from CO2 sequestration in soils and forests, reductions in emissions from uncapped sectors, allowances acquired from foreign emissions trading systems, and from a special incentive program for automobile manufacturers. The 15% and 10% limits increase the incentive for banking and could prevent full use of cost-effective reductions from the uncapped sectors. Moreover, some of the potential credits might contribute little or no real climate benefit, particularly if care is not taken in defining those from forest and soil CO2 sequestration. Analysis using the MIT Emissions Prediction and Policy Analysis model shows that costs over the two Phases of the program could vary substantially, depending on normal uncertainty in economic and emissions growth, and the details of credit system implementation.

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