Consequences of Alternative U.S. Cap-and-Trade Policies: Controlling Both Emissions and Costs

by Warwick J. McKibbin, Adele Morris, Peter J. Wilcoxen, and Yiyong Cai

- The U.S. Congress continues to debate a potential cap-and-trade program for the control of greenhouse gas emissions. The economic effects of such a bill remain in dispute, with some arguing that a cap-and-trade program would create jobs and improve economic growth and others arguing that the program would shift jobs overseas and hit households with large energy price increases. This report applies a state-of-the art global economic model to the question and offers insights to policymakers about how to design the program to achieve long-run environmental goals at minimum cost and with low risk to the economy. The report analyzes a range of possible cap-and-trade policies for the U.S. The seven policy scenarios we analyze meet similar long run environmental objectives, but differ in their emissions trajectories and costs. The report concludes that a policy similar to the Obama proposal, augmented by a price collar or safety value, could achieve very significant long-term reductions in emissions while imposing a firm upper bound on compliance costs.

McKibbin, W.J., A. Morris, P.J. Wilcoxen and Y. Cai (2009). "Consequences of Alternative U.S. Cap-and-Trade Policies: Controlling Both Emissions and Costs." Brookings, July 2009.