Wednesday, February 13, 2008

CBO Report: Policy Options for Reducing CO2 Emissions

Feb 12: The Congressional Budget Office (CBO) has released a new report entitled, Policy Options for Reducing CO2 Emissions. According to the preface to the report, "There is a growing scientific consensus that rising concentrations of carbon dioxide (CO2) and other greenhouse gases, which result from the burning of fossil fuels, are gradually warming the Earth’s climate. The amount of damage associated with that warming remains uncertain, but there is some risk that it could be large and perhaps even catastrophic. Reducing that risk would require restraining the growth of CO2 emissions -- and ultimately limiting those emissions to a level that would stabilize atmospheric concentrations -- which would involve costs that are also uncertain but could be substantial.

"The most efficient approaches to reducing emissions of CO2 involve giving businesses and households an economic incentive for such reductions. Such an incentive could be provided in various ways, including a tax on emissions, a cap on the total annual level of emissions combined with a system of tradable emission allowances, or a modified cap-and-trade program that includes features to constrain the cost of emission reductions that would be undertaken in an effort to meet the cap.

"This Congressional Budget Office (CBO) study -- prepared at the request of the Chairman of the Senate Committee on Energy and Natural Resources [Senator Jeff Bingaman (D-NM)] -- compares those policy options on the basis of three key criteria: their potential to reduce emissions efficiently, to be implemented with relatively low administrative costs, and to create incentives for emission reductions that are consistent with incentives in other countries. In keeping with CBO’s mandate to provide objective, impartial analysis, the report contains no recommendations."

Further the report says, "Given the gradual nature of climate change, the uncertainty that exists about the cost of reducing emissions, and the potential variability of the cost of meeting a particular cap on emissions at different points in time, a tax could offer significant advantages. If policymakers chose to specify a long-term target for cutting emissions, a tax could be set at a rate that could meet that target at a lower cost than a comparable cap. In addition, if policymakers set the tax rate at a level that reflected the expected benefits of reducing a ton of emissions (which would rise over time), a tax would keep the costs of emission reductions in balance with the anticipated benefits, whereas a cap would not.

"There is significant interest, however, in a cap-and-trade approach (which has been used in the United States to reduce emissions that cause acid rain and is currently being used in the European Union to limit CO2 emissions). This study therefore explores ways in which policymakers could preserve the structure of a cap-and-trade program but achieve some of the efficiency advantages of a tax."

Access the complete 42-page CBO report (
click here). [*Climate]