About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

LOG IN
LOG IN


1 [1] (January 12, 2021)

handle is hein.crs/goveboq0001 and id is 1 raw text is: C o g e s o a R e s a r c S e r v i c S Updated January 12, 2021 A Brief Comparison of Two Climate Change Mitigation Approaches: Cap-and-Trade and Carbon Tax (or Fee) Almost all climate scientists agree that greenhouse gas (GHG) emission increases have contributed to observed climate change and that continued increases in GHG emissions will contribute to future climate change. Although a variety of efforts seeking to reduce GHG emissions are currently underway on the international level and in individual states or regional partnerships, federal policymakers and stakeholders have different viewpoints over what to do-if anything-about GHG emissions, future climate change, and related impacts. For policymakers considering actions to reduce GHG emissions, various policy options are available. Over the last 15 years, many of the legislative proposals have involved market-based approaches, such as a GHG emissions cap-and-trade system or a carbon tax or emissions fee. These particular approaches may be considered in the 117th Congress and are discussed below. The information below provides an overview of two approaches while briefly addressing their similarities and differences. What Is a Cap-and-Trade System? A cap-and-trade system is a policy tool that creates a cap on GHG emissions from selected emission sources while providing the sources with flexibility-on-site reduction or emissions trading-when complying with the emissions cap. The cap could apply to the primary GHG emitted by human activity, carbon dioxide (CO2), or it could apply to multiple GHGs, such as methane, nitrous oxide, or fluorinated gases. Covered sources in prior legislative proposals have included major emitting sectors (such as power plants and specific industries), fuel producers and/or processors (such as coal mines or petroleum refineries), or some combination of both. An emissions cap is partitioned into emission allowances (or permits). Typically, in a GHG cap-and-trade system, an emission allowance represents the authority to emit one metric ton of CO2-equivalent-a measure that accounts for different GHG global warming potentials. Policymakers may decide to (1) sell the emission allowances through periodic auctions, which would generate a new federal revenue stream; (2) distribute allowances to covered sources at no cost (based on, for example, previous years' emissions); or (3) use some combination of these strategies. Given that emission allowances have a market value, the distribution of emission allowances would likely be a source of significant debate during a cap-and-trade program's development, as discussed below. At the end of each established compliance period (a calendar year or multiple years), covered sources submit emission allowances to an implementing agency to cover the number of tons emitted during the period. Generally, if a source did not provide enough allowances to cover its emissions, the source would be subject to penalties. Under an emissions cap, covered sources would have a financial incentive to make reductions beyond what is required, because they could (1) sell unused emission allowances to entities that face higher costs to reduce their facility emissions, (2) reduce the number of emission allowances they need to purchase, or (3) bank emission allowances-if allowed-to use in a future compliance period. A cap-and-trade system would create an emissions trading market. Depending on program design details, emission allowance trading could involve not only sources directly subject to an emissions cap but also a range of brokers and intermediaries. The federal government oversees existing emissions trading programs (sulfur dioxide and nitrogen oxides) and would likely oversee a GHG program. What Is a Carbon Tax (Emissions Fee)? A carbon tax or emissions fee is a policy tool that provides a financial incentive to reduce GHG emissions by attaching a price to GHG emissions (CO2 emissions or multiple GHGs) or their emission inputs, namely fossil fuels. The choice of terminology between a tax or fee may have procedural consequences, particularly in terms of congressional committee jurisdiction, which could potentially influence the policy's design. As many policymakers, stakeholders, and academic journals use the term carbon tax, this is the default term in this document. A central policy choice when establishing a price on GHG emissions is the rate of the carbon tax (measured in dollars per ton of emissions). Several factors could be considered when setting the rate. For example, Congress could set the rate at a level or pathway-based on modeling estimates- that would achieve a specific GHG emissions target. Congress may also consider whether the tax rate should increase over time and, if so, by how much. A carbon tax would generate a new revenue stream. The magnitude of the revenues would depend on the scope and rate of the tax, the responsiveness of covered entities in reducing their potential emissions, and multiple other market factors. A 2018 Congressional Budget Office study estimated that a $25/metric ton tax on energy-related and other GHG emissions would yield approximately $100 billion each year during the first 10 years of the program. ittps://Crsreports.congress.gt