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Designing a Cap-and-Trade System: California Proposals Relevant to Federal Policy

Designing a Cap-and-Trade System: California Proposals Relevant to Federal Policy Lawrence H. Goulder Stanford University. Key Design Issues. Breadth of the program MAC: very broad (all electricity, industrial, and transportation sources) Breadth -> cost-savings

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Designing a Cap-and-Trade System: California Proposals Relevant to Federal Policy

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  1. Designing a Cap-and-Trade System: • California Proposals Relevant to Federal Policy • Lawrence H. Goulder • Stanford University

  2. Key Design Issues • Breadth of the program • MAC: very broad (all electricity, industrial, and transportation sources) Breadth -> cost-savings • Recommendation for Federal program: same

  3. Key Design Issues • Breadth of the program • MAC: very broad (all electricity, industrial, and transportation sources) Breadth -> cost-savings • Recommendation for Federal program: same • Allocation of allowances • MAC: move toward 100% auctioning Auctioning: -- can achieve comparable distributional goals -- yet has a cost-advantage over free allocation • Recommendation for Federal program: same

  4. Key Design Issues, cont’d • Leakage • MAC: CA faces significant leakage challenge MAC addressed via first-seller and load-based approaches to electricity • Recommendation for Federal program: Leakage much less an issue Simple generator-based approach to electricity would involve virtually no leakage

  5. Key Design Issues, cont’d • Leakage • MAC: CA faces significant leakage challenge MAC addressed via first-seller and load-based approaches to electricity • Recommendation for Federal program: Leakage much less an issue Simple generator-based approach to electricity would involve virtually no leakage • 4. Offsets • MAC: allowed for offsets, but insisted that they be real, additional, and verifiable • Recommendation for Federal program: approach with great caution!

  6. Key Design Issues, cont’d • 5. Point of regulation: upstream vs. downstream approaches to CO2 • MAC: Significant majority favored downstream Potential for gradual expansion across sectors Greater prior experience with downstream • I prefer upstream for CA and Federal program Assures comprehensive CO2 coverage Much simpler to administer

  7. Key Design Issues, cont’d • 5. Point of regulation: upstream vs. downstream approaches to CO2 • MAC: Significant majority favored downstream Potential for gradual expansion across sectors Greater prior experience with downstream • I prefer upstream for CA and Federal program Assures comprehensive CO2 coverage Much simpler to administer • Notes: • Distribution of costs is not an issue here. Comprehensive upstream and downstream programs imply virtually identical distribution of costs across emitters. • Downstream approach necessary for other greenhouse gases in most settings

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