The Kyoto Protocol, set to expire in 2012, established binding reductions of greenhouse gas (GHG) emissions for thirty-six countries. The United States was not a party to the treaty. Reducing GHG emissions through cap-and-trade programs is generating widespread discussion, including consideration by the U.S. Congress. Debate is ongoing as to cap and trade’s effectiveness, costs, inequities, and questionable reductions in pollution, to name a few.

Authorizations to emit in the form of emission allowances are then allocated to affected sources, and the total number of allowances cannot exceed the cap. Individual control requirements are not specified for sources; instead, sources report all emissions and then surrender the equivalent number of allowances at the end of the compliance period.

Allowance trading enables sources to design their own compliance strategy based on their individual circumstances while still achieving the overall emissions reductions required by the cap.

A compliance option in a cap and trade program is an offset. An offset is a measurable reduction, avoidance, or sequestration of GHG emissions from a source not covered by an emission reduction program. If allowed, offset projects could generate "emission credits" which could be used by a regulated entity to comply with its reduction requirement.

Examples of cap-and-trade programs in the United States include the Acid Rain SO₂ Program and the Ozone Transport Commission NO_x SIP call, while in Europe the European Union Trading System spreads across the bloc’s twenty-seven member nations.

Table of Contents

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(Table of Contents below)
Cap and Trade: The Kyoto Protocol, Greenhouse Gas (GHG) Emissi...

 

Table of Contents

1.  "Cap and Trade: Essentials," U.S. Environmental Protection Agency . . . . . . . . . . . . . . . 1

2.  "Cap and Trade: Multi-State NO_x Programs," U.S. Environmental Protection Agency . . . . . . . . . . . . . . . 3

3.  "Cap and Trade: Acid Rain Program Basics," U.S. Environmental Protection Agency. . . . . . . 5 

4.  "Annual Energy Outlook 2010 Early Release Overview December 2009," Energy Information Administration, U.S. Department of Energy . . . . . 7

5.  "Annual Energy Outlook 2010 Reference Case," Energy Information Administration, U.S. Department of Energy . . . . . . 19

6.  "The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns," CRS Report for Congress RL34436, May 18, 2009 . . . . . . 31

- Introduction
- Offsets: An Overview
- Offset Types and Examples
- Biological Sequestration
- Renewable Energy Projects
- Energy Efficiency
- Non-CO2 Emissions Reduction
- Potential Benefits of Offsets
- Cost-Effectiveness
- Potential Co-Benefits
- Potential Benefits to Developing Nations
- Other Potential Domestic Benefits
- Potential Concerns
- Integrity Concerns
- Additionality
- Measurement
- Double-Counting
- Permanence
- Leakage
- Delay of Technology Development
- Transaction Costs
- Concerns in Developing Nations
- Considerations for Congress
- Figure 1. Emission Allowance Price at Three Offset Scenarios Under Framework of S. 2191
- Figure 2. CERs Issued to Data by Project Type (as of May 1, 2009)
- Figure 3. 2012 Projections for CERs by Project Type (as of May 1, 2009)
- Table 1. Comparison of Offset Treatment in GHG Emission Control Proposals in the 111th Congress
- Table 2. Comparison of Offset Treatment in GHG Emission Control Proposals from the 110th Congress
- Table 3. Comparison of Offset Treatment in GHG Emissions Reduction Initiatives in the U.S. States
- Table 4. Comparison of Offset Treatment in International Emissions Trading Programs

7.  "Potential Offset Supply in a Cap-and-Trade Program," CRS Report for Congress RL34705, October 14, 2008 . . . . . . 65

- Introduction
- Factors Affecting Offset Supply
- Mitigation Potential
- Elements of Uncertainty
- Estimates from Agriculture and Forestry Activities
- Estimates from Other Activities
- Policy Choices
- Design of the Cap-and-Trade Program
- Actions in Other Nations or U.S. States
- Other Policy Influences
- Economic Factors
- Emission Allowance Price
- Other Factors
- Offset Use in a Cap-and-Trade Program
- Figure 1. Illustration of Inputs and Variables That Affect Potential Offset Supply
- Figure 2. Estimated Offset Use Under S. 2191 If International and Domestic Offsets Limited to 15% of Allowance Submission
- Figure 3. Estimated Offset Use Under S. 2191 If Domestic and International Offset Use Unlimited
- Figure 4. Estimated Offset Use Under S. 2191 If Domestic Offset Use Unlimited and International Offset Use Limited to 15%
- Table 1. EPA and USDA Estimates of Mitigation Potential for Afforestation and Soil Sequestration (in 2025)
- Table 2. EPA Estimates of Mitigation Potential for Other Agriculture and Forestry Activities (in 2025)
- Table 3. EPA Estimates of Mitigation Potential from Other Activities (in 2010)

8.  "Allowance Markets Assessment: A Closer Look at the Two Biggest Price Changes in the Federal SO₂ and NO_X Allowance Markets," U.S. Environmental Protection Agency, April 23, 2009 . . . . . . . 85
 

9.  "Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress," CRS Report for Congress R40242, March 10, 2009 . . . . . . . 95

- Introduction
- Cost or Quantity Control: An Overview
- Economic Theory vs. Uncertainty
- A Stark Choice or a Policy Continuum?
- A Flexible Emissions Cap
- A Flexible Carbon Tax
- Limits of the Policy Continuum
- Potential Advantages of a Carbon Tax
- Economic Efficiency
- Basis for the Argument
- Underpinnings of the Argument
- Modeled Efficiency Gains
- Economic Efficiency Versus Precaution
- Price Stability
- Tax Revenue Applications
- Potential Implementation Advantages
- Transparency
- Administrative Issues
- Policy Modification
- Potential Disadvantages
- Uncertain Emissions
- Political Feasibility
- What’s in a Name?
- Support from Industry?
- Support from Environmental Groups?
- Consideration of International Efforts and Cooperation
- Coordination with Existing International Efforts
- Maximizing Participation
- International Implementation Concerns
- Implementation of a Carbon Tax
- Point of Taxation
- Where to Impose a Carbon Tax?
- CO2 Emissions or All GHG Emissions?
- Which Emissions Sources to Control?
- Level of Taxation
- Tax Based on Estimates of Costs and Benefits
- Tax Based on Meeting an Emissions Target
- Tax Revenue Distribution
- Estimates of Tax Revenues
- Uses of Tax Revenues
- Policy Considerations of Different Revenue Applications
- Distributional Impacts
- Conclusions
- Figure 1. Illustration of Price Versus Quantity
- Figure 2. Bridging the Gap between Price and Quantity Control
- Figure 3. Illustrative Scenario with a Relatively Flat Marginal Benefits Curve
- Figure 4. Illustrative Scenario with a Relatively Steep Marginal Benefits Curve
- Figure 5. Illustrative Scenario with Marginal Costs and Marginal Benefits That Are Higher Than Expected
- Figure 6. “Phase 2” Emission Allowance Prices in the European Union’s Emission Trading System
- Figure 7. Illustration of Options for Points of Taxation within the Energy Production-to- Consumption Chain
- Figure 8. Emission Allowance Price Estimates under S. 2191
- Figure 9. Relative Differences in Efficiency Costs between Different Applications of Tax (or Auction) Revenues and No-Cost Allowance Distribution in a Cap-and-Trade Program
- Figure A-1. Illustration of Relationship between the Stock of CO2 in Atmosphere and Annual CO2 Emissions
- Table 1. CO2 Emissions Per Unit of Energy for Fossil Fuels
- Table 2. Selected Sources of U.S. GHG Emissions and Potential Applications of a Carbon Tax
- Table 3. Estimates of Potential Tax Revenues from Carbon Tax Proposals from the 110th Congress (in 2005 dollars)
- Table 4. Distributional Effects of Carbon Tax with Different Applications of Carbon Tax Revenues
- Table A-1. Comparison of Estimated Carbon Tax-Related Price Impacts to Fossil Fuels and Motor Gasoline from Selected Carbon Tax Rates
- Appendix. Additional Information
 

10.  "The Carbon Cycle: Implications for Climate Change and Congress," CRS Report for Congress RL34059, February 18, 2009 . . . . . 147

- Introduction
- Carbon Storage, Sources, and Sinks
- Carbon Flux, or Exchange, with the Atmosphere
- How Much Carbon Is Exchanged
- How Fast Carbon Is Exchanged
- Land Surface-Atmosphere Flux
- The “Missing Sink”
- Ocean-Atmosphere Flux
- Policy Implications
- Figure 1. (a) Storage or Pools (GtC); and (b) Annual Flux or Exchange of Carbon (GtC per year)
- Table 1. Carbon Stocks in the Atmosphere, Ocean, and Land Surface, and Annual Carbon Fluxes
 

11.  "Measuring and Monitoring Carbon in the Agricultural and Forestry Sectors," CRS Report for Congress RS22964, August 6, 2009 . . . . . . . 161

- Purpose of Measuring Forest and Agricultural Carbon
- Decisions Needed in Setting Measurement Requirements
- Scale and Baseline
- Periodicity
- Verification
- Measurement Techniques
- On-Site Measurement
- Indirect Measurement with Off-Site Tools
- Estimation Using Process Models or Inferences
- Considerations for Congress
- Appendix. Forestry and Agricultural Activities for Carbon Sequestration and/or Emission Reduction
 

12.  "Climate Change: The Role of the U.S. Agriculture Sector and Congressional Action," CRS Report for Congress RL33898, November 9, 2009 . . . . . . . 183

- Agricultural Emissions and Sinks
- Source of National Estimates
- Agricultural Emissions
- Direct Emissions
- Electricity-Related Emissions
- Land Use and Forestry Emissions
- Uncertainty Estimating Emissions
- Potential for Additional Emission Reductions
- Agricultural Carbon Sinks
- Carbon Loss and Uptake
- Agriculture-Based Sequestration
- Other Land Use and Forestry Sequestration
- Uncertainty Estimating Carbon Sinks
- Potential for Additional Uptake
- Enhancing Carbon Sinks
- Conservation Practices that Promote Mitigation
- Federal Programs
- Conservation Programs
- Other Farm Programs
- State Programs
- Agriculture Conservation and Land Management Programs
- State and Regional Climate Initiatives
- Congressional Action
- Energy and Climate Legislative Proposals
- 2008 Farm Bill Provisions
- Considerations for Congress
- Figure 1. Agricultural GHG Emissions, Average 2003-2007
- Figure 2. National Distribution of Anaerobic Digester Energy Production
- Figure 3. Carbon Sequestration in Agricultural Soils
- Figure 4. USDA Conservation Spending, FY2005
- Table 1. Estimated Current GHG Emissions and Carbon Sequestration: U.S. Agricultural and Forestry Activities, Average 2003-2007
- Table 2. Carbon Sequestration Potential in the U.S. Agriculture Sector, Alternative Scenarios and Payment Levels
- Table 3.Conservation and Land Management Practices
- Appendix. Primer on Agriculture’s Role in the Climate Change Debate
 

13.  "Forest Carbon Markets: Potential and Drawbacks," CRS Report for Congress RL34560, July 3, 2008 . . . . . . . 219

- Forest Carbon Markets
- Compliance Offset Markets
- Kyoto Protocol
- European Union’s Emission Trading Scheme
- Regional Initiatives in the United States
- Mandatory U.S. State Requirements
- Proposals in the 110th Congress
- Voluntary Offset Markets
- Retail Offsets
- Chicago Climate Exchange
- Reporting and Registry Programs
- 1605(b) Reporting Program
- California Registry
- The Climate Registry
- USDA Guidelines
- Forestry Projects for Offsets
- Afforestation and Reforestation
- Long-Term Wood Products
- Forest Management
- Avoided Deforestation
- Potential Drawbacks of Forestry-Related Projects
- Additionality
- Verifiability
- Measurement
- Monitoring
- Enforcement
- Leakage
- Emissions Leakage
- Product Leakage
- Permanence
- Forward Crediting
- Figure 1. Trading Volume and Market Value of the Clean Development Mechanism (2005-2007)
- Figure 2. Estimated U.S. GHG Mitigation Totals by Activity: Annualized Averages, 2010- 2110
 

14.  "Methane Capture: Options for Greenhouse Gas Emission Reduction," CRS Report for Congress R40813, September 17, 2009 . . . . . . 239

- Introduction
- Policy Options for Addressing Methane Capture
- Market-Based Emission Control Programs
- Carbon Offsets
- Emission Performance Standards
- Maintain Existing Programs/Incentives
- Legislative Proposals Concerning Methane Capture
- Methane: A Primer
- Global Warming Potential
- Sources of Methane
- Domestic
- International
- Methane Use and Storage
- Opportunities and Challenges for Methane Capture
- Agriculture
- Landfill Gas
- Oil and Natural Gas
- Coalbed Methane
- Concerns Applicable to All Sources
- Federal Support for Methane Capture
- Methane-to-Markets Partnership
- Voluntary Methane Programs
- Federal Energy Management Program
- Tax Incentives
- DOE Methane Hydrate Research and Development
- Figure 1. 2007 U.S. Sources of Anthropogenic Methane Emissions
- Figure 2. U.S. Underground Natural Gas Storage Facilities, Close of 2007
- Table 1. Selected Sources of U.S. Methane Emissions and Potential Number of Entities Subject to Emission Control Program
- Table 2. Selected Legislation Proposed in the 111th Congress Relevant to Methane
- Table 3. Top Five Methane-Emitting Countries in 2005
- Table 4. U.S. Methane Emissions by Source
 

15.  "Cars and Climate: What Can EPA Do to Control Greenhouse Gases from Mobile Sources?" CRS Report for Congress R40506, December 9, 2009 . . . . . . . 263

- Introduction
- Option 1: Cap-and-Trade
- Option 2: A Carbon (or GHG) Tax
- Option 3: Regulation Under Existing Authority
- The Entry Point: Massachusetts vs. EPA
- The ANPR
- The Obama Administration's Approach
- Going After Mobile Sources: Title II Authorities
- New Motor Vehicles
- Ships
- Other Nonroad Engines
- Aircraft
- Fuels
- Summary of Mobile Source and Fuel GHG Emissions
- Figure 1. Motor Vehicle Greenhouse Gas Emissions
- Table 1. Petitions for Regulation of Greenhouse Gas Emissions Under the Clean Air Act
- Table 2. Motor Vehicle GHG Emissions, 2007, by Source Category
- Table 3. Nonroad Sector CO2 Emissions, 2007, by Source Category
 

16.  "Aviation and Climate Change," CRS Report for Congress R40090, August 4, 2009 . . . . . . . 285

- Introduction
- Aircraft Emissions
- Reducing Emissions: Non-Regulatory Factors
- Fuel Cost
- Air Traffic Control
- Regulating Aircraft Under the Clean Air Act
- Proposed Legislation
- International Developments
- European Union
- ICAO
- Conclusion
- Table 1. CO2 Emissions from U.S. Aviation, 1990-2007
- Table 2. Greenhouse Gas Emissions from U.S. Transportation Sectors, 1990-2007
 

17.  "Cap and Trade Programs for Air Emissions," by Sam Napolitano, Clean Air Markets Division, Office of Air and Radiation, U.S. Environmental Protection Agency, Presentation for the Clean Air Conference, December 4, 2009 . . . . . . . 299

18.  "Climate Change and the EU Emissions Trading Scheme (ETS): Kyoto and Beyond," CRS Report for Congress RL34150, November 24, 2008 . . . . . . . 321

- Overview
- National Allocation Plans and the ETS
- Need for Further Emissions Reductions
- Need to Adjust ETS Allocations
- Issues Arising in Phase 2 NAPs for the ETS
- Supplementarity
- Auction Policy
- New Entrant Reserves
- Closure Policy
- Benchmarking
- Allocation and Energy Policy
- Looking to Phase III
- Eliminating NAPs
- Expanding Coverage
- Auctions
- Summary and Considerations for U.S. Cap-and-Trade Proposals
- Emission Inventories and Target Setting
- Coverage
- Allocation Schemes
- Flexibility and Price Volatility
- Figure 1. ECX CFI Futures Contracts: Price and Volume
- Figure 2. EU-15 Greenhouse Gas Emissions and Projections for the Kyoto Period: 2008- 2012
- Table 1. ETS Annual Allocations for Phase 2: 2008-2012
- Table 2. JI/CDM Limits for Phase 2: 2008-2012
- Table 3. Value of Annual Allocation for New NGCC Powerplant
- Table 4. Annual ETS Cap Figures for Proposed Phase 3
 

19.  "Climate Change: Potential Regulation of Stationary Greenhouse Gas Sources Under the Clean Air Act," CRS Report for Congress R40585, December 10, 2009 . . . . . . 349

- Introduction
- The Entry Point: Massachusetts vs. EPA
- The Advance Notice of Proposed Rulemaking (ANPR)
- Potential Implications for Stationary Sources
- Potential Paths for GHG Stationary Source Control
- Path 1: Regulating GHG through National Ambient Air Quality Standards (NAAQS
- Importance of NAAQS
- NAAQS and Controlling GHGs
- Path 2: Regulating GHGs through Section 112 as Hazardous Air Pollutants
- Importance of Section 112
- Section 112 and Controlling GHGs
- Path 3: Regulating GHGs through Sections 111 as Designated Air Pollutants
- Importance of Section 111
- Controlling GHG through Section 111
- Going Off the Beaten Path: Regulating under Section 115 or Title VI
- Section 115: International Pollution
- Title VI: Stratospheric Ozone Protection
- Potential Control Approaches for Stationary Sources
- Forcing Commercialization of Technology Through a Regulatory Requirement: An Example from the SO2 New Source Performance Standards
- Potential for Cap-and-Trade
- Potential Under Section 111
- Potential Under Other Sections
- Implementation Issues
- New Source Review
- Issue of Case-by-Case BACT Determinations
- Title V and the Size Threshold
- Section 304: Citizen Suits
- Conclusion
- Figure 1. Number of FGD Units and Cumulative Gigawatt (GW) Capacity of FGD Units: 1973-1996
- Table 1. Selected U.S. Stationary Sources of Greenhouse Gases
- Table 2. Simplified Requirements under Title I for Most Stationary Sources
 

20.  Testimony of David L. Sokol, Chairman, MidAmerican Energy Holdings Company Before the Subcommittee on Energy and Environment, Committee on Energy and Commerce, U.S. House of Representatives, June 9, 2009 . . . . . . . 383
 

21.  Testimony of Dr. Richard Newell, Administrator, Energy Information Administration, U.S. Department of Energy before the Committee on Energy and Natural Resources, U.S. Senate, October 14, 2009 . . . . . . . 407
 

22.  Testimony of Robert Greenstein, Executive Director, Center on Budget and Policy Priorities, House Committee on Energy and Commerce, Subcommittee on Energy and Environment, March 12, 2009 . . . . . . . 423
 

23.  Testimony of Sonny Popowsky, Consumer Advocate of Pennsylvania Before the House Committee on Energy and Commerce, Subcommittee on Energy and Environment, March 12, 2009 . . . . . . . 439
 

24.  Testimony of Steven L. Kline, Vice President, Corporate Environmental and Federal Affairs, PG&E Corporation Before the Subcommittee on Energy and Environment of the House Energy and Commerce Committee, March 12, 2009 . . . . . . 451

25.  Testimony of Michael Carey, President, Ohio Coal Association Before the Subcommittee on Energy and Environment of the House Energy and Commerce Committee, March 12, 2009 . . . . . . . 461
 

26.  Testimony of Dr. A. Denny Ellerman, Center for Energy and Environmental Policy Research, Massachusetts Institute of Technology, Before the Senate Committee on Energy and Natural Resources, October 21, 2009 . . . . . . . 467
 

27.  Testimony of Gilbert E. Metcalf, Professor of Economics, Tufts University, Before the Senate Committee on Energy and Natural Resources, October 21, 2009 . . . . . . . 483
 

28.  Testimony of Karen Palmer, Darius Gaskins Senior Fellow, Resources for the Future, Before the Senate Committee on Energy and Natural Resources, October 21, 2009 . . . . . . . 495
 

29.  Testimony of Dr. Chad Stone, Chief Economist, Center on Budget and Policy Priorities, Before the Senate Committee on Energy and Natural Resources, October 21, 2009 . . . . . . 505

30.  Testimony of Ray Kopp, Senior Fellow and Director, Climate Policy Program, Resources for the Future, Before the Senate Committee on Energy and Natural Resources, December 2, 2009 . . . . . . . 519

31.  "Testimony of Ted Gayer, Brookings Institution, Before the Senate Committee on Energy and Natural Resources, December 2, 2009 . . . . . . . 525

32.  Testimony of Jonathan M. Banks, Climate Policy Coordinator, Clean Air Task Force, Before the Senate Committee on Energy and Natural Resources, December 2, 2009 . . . . . . . 529
 

33.  Other Resources From TheCapitol.Net . . . . . 539 

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