Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System

There is growing impetus for a domestic US climate policy that can providemeaningful reductions in emissions of carbon dioxide (CO2) and other greenhouse gases. I describe and analyse an up-stream, economy-wide CO2 cap-and-trade system which implements a gradual trajectory of emissions reductions (with inclusion over time of non-CO2 greenhouse gases), and includes mechanisms to reduce cost uncertainty. Initially, half of the allowances are allocated through auction and half through free distribution, with the share being auctioned gradually increasing to 100 per cent over 25 years. The system provides for linkage with emission-reduction credit projects in other countries, harmonization over time with effective cap-and-trade systems in other countries and regions, and appropriate linkage with actions taken in other countries, in order to establish a level playing field among domestically produced and imported products.