Congress recently considered creating a nationwide cap-and-trade program that would limit emissions of greenhouse gases below the levels projected under current law and would allow trading of rights, or allowances, to produce those emissions. The ability to buy and sell allowances would reduce the cost to the economy of meeting the cap by letting market forces determine where, how, and when the associated cuts in emissions would be made. However, in creating allowance markets, policymakers would face important questions about how best to ensure that any instability in those markets did not raise the cost of reducing emissions or spread to the rest of the U.S. economy—as happened with instability in mortgage markets during the recent financial crisis. Last Friday, CBO released a study—prepared at the request of the Chairman of the Senate Energy and Natural Resources Committee—examining the likely impact of alternative possible limits on the types of participants and transactions permitted in allowance markets.
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