New GAO Study on Cap-and-Trade

The Government Accountability Office (GAO) released a new report urging Congress to set well-defined goals for what it wants to accomplish with climate change legislation before it makes decisions on the method for distributing valuable greenhouse gas emission allowances among regulated industries. The recommendations are based on research and interviews with officials who have experiences in Europe and the northeastern United States. They include setting up a simple and transparent system for selling the credits "to encourage participation, prevent discrimination and ensure easy access to allowances," as well as the need for maximum participation in the allowance sales to stimulate competition and limit the opportunity for price collusion.

The report also looks at price collar issues as well as the use of single versus multiple auctions. (Frank Maisano)

Congress is considering proposals for market-based programs to limit greenhouse gas emissions. Many proposals involve creating a cap-and-trade program, in which an overall emissions cap is set and entities covered by the program must hold tradable permits—or "allowances"— to cover their emissions. According to the Congressional Budget Office (CBO), the value of these allowances could total $300 billion annually by 2020. The government could either sell the allowances, give them away for free, or some combination of the two.

Some existing cap-and-trade programs have experience selling allowances. For example, member states participating in the European Union’s (EU) Emissions Trading Scheme (ETS) have sold up to about 9 percent of their allowances, and the amount of auctioning is expected to increase significantly starting in 2013. In the United States, the 10 northeastern states participating in the Regional Greenhouse Gas Initiative (RGGI) have auctioned about 87 percent of their allowances.

This report is part of GAO’s response to a request to review climate change policy options. This report describes the implications of different methods for selling allowances, given available information and the experiences of selected programs. GAO reviewed relevant literature and interviewed program officials from the EU and RGGI, economists, and other researchers. This report contains no recommendations.

"Climate Change: Observations on Options for Selling Emissions Allowances in a Cap-and-Trade Program." GAO-10-377, February 24.

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