SCOPE AND POINT OF REGUlATION FOR PRICING POlICIES TO REDUCE FOSSIl- FUEl CO2 EmISSIONS

SUMMARy This issue brief examines the choice of what emissions to include—and where to regulate them—under a tax or tradable allowance policy to reduce fossil-fuel carbon dioxide (CO 2) emissions. A companion brief (Issue Brief # 14) examines options for regulating non-CO 2 greenhouse gases (GHGs) and non-fossil CO 2 emissions. Several points emerge from this discussion: A regulatory program that establishes a price on CO 2 emissions—either through a tax or tradable permit system—will achieve the most reductions at the least cost when it covers as many emissions as possible under a single program with one price. Broader coverage also mitigates the tendency for emissions to shift to uncovered sources over time, raising the profile of any excluded emissions sources (that is, leakage). The argument for a broad-based, • single-price program is grounded in cost considerations. Other policies, however, are often proposed instead of, or in addition to, a pricing policy. These proposals are often motivated by a desire to pursue more popular technologies, to guarantee certain technology outcomes or emissions-reducing actions within a sector, and to shield some fossil-energy users from higher energy prices. A program to price CO • 2 emissions that focused on large emission sources (for example, sources that emit over 10,000 metric tons of CO 2 annually) could cover just over half of U.S. GHG emissions by regulating roughly 13,000 facilities. A program focused solely on the electricity sector would cover roughly one-third of U.S. emissions and involve 2,000–3,000 facilities. An upstream tax or emissions-trading • program could effectively cover almost all fossil-energy CO 2 emissions by regulating approximately 3,000 entities, including refineries, natural gas pipelines or processors, coal mines, and importers. While regulatory programs for other forms • of pollution have traditionally focused on emitters, the unique nature of CO 2 emissions makes it possible to regulate effectively at any point in the fossil-fuel supply chain. The vast majority of CO 2 emissions result from the combustion of fossil fuels. Because these emissions do not depend on the combustion technology used or on other operating parameters, and because there is limited opportunity to reduce emissions other than by burning less fuel, downstream emissions can be calculated with relative ease and accuracy based on the quantity of fuel produced or processed and its carbon content. Thus, fuels can be regulated as a proxy for emissions at any point in the chain from production to …