Evaluating Limits on Participation and Transactions in Markets for Emissions Allowances

Evaluating Limits on Participation and Transactions in Markets for Emissions Allowances

Printed Ephemera - 2010
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"In response to concerns that the accumulation of greenhouse gases in the atmosphere could have serious and costly effects, the Congress has considered creating a nationwide cap-and-trade program that would limit emissions of those gases below the levels projected under current law and would allow trading of rights (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 markets for allowance trading, 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 spill over to the rest of the U.S. economy--as happened with instability in mortgage markets during the recent financial crisis. Various types of participants would probably be active in allowance markets, including covered entities (emitters that must comply with the cap); other entities that would receive allowances from the government and want to sell them; and numerous banks, investors, and other parties that would buy allowances from, and sell them to, the first two types of participants. Transactions in allowance markets would most likely include allowance derivatives (financial contracts whose value would depend on the future price of allowances). Although broad participation and derivatives transactions are common in many markets--such as those for agricultural and energy commodities--some observers have proposed excluding certain market participants or transactions under a potential cap-and-trade program to protect allowance markets and the broader economy from unwanted risks. This Congressional Budget Office (CBO) study--prepared at the request of the Chairman of the Senate Committee on Energy and Natural Resources--examines the likely impact of prohibiting allowance trading by parties other than covered entities or allowance recipients and of banning the use of allowance derivatives. The report also discusses some alternative restrictions on participation and transactions in allowance markets that could impose lower costs on covered entities while reducing the risk of instability in those markets and in the overall economy. In keeping with CBO's mandate to provide objective, impartial analysis, this study makes no recommendations."--Preface.
Publisher: [Washington, D.C.] : Congress of the U.S., Congressional Budget Office, [2010]
Branch Call Number: Y 10.2:EM 4/2
Characteristics: 1 online resource (viii, 15 p.)
Additional Contributors: United States

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