The economic costs of a market-based climate policy

This report offers a comprehensive analysis of a suite of climate policy initiatives associated with a cap and trade program with the goal of identifying those empirical and design issues that most influence the economic consequences of their enactment. Empirically, present-value policy costs heavily depend on the actual outcomes of household consumption-saving and labor-leisure decisions, the magnitudes of and any induced changes in sectoral demand elasticities and technological trends, and the resulting time paths of permit prices and market interest rates. From a design perspective, mitigation policies can be made much less costly if they jointly promote environmental and economic successes, if all legitimate and verifiable emissions reducing alternatives are allowed to compete, and if the only limits on the use of competing abatement options are those arising from the marketplace.

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