Key climate question: What's the cost of carbon?

Current offset prices vary from 50 cents to $30 a ton. But the US Congress will have to find the optimum rate.

from the April 12, 2007 edition

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"Economists haven't really thought in any detail about what including a borrowing mechanism really does," says William Pizer, an economist and senior fellow at Resources for the Future, a Washington think tank. "You could end up with a bunch of emissions debtors" who never can reduce emissions enough to make up for the allowances they've borrowed.

• Foreign competition. Under most cap-and-trade approaches, the cap on emissions would drop over time, increasing the cost of emissions and leading to higher-priced goods and services. But what happens if other countries do not take comparable action on global warming?

For example: If Chinese-made autos arrive on US shores made with unacceptably high levels of greenhouse gases, one possible solution is a tariff. But a new idea bouncing around among economists is that companies importing such products would be required to purchase emissions allowances for them.

• Who's the emitter? Producers of oil, gas, and coal are considered upstream sources of carbon emissions. Downstream sources include buildings, automobiles, electric utilities, and refineries to name a few. Choosing whom to regulate is a critical question that could mean billions of dollars in costs to the industries affected. Power companies are the focal point of some legislation, while most economists argue the focus should be on the entire economy to spread the cost around.

• Who gets the emissions revenue? So vast are US carbon emissions that if the value of US greenhouse-gas allowances rose to $15 per ton, revenues from their sale could bring in $100 billion annually, by some estimates. If more stringent targets were set on total emissions, allowance values could soar to hundreds of billions of dollars annually.

So how should that money get spent? Revenues could go to develop new emissions technology – or to lower income taxes, cut the federal deficit, or some other priority.

"Right now you have different legislative approaches, most of them pretty sketchy. Or [they] leave it up to agencies to figure out how allowances are handled," Dr. Newell says. "But I think in the end Congress will have a big hand in determining how these billions are handed out.

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