Global climate change is one of the nation's most significant long-term policy challenges: Human activities are producing increasingly large quantities of greenhouse gases, particularly carbon dioxide, and their accumulation in the atmosphere is expected to affect regional climates throughout the world. Although the economic and social costs from climate change remain highly uncertain, there is some risk that they will turn out to be quite large. The associated risks could be reduced by policies that reduced emissions of greenhouse gases.
Efforts to limit greenhouse-gas emissions probably would yield long-term economic benefits by avoiding damages from climate change in the future, but they also would impose economic costs now, primarily by restricting the use of fossil fuels. Those costs could be minimized by policies that provided broad incentives to reduce emissions, relying on markets to do so where it was most economically efficient. Different incentive-based approaches could have substantially different effects both on economic efficiency and on equity (that is, on how the costs were distributed among businesses and individuals).
One approach would be to levy a gradually rising tax on sellers or consumers of fossil fuels in proportion to the carbon dioxide emitted in burning those fuels. Another approach would be to establish a "cap-and-trade" program: The government would set gradually tightening limits on emissions, issue rights (or allowances) corresponding to those limits, and then allow firms to trade the allowances.
Either approach would create an incentive to reduce emissions at a lower cost than "command and control" regulations that specify when, where, and possibly how, emission reductions must take place. But not all incentive-based policies would be equally cost-effective. Policies that allowed individuals and firms flexibility to cut emissions less in years when it was costly to do so (for instance, because of an unusually cold winter or a disruption in energy markets) while motivating them to undertake greater reductions in relatively low-cost years, could reduce the cost of meeting a long-term target for emissions.
On the basis of various proposals recently considered by the Congress, emission allowances (or emission tax revenues) might be worth between $50 billion and $300 billion per year (in 2007 dollars) by 2020. How policymakers decided to allocate allowances (or use the revenues) would influence the impact of the policy on the economy, businesses, and individuals. Given the potential value of the allowances and their liquidity, CBO decided that the value of allowances given away by the government should be reflected in the federal budget. Cost estimates should show, both as revenues and outlays, the value of any allowances created and distributed at no cost to the recipient.
CBO has a team of economists, budget analysts, and other policy specialists examining the economic and budgetary consequences of climate change. This web page provides links to many of the agency's documents and activities on the topic.
