Carbon Costs in an Uncertain World

Abstract

Introduction of policies to reduce greenhouse gas emissions will impose costs, but emissions trading should help reduce the overall cost of compliance, especially compared to a direct regulatory approach. Emissions trading will enable companies (at the domestic level) and countries (at the international level) with high marginal costs to purchase reductions from companies and countries with lower marginal abatement costs. Even with emissions trading, however, costs will be incurred and impacts felt. Impacts will include a change in the generation mix and the price of electricity, but the extent of the impact is dependent on many other factors, including the composition of a country’s power generators, the primary fuel used, the cost of the primary fuel used, and domestic energy policies. The extent to which these impacts can be predicted, or felt during the trading periods, depends in part on the uncertainties surrounding the process of implementing an emissions trading scheme.