Washington, December 2010

Congressional Budget Office: 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, or allowances, to produce those emissions.

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). Some observers have proposed excluding certain participants or transactions from allowance markets. This study examines the likely impact of prohibiting allowance trading by entities not directly covered by a cap-and-trade program 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.

Ends --

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12-10-LimitsAllowanceMarkets.pdf

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