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Cap-and-trade: a sufficient or necessary condition for emission reduction?


  • Michael Hanemann


Influenced by the success of emission trading in the US for sulphur dioxide (SO 2 ), some economists have argued for an upstream, economy-wide cap-and-trade scheme as the primary tool for achieving the required reduction in greenhouse gas (GHG) emissions. This paper addresses that argument and concludes that cap-and-trade will need to be accompanied by complementary regulatory measures. While it is a necessary component in a climate mitigation programme, it is unlikely to be sufficient by itself to accomplish the desired emission reductions. The paper reviews the evidence on how SO 2 emissions were reduced and the extent to which actual emission trading was responsible for the reduction as opposed to other innovations. It also identifies differences between the past regulation of SO 2 and other air pollutants and the challenges presented by the regulation of GHG emissions. What actually happened in the US with SO 2 emission trading deviated in several significant respects from what would be predicted based on the conventional theoretical analysis. While there was a dramatic reduction in SO 2 emissions, it occurred because of several factors, some of which are unlikely to apply for GHG emissions, and others of which argue for an activist regulatory policy by the government as a complement to the functioning of an emissions market for GHGs. Copyright 2010, Oxford University Press.

Suggested Citation

  • Michael Hanemann, 2010. "Cap-and-trade: a sufficient or necessary condition for emission reduction?," Oxford Review of Economic Policy, Oxford University Press, vol. 26(2), pages 225-252, Summer.
  • Handle: RePEc:oup:oxford:v:26:y:2010:i:2:p:225-252

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    Cited by:

    1. John A. “Skip” Laitner, 2015. "Linking energy efficiency to economic productivity: recommendations for improving the robustness of the U.S. economy," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 4(3), pages 235-252, May.
    2. Wolfgang Buchholz & Jonas Frank & Hans-Dieter Karl & Johannes Pfeiffer & Karen Pittel & Ursula Triebswetter & Jochen Habermann & Wolfgang Mauch & Thomas Staudacher, 2012. "Die Zukunft der Energiemärkte: Ökonomische Analyse und Bewertung von Potenzialen und Handlungsmöglichkeiten," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 57, October.
    3. Chen, Xu & Wang, Xiaojun, 2016. "Effects of carbon emission reduction policies on transportation mode selections with stochastic demand," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 90(C), pages 196-205.
    4. Claudia Kettner & Daniela Kletzan-Slamanig & Angela Köppl & Thomas Schinko & Andreas Türk, 2011. "ETCLIP – The Challenge of the European Carbon Market: Emission Trading, Carbon Leakage and Instruments to Stabilise the CO2 Price. Price Volatility in Carbon Markets: Why it Matters and How it Can be ," WIFO Working Papers 409, WIFO.
    5. Burtraw, Dallas & Woerman, Matt, 2013. "Economic ideas for a complex climate policy regime," Energy Economics, Elsevier, vol. 40(S1), pages 24-31.
    6. Inglesi-Lotz, Roula & Blignaut, James N., 2014. "Improving the electricity efficiency in South Africa through a benchmark-and-trade system," Renewable and Sustainable Energy Reviews, Elsevier, vol. 30(C), pages 833-840.

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