As countries around the world formulate policies to mitigate greenhouse gas (GHG) emissions, policymakers must weigh the merits of implementing an emissions tax or a cap-and-trade system. A primary barrier to the adoption of a capand-trade system is the idea that variability and uncertainty in the permit price (and hence a firm's emissions cost) has an adverse impact on domestic manufacturing firms. An emissions tax, on the other hand, can establish a fixed, certain emissions cost. Analysis in this chapter, however, suggests that variability in the emissions cost under a cap-and-trade system is beneficial, stimulating domestic manufacturing, compared to a mean-equivalent emissions tax. Hence, if emissions intensity among foreign competitors located in the region without climate policy is high, then variability in the emissions cost decreases expected emissions from production. Although global emissions may increase after a region initiates climate policy, due to a shift in manufacturing to a region without climate policy and increased transportation, that leakage phenomenon might be mitigated by adopting a cap-and-trade system, compared to a mean-equivalent tax.

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For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in carbon dioxide (CO 2) emissions. We examine the break-even value for CCS adoptions, that is, the critical value in the charge for CO 2 emissions that would justify investment in CCS capabilities. Our analysis takes explicitly into account that the supply of electricity at the wholesale level (generation) is organized competitively in some U.S. jurisdictions, whereas in others a regulated utility provides integrated generation and distribution services. For either market structure, we find that emissions charges near $30 per tonne of CO 2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The corresponding break-even values for natural gas plants are substantially higher, near $60 per tonne. Our break-even estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly. CCS capabilities effectively put an upper bound on the increase in electricity prices resulting from carbon regulations, and we estimate this bound to be near 30% at the retail level for both coal and natural gas plants. In contrast to the competitive power supply scenario, however, these price increases materialize only gradually for a regulated utility. The delay in price adjustments reflects that for regulated firms the basis for setting product prices is historical cost, rather than current cost. This paper was accepted by Gérard P. Cachon, accounting.cost-benefit analysis, environment, pollution, government, energy policies, accounting, natural resources, energy

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