Executive Summary

I. Introduction

Climate change policy will fundamentally affect the way that electricity is generated in the United States. A strong scientific consensus on the nature and magnitude of the challenges raised by anthropogenic climate change is the key driver of the increasing likelihood of federal policy to limit greenhouse gases (GHGs). Elected officials, businesses, non-governmental organizations, and policy analysts and scholars are increasingly in general agreement that a mandatory policy that puts explicit limits on GHGs, or puts a price on GHG emissions, is an essential component of a federal policy response. A cap-and-trade system for GHGs is the most likely policy response.

II. GHG Cap-and-Trade Policies and Compliance Responses

The way that a cap-and-trade system affects the electric industry and the end users of electricity depends on how the system is designed and implemented. One key metric of the system is the price of allowances, which is influenced by the strictness of the quantitative limit on emissions and the percentage of total emissions that must be covered by allowances. Stricter limits increase allowance prices, causing larger increases in the end user price of electricity.

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