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U.S. adoption of a cap-and-trade program for greenhouse gases could place some domestic producers at a disadvantage relative to international competitors who do not face similar regulation. To address this issue, proposed federal climate change legislation includes a provision that would freely allocate (or rebate) emission allowances to eligible sectors using a continuously updating output-based formula. Eligibility for the rebates would be deter-mined at the industry-level based on emissions or energy intensity and a measure of import penetration. Dynamic updating of permit allocations has the potential to mitigate adverse competitiveness impacts and emissions leakage in eligible industries.
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