Interaction Effects of Market-Based and Command-and-Control Policies.

Scientific evidence indicates that greenhouse gases emissions related to human activity are a significant contributor to global climate change. This paper investigates the impact of policy prescriptions and technologies for reducing U.S. greenhouse gas emissions. The analysis uses NERA's N_ewERA integrated model, which combines a top-down general equilibrium macro model of the U.S. economy with a detailed bottom-up model of the North American electricity sector. It examines the cost of cutting emissions by 0% to 80% of 2005 levels by 2050 under several scenarios, which consider different assumptions about policy choices ranging from purely market-based policy such as a cap-and-trade program to purely command-and-control policies and technology involving availability and efficacy of nuclear, Carbon Capture and Storage, renewables, and end-use efficiency technology. Our analysis shows a distinct efficiency advantage for market-based mechanisms and interaction of command-and-control mandates with market-based policies increase market distortions leading to higher welfare loss. We show that under such a mixed policy regime, carbon price is an unsuitable indicator of economic costs. [ABSTRACT FROM AUTHOR]