Order Code RL32953
CRS Report for Congress
Received through the CRS Web
Climate Change: Comparison and Analysis of
S. 1151 and the Draft “Climate and
Economy Insurance Act of 2005”
June 20, 2005
Brent D. Yacobucci
Specialist in Energy Policy
Resources, Science, and Industry Division
Larry Parker
Specialists in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Climate Change: Comparison and Analysis of S. 1151
and the Draft “Climate and Economy
Insurance Act of 2005”
Summary
Climate change is generally viewed as a global issue, but proposed responses
generally require action at the national level. In 1992, the United States ratified the
United Nations’ Framework Convention on Climate Change (UNFCCC) which
called on industrialized countries to take the lead in reducing greenhouse gases to
1990 levels by the year 2000. Over the past decade, a variety of voluntary and
regulatory actions have been proposed or undertaken in the United States, but carbon
dioxide emissions have continued to increase.
A number of congressional proposals to advance programs designed to reduce
greenhouse gases have been introduced in the 109th Congress. Two proposals, S.
1151, introduced by Senators McCain and Lieberman, and a draft alternative,
announced by Senator Bingaman, have received increased scrutiny in preparation for
the Senate’s debate on comprehensive energy legislation. This report provides a
side-by-side comparison of these two proposals.
Both proposals would establish market-based systems to limit emissions of
greenhouse gases. However, the proposals differ in how those systems would work.
S. 1151 would establish an absolute cap on emissions from covered entities, and
would allow entities to trade emissions under that cap. The draft amendment would
limit emissions intensity (greenhouse gas emissions per unit of GDP), and establish
a cost-limiting safety valve to protect against high compliance costs. Each would set
up a market-oriented tradeable permit program to begin addressing greenhouse gases
by the year 2010.
In 2004, the Energy Information Administration analyzed an earlier version of
S. 1151. Under EIA’s analysis, S. 1151 would achieve a 6.7% reduction in overall
greenhouse gas emissions in 2010 compared with its projected business-as-usual
scenario, but would not return emissions to their 2000 or 1990 levels. This contrasts
with the CRS estimate that the draft amendment would reduce overall greenhouse gas
emissions 2.5% in 2010 compared with EIA’s business-as-usual scenario.
The two proposals represent different answers to the price-versus-quantity issue
in reducing greenhouse gases. In general, market-based mechanisms to reduce CO2
emissions focus on specifying either the acceptable emissions level (quantity) or
compliance costs (price) and allowing the marketplace to determine the economically
efficient solution for the other variable. If one is more concerned about the possible
economic cost (price) of the program, then use of a safety valve to limit costs could
appear to some more appropriate, even through it introduces some uncertainty about
the amount of reduction achieved (quantity). In contrast, if one is more concerned
about achieving a specific emission reduction level (quantity), with costs handled
efficiently, but not capped, a tradeable permit program without a safety valve may be
viewed as more appropriate. In the case of these alternatives, S. 1151 leans toward
the quantity (total emissions) side of the equation; the draft amendment leans more
toward the price side. This report will be updated as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Proposed Senate Legislation: A Comparison of Two Proposals . . . . . . . . . . . . . . 2
Results: Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Analysis: Addressing the Price versus Quantity Issue . . . . . . . . . . . . . . . . . . . . . . 8
Uncertainty in Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Uncertainty in Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Price versus Quantity: The Safety Valve . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Tables
Table 1. Comparison of Key Topics Covered by S. 1151 and the
Draft Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Projected Emissions Under S. 1151 and Draft Amendment . . . . . . . . . . 8
Table 3. Factors Potentially Affecting Emission Reductions . . . . . . . . . . . . . . . . 8

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Climate Change: Comparison and Analysis
of S. 1151 and the Draft “Climate and
Economy Insurance Act of 2005”
Introduction
Climate change is generally viewed as a global issue, but proposed responses
generally require action at the national level. In 1992, the United States ratified the
United Nations’ Framework Convention on Climate Change (UNFCCC) which
called on industrialized countries to take the lead in reducing the six primary
greenhouse gases to 1990 levels by the year 2000.1 Over the past decade, a variety
of voluntary and regulatory actions have been proposed or undertaken in the United
States, including monitoring of power plant carbon dioxide emissions, improved
appliance efficiency, and incentives for developing renewable energy sources. But
carbon dioxide emissions have continued to increase.
In 2001, President George W. Bush rejected the Kyoto Protocol, which called
for legally binding commitments by developed countries to reduce their greenhouse
gas emissions.2 He also rejected the concept of mandatory emissions reductions.
Since then, the Administration has focused U.S. climate change policy on voluntary
initiatives to reduce the growth in greenhouse gas emissions. This focus is
particularly evident in the Administration’s 2002 Climate Action Report (CAR)
submitted under the provisions of the UNFCCC. Of the over 50 programs
summarized in the 2002 CAR, only six are described as “regulatory.”3 These
regulatory programs were generally implemented to achieve energy or environmental
goals other than the reduction of greenhouse gas emissions, but produced a
concomitant greenhouse gas emissions reduction. In this sense, they could be
considered the results of a “no regrets”4 policy where climate change effects resulting
1 Under the United Nations Framework Convention on Climate Change (UNFCCC) those
gases are carbon dioxide (CO ), methane (CH ), nitrous oxide (N O), hydrofluorocarbons
2
4
2
(HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF ). Other greenhouse gases
6
are controlled under the Montreal Protocol on Substances that Deplete the Ozone Layer, and
not covered under this proposed legislation or other international agreements.
2 For further information, see CRS Report RL30692, Global Climate Change: The Kyoto
Protocol.
3 Most of the programs outlined in the report involve research, technical assistance,
information gathering, or technical assistance programs initiated by the federal government,
or voluntary emissions reduction programs coordinated by the government.
4 The “no regrets” policy was one of establishing programs for other purposes, that would
have concomitant greenhouse gas reductions. Therefore, only those policies that reduced
(continued...)

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CRS-2
from related air quality and energy policies are included in the decision-making
process on new or modified rules.
A number of congressional proposals to advance programs designed to reduce
greenhouse gases have been introduced in the 109th Congress. These have generally
followed one of three tracks. The first is to improve the monitoring of greenhouse
gas emissions — in order to provide a basis for research and development and for any
potential future reduction scheme. The second is to enact a market-oriented
greenhouse gas reduction program along the lines of the trading provisions of the
current acid rain reduction program established by the 1990 Clean Air Act
Amendments. The third is to enact energy and related programs that would also have
the added effect of reducing greenhouse gases; an example would be a requirement
that electricity producers generate a portion of their electricity from renewable
resources (a renewable portfolio standard). This report focuses on the second
category of bills, specifically comparing the major provisions of two bills introduced
in the Senate in preparation of the pending debate on the Senate version of H.R. 6 —
The Energy Policy Act of 2005.
Proposed Senate Legislation:
A Comparison of Two Proposals
In February 2005, Senators McCain and Lieberman introduced S. 342, the
Climate Stewardship Act of 2005.5 The primary focus of the proposed legislation is
to reduce U.S. emissions of greenhouse gases through the use of flexible, market-
based mechanisms. In May 2005, Senators McCain and Lieberman introduced S.
1151, an expanded version of S. 342 that includes a new title designed to encourage
innovation and deployment of less carbon intensive technologies, sequester carbon
emissions, or mitigate the effects of climate change. The bill’s emission reduction
provisions are very similar to S.Amdt. 2028 (to S. 139) of the 108th Congress, which
the Senate debated in 2003. That amendment failed on a 43-55 vote.
As summarized in Table 1, S. 1151 would require mandatory and economy-
wide emission reductions. Using a flexible, market-based implementation strategy,
the bills would require economy-wide reductions, but permit participation in pre-
certified international trading systems and in carbon sequestration programs to
achieve part of the reduction requirement. The bills exclude residential and
agricultural sources of greenhouse gases, along with entities that do not own a single
facility that emits more than 10,000 metric tons of carbon dioxide equivalents
annually.6
4 (...continued)
greenhouse gas emissions at no cost were considered.
5 At the same time, Representatives Gilchrest and Olver introduced H.R. 759, which is very
similar to S. 342.
6 For more information on S. 1151, see CRS Report RS22076, Climate Change: Summary
and Analysis of the Climate Stewardship Act, by Larry Parker and Brent Yacobucci.

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CRS-3
A draft amendment,7 announced by Senator Bingaman, is based on the report
of the National Commission on Energy Policy (NCEP) that called for a mandatory,
economy-wide tradeable permit program to begin limiting greenhouse gases.8 The
Climate and Economy Insurance Act of 2005 (hereafter referred to as the “draft
amendment”) would mandate an accelerated reduction in the greenhouse gas intensity
of the country’s economy.9 Between 2010 and 2019, the draft amendment would
require a 2.4% annual reduction in greenhouse gas emissions per dollar of projected
gross domestic product (GDP). After 2019, this reduction would increase to 2.8%
annually.
Implementation would be through a flexible, market-oriented allowance trading
program. The total number of allowances each year would be calculated based on
the mandated decline in greenhouse gas intensity, and projected GDP growth.
However, the draft amendment includes a cost-limiting safety valve that allows
covered entities to make a payment to DOE in lieu of reducing emissions. The initial
price of such payments would be $7 a ton in 2010.10 Thus, if a covered entity
chooses, it may make payments to DOE at a specific price rather than make any
necessary emissions reductions.

The most notable difference between the two proposals is their approach to
controlling emissions of greenhouse gases. Both would cover the majority of U.S.
greenhouse gas emissions. However, while S. 1151 would place an absolute cap on
emissions from covered entities, the draft amendment aims to reduce greenhouse gas
intensity. Under S. 1151, while emissions from covered entities would be capped,
uncovered emissions would be expected to continue to rise: ultimately, overall U.S.
emissions would be expected to grow. Under the draft amendment, if it is assumed
that all U.S. emissions are covered, economic growth would determine whether total
U.S. emissions grow or decline: if economic growth outpaces the scheduled
reductions in emissions intensity, or the proposal’s safety valve is invoked, emissions
could continue to grow.11
A second key difference is the establishment of a cost-limiting “safety valve”
in the draft amendment. Under this proposal, covered entities in need of extra
tradeable allowances may purchase them on an open market, or they can make a
payment to DOE at a set price (i.e., the safety valve).12 Under S. 1151, there is no
7 Announced at a press briefing held June 17, 2005, in the Dirksen Senate Office Building.
The draft amendment is dated June 16, 2005
8 The National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan
Strategy to Meet America’s Energy Challenges (December 2004). For background on the
Commission, please refer to their website: [http://www.energycommission.org].
9 Greenhouse gas intensity is a measure of emissions per unit of Gross Domestic Product
(GDP).
10 For more information on safety valves, see CRS Report RS21067, Global Climate
Change: Controlling CO Emissions — Cost-Limiting Safety Valves, by Larry Parker.
2
11 If GDP growth continues at historic rates (roughly 3% to 4% per year), absolute emissions
levels would be projected to increase by roughly 1% per year.
12 $7 per metric ton of carbon dioxide equivalent in 2010, increasing by 5% annually after
(continued...)

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CRS-4
provision to limit the price per allowance that a covered entity would be required to
pay.
In addition, the two proposals differ in other ways, as well, including which
entities are covered, which agency has primary responsibility for the program, how
credits for early action and other activities can be generated, and how proceeds from
the sale/auction of allowances will be utilized. Table 1 compares key topics covered
by the two proposals.
Table 1. Comparison of Key Topics Covered by S. 1151
and the Draft Amendment
Topic
S. 1151
Draft Amendment
Emission
Absolute cap on total emissions
Progressively lower limit on
Reduction /
from all covered entities.
greenhouse gas intensity over
Limitation
time, but no cap.
Scheme
Specific
Emissions from covered entities
Starting in 2010, through 2019,
Emissions
are capped at their 2000 levels
allowable greenhouse gas
Limits
beginning in 2010.
intensity decreases 2.4% yearly
from projected 2009 levels.
After 2019, allowable
greenhouse gas intensity
decreases 2.8% yearly.
Greenhouse
Carbon dioxide, methane,
Same six gases.
Gases Defined
nitrous oxide (N O),
2
hydrofluorocarbons (HFCs), per
fluorocarbons (PFCs), and
sulfur hexafluoride (SF ).
6
Covered
In metric tons of carbon dioxide
All “Regulated Fuel
Entities
equivalents: any electric power,
Distributors” and “Nonfuel
industrial, or commercial entity
Regulated Entities.” Regulated
that emits from any single
Fuel Distributors include natural
facility owned by the entity over
gas pipelines, petroleum
10,000 metric tons carbon
refineries, natural gas
dioxide equivalent annually; any
processing plants, and most coal
refiner or importer of petroleum
mines, as well as importers of
products for transportation use
petroleum products, coal, and
that, when combusted, will emit
coke. Nonfuel regulated entities
over 10,000 metric tons
include manufacturers and
annually; and any importer or
importers of
producer of HFCs, PFCs, or SF
hydrofluorocarbons, per
6
that, when used, will emit over
fluorocarbons, sulfur
10,000 metric tons of carbon
hexafluoride, and nitrous oxide,
equivalent.
as well as cement and lime
producers, aluminum smelters,
and certain underground coal
mines.
12 (...continued)
2010. The price is in nominal 2010 dollars.

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CRS-5
Topic
S. 1151
Draft Amendment
Responsible
Environmental Protection
Department of Energy (DOE)
Agency
Agency (EPA), with the
Department of Commerce
(DOC)
General
A tradeable allowance system is
A tradeable allowance system
Allocating and
established: DOC shall
with cost-limiting safety valve
Implementing
determine allocations based on
is established: DOE shall
Strategy
several economic and equity
determine allocations to covered
criteria, including efficiency and
sectors with special allocations
impact on consumers.
to electric generator and energy
Allowances are to be allocated
intensive manufacturers to
upstream to refiners and
protect their profits. Allowances
importers of transportation fuel,
are to be allocated upstream to
along with producers of HFCs,
all Regulated Fuel Distributors
PFCs, and SF , and downstream
and Nonfuel Regulated Entities.
6
to electric generation, industrial,
and commercial entities.
Allocations to covered entities
Allocations to covered entities
are provided at no cost.
are provided at no cost.
Public Sale /
DOC shall determine the
5% of yearly allowances
Auction of
number of allowances allocated
(increasing to 10% by 2020) to
Allowances
to the Climate Change Credit
be auctioned by DOE with
Corporation (established by the
funds deposited in a Climate
bill).
Change Trust Fund. (established
by the bill).
The Corporation may buy and
sell allowances, and use the
Also, see “Cost-Limiting Safety
proceeds to reduce costs borne
Valve” above.
by consumers (see “Revenue
Recycling” below).
Cost-Limiting
No provision.
If the allowance market price is
Safety Valve
too high, in lieu of submitting
an allowance, a covered entity
may submit a payment to DOE
at the safety valve price.
For 2010, the safety valve price
is set at $7 per metric ton of
carbon dioxide equivalent.
After 2010, this price increases
5% annually.
Other Market
Up to 15% of required
Credits may be submitted by
Trading
reductions may be achieved
covered entities in lieu of
System
through pre-certified
allowances. Credits may be
Features
international emissions trading
generated through various
programs, carbon sequestration,
means, including geologic
reductions from non-covered
carbon dioxide sequestration,
entities, and borrowing against
fuel exports, and the export or
future reductions.
destruction of HFCs, PFCs, SF ,
6
and N O.
2

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CRS-6
Topic
S. 1151
Draft Amendment
Banking
Banking of allowances is
Banking of allowances is
permitted — allowances may be
permitted — allowances may be
saved for use in future years.
saved for use in future years.
Early
Entities that reduce emissions
DOE may distribute up to 1% of
Reduction
before 2010 may receive bonus
a total annual allowances for
Credits and
allowances for 2010 through
early reduction projects reported
Bonus Credits
2015. Reductions achieved
under either DOE’s 1605(b)
under more stringent mandatory
program or EPA’ s Climate
state programs are eligible for
Leaders Program.
bonus allowances.
Entities that enter an agreement
with EPA to reduce emissions to
1990 levels by 2010 are also
allowed to achieve 20% of their
reduction requirement (as
opposed to 15% — see above)
between 2010 and 2015 through
international emissions trading,
sequestration, or reductions by
non-covered entities.
Revenue
Revenue recycling to reduce
Revenues generated from
Recycling
consumer costs and to assist
auctions of allowances and
dislocated workers and affected
safety valve payments are
communities, along with
deposited in a Climate Change
assistance with deploying new
Trust Fund. Funds are to be
technology, is provided through
allocated for adaptation, low-
a Climate Change Credit
carbon energy technologies and
Corporation; however, the
vehicles, advanced energy
methodology and amount is
technologies, and sequestration
unspecified. Assistance to low-
projects. In addition, 1% of
income persons and
allowances available for
communities is included.
allocation are to be distributed
Further, at least 50% of revenue
to organizations that retrain,
received must be used for
educate or provide other
technology deployment.
assistance to displaced workers.
Scope
The provisions cover the 50
The provisions cover the 50
states and the District of
states and the District of
Columbia.
Columbia.
Penalty for
Excess emission penalties are
Excess emission penalties are
non-
equal to three times the market
equal to three times the safety
compliance
price for allowances on the last
valve price for the calendar year
day of the year at issue.
at issue.

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CRS-7
Topic
S. 1151
Draft Amendment
Other Key
Provisions include studies of
Through a joint resolution of the
Provisions
research on abrupt climate
House and the Senate, Congress
change; and creation of a
may amend provisions to
national greenhouse gas
change the total number of
database, among others. A new
yearly allowances, the
Innovation Administration
allocation of those allowances,
infrastructure is created, along
and the safety valve price.
with program initiatives to
promote less carbon intensive
technology, adaption,
sequestration, and related
activities.
Results: Emission Reductions
As discussed in the next section, emission reduction estimates under both
options involve at least some uncertainty, particularly for the draft amendment. Thus
the estimates provided in Table 2 should be considered “ballpark” in nature.
In 2004, The Energy Information Administration (EIA) analyzed an earlier
version of S. 1151.13 Under EIA’s analysis, S. 1151 would achieve a 6.7% reduction
in overall greenhouse gas emissions in 2010 compared with its projected business-as-
usual scenario, but would not return greenhouse gas emissions to their 2000 or 1990
levels. This result contrasts with CRS’s estimate that the draft amendment would
result in a 2.5% reduction in overall greenhouse gas emissions in 2010 compared
with EIA’s business-as-usual scenario.14
CRS did not estimate longer term reductions from either S. 1151 or the draft
amendment because of the inherent uncertainty involved in such projections.
Qualitatively, it can be stated that emissions of greenhouse gases would likely
continue to increase under both options, although somewhat more slowly than
business-as-usual. In the case of S. 1151, the percentage of greenhouse gases not
covered by the bill would increase and would be uncontrolled by the reduction
program. Thus, the initial reduction in emissions achieved in 2010 would be slowly
eaten up over time. In the case of the draft amendment, covered emissions would
continue to grow to the extent that economic growth outstripped the 2.4% annual
reduction in carbon intensity (2.8% beginning in 2020), and to the extent that
increased costs drove covered entities to invoke the safety valve rather than further
reduce emissions. In the longer term, emissions could potentially rise faster under the
draft amendment than under S. 1151.
13 Energy Information Administration, Analysis of Senate Amendment 2028, the Climate
Stewardship Act of 2003 (May 2004). S.Amdt. 2028 is very similar to S. 1151 and is used
as a surrogate here. However, the number of covered entities may be greater or fewer under
S. 1151 than assumed here, so the estimates may understate or overstate actual reductions
that would be achieved under S. 1151.
14 Assumptions for analysis are discussed in the next section.

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CRS-8
Table 2. Projected Emissions Under S. 1151
and Draft Amendment
(billions of metric tons of carbon dioxide equivalents)
Year
Reference Case
S.Amdt. 2028
Draft Amendment
(surrogate for S.
1151)
1990
6.1
6.1
6.1
2000
7.0
7.0
7.0
2010
8.1
7.6
7.9
Sources: 1990 and 2000 data: U.S. submission to the United Nations Framework Convention on
Climate Change, 2010 projections. For S.Amdt. 2028: Energy Information Administration, Analysis
of Senate Amendment 2028, the Climate Stewardship Act of 2003 (May 2004). S.Amdt. 2028 is very
similar to S. 1151 and is used as a surrogate here. However, the number of covered entities may be
more or less under S. 1151 then assumed here, so the estimates may understate or overstate actual
reductions that would be achieved under S. 1151. For the draft amendment, calculations by CRS are
based on projected GDP and carbon intensity improvements by Energy Information Administration,
Annual Energy Outlook 2005, DOE/EIA-0383(2005), February 2005. See text for discussion of
uncertainties surrounding the draft amendment’s estimate. Estimates do not take into account the
potential for carbon sequestration.
Analysis: Addressing the Price versus
Quantity Issue
Uncertainty in Emission Reductions
The projected emission reductions under the draft amendment are more
uncertain than under S. 1151. The primary source of uncertainty for S. 1151 is the
precise number of covered entities that must meet the reduction requirements. In
EIA’s analysis of previous versions of S. 1151, the assumed coverage is about 75%;
supporters of the bill have suggested the coverage is about 85%. The difference is
significant as higher coverage means more reductions than estimated by EIA and
more certainty about their quantity; lower coverage means lower compliance costs,
but greater uncertainty about quantity.
Table 3. Factors Potentially Affecting Emission Reductions
S. 1151
Draft Amendment
GDP Growth
No
Yes
Carbon Intensity
No
Yes to year 2009
Improvement
Covered Entities
Yes
Yes
Safety Valve
No
Yes

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CRS-9
As indicated in Table 3, the draft amendment has several uncertainties with
respect to emissions reductions. Unlike S. 1151, which defines a historic emissions
baseline which covered entities must achieve, the draft amendment calculates a future
baseline from projections of 2009 GDP growth and carbon intensity improvement.
Both of those variables are uncertain. In EIA’s current projections, economic growth
to 2010 is assumed under its three scenarios to range from 2.5% annually (low case)
to 3.6% annually (high case) with its reference case set at 3.1% annually. CRS
calculations presented in Table 2 assume the reference case assumption of 3.1%
annual GDP growth. However, as indicated here, this estimate could be off by 20%,
or more.
Likewise, the carbon intensity improvement projection is uncertain. Based on
EIA projections, CRS estimated a 2009 carbon intensity of 165 million metric tons
carbon equivalent per million dollars GDP (MMTCE/M$GDP) for its calculations.
However, based on the President’s Climate Change Initiative, the targeted 2009
carbon intensity is in the range of 159 MMTCE/M$GDP).15 Likewise, improvement
could be less than projected, as current intensity levels are considerably higher than
those projected under the initiative. The 2002 estimate of carbon intensity is 183
MMTCE/M$GDP.
Like S. 1151, the draft amendment raises some questions as to the exact extent
of its coverage. The CRS estimate in Table 2 assumes 100% coverage. However,
there are potentially entities not covered under the draft amendment
The final uncertainty affecting emissions reductions achieved under the draft
amendment is the safety valve. All analysis done of previous versions of S. 1151
indicate that a $7 per ton of carbon dioxide safety valve would be triggered
immediately.16 In contrast, the Energy Information Administration’s analysis projects
the safety valve would be triggered around the year 2015.17 As the degree to which
reductions could be achieved before the safety valve would be triggered is disputed,
another layer of uncertainty is added to the emission reductions achieved under the
draft amendment, particularly in the longer term.
Uncertainty in Cost Estimates
The projected cost under S. 1151 is more uncertain than under the draft
amendment. A major source of uncertainty for S. 1151 is future growth in
greenhouse gas emissions by covered entities. Because S. 1151 establishes a firm
cap on greenhouse gas emissions based on the year 2000, any increased emissions
15 See CRS Report 98-235 ENR, Global Climate Change: U.S. Greenhouse Gas Emissions
— Status, Trends, and Projections, by John Blodgett and Larry Parker.
16 See CRS Report RS22076, Climate Change: Summary and Analysis of the Climate
Stewardship Act (S. 342, S. 1151, and H.R. 759), by Larry Parker and Brent Yacobucci.
17 The National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan
Strategy to Meet America’s Energy Challenges (December 2004), p. 26. Also: Energy
Information Administration, Impacts of Modeled Recommendations of the National
Commission on Energy Policy, Report SR/OIAF/2005-02 (April 2005).

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CRS-10
resulting from continuing economic growth would have to be offset. The more
robust the economic growth, the greater potential for more emissions that would have
to be offset to maintain the cap. In general, more emission reductions probably means
higher costs. If economic growth is less robust, fewer reductions would have to be
made and costs would be less.
S. 1151 cost estimates are affected by several other uncertainties. In three
studies conducted on the cost of previous versions of S. 1151, two studies placed the
potential permit price in 2010 at $9 a ton (2001$), and one at $15 a ton (2001$). The
sources of the differing estimates are different assumptions about the availability of
the following: (1) cost effective energy efficiency improvements, (2) cost-effective
non-CO greenhouse gas reductions, (3) cost-effective carbon sequestration and
2
international credits, and (4) future natural gas supply. With a program designed to
achieve a least-cost solution through a market-based allowance trading system,
restricting the availability of options increases projected costs. The range between
the two studies indicating $9 a ton and the one indicating $15 a ton illustrates the
sensitivity and uncertainty surrounding S. 1151’s potential costs.18
The draft amendment’s cost estimates are not as sensitive to the factors
identified above. Partly this is by design, and partly this is because the draft
amendment requires less emission reductions than S. 1151. Unlike S. 1151, the draft
amendment incorporates economic growth into its emissions limitation target,
permitting some increase in future emissions if economic growth exceeds the
mandated improvement in greenhouse gas intensity. Fewer offsets required translates
into lower costs.
Like S. 1151, the draft amendment’s projected cost is affected by the assumed
availability of cost-effective control measures, such as those noted above — energy
efficiency improvements, cost-effective carbon sequestration and non-CO2
greenhouse gas reductions, along with assumed future natural gas supply. However,
the draft amendment does not extend its flexible market implementation program to
international credits in the manner that S. 1151 does. Thus, no uncertainty (or
possible lower costs) is introduced by the potential for international trading.
The National Commission on Energy Policy placed the permit price of its
proposal (on which the draft amendment is based) at $5 a ton in 2010 (2004$).
Although there are uncertainties in the draft amendment’s potential costs, its safety
valve puts a firm limit on its upside risk — $7 a ton (nominal 2010$). Converting
these estimates to 2001 dollars, the projected permit price for the draft amendment
would be $4.8 - $5.9 a ton (2001$).19 Besides putting a ceiling on upside cost, the
18 For more, see CRS Report RS22076, Climate Change: Summary and Analysis of the
Climate Stewardship Act (S. 342, S. 1151, and H.R. 759), by Larry Parker and Brent
Yacobucci.
19 For the safety valve, EIA estimated its 2003 dollar valve at $6.10 a ton. CRS converted
it, along with the NCEP cost estimate to 2001 dollars using the GDP implicit price deflator.
See Energy Information Administration, Impacts of Modeled Recommendations of the
National Commission on Energy Policy, Report SR/OIAF/2005-02 (April 2005).

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CRS-11
draft amendment’s safety valve narrows the band of potential costs substantially.
The remaining cost uncertainty is with respect to the lower bound of costs.
Price versus Quantity: The Safety Valve
The purpose of a safety valve is to bound the costs of any climate change control
program (price) at the expense of reductions achieved (quantity).20 In general,
market-based mechanisms to reduce CO emissions focus on specifying either the
2
acceptable emissions level (quantity), or compliance costs (price), and allowing the
marketplace to determine the economically efficient solution for the other variable.
For example, a tradeable permit program sets the amount of emissions allowable
under the program (i.e., the number of permits available caps allowable emissions),
while letting the marketplace determine what each permit will be worth. Likewise,
a carbon tax (or the safety valve contained in the draft amendment) sets the
maximum unit (per ton of CO ) cost that one should pay for reducing emissions,
2
while the marketplace determines how much actually gets reduced. In one sense,
preference for a pure tradeable permit system or inclusion of a safety valve depends
on how one views the uncertainty of costs involved and benefits to be received.
For those confident that achieving a specific level of CO reduction will yield
2
significant benefits — enough so that even the potentially very high end of the
marginal cost curve does not bother them — a pure tradeable permit program may
be most appropriate. CO emissions would be reduced to a specific level, and in the
2
case of a tradeable permit program, the cost involved would be handled efficiently,
though not controlled at a specific cost level. This efficiency occurs because through
the trading of permits, emission reduction efforts concentrate at sources at which
controls can be achieved at least cost.
However, if one is more concerned about the potential downside risk of
substantial control costs to the economy than of the benefits of a specific level of
reduction, then including a safety valve may be most appropriate. In this approach,
the level of the safety valve effectively caps the marginal cost of control that affected
entities would pay under the reduction scheme, but the precise level of CO achieved
2
is less certain. Emitters of CO would spend money controlling CO emissions up
2
2
to the level of the safety valve. However, since the marginal cost of control among
millions of emitters is not well known, the overall emissions reductions for a given
safety valve level on CO emissions cannot be accurately forecast. In essence, the
2
safety valve on the draft amendment could be seen as a contingent carbon tax.
Hence, a major policy question is whether one is more concerned about the
possible economic cost of the program and therefore willing to accept some
uncertainty about the amount of reduction received (i.e., a safety valve); or one is
more concerned about achieving a specific emission reduction level with costs
handled efficiently, but not capped (i.e., pure tradeable permits). S. 1151 leans
toward the quantity (total emissions) side of the equation; the draft amendment leans
more toward the price side.
20 See CRS Report RS21067, Global Climate Change: Controlling CO2 Emissions — Cost-
Limiting Safety Valves, by Larry Parker.

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Conclusion
The two proposals — S. 1151 and the draft amendment — would establish
market-based systems to limit emissions of greenhouse gases. However, the
proposals differ in how those systems would work. S. 1151 would establish an
absolute cap on emissions from covered entities, and would allow entities to trade
emissions under that cap. The draft amendment would limit greenhouse gas
emissions intensity and establish a cost-limiting safety valve to protect against high
compliance costs. Under both proposals, short-term U.S. emissions would likely be
below a business-as-usual scenario, although reductions under S. 1151 are likely to
be larger and more certain. In contrast, the cost of the draft amendment is likely to
be less and more predictable. However, under both proposals, total U.S. emissions
could be expected to continue their upward trend, albeit at a slower rate than
currently forecasted.

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