Implications of Climate Policy in a Carbon-Intensive Region: Estimating Abatement Costs Under Deep Policy Uncertainty

Abstract

This report looks at the most important uncertain details of climate change mitigation policy, depicts the dispersion of implementation details in existing policy proposals, assesses which ones will have greater cost impacts, and then describes the type of scenarios that could have major direct economic impacts on Wisconsin utility consumers. The strongest drivers of future costs are: 1) the stringency of an emissions cap, 2) the level of international offsets available for compliance, 3) the presence of explicit, binding cost containment such as a safety valve or price collar, 4) the banking of emission allowances, and 5) the distribution of allowance value via free allocation or the recycling of allowance auction revenue. External factors that will influence costs are: population and economic growth; perceptions of the urgency of climate change; the price of fossil fuels; mitigation efforts by other countries; and decisions by local utility regulators.

Keywords: climate change policy; abatement costs

JEL Classification: Q4, Q48, L94