A Flexible Cap-and-Trade Program Could Play an Important Role in Colorado’s Long-Term Climate Goals

WASHINGTON, DC — In 2019, Colorado governor Jared Polis signed the Climate Action Plan (House Bill 19-1261) into law, laying out ambitious goals to reduce the state’s carbon dioxide emissions to 90 percent below 2005 levels by 2050. The legislation, which includes midterm targets in 2025 and 2030, is largely in line with the global emissions pathway required to keep global warming at or below 1.5 °C.

However, short of new policies, Colorado is not on track to meet its strict emission targets. As the state looks for a way to meet its climate goals, new research from Resources for the Future lays out a viable path through the use of flexible cap-and-trade policies. Such policies could result in cumulative climate-related and local health-related benefits that exceed the cumulative costs of implementing them. Cap-and-trade programs allow firms the flexibility to find the lowest-cost methods to reduce emissions, and do not require firms to reduce emissions through any specific actions.

The study is designed to assist Colorado policymakers and stakeholders by evaluating two illustrative cap-and-trade programs, a Colorado-only program and a WCI-linked program, where Colorado joins California and Quebec in the Western Climate Initiative.

“Colorado has admirably committed itself to reducing its greenhouse gas emissions in line with a pathway that is consistent with the IPCC 1.5-degree scenario,” Marc Hafstead, the report’s author and director of RFF’s Carbon Pricing Initiative, said. “However, its policies to date remain insufficient to meet these deep reduction targets. In this report, I’ve investigated the environmental and economic impacts of using new cap-and-trade programs to meet these targets and highlight some key design decisions that affect the cost-effectiveness of the policy.”

Among the top findings laid out in the report:

• Additional policies are required to achieve CO’s 2025 and 2030 targets, and an economy-wide cap-and-trade program is likely to cost significantly less than sector-specific strategies.
• Giving firms flexibility in determining when they reduce their emissions through a system of banking emission allowances will promote cost-effectiveness.
• Allowing the use of offsets can reduce the burden of achieving emissions on firms covered by the policy by allowing for emissions in uncovered sectors of the economy.
• Linking Colorado’s cap-and-trade program with the Western Climate Initiative would provide even greater program flexibility and significantly reduce the cost of meeting Colorado’s climate targets (though linking also reduces benefits from reductions in local air pollutants).

“Emissions pricing through either cap-and-trade programs or a direct tax are powerful tools for cost-effectively reducing greenhouse gas emissions,” Hafstead said. “This report showcases the importance of promoting flexibility to reduce emissions cost-effectively across sectors, time, and space by allowing for offsets, allowance banking, and linking to existing or new multi-jurisdiction initiatives.”