Decarbonizing Colorado: Evaluating Cap and Trade Programs to Meet Colorado’s Emissions Targets

• 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).

Colorado has committed to reduce its net greenhouse gas (GHG) emissions to 26 percent below 2005 levels by 2025, 50 percent below 2005 levels by 2030, and 90 percent below 2005 levels by 2050 through House Bill 19-1261, signed into law by Governor Jared Polis in May 2019.

Despite committing to numerous policies to reduce future GHG emissions, including, but not limited to the adoption of both low- and zero-emission vehicle standards, regulations requiring reductions in emissions from delivered electricity, enhancements to the state’s existing regulations on methane emissions from oil and gas operations, and a phase out of the use of certain HFC’s, the state’s business-as-usual emissions are projected to be well above emissions targets in both 2025 and 2030. Additional policy will be required for the state to meet its goals.

Cap-and-trade programs have been successfully used to cost-effectively reduce emissions around the globe. This report investigates the environmental and economic impacts of two illustrative cap-and-trade programs designed to meet Colorado’s midterm emissions targets using the RFF-DR CGE model, a multi-sector and multi-region computable general equilibrium (CGE) model of the US.

The analysis demonstrates that cap-and-trade programs that provide flexibility in when and where emissions reductions are achieved increase the cost-effectiveness of cap-and-trade programs and deliver climate-related and local health benefits to Colorado that exceed various measures of program cost. Program measures that provide such flexibility across time and space include the use of offsets, linking the program to existing or new multi-state initiatives, and allowing for the use of banking (and/or borrowing) of allowances over time.

The report considers two types of cap-and-trade programs. A Colorado-only program and a WCI-linked program, where Colorado joins California and Quebec in the Western Climate Initiative. The CO-only cap-and-trade program introduces offsets (in a limited amount) and allows for banking of allowances over time to achieve the state’s cumulative emissions target between 2021 and 2030. The WCI-linked program provides additional flexibility and is more cost-effective than the CO-only approach, a reflection of the much lower allowance prices in the WRI program relative to the projected allowance prices under the CO-only program and the benefits of providing flexibility to allow for the most cost-effective reductions across participating jurisdictions.

The report also demonstrates that an economy-wide cap-and-trade program, whether for Colorado only or linked to other states, is also likely to be much more cost-effective than sector-specific mitigation strategies. We find significant differences in the abatement costs across sectors which suggests a need for an approach that allows for different levels of emissions reductions by sector.

The ongoing COVID-19 pandemic provides a particularly acute and salient reminder of the uncertainty and inherent difficultly in projecting policy-related environmental and economic impacts over the next decade and beyond. Further analysis is also required to study the effects of the COVID crisis on future energy demand and supply and to consider the impacts of key program design elements such as the coverage of imported electricity and the allocation of allowances that are beyond the scope of this report.