CONFUSION ABOUT CONTROL COSTS

The initially low price of allowances in Phase I led to some misunderstanding and controversy about the cost of compliance with Title IV. Specifically, the initially low and declining allowance prices were interpreted as an indication that the costs of complying with Title IV were dramatically less than had been anticipated. For instance, prominent representatives of President Clinton's Administration asserted that:

and

These statements err both in the interpretation of allowance prices and in the recollection of what earlier studies had estimated Title IV's costs to be. Our interpretation of the low allowance prices early in Phase I and of the subsequent doubling of allowance prices in 1998 is provided in Chapter 11. In this chapter we develop an estimate of the cost of complying with Title IV in Phase I and compare it with the predictions of the same cost made in earlier studies of Title IV. The objective in this chapter is not to estimate the cost savings attributable to emissions trading when compared to some hypothetical alternative emissions control mechanism. That more difficult analytic task will be addressed in Chapter 10.