Bottom Line on Cost Containment

This fact sheet from the World Resources Institute explains cost containment mechanisms used in cap-and-trade programs to increase economic efficiency, provide price certainty, and manage compliance costs without compromising environmental goals.

• Compliance costs in cap-and-trade programs are influenced by several design factors, including how allowances are allocated and auctioned, the presence of complementary greenhouse gas (GHG) reducing measures like renewable energy standards and vehicle efficiency standards, and government funding for technology research and development.
• Various mechanisms can be used to manage costs and price volatility. Longer compliance periods (typically two or three years in the U.S.) mitigate impacts from business cycles and weather. Banking allows firms to save allowances for later use to temper price fluctuations, while borrowing allows firms to exceed early caps in exchange for future reductions, though borrowing is more controversial due to risks of default and lobbying for weaker future targets.
• To prevent carbon prices from falling too low and stalling low-carbon investment, programs can use price floors in auctions, reduce the quantity of offsets, constrain borrowing, or reduce the overall cap. Conversely, price triggers can address unexpectedly high prices through price caps (safety valves), which provide regulatory certainty but may compromise the emissions cap, or allowance auction reserves, such as the Midwestern Accord's cost containment pool where 2 percent of allowances are set aside annually.
• Carbon offsets allow regulated companies to purchase emissions reductions from non-regulated sectors, which can be cheaper than internal reductions, though programs often limit their use to ensure reductions occur within capped sectors.

APA

World Resources Institute (n.d.). Bottom Line on Cost Containment. https://www.wri.org/research/bottom-line-cost-containment

Chicago

World Resources Institute. Bottom Line on Cost Containment. n.d. https://www.wri.org/research/bottom-line-cost-containment.

Wikipedia

{{cite report |author=World Resources Institute |title=Bottom Line on Cost Containment |url=https://www.wri.org/research/bottom-line-cost-containment |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{worldresourcesinstitutendbottom, author = {{World Resources Institute}}, title = {{Bottom Line on Cost Containment}}, institution = {World Resources Institute}, url = {https://www.wri.org/research/bottom-line-cost-containment}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }