Climate change has been a continuing policy issue since the United States ratified the 1992 United Nations Framework Convention on Climate Change (UNFCCC). An integral part, and sometimes driving part, of the ensuing debate has been the issue of cost—in several manifestations. For the George W. Bush Administration, the Kyoto Protocol was "fatally flawed in fundamental ways," including requiring compliance with mandates that "would have a negative economic impact with layoffs of workers and price increases for consumers." This concern about cost has been a significant feature of the congressional debate on H.R. 2454 . As passed by the House, the bill would mandate an 83% reduction in the country's greenhouse gas (GHG) emissions from 2005 by 2050. The reduction would be primarily achieved through a market-based, cap-and-trade program, beginning in 2012 that supporters believe will result in cost-effective reductions in greenhouse gas emissions and encourage other countries to initiate their own programs. Facets of the cost issue that have raised concern include absolute costs to the economy, distribution of costs across industries, competitive impact domestically and internationally, incentives for new technology, and uncertainty about possible costs. With the congressional debate moving to the Senate, concern about costs and economic impacts has attention focused on options to address these issues and to move the debate forward. These options range from incremental mechanisms within a tradeable permit program, such as banking and borrowing of credits, which minimally affect overall emissions reduction targets, to more fundamental proposals, such as a carbon tax, which would take climate change policy in a new and somewhat uncharted direction. This paper explores these options to address the cost issue in four parts. First, the basic economic tradeoff between controlling the quantity of GHG emissions and the program's compliance costs is introduced and explained. Second, the five dimensions of the cost issue that have arisen so far in the climate change debate are identified and discussed. Third, a representative sample of proposed approaches to address cost concerns is compared and analyzed according to the five cost dimensions identified previously. Finally, the proposed options are summarized and opportunities to combine or merge different approaches are analyzed. The paper does not provide a detailed discussion of allocation and implementation issues that creating a market-based mechanism (particularly a cap-and-trade program) would entail. In general, market-based mechanisms to reduce GHG emissions, the most important being carbon dioxide (CO 2 ), focus on specifying either the acceptable emissions level (quantity) or the compliance costs (price) and allowing the marketplace to determine the economically efficient solution for the other variable. For example, a tradeable permit program sets the amount of emissions allowable under the program (i.e., the number of permits available limits or caps allowable emissions), while permitting the marketplace to determine what each permit will be worth. Likewise, a carbon tax sets the maximum unit cost (per ton of CO 2 equivalent) that one should pay for reducing emissions, while the marketplace determines how much actually gets reduced. In one sense, preference for a carbon tax or a tradeable permit system depends on how one views the uncertainty of costs involved and benefits to be received. For those confident that achieving a specific level of CO 2 reduction will yield significant benefits—enough so that even the potentially very high end of the marginal cost curve does not bother them—a tradeable permit program may be most appropriate. CO 2 emissions would be reduced to a specific level, and in the case of a tradeable permit program, the cost involved would be handled efficiently, though not controlled at a specific cost level. This efficiency occurs because through the trading of permits, emissions reduction efforts focus on sources at which controls can be achieved at least cost. However, if one feels uncertain of the environmental benefits of a specific level of reduction and anxious about the downside risk of substantial control costs to the economy, then a carbon tax may be most appropriate. In this approach, the level of the tax effectively caps the marginal cost of control that affected activities would pay under the reduction scheme, but the precise level of CO 2 reduction achieved is less certain. Emitters of CO 2 would spend money controlling CO 2 emissions up to the level of the tax. However, because the marginal cost of control among millions of emitters is not well known, the overall emissions reductions for a given tax level on CO 2 emissions is subject to some uncertainty. Hence, a major policy question is whether one is more concerned about the possible economic cost of the program and therefore willing to accept some uncertainty about the amount of reduction received (i.e., carbon taxes); or one is more concerned about achieving a specific emissions reduction level with costs handled efficiently, but not capped (i.e., tradeable permits). A model for a tradeable permit approach is the sulfur dioxide (SO 2 ) allowance program contained in Title IV of the 1990 Clean Air Act Amendments (42 U.S.C. 7651). Also called the Acid Rain Program, the tradeable permit system is based on two premises. First, a set amount of SO 2 emitted by human activities can be assimilated by the ecological system without undue harm. Thus the goal of the program is to put a ceiling, or cap, on the total emissions of SO 2 rather than limit ambient concentrations. Second, a market in pollution licenses between polluters is the most cost-effective means of achieving a given reduction. This market in pollution licenses (or allowances, each of which is equal to 1 ton of SO 2 ) is designed so that owners of allowances can trade those allowances with other emitters who need them or retain (bank) them for future use or sale. Initially, most allowances were allocated free by the federal government to utilities according to statutory formulas related to a given facility's historic fuel use and emissions; other allowances have been reserved by the government for periodic auctions to ensure market liquidity. There are no existing U.S. models of an emissions tax, although five European countries have carbon-based taxes. The closest U.S. example is the tax on ozone-depleting chemicals (ODCs). To facilitate the phaseout of ODCs under the Montreal Protocol and subsequent amendments, the United States imposed a tax on specific ODCs in 1990. This tax was designed to supplement the allowance trading program that the EPA had designed to implement the international agreements. Several activities trigger the tax, including the production and/or importation of the chemicals, or the importation of products that contain them or used them in their production processes. In addition, inventories of certain ODCs held on January 1 of each year are subjected to a "floor stocks tax." Five dimensions of costs associated with reducing GHG emissions are discussed in this section: (1) absolute costs, (2) distribution of costs, (3) long-term costs, (4) price signal and stability, and (5) uncertainty of costs. The absolute costs of a GHG reduction program are a function of the interplay among the tonnage reduction required, the timetable imposed on that reduction, and the techniques available and used to achieve that reduction (the "three Ts"). Variables involved with the tonnage requirement include the magnitude and firmness of the reduction requirement and the number of gases and sectors involved in the program. Variables involved with the timetable include its length and number of phases, along with the number and extent of any deadline extensions allowed and on what criteria. Finally, variables involved with techniques include promotion and availability of new technology, the degree of flexibility permitted in complying with the program, and any ceiling on compliance costs. All these program design parameters influence the absolute cost of the program and the timing and extent of any benefits received. A second concern with costs is their distribution across the various sectors of the economy. As indicated by Table 1 , GHG emissions are spread throughout the economy, with about 81% emitted by the electric power, transportation, and industry sectors. Restricting participation by any group could increase the absolute cost of the program and would certainly increase the costs to the remaining participants. However, numerous rationales have been put forward to justify excluding one group or sector from a reduction requirement, or to provide some other special consideration. Rationales offered include a sector or industry's concern about (1) international competitiveness, (2) lack of cost-effective control options, (3) inability to make necessary capital investments, (4) economic disruption, (5) credit for previous efforts that reduced emissions, and (6) the "minor" contribution that industry or sector makes to the overall problem. It is the multitude of such variables that make constructing an acceptable reduction allocation scheme very difficult. A third concern is the long-term cost considerations of a GHG reduction program. Climate change policy has to be thought of in decades, not years. Ultimately, a successful climate change program would involve a long-term transition to a less carbon-emitting economy. Generally, studies that indicate the availability and cost-effectiveness of emerging new technologies to achieve this transition include an economic mechanism to provide the necessary long-term price signal to direct research, development, demonstration, and deployment efforts. Developing such a price signal involves variables such as the magnitude and nature of the market signal, and the timing, direction, and duration of it. In addition, studies indicate combining a sustained price signal with public support for research and development efforts is the most effective long-term strategy for encouraging development of new technology. As stated by Morgenstern: "The key to a long term research and development strategy is both a rising carbon price, and some form of government supported research program to compensate for market imperfections." A fourth consideration is the stability of the price signal in whatever form it takes (e.g., allowance prices, carbon taxes, auction prices). A stable and reliable signal is necessary to minimize economic disruption and to encourage new technology.