| Summary: | Increasingly, climate change has come to the fore as an environmental issue with nearly universal agreement that the current trend is unsustainable and must be addressed. Of particular concern is the amount of carbon dioxide (CO2) emitted into the atmosphere, the primary contributor to climate change through the combustion of fossil fuels. In the United States alone, CO2 emissions account for approximately 85% of all U.S. greenhouse gas emissions, most of which come from fossil fuels (EPA, 2008). Reducing the risk of the damage caused by climate change requires the world to substantially reduce CO2 production. In the past five to ten years several proposals to address climate change have been suggested; most prominently cap-and-trade and carbon taxes. These market-based approaches differ from the traditional command-and-control policies, such as Corporate Average Fuel Efficiency (CAFÉ) standards which mandate minimum fleet mileage standards for vehicles sold in the United States, by providing firms a cost-effective and flexible form of environmental regulation. Other benefits also exist, such as technological innovation to reduce greenhouse gas emissions and potential revenue sources for governments; the more a firm emits CO2, the more they pay, either in taxes or through purchased emission permits.
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