Transcript Cost Containment in a Federal GHG Cap and Trade Program

Cost Containment in a Federal
GHG Cap and Trade Program
NARUC Webcast
May 30, 2008
Andy Keeler
John Glenn School of Public Affairs
The Ohio State University
Cost Containment – Overview of
mechanisms and issues
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What does “cost containment” mean?
Why is it important for program design?
What are the options for cost
containment that are under
consideration?
What are the key issues for policy
design?
Cost Containment
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A “textbook” cap-and-trade program will
result in some allowance price that
affects all covered entities
Cost containment refers to modifications
of the “textbook” policy that (may) lower
the allowance price
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Under all conditions
When “emergency” criteria are met
Why is cost containment
important in program design?
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High allowance prices increase
economic risk
Volatility and uncertainty create
investment choice problems
Bad economic outcomes increases the
political risk for long-term climate policy
Protecting against the
unexpected and/or bad luck
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There is enormous uncertainty about
both the demand and supply sides of a
national GHG allowance market
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Economic
Technological
Institutional
And the uncertainty is greatest in the
early years of a new program
Offsets – Engaging Non-covered
sectors
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Emissions reductions from entities outside the capand-trade systems can offset increased emissions
within the cap
In theory, this has the twin benefits of
 Lowering allowance prices
 Encouraging long-term GHG reductions by the
sectors producing the offsets
Changes in the limits or terms of offsets are a cost
containment policy
Banking and Borrowing
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Banking means holding over allowances
for use in the future – this reduces
future allowance prices and increases
current prices
Borrowing means using allowances
allocated for use in future years now -this increases allowance supply and
reduces prices now, while increasing
prices in the future
Borrowing
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Policy proposals limit borrowing to
specific circumstances and to maximum
amounts
Changes in the limits or terms of
borrowing are a cost containment policy
Emergency-Metaphor Policies—safety valves,
circuit breakers, and emergency off-ramps
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Reduce the price of allowances by
making additional allowances available
Crucial distinctions
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Relax the long-term cap, or all released
allowances made up in the future
(borrowing)
Price certainty, trigger certainty, or
additional allowances released without
certainty
Emergency-Metaphor Policies
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Safety Valve – unlimited allowances
available at a known price
Circuit Breaker – annual cap is frozen
(stops declining) as long as prices are
above a known price
Emergency Off-Ramp – a reserve of
future-year allowances is auctioned
annually with a (known) minimum price
Cap Neutrality
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The safety valve is not cap-neutral –
additional allowances sold at the safety
valve price represent additional
emissions
The circuit breaker is not cap-neutral –
but there are limits to the quantity of
emissions above the cap
The “allowance reserve” is cap-neutral
(in theory)
Triggers
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A safety valve works off a known, preannounced price
Reserves, circuit breakers, and other
borrowing mechanisms can be
designed to work off announced triggers
or at the discretion of regulators (e.g.
Carbon Market Efficiency Board)
Carbon Market Efficiency Board
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The “Carbon Fed” would have discretion
to change
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Offset quantities
Borrowing restrictions
????
There are positive and negative
consequences of building such
discretion into a cap-and-trade system
Two Current Proposals
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Emergency off-ramp (Boxer / L-W) –
price effects are not certain, capneutral, has a pre-announced minimum
price (starts at $22-30 per ton CO2)
Safety valve (Bingaman-Specter) –
certain, pre-announced (current version
$12 per ton CO2), excess emission
above the cap
What’s the price?
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Discussions about the safety valve in
particular, and about all of these
mechanisms, should focus more on the
price at which they kick in
A $12 safety valve is very different than
a $50 safety valve
Summary
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Cost containment is a key part of
program design
Debate on this issue has a long way to
go
Big issues
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Price certainty
Emissions neutrality
Extent of discretion
What’s the price?