Cost Containment
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Mechanisms to stabilize the cost of a policy (usually viewed as the price of permits) increase compliance flexibility - above and beyond typical trading programs - in order to reduce cost uncertainty. In general, these cost containment mechanisms make a quantity-based instrument (a cap-and-trade program) behave somewhat more like a price-based instrument (a carbon tax). Allowing the trade of quantities (in this case, emissions permits) over time through banking and borrowing can deliver greater near-term price stability. A safety valve limits cost uncertainty by simply setting a ceiling on allowance prices, with the government selling an unlimited number of additional allowances at the safety valve price. (In some proposals, this is coupled with a corresponding allowance price floor.) |
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| Other mechanisms include a reserve, which is essentially a quantity-limited safety valve, although typically reserve allowances must be made up in the far future); "circuit breakers" that would stop a ramp-down in annual emissions caps over time if permit prices exceed a specified trigger; and other trigger mechanisms that would temporarily make the program more flexible through more offsets or more borrowing, if prices exceed a specified trigger. Finally, proposals such as the "Carbon Market Efficiency Board" (CMEB) in Lieberman-Warner take a more discretionary approach to cost containment, entrusting an independent board with the power to intervene in permit markets. Regardless of the specific mechanism, the cost and flexibility of compliance have to be weighed against a potential reduction in environmental efficacy. |
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Lieberman-Warner provisions Allows banking and borrowing (up to 15 percent of compliance obligation). Creates the CMEB to monitor the allowance market and gives it discretion to temporarily increase borrowing and the use of offsets. The manager's amendment provisions include a reserve of six billion metric tons (approximately one year's worth of allowances early in the program) that is gradually available from 2012 to 2027. These reserve allowances are sold for between $22 and 30 in 2012 (the exact price to be determined by the President), with the price rising at 5 percent over inflation annually. These reserve allowances must be made up - in the form of lower aggregate emissions caps - in 2030 to 2050. | ||
