Reilly, Rowe and Tierney: Guidelines for Reliable, Affordable Cap-and-Trade
Special to Roll Call
Seventeen years have passed since President George H.W. Bush traveled to Rio de Janeiro and joined world leaders in pledging to stabilize greenhouse gases from human activities. Since then, U.S. emissions have increased 14 percent while global emissions have risen nearly 36 percent. Clearly a new global effort is needed. And time is of the essence.
But the world will not act unless and until the U.S. takes decisive action at home. Fortunately, we are closer than ever before. Recent passage of the Waxman-Markey bill in the House and the focused, ongoing debate in the Senate signal a real opportunity to pass comprehensive climate legislation in this Congress. We must not allow that opportunity to escape. We must not forget that cap-and-trade systems harness market forces to find the lowest-cost solutions to climate issues.
Enacting a well-designed national cap-and-trade program is a demanding task. There are a host of key issues — many of which are complex. Yet addressing these issues will enable us to fashion a compliance program that will prove far more cost-effective than traditional command and control regulation. Set forth below is our view on how best to address the most challenging of these issues.
Containing Costs and Reducing Price Volatility
Cost remains the core objection to mandatory limits on U.S. emissions. But costs can be mitigated by the adoption of an overarching cap-and-trade system with an effective cost-containment mechanism. We believe that simplifying and strengthening the cost-containment provisions in the House legislation are critical to building a bipartisan consensus.
While we still favor a simple price cap, a properly designed reserve allowance provision, like that found in the House bill, can be effective as a mechanism for managing economic risk. However, the provision must be revised to reduce uncertainty, not add to it. Specifically, we believe that the size of the allowance reserve must be increased; the mechanism for determining the “trigger price” must be more transparent, predictable, and affordable over time; and the reserve should be drawn from “out years,” not the early years, to further protect against high initial cost.
Supporting U.S. Competitiveness
Absent mitigating measures, a cap on domestic greenhouse gas emissions would increase costs to the energy-intensive sector and could lead to the off-shoring of domestic industry. Successful climate legislation must address this concern. Fortunately, recent analysis indicates that the additional costs to energy-intensive sectors can be mitigated to a large extent through allocation measures and investment policies worth around 10 percent to 15 percent of the overall allowance value generated by the program. Effective clean technology programs for energy-intensive industry can also mitigate increased costs.
Engaging major trade partners to do their part in addressing their own carbon emissions will require a combination of carrots and sticks. Current legislative proposals provide positive inducements (such as technology assistance) for participation by other nations. In addition, the United States must work with other countries to develop forceful and coordinated responses to international trade and competitiveness concerns if major emitting nations fail to adopt comparable climate policies over some reasonable time frame.
Using Emission Allowance Allocations and Revenue Recycling as a Deliberate Transition Strategy
Deciding who gets the benefits of emissions allowances distributed for free is a critical fairness issue as we transition toward a system that relies on auctions as the means to allocate allowances into the economy. In our view, initial allocations should accomplish several important objectives: protecting households, especially low- and moderate-income households, from adverse economic impacts; supporting energy-intensive industries in making a viable transition to a smaller carbon footprint; funding incentives for increased investment in the research, development and deployment efforts to advance no- and low-carbon technologies and for investment in adaptation measures. Importantly, none of these allocations will undermine the environmental cap in a cap-and-trade system. While allocation affects the distribution of economic benefits and burdens, it does not reduce environmental results. This distinction is critical.
Congress should strive for allocation designs that are simple, clear and transparent. The approach we recommended in 2007 provides a reasonable basis for compromise and transition: Start by allocating a significant percentage of allowances for free to affected industry and consumers, while remaining allowances are auctioned. Over time, the quantity of allowances allocated for free would decline to allow for a gradual transition to a full auction. Recognizing that the revenue streams generated over time will be significant, it is appropriate to begin exploring the fiscal implications and possible uses, including recycling revenues.
Schumer Advocates for Many on Panel
Nov. 16, 12 a.m.
As Senate Majority Leader, Lyndon Johnson once said of the Joint Economic Committee, “It’s as useless as tits on a bull.” But as that panel’s chairman during the 110th Congress, Sen. Charles Schumer (D-N.Y.) seized the opportunity to elevate the traditionally low-profile post to the forefront of shaping policy. Read Full Article
Roll Call Video Channels
