A newly released CalEPA report says the state should not adopt a safety valve as part of its greenhouse gas reduction strategy. Interestingly, the same California Air Resources Board (CARB) report says the state should consider an “allowance price floor”:
CARB could enforce a floor by purchasing allowances and removing them from circulation whenever the allowance price reached the lower limit…. A price floor has the attraction of giving investors certainty that the price of emission allowances would never fall below a specified level. While a price ceiling [i. e. safety valve] could jeopardize environmental integrity and reduce the return on investments in clean technologies, a price floor would reinforce environmental integrity.
Here is everything CARB’s Market Advisory Committee has to say about the safety valve in its report, “Recommendations for Designing a Greenhouse Gas Cap-and-Trade System for California“:
“A safety valve places a ceiling price on emission allowances in order to provide price certainty and limit the cost of a cap and trade program. When the allowance price reaches this predetermined level the program administrator may sell additional allowances at the ceiling price. Thus a safety valve brings assurances that the price of allowances will not exceed a certain level. At the same time, it removes what many consider to be a major potential attraction of a cap-and-trade program: the certainty that total emissions from entities within the program would be kept within a given cap.
“Along with removing prior certainty as to the total emissions of the cap-and-trade system, a safety valve could increase the risk that overall California emissions — that is, emissions from the cap-and-trade program plus those from entities outside of the program — might exceed the limit declared under the Global Warming Solutions Act. Moreover, without the environmental integrity ensured by an unambiguous hard cap, California may not be able to link to other emissions trading programs.
“On the other hand, it is possible to keep the total emissions under the cap-and-trade program within a given pre-established limit, even with a safety valve. One way to accomplish this would be for the state to purchase offsets that fully compensate for the additional emissions allowed by the sale of additional emissions allowances. The revenues to finance such purchases could come from the states’ allowance sales undertaken to maintain the safety valve, or (if allowances are auctioned initially) the allowance auction.
“The Committee judges that the various difficulties and challenges posed by a safety valve outweigh the potential attractions. It concludes that the safety valve should not be included as part of a California cap-and-trade system.“