The climate and clean energy bill that narrowly passed the House has three problems related to cost containment (CC) that the Senate should — and I expect will — address:
- Fence-sitting Senators (and industries) worry that its CC provisions aren’t hard-nosed and specific enough to protect the public and businesses from carbon prices that get too high too fast, possibly driven by speculators.
- Progressives worry that its CC provisions are already too strong and that some proposals floating around to strengthen CC would environmentally weaken an already weak bill.
- The major CC provision in the bill — the strategic reserve — is so opaque that it is understood by a handful of people at most and none of them are U.S. Senators.
I’m going to try to take the best of all the current CC proposals and propose an alternative that I think might actually be appealing to all sides, what I’m calling “price collar plus.”
Two weeks ago, the Brookings Institution — which I’d view as center-right on the energy and climate issue now that David Sandalow has left — proposed a traditional price collar in Politico, “Time for a price collar on carbon.” To their credit, they did suggest this was a way to “rein in offsets” but offered no specifics on how to achieve that important end.
The benefit of a price collar to Brookings:
By preventing the policy from being either unexpectedly lax or unexpectedly stringent, a price collar protects both investors in green technologies and households and preserves strong incentives to abate.
The House climate bill already has a price floor for the auction, which starts at $10 a ton in 2012 and rises 5% plus inflation every year thereafter. I believe most everyone understands the need for a rising price floor — giving some certainty to businesses about investment decisions they make, say, in biomass cofiring or natural gas fuel switching. The floor in Waxman-Markey is, by almost every independent analysis, on the low side in the sense that the CBO and EPA and especially the EIA project the price for a CO2 allowance in 2020 will be above the floor — in EIA’s estimation, double the floor price.
The fossil fuel industry, of course, funds economic analyses that project incredibly high allowance prices to scare people into opposing the bill entirely. If their analyses were anywhere near accurate, the floor in the House bill would be utterly irrelevant. I’d love a higher floor, but since it has already passed the House, we’re probably stuck with it.
A price collar, of course, requires a ceiling to go with the floor. Brookings explains: