In a “a sharp departure from the House measure,” Boxer climate bill to adopt a price collar for allowance auction — as predicted

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"In a “a sharp departure from the House measure,” Boxer climate bill to adopt a price collar for allowance auction — as predicted"

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Back on August 5, I explained How the Senate can fix cost containment in the climate bill with ‘price collar plus’E&E News then noted that Boxer was considering a modified ‘price collar’ for climate bill.   Now Energy Daily reports (subs. req’d):

Moving to assuage concerns about the potential costs of capping U.S. greenhouse gas emissions, Senate Environment and Public Works Committee Chair Barbara Boxer has included an allowance “price collar” provision in climate change legislation she is drafting that would establish maximum and minimum prices for emission allowances in the early years of the cap-and-trade program the bill would create, The Energy Daily has learned.

The draft legislation, which Boxer (D-Calif.) plans to introduce at the end of the month, would establish an initial allowance price ceiling of $28 per metric ton of carbon dioxide and a price floor of $11, with the prices adjusted upwards annually thereafter, according to a source familiar with the measure.

Under the provision, if heavy demand pushed allowance market prices above the $28 ceiling, the government would borrow allowances from future years and sell them to regulated entities at the ceiling price, a move that in theory would reduce demand for allowances and lower prices.

The minimum, or floor, price would ensure that government-administered allowance auctions generate sufficient revenues to fund climate change adaptation efforts, for example, and other climate change-related public benefits.

This is almost precisely what I proposed.   I had originally suggested using the House’s starting floor price of $10, but recently suggested raising that to $14.  So $11 is a good start, but I hope Boxer and the Senate goes higher.  Equally important — the bill needs to have both the floor and ceiling rising 5% plus inflation every year thereafter.

This Carbon Collar is a vast improvement over the House bill.   Fence-sitting Senators and industries can legitimately see it as achieving stronger cost-containment protection than their analysis suggests the House bill now provides, including protection against speculators running the permit price up, while progressives can legitimately see it as achieving better environmental outcomes than their analysis suggests the House bill now provides. Win-win.

Boxer is expected to hold hearings on her legislation in early October and move it through her committee later that month.

Boxer signaled in early August she was considering including a price collar in her legislation, a move clearly aimed at addressing concerns by a number of Democratic senators over the past two months that limiting carbon emissions could harm the U.S. economy by driving up the costs of energy and consumer products.

Although Boxer’s bill draws heavily on legislation (H.R. 2454) approved by the House in June, her price collar provision is a sharp departure from the House measure, sponsored by House Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) and Rep. Edward Markey (D-Mass.), chairman of the House Select Committee on Energy Independence and Climate Change.

Both bills would allow utilities and other regulated entities to bank unused allowances for use in future years, and to borrow allowances””to be repaid with a substantial borrowing rate””from future years.

The House bill contains a strategic allowance reserve in which a portion of allowances from each year of the bill’s cap-and-trade program is placed in a pool, which is then made available to regulated entities at a price set at $28 in 2012″”the year the emissions cap begins””and thereafter at 60 percent above a 36-month rolling average allowance price.

The price collar concept has gained considerable support among regulated industries in the wake of House passage of the Waxman-Markey bill. Support for the price collar has been fueled in large part by growing skepticism about the availability of emission offsets“”emission reductions taken in sectors not subject to the emissions cap, such as agriculture and forestry””in the early years of a cap-and-trade program.

No, that isn’t where most of the support for the price collar comes from.  Most of the people who are pushing the collar, like the utility industry, have been pushing it for a long time.

The House bill allows up to 1 billion tons each of domestic and international offsets annually and up to 1.5 billion tons of international offsets if insufficient numbers of domestic offsets are available. Because they are expected to be available at prices considerably cheaper than U.S. emission allowances, offsets are seen as an important tool for keeping the overall costs of a cap-and-trade program manageable.

At a Tuesday hearing before the Senate Energy and Natural Resources Committee, however, Bipartisan Policy Center (BPC) President Jason Grumet noted that the Kyoto Protocol’s Clean Development Mechanism, which allows developed countries that build clean energy projects in developing countries to earn emission credits, has registered roughly 300 million tons of offset credits during its five-year tenure.

“We therefore believe it is unlikely that the U.S. purchases of international offsets would exceed 300 million tons of carbon dioxide-equivalent credit per year during the first several years of the program, and while this estimate may be conservative over the long term, the five-fold increase (1.5 billion ton limit) contemplated by the Waxman-Markey bill seems unrealistic.

“The inclusion of a price ceiling or robust allowance auction reserve in the early years of a cap-and-trade program for greenhouse gas emissions would ease the pressure for short-term reliance on international offsets as the primary mechanism for managing program-related economic risks.”

Another lame argument from NCEP (see “Who is the National Commission on Energy Policy and why are they trying to weaken “” not strengthen “” the climate bill?“)

The bill doesn’t need MORE cost containment in the early years as even the most basic analysis makes clear  — (see “Game changer, Part 2: Unconventional gas makes the 2020 Waxman-Markey target so damn easy and cheap to meet and “EIA stunner: By year’s end, we’ll be 8.5% below 2005 levels of CO2 “” halfway to climate bill’s 2020 target”).

Indeed, consider CBO, which has the most solid, nonpartisan analysis of the House bill.  CBO finds that even with U.S. purchases of international offsets in the early years comparable to what Grumet projects, the bill has a modest permit cost — about $21 a ton in 2020 — along with low total costs (see “CBO stunner: Waxman-Markey cuts U.S. GHGs sharply but costs only a postage stamp a day “” without counting the efficiency savings“).

Brent Yacobucci, specialist in energy and environmental policy for the Congressional Research Service, told the committee that any number of options are available for reducing the costs of a climate change program, but that short of a carbon tax, “arguably the most comprehensive cost-containment scheme would be a [price collar].”

In other notable changes to the Waxman-Markey legislation, Boxer’s bill would tighten the House bill’s emissions cap in 2020 from 17 percent below 2005 levels to 20 percent below 2005 levels. In addition, the bill would eliminate language in the House bill prohibiting the Environmental Protection Agency from regulating carbon dioxide under the Clean Air Act’s New Source Review and New Source Performance Standard provisions””a key demand of environmental organizations.

Those are two very good changes.

If this report is accurate, then kudos to Boxer.

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14 Responses to In a “a sharp departure from the House measure,” Boxer climate bill to adopt a price collar for allowance auction — as predicted

  1. Wonhyo says:

    “if heavy demand pushed allowance market prices above the $28 ceiling, the government would borrow allowances from future years”

    Isn’t this the strategy that led U.S. automakers to end up with a business dependent on gas guzzlers just as gas prices were peaking? As I understand it, federal CAFE standards were supposed to increase U.S. fuel economy over time. CAFE standards got in the way of U.S. automakers expanding sales of gas-guzzling SUVs. To get around this, the U.S. automakers borrowed against future efficiency increases to continue expanding sales of guzzlers. Before they could “pay back” this efficiency debt, the gas price spike hit and the taxpayers bailed them out.

    [JR: I have no idea where you got this but it has no basis in fact. Ronald Reagan rollback fuel economy standards in 1985 and conservatives blocked any increases for two decades, until we finally got serious majorities in both houses of Congress.

    The key point about the ceiling is that it rises over time and I'm assuming that Boxer is using the same formula that is in the House bill of 5% real price rise per year -- which from my perspective would keep the ceiling price far above the actual permit price, while ensuring that the overwhelming majority of emissions reductions would be achieved through domestic clean energy strategies.]

    I’ve said this before and I’ll say it again: We are making the mistake of framing the climate/energy debate in economic terms. Our global economic system is based an economic framework where everything is negotiable, for the right price. I’ve always feared that any climate/energy action based on an economic framework is susceptible to all of the kinds of shenanigans that are used in the financial world.

    The problem is, nature does not negotiate, compromise. Nature does what it does in response to human (and natural) inputs. The only way to limit the scope of climate change is to reverse our framework of discussion: We need to discuss economic policy in the framework of climate and energy change. Only then will we fully acknowledge the challenge of climate/energy change, and deal with it effectively.

    I’m not opposed to a cap-and-trade system per se. I just think it needs to be implemented in a framework of thought that acknowledges that our economic systems are subject to the forces of nature, not vice versa.

    [JR: The climate bill working its way through Congress is designed to be implemented that way -- the tricky part is getting 60 senators to vote for something.]

  2. Mac Ferguson says:

    I agree wholeheartedly, but unfortunately climate change ‘politics’ at present are driven more by economics that the consequences of inaction on global warming. (Wrong by any measure, but an unfortunately reality that we seem to be stuck with.) I believe Joe has stated it in the past that given the choice between this bill or no bill…this may be as good as it gets. I still find it mind boggling that so many Americans STILL cannot find the motivation to take personal measures toward conservation or political action etc. in addressing this problem. Many that I speak with still do not have a sense of urgency with this issue or simply believe that ‘technology’ will come up with a solution that will remove the burden from individuals. ‘If we just wait long enough, they’ll find a solution and we won’t have to change the way we live.’ I hear it constantly from coworkers and others in my personal pursuit of ‘green’ in the workplace.

  3. EricG says:

    How will the floor be enforced? If the ceiling is enforced through selling allowances not currently on the market, will the floor be enforced by buying allowances and banking them? Also, who will be able to purchase allowances? Could private citizens purchase allowances and retire them?

    BTW, the dog in the picture is not a boxer, it’s an American pit bull terrier.

  4. Lars Intelars says:

    If you cannot be a member of the Administration team then it is good to see that the politicians are doing exactly what you suggest. Are you in the running to be the czar role that Van Jones left? I hope so!

  5. Peter Wood says:

    The improvement from a 17% reduction to a 20% reduction is very welcome indeed, as is the increase in the floor price to $11. The continuation of the EPA ability to regulate emissions is also welcome. What would also be good would be a greater portion of permits going into the strategic reserve or whatever replaces it. It will be interesting to see the fine print on how the modified price collar works.

  6. Leif says:

    New research on Greenland Ice Sheets.
    Not what the “deniers” want.

  7. ““The inclusion of a price ceiling or robust allowance auction reserve in the early years of a cap-and-trade program….”

    I don’t see any specific mention of it being phased out in the later years. I think it needs to be phased out to reduce emissions by 80% or 90%. At that point, we may need a high price to ration the remaining emission allowances and allocate them where they are really needed.

    And at that point, it will be too late to borrow against the future. Borrowing against the future makes sense as a transitional measure. But Americans seem to have adopted the practice of borrowing against the future as a permanent way of life.

    [JR: Doesn't need to be phased out if it starts at $28 and rises 5% real a year.]

  8. Leif says:

    My link to Greenland Ice research in number six failed to post. Google: ABC Science.

  9. From Peru says:

    Finally some good news!

    A measure to stop speculators from playing with prices and permits.

    It would be a disater seeing a carbon-credit crash in the future similar to the current mortgage-titles crash that triggered the current economic collapse.

    It is evident that absolute free-trade is not the answer. Now we can hve a planned(ie. not free) carbon market.If we continue in these path, maybe a mixed economy like in post-WWII Europe (this mixed socialist-market economy brought the greatest economic growth in recorded history, the so called post-WWII “boom” or “golden age”)will re-emerge in coming years..

    This obviously will disgust even more the utra-liberist conservatives, but will give more confidence to Left movements to this reform, so the bill will have more support from Greens , Socialists and Social-Democrats.

    Whith this more broad support, Democratic liberals could form the much needed United Center-Left Block(That is, from Center , the Liberals, to the Left, the Socialists and Greens) against the ultra-Conservative Right.

  10. Jeff Huggins says:

    Numbers

    The $28 per metric tonne ceiling equates to about 25 cents per gallon of gasoline based on the amount of CO2 actually generated when the gasoline is burned. (So, considering that some CO2 is generated during the production, refining, and logistics processes, the total amount could be modestly higher, although I don’t have those figures.)

    In my view, if we actually thought better about how to accomplish all this, the “economic incentive to not use CO2-producing fuels” should and could be much higher. We are playing “patty cake” with the companies involved. It feels to me as though we are preferring to use “kid gloves” with some of these companies while we continue to fuel the climate problem. Instead, we should use “kid gloves” with the climate — and adopt policies that would cause the shift from old energy to new energy much faster.

    Be Well,

    Jeff

  11. Wonhyo says:

    “Isn’t this the strategy that led U.S. automakers to end up with a business dependent on gas guzzlers…”

    [JR: I have no idea where you got this but it has no basis in fact...]

    I stand corrected.

    “I’m not opposed to a cap-and-trade system per se. I just think it needs to be implemented in a framework of thought that acknowledges that our economic systems are subject to the forces of nature, not vice versa.”

    [JR: The climate bill working its way through Congress is designed to be implemented that way -- the tricky part is getting 60 senators to vote for something.]

    I realize the supporters of the climate bill designed it to be implemented that way. Getting 60 senators to vote for the bill may be tricky, but consistent, long-term enforcement of the bill will be a continuous challenge. I cringe when I think of all the California Air Resources Board EV requirements that were gradually but steadily scaled back to the point they disappeared. Had these EV requirements been maintained, GM and other manufacturers would have had to continue providing EVs to California customers, and they would have given Toyota a run for the money on high efficiency cars.

    The hard problem is getting all the players to put the spirit of the bill above the temptation to weaken it, work around it, exploit loopholes in it, etc.

    Excuse me for being a little jaded. I’ve been following the health care debate a little too closely.

  12. Ken Johnson says:

    Why don’t they cut to the chase — just split the difference and set the floor and the ceiling prices both to $21. As a bonus, they could eliminate the cap, which never really “guarantees” anything unless you’re willing to pay > $1000/ton. I think it’s gradually beginning to dawn on the political establishment that a robust price floor is really more important than the cap.

  13. Mike#22 says:

    “As a bonus, they could eliminate the cap,”

    Just curious, but what would you suggest instead of a steadily shrinking cap?

    Growing emissions?

  14. Jack t says:

    Where in the bill is the “price ceiling” component? This looks just like the House version, only the minimum strategic reserve price is calculated differently. And it doesn’t cap prices, it simply provides a cushion by adding 15–25% supply. That’s not really a ceiling, am I right? I also don’t see in Kerry-Boxer how the reserve would be filled initially. Rather than skim off the top each year and replenishing through offsets, it seems to be pulling from future years. Not privileging international REDD and increasing the minimum price by predetermined steps… that’s all good. If you can, point me to the specific parts of the bill that describe filling the reserve initially.