Common Tragedies

Thoughts on Environmental Economics

Article on the debate over a ‘safety valve’

Posted by Daniel Hall on March 12, 2008

Evan pointed us to the new ClimateWire service a couple days ago. They seem to have gotten off to a great start. Tuesday’s edition contained a lengthy and well-researched article by senior reporter Darren Samuelsohn on the history of the safety valve proposal — the idea that a cap-and-trade system include a maximum price above which the government would sell additional allowances. It is an absolute must-read. It is lucid, interesting, and detailed — I work on these issues and I learned quite a bit from the article. (Including things about some of the people I work with!) ClimateWire is a subscription service, but fortunately for the general public the Carbon Tax Center obtained permission to run the entire column at its blog.

I’ll make two quick observations about the safety valve:

1. The controversy about the safety valve is largely a question of “what is the price?” Most environmental advocates would not have a problem with a safety valve of $100 per ton of CO2 emissions (three times higher than current prices in Europe and even higher than the Stern Review’s estimate of the cost of emissions).

2. There is a “price” safety valve but there is also a “political” safety valve. If a cap-and-trade program without a price safety valve turns out to be far, far more costly than projected the program will be suspended, weakened, or dismantled.

For those of you in DC, remember that RFF is hosting a workshop on managing the costs of climate policy (including discussion of the safety valve) next Wednesday.  RSVP by today at the link.

Remember, please read the article, it is superb.

5 Responses to “Article on the debate over a ‘safety valve’”

  1. Dan said

    I think (you might have to correct me!) that any cap-and-trade scheme must have a valve built in. You have to say that you will fine the regulated companies per tonne of emissions for which they do not have credits. In the EU ETS, this fine is currently 40 Euros (rising to 100 in Phase 3 from 2012). This means that the EUA (the credit used in the EU ETS) can’t rise above 40 Euros, because at this point the participants decide to start paying the fine rather than buying EUAs.

    If you don’t have a fine, the regulated companies would have no reason to comply!

  2. Daniel Hall said

    any cap-and-trade scheme must have a valve built in.

    In theory you are correct but in practice regulators can make it sufficiently expensive to violate the cap that we are back to a “political” safety valve, e.g., fines for non-compliance, rather than being monetary, could be incarceration (or execution, which would probably exceed the political safety valve).

    More practically regulators can require not only a fine now but also require violating firms to make up excess emissions in the next period. This is in fact what the EU ETS does. (Also, in terms of the fine price, I think you are slightly off: I think the fine was 40 euros prior to this year, it is now 100 euros through 2012, and I’m not sure what the phase 3 fine is.) The Lieberman-Warner bill now in the U.S. Senate also uses a similar rule, with a fine set at the greater of: a) $200, or b) 3 times the mean permit price in that year. Given that firms must both pay the fine and make up excess emissions the next year, it is hard to see a firm ever choosing non-compliance. (Excepting, again, the case of the “political” safety valve, e.g., some kind of massive breakdown of the system where almost all actors were in non-compliance, or some kind of hyperinflationary economic meltdown.) Also, remember that in this system prices could rise above the fine price, so it does not function as a “price” safety valve.

  3. Dan said

    Thanks Daniel. Very helpful comment & I’ve now read ClimateWire article @ CTC too. Best, Dan.

  4. […] As well as a good post at Common Tragedies (see here), […]

  5. Nice post thanks. Canada is implementing a safety value that is worth a look. See

    http://www.ec.gc.ca/doc/virage-corner/2008-03/541_eng.htm#technology

    Modeling suggests the valve is set very low, and so cost containment trumps emission reductions.

    Cheers

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