Common Tragedies

Thoughts on Environmental Economics

The Boxer amendment

Posted by Daniel Hall on May 22, 2008

The amended version of the Lieberman-Warner bill is out. The headline change is the revised cost containment provisions, referred to collectively as “emergency off-ramps”.

The main change is the addition of an annual “Cost-Containment Auction”. Each year from 2012 to 2027 there would be a pool of allowances which would be available for sale at a predetermined threshold price. The pool of allowances is pulled from future allocations in 2030 through 2050. The total size of the pool is 6 billion metric tons — about one years’ worth of allowances early in the program — with only a fraction of this total pool available in any given year. Allowances sold through the auction would have to be made up in the 2030 to 2050 period. And the price of these allowances — oh, the ever-important price — would be between $22 and $30 in 2012. The exact figure would be set by the President, and it would then rise by 5% over inflation each year beyond 2012.

This mechanism is sometimes called a “reserve”. It is essentially a quantity-limited safety valve. There are two main differences compared to a traditional safety valve. First, there are a limited number of extra allowances, so potentially the number of allowances demanded could exceed the available pool. Once the entire reserve is sold then allowance prices could still go higher than the threshold price. Second, the reserve allowances must be “paid back” in the future in the form of lower emissions caps, and so the total emissions across the entire policy period remain the same. Note that there is a spectrum with these policies that goes from certainty about price (safety valve) to certainty about emissions (pure cap), with the reserve trying to fit in between.

My first impression of this change is that it is a positive one. I have much more that I could — and may — say about this in future, but for now let me just say that I view the core question of the climate change policy debate as, “What is the price of emissions?” The fundamental political negotiation is thus one that is about price. In this regard I view any change that makes this negotiating price more explicit and transparent as a step in the right direction.

For those who want more information about cost containment in general — and reserves specifically — I cannot recommend this webpage highly enough. It’s the coverage of the event on cost containment that was held at RFF a couple months ago. In particular watch the video of the presentations by Billy Pizer, who gives an overview of cost containment, and Brian Murray, who makes the case for a quantity-limited safety valve.

Here’s a summary of some of the Boxer amendment changes from Kate Sheppard at Grist, and a couple of her previous posts.

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