As the Presidential hopefuls tout their climate legislation promises and Congress continues to dance around the pending carbon policy, a strange term has arisen in the climate debate: a cap and trade “safety valve.” Also called a “cost ceiling,” a safety valve is an escape hatch built into a cap and trade system that provides a definite economic bottom line. If the price of carbon emissions moves above a predetermined level, a governing body could issue more credits to bail out emitters who hit their polluting heads on the ceiling.
The idea is both politically and industrially palatable. At least for the politicians and industrialists of the fossil fuel age. But an under-valued safety valve undermines the cleantech industry. If polluters are assured they can cheaply buy their emission credits, then they have no reason to reduce their emissions.
Joseph Romm, formerly of the Department of Energy and long-time safety valve opponent, offers his thoughts on an extremely thorough piece (subs. req.) on the history of the safety valve debate, which the piece describes as the story of “an obscure, almost monastic dispute among economists three decades ago [that] has now emerged as a potential make-or-break point for the proposed legislation.”
The Lieberman-Warner bill, the flagship carbon legislation, allows emitters to bank credits as well as draw from future credits, with interest, as needed. It also stipulates the creation of the ill-defined Carbon Market Efficiency Board which could issue extra carbon credits as it deems necessary. The Bingaman-Specter bill goes farther with a flat-out limit on the cost of carbon at $12 per ton.
Even the Bush administration’s eco chief James Connaughton said in a talk to VCs last week that he supports a “safety valve” cap and trade proposal.
These sorts of artificial cost controls are unprecedented in existing emission control systems. Neither the ongoing European carbon trading experiment nor the highly successful U.S. sulfur emissions trading scheme have such ejection seats. Much of the debate surrounding the efficacy of a safety valve is still being done by Nobel laureate economists from all sorts of political persuasions.
While a carbon safety valve could meld the flexibility of market controls with the certainty of a carbon tax, the danger is that an abysmally low safety valve value would do nothing to encourage reduced emissions. In addition, the elasticity of carbon and its connected markets is poorly understood and a safety valve could prevent the great carbon trading experiment from providing policy-makers with any substantiative conclusions. As carbon legislation draws nearer and nearer, the coal industry and big oil will likely switch their tactics from blocking a carbon market to manipulating its creation. A tampered-with safety valve could keep the polluters in the black while stifling green energy.
Image courtesy of Zhejiang Jiali Tech.