Cap-and-Trade: The Return of the Safety Valve

If you want to cut carbon emissions, there are some ways of doing so which

actually make money, in net present value terms. Some methods, however, cost

money – and many of the most promising emissions-reduction schemes cost

a lot of money. Under a cap-and-trade system of carbon credits, the

higher the cost of such credits goes, the more that ambitious carbon-reduction

schemes become econmically viable. That’s the whole point of a system. But the

electric utilities, of course, are pretending

not to understand:

Executives of major utilities are prodding Congress to install a feature

in climate-change legislation that would prevent the price levied upon carbon-dioxide

emissions from rising too high.

At least 26 utilities have signed a letter calling for an "economic safety

valve" as part of a system that would set a limit on such emissions…

"We need a mechanism that would send a more predictable price signal

that would help us plan for the billions of dollars of investments that we

and others will have to make to move to a desired lower-carbon economy,"

said John Bryson, president and chief executive officer of Los Angeles-based

Edison International.

According to the U.S. Department of Energy, electric utilities are the largest

sector that would be covered by a law curbing CO2 because they produce about

40% of the nation’s emissions. Cutting emissions would require utilities to

build more nuclear- or wind-power plants.

Any "safety valve" mechanism would defeat the purpose of a cap-and-trade

system, which is, um, to cap emissions. A cap-and-trade system without an emissions

cap is basically a carbon tax without the tax, and the chances that it would

result in any meaningful reduction in emissions are slim indeed.

The fact is that nuclear- and wind-power plants are expensive, and the best

way of making them economically feasible is to allow carbon-based energy prices

to rise as far as the market takes them.

All that said, if you are going to have a safety valve, then Joe Lieberman’s

proposal seems to be the best way of having one:

There are two types of safety-valve mechanisms in legislation being prepared

by the Senate. One, proposed by Sen. Jeff Bing-aman (D., N.M.), would allow

the government to freeze the price of a carbon-emission credit once it reached

a certain level. Another, which is about to be introduced by Sen. Joseph Lieberman,

a Connecticut independent aligned with Democrats, would create a politically

appointed board of experts, similar to the Federal Reserve Board, with authority

to adjust various aspects of trading, such as borrowing credits from future

years, if it saw "significant harm to the economy" in prices.

At least that way the total cap in emissions is retained, even if the cap in

any given year is breached.

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