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Boxer Climate Bill To Put ‘Collar' On Allowance Prices (Energy Daily 9/17/09)
September 17, 2009

Posted by Matt Dempsey

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Energy Daily 

Boxer Climate Bill To Put ‘Collar' On Allowance Prices


September 17, 2009

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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.

Details of Boxer's draft emerged as Senate Majority Leader Harry Reid (D-Nev.) signaled Tuesday that climate change legislation is unlikely to come to the Senate floor until late in the year given the Senate's crowded schedule, which includes health care and financial services reform legislation and a number of appropriations bills.

Reid's pronouncement notwithstanding, 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.

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."

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]."

Joseph Mason, an economics professor at Louisiana State University, cautioned that an allowance price collar could invite speculation by arbitrageurs aimed at profiting by trading at either end of the collar. This type of market behavior, which Mason said has been observed in countries that used price collars to limit the effect of monetary policy initiatives, had in some cases resulted in severe price distortions that forced governments to abandon or sharply curtail the initiatives.

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.

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