MARKETS: Outside groups float compromise to 'safety valve' (04/08/2008)

John J. Fialka and Darren Samuelsohn
ClimateWire reporters

The staffs of two nonprofit groups with important roles in shaping the leading Senate global warming bill are suggesting a compromise that would bridge one of the measure's biggest sticking points -- the uncertainty over what the carbon emissions cap-and-trade system will cost the nation's economy.

In a memorandum sent yesterday to key House and Senate committee members, the National Commission on Energy Policy (NCEP) and Duke University's Nicholas Institute for Environmental Policy Solutions suggested several additional ways to help avert price spikes in a new U.S. carbon market.
Their primary idea suggests building up a "limited" reserve of emissions allowances that normally would be issued in future years for compliance but that could instead be borrowed by companies in the first years of carbon trading to help prevent abnormal price volatility.

Officials from both NCEP and Duke said their latest idea is aimed at defusing controversy over two other potentially conflicting cost-related items under intense discussion on Capitol Hill and among industry, environmental and labor groups.

NCEP is a leading advocate for one of those approaches, commonly called a "safety valve," which puts an absolute ceiling on the price of an emission allowance. Labor unions and some industries like the idea because it gives them a better sense of the potential costs of the expected multibillion-dollar climate policy.
By contrast, Duke researchers helped come up with the "Carbon Market Efficiency Board," a government-appointed body with wide-ranging, but less defined administrative powers to alter emissions trading. Environmental groups and market traders support this approach largely because they do not want market forces restricting emissions to be blunted by an automatic "safety valve."

Sens. Joe Lieberman (I-Conn.) and John Warner (R-Va.), cosponsors of the global warming legislation scheduled for a floor debate this June, opted against using the "safety valve" approach and instead pulled mostly from Duke's concept. But going forward, both camps are trying to work together in an attempt to build the winning 60-vote coalition that can overcome an all-but-guaranteed filibuster.

Details to be determined by Congress

In an interview, Duke's Tim Profeta and NCEP's Jason Grumet cautioned that their compromise has not yet received the endorsement of their respective boards. Nor has it nailed down an important specific on a legislated trigger price for carbon that would give the Carbon Market Efficiency Board the signal to begin borrowing from future years.
"The details matter, but we think this is a structure that can create a discussion," said Grumet, who explained that his group feels strongly that there should be a "worst-case scenario" or an overall upper limit to the cost of the measure that would be imposed on the economy.

Profeta said the latest idea also addresses critics who say the Carbon Market Efficiency Board's powers are sweeping and ill-defined.

"This makes it more transparent," Profeta said. "You have a defined reserve. You have a board that will report to Congress. The reserve gives Congress a kind of fuel gauge. If companies are borrowing a lot and the reserve is running low, Congress will know the market isn't performing the way they'd like it to."
Over time, as the carbon market matures, the borrowing would decline and the legislated trigger price would phase out, Grumet and Profeta said.

"This is a potential $200-billion-a-year commodity market we're creating," Grumet said. "By simplifying the tools to this one mechanism, this gives the board a period of time to oversee the market and to get comfortable with its role. It also lessens the anxiety over costs, in our view."

Dovetailing ideas

The joint NCEP-Duke cost idea is the latest example of an outside group trying to influence lawmakers working through the issue.

Last month, the U.S. Climate Action Partnership recommended a similar type of credit borrowing as part of a broader cost-containment plan that also suggested payments for countries that want to keep their trees standing and allowing international credits into the U.S. program so long as other countries' emission reduction goals were consistent with scientific recommendations (E&ENews PM, March 20).

A Lieberman aide highlighted the similarities between the two proposals and said both have been forwarded to other Senate offices for consideration. "It's interesting and positive that essentially the same idea seems to be percolating up simultaneously from several different sources," the aide said.

Lieberman and Warner are trying to find compromise on costs and other top-tier issues through private talks that also include Senate Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) and Sens. Max Baucus (D-Mont.), Jeff Bingaman (D-N.M.) and Arlen Specter (R-Pa.). Those negotiations started in January (E&E Daily, March 31).

For Bingaman and Specter, the latest NCEP-Duke concept offers a modification to the "safety valve" idea originally in their own climate bill. That legislation suggested limiting CO2 prices to $12 per ton in the program's first year and then allowing them to rise 5 percent per year above the rate of inflation. Aides to both senators said yesterday that they would review the latest NCEP-Duke idea.

Aides to House Energy and Commerce Chairman John Dingell (D-Mich.) and Energy and Air Quality Subcommittee Chairman Rick Boucher (D-Va.) also received the NCEP-Duke memo. The committee's Democratic leaders have promised to craft a climate bill this year but have offered no further details on their timing. A committee spokesman declined comment.