The American Clean Energy and Security Act, also known as the Waxman-Markey bill, has a reserve price for permits that are auctioned. This functions as a type of price floor. It is not a strict price floor, because there is nothing preventing the market price for permits from getting lower than than the auction reserve price. Also, only something like 15% of permits will initially be auctioned [Actually significantly more than 15% of permits are likely to be auctioned, because entities that are allocated permits for free have the option of having them auctioned by the Administrator. However, firms may buy international permits from other qualifying cap and trade schemes, which could drive the US market price to less than the reserve price.]
This is what the bill has to say:
Section 791 (d) RESERVE AUCTION PRICE.—The minimum reserve auction price shall be $10 for auctions occurring in 2012. The minimum reserve price for auctions occurring in years after 2012 shall be the minimum reserve auction price for the previous year increased by 5 percent plus the rate of inflation (as measured by the Consumer Price Index for all urban consumers).
The fact that the reserve price increases by 5% above the CPI is very important. This sends a strong long term signal to investors. People will think twice about investing in new coal plants when they know that the carbon price will be at least $39 in 2040, $63 in 2050, and $100 in 2060. If the initial price was higher (say $20 or $50), there would be an even stronger signal. A higher floor price would also send a stronger signal to developing countries that the US is prepared to play its fair share in reducing global emissions.
