October 2009

A joint working paper that I have written with Dr Frank Jotzo on Price Floors for Emissions Trading is on the Environmental Economics Research Hub website.

See also:

The Australian government is presently negotiating with the Liberal Party amendments to its proposed Carbon Pollution Reduction Scheme. The Age is reporting that one of the proposed amendments is to extend the period of specific caps on emissions from 5 years to 10 years, followed by a further 10 years of upper and lower bounds for Australia’s target (gateways). At present the governments policy is for 5 years of caps, followed by 5 years of gateways, but the legislation allows the government to set the gateways for as long as they want.

At present, for political reasons most countries are proposing emission reduction targets for the next ten years that are significantly weaker that what the science is suggesting. This will result in countries having to make very steep emission reductions after 2020, or the more likely outcome of dangerous greenhouse gas concentrations. For this reason the next round of commitments for industrialised countries should be for the 5 year period 2013-2017 rather than the 8 year period 2013-2020. There should also be a mechanism where countries can increase the ambition of their targets without having to renegotiate and re-ratify an international agreement.

It is Climate Dilemma‘s understanding that Australia would prefer a shorter commitment period for industrialised countries after 2012. Australia is also proposing a mechanism for increasing emission reduction commitments as part of its “schedules” approach to the legal architecture for a post-2012 agreement. The coalition’s proposal to lock in targets for 10-20 years would not be compatible with a shorter commitment period. It would be a serious barrier to Australia increasing its own mitigation ambition. This proposal will undermine Australia’s international negotiating position.

Update: Peter Wood has an opinion piece on this in The Canberra Times, October 28, 2009, Page 11.

For the Kerry-Boxer bill (the US Senate emissions trading legislation) to be passed, it will require 60 out of 100 votes in order to avoid a filibuster. This will be difficult. Passage of the bill has become significantly more likely due to the support of Republican Senator Lindsey Graham. Graham and Kerry have written an op-ed in the New York Times supporting climate legislation and discussing what is likely to be in it. This is good news, and Senator Graham deserves to be congratulated.

The Senate version of the U.S. emissions reduction legislation has been announced. The House version was known as the Waxman-Markey Bill. It has been drafted by Senators Barbara Boxer and John Kerry and is known as the “Clean Energy Jobs and American Power Act”. The emissions reductions by 2020 have been increased from 17 percent to 20 percent (below 2005 levels). This is an improvement, but more would be needed for the United States to play its proportionate part in reducing global greenhouse gas emissions and the risk of dangerous climate change. How can this be done without making the passage of this bill any less likely?

The most feasible opportunity is almost certainly to push for the expansion of the amount of permits that go into “Market Stability Reserve” (formerly the “Strategic Reserve” in the Waxman-Markey Bill). The Market Stability Reserve, together with the price floor, constitute what is known as a “modified price collar”, which provides some certainty about the future carbon price.

Permits that go into the Market Stability Reserve will not get auctioned if the carbon price stays below the reserve price. When permits don’t get auctioned that means less emissions. The reserve price will be initially US$28, and initially increases by 5% above the C.P.I. per year, and later by 7% above the C.P.I. per year. Given the recent fall in U.S. emissions, it is quite possible that the carbon price will stay below this level for a long time.

The amount of permits put into the Market Stability Reserve should be significantly higher than 1% per year (which is what was proposed initial years in the house bill). It is not yet specified in the Senate Bill, so is something that will be bargained over. Increasing the portion of permits that go into the reserve would also reduce the likelihood of the carbon price going above the reserve price, which is supposed to act like a price ceiling. For these reasons the goal of increasing the amount of permits that go into the Reserve is achievable.