As Congress develops national climate change policy, members are focusing more on the details of the legislation. As a result, new terms are being used in the debates. One such term, something of a misnomer, is “safety valve.” This term is being used as short-hand for non-market mechanisms to control costs under an economy-wide cap-and-trade system.

The issue of cost containment arises in the context of hypothetical market disruptions leading to steep and rapid increases in the price of carbon credits that some believe could result in significant negative impacts on the U.S. economy.

Proponents of including a cost control mechanism contend that such price spikes could cause unanticipated declines in economic output and growth and that a cost control mechanism is necessary to buffer the most severe negative consequences. Opponents of cost control mechanisms argue that a limit on the price of emission credits would, inter alia, create market distortions for those investing in clean energy technologies or constructing clean energy infrastructure.

The bills introduced in Congress contain varying approaches to controlling the price of carbon credits. The Lieberman-Warner climate change legislation, S. 2191, which currently is the leading vehicle for future Senate action, contains a system of cost control measures, such as allowing banking and borrowing of credits, allowing emitters to create or purchase emissions offsets, and the establishment of a Carbon Market Efficiency Board that would be empowered to implement specific cost control measures. For example, if in year 2030, Company A needed 100 emissions credits, it could borrow credits against its allowance in future years or rely on extra credits it had “banked” from previous years. For periods of time during which there was an extraordinary shortage of credits, the Carbon Market Efficiency Board could increase the supply of carbon credits to stabilize prices; however, the Board would have to compensate by reducing the number of credits available in a later year.

The Bingaman-Specter bill, S. 1766, takes a more direct approach to cost control, establishing a fixed price ceiling on carbon credits. This bill establishes an initial price limit on carbon at $12 per ton via a mechanism known as the Technology Accelerator Payment (TAP). The TAP allows a regulated entity to make a payment into an “Energy Technology Deployment Fund” in lieu of submitting an allowance. The bill provides that the TAP price rises five percent (5%) per year above the rate of inflation. The cost control mechanism is something of a hybrid approach, in that entities needing additional credits can pay into the fund an amount equal to the number of credits it is short.

A third approach, adopted in the Sanders-Boxer bill, S. 309, is to provide the President with the authority to act in the event of steep and rapid price escalation without specifying. The bill does not specify what he or she should do in those circumstances.

The issue of cost containment, whether to provide for it and, if so, the nature of the mechanism, will be a key part of the debate to come.

For further information about this topic, please contact Akin Gump.