The U.S. Climate Action Partnership (USCAP) made an important contribution to the debate over cost containment mechanisms in a national economy-wide cap and trade program. In a six-page “discussion paper,” the coalition of industry, environmental groups and other NGOs identified the elements of a systematic approach to address price instability in a carbon cap and trade program.

The USCAP proposal focuses on measures to ensure carbon market integrity, while simultaneously providing tools to ameliorate market distortions. USCAP urges Congress to design cost containment measures to address a variety of concerns about price and cost impacts of a cap-and-trade system. The group identifies the “primary concerns” as:

1. Short-term extreme price volatility;
2. Sustained excessively high allowance prices;
3. An allowance price trajectory that discourages important investments in emissions-reducing technologies; and
4. An illiquid market.

More specifically, USCAP urges greater flexibility in the mechanisms available to achieve compliance with an emissions reduction target. The mechanisms for controlling short-term price volatility include linkage with international systems of carbon credits and offsets, unlimited banking, and multi-year compliance periods. Critical mechanisms to control sustained high allowance prices, most likely to occur in early years as technology innovation lags behind emissions reduction targets, are increased use of qualified project-based offsets and systemwide allowance transfers from future periods. Sustained low allowance prices, which might discourage investment in innovative technologies, can be addressed by reducing future emissions caps and an allowance auction reserve price.

Underlying all of USCAP’s proposals is the need for carbon market integrity. An essential element of this is an administrative agency charged with administering cost-containment market interventions. Legitimacy of such a system requires a high level of transparency and information exchange. Private actors should have access to the facts and information on which the administrative agency bases its decisions. At a minimum, the parties must have the ability to request and attend agency proceedings, receive all the information necessary to participate in such proceedings and a full and fair opportunity to advocate as part of any administrative decision making process. There must also be rigorous oversight of market participants’ rights, obligations and transactional dynamics.

These measures, taken in whole or individually, will increase market confidence, reduce regulatory risk, and further the flow of investment towards high-quality greenhouse gas (GHG) reduction projects. USCAP’s proposals will lead to a more credible, transparent, responsive, accountable and efficient regulatory system that provides a predictable, long-term framework to reduce GHG emission reductions and promote sustainable development.

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