The International Energy Agency (”IEA”) is set to publish a provocative new cost containment study that may find a receptive audience in the U.S. Congress.   The study, entitled “Halving the Costs of Halving Emissions,” concludes that price caps not only significantly reduce the costs of emissions abatement, but also allow for more ambitious emissions reductions targets. 

“Cost containment” means different things to different people.  Default assumptions are that cost containment means “price caps” and that cost containment prejudices environmental integrity.  The former assumption is too simple; cost caps are only one form of cost containment.  The latter assumption is the subject of the IEA study.  Moreover, there are many different types of cost containment, most of which are ones on which essentially all parties agree.  These cost containment mechanisms include international offsets, provisions for the banking and borrowing of credits and establishing multi-year compliance periods.

The cost containment mechanisms that provoke the most controversy are price caps.  In the European Union Emissions Trading System, for example, there are several cost containment mechanisms, but price caps are seemingly so far off the table that the issue is rarely, if ever, debated.  From the European perspective, a comprehensive climate system can guarantee emissions levels or carbon price levels, but not both.  The importance of the new IEA study is that it suggests that both may be attainable simultaneously.

As the study explains, price caps set at the appropriate levels allow regulators to achieve: i) the same environmental results as halving 2050 global energy related CO₂ emissions from 2005 levels for about half the expected costs; or ii) better environmental results than halving 2050 global energy related CO₂ emissions from 1990 levels for expected costs lower than with halving emissions from 2005 levels.  Author Cédric Philibert, Principal Administrator in IEA’s Energy Efficiency and Environment Division, used a model of greenhouse gas mitigations costs - the Abatement Costs Temperature Change (”ACTC”) model - to capture all energy-related CO₂ emission sources.

The “key findings” of the Philibert study are:

• Price caps would considerably reduce uncertainty on total abatement costs and expected abatement costs, but would shift that uncertainty on the short-term emission outcomes.
• Uncertainty on concentration level is much smaller than uncertainty on short-term emission levels, due to the slow building up of atmospheric concentrations.
• A climate policy with price caps set below ‘best guess” marginal abatement costs will not achieve its stated objectives, but may remain largely preferable to the absence of any policy.
• Abatement cost savings due to price caps and, if possible, price floors, allow setting more ambitious objectives.

The IEA study must be viewed in context, as a first step, that needs to be subjected to peer review and replication, as well as refinement.  An important aspect of the study, easily overlooked, is that the price caps modeled are quite high, particularly as compared to those in the Bingaman-Spector bill.  It seems likely that any climate legislation in the next Congress will address the issues related to cost containment generally and price caps in particular.  The new IEA study will help to inform that debate.

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