Public Power - September 2008 - (Page 35)

ance, they will likely encourage emission controls. No matter what type of safety valve Congress members go with, the price must be balanced. For instance, one that is set at a very low level does not allow the market to operate efficiently and will stifle allowance trading, since there is no expectation that the price will rise above the predetermined level of the safety valve. While this essentially handcuffs the market aspect of a cap-and-trade program it has some advantages. If the implementation of a cap-and-trade program is a foregone conclusion, a low safety valve has some of the same advantages as a tax, such as allowing businesses to plan their budgets more effectively. However, if the safety valve price is low, the price of allowances would likely rise quickly to that price and stay there. If that were the case, then the safety valve would be nothing more than a tax under the guise of a cap-and-trade program. A high safety valve price has the advantage of allowing the market to find the true market price of emission allowances. Unfortunately, if that safety valve level is too high, the price of emission allowances might rise too high, as well. Many knowledgeable people have tried to make educated estimates of what the prices of emission allowances would be under various cap-and-trade programs. For instance, in 1998, the U.S. Energy Information Administration predicted emissions allowances should range from $92 to $478 per metric ton to comply with the Kyoto protocol. While these price predictions have some value for policymakers, no one can predict the price of emissions allowances once trading begins. A safety valve would place an upper limit on the price of emission allowances. Scientists generally agree greenhouse gas emissions have a negative social cost. Quantifying this cost might make a good starting point for establishing a safety valve price. Unfortunately, while there have been dozens of economic models run trying to quantify this social cost, there’s little agreement among them. Social cost estimates have to take into account factors like the cost of coastline, www.APPAnet.org agricultural damage, health costs, damage to fish populations, etcetera. It is extremely hard to quantify all the possible social damage from global climate change. In a survey of 100 estimates, the values ran $3 per ton of carbon up to $95 per ton of carbon, according to the Intergovernmental Panel on Climate Change. “Peer-reviewed estimates of the social cost of carbon for 2005 have an average value of $12 per ton.” This is also the amount the Bingaman-Specter bill proposes as a safety valve. Given the number of unknowns, a goslow approach is likely to be the safest and most prudent method for a cap-and-trade regime. Over time, as the proposed program, whatever its eventual form, begins to work and its impact on the economy is more clearly understood, the safety valve could gradually be lifted. The BingamanSpecter bill advocates this approach; it would gradually raise the safety valve price point with inflation each successive year. While it is impossible to specify an ideal price point for a safety valve, it is reasonable to start low, but not so low that the market has no room to operate. The goal with a cap-and-trade program that uses a safety valve should be to develop the market for emissions, but not to allow the price to get so high that the costs to the economy become detrimental. Starting at $12 per ton — and gradually raising the safety valve price with each successive year — is likely efficient and reasonable implementation. Banking and borrowing would also provide a stabilizing effect on traded allowances. Combining the above safety valve policy with banking and borrowing might be the best overall strategy for designing a cap-and-trade program with price protection and some degree of price stability. ❚ Ron Keith received a DEED (Demonstration of Energy-Efficient Developments) grant from APPA to research cap-and-trade safety valves as part of his graduate studies in public policy. WE BURN IT AT BOTH ENDS. THAT MEANS YOU DON’T HAVE TO. With POWER, rest assured that your project is getting done and done right. Sure, all projects have risks, but we identify and manage those risks with a proven, project-driven approach. www.powereng.com OVERHEAD & UNDERGROUND TRANSMISSION SUBSTATIONS | CONSTRUCTION MANAGEMENT ROUTING & SITING | ELECTRICAL SYSTEMS STUDIES | TESTING & COMMISSIONING GEOGRAPHIC INFORMATION SYSTEMS | UTILITY AUTOMATION | GAS TURBINE PLANT DESIGN COAL & SOLID FUEL PLANTS | RENEWABLE POWER | TELECOMMUNICATION SYSTEMS SEPTEMBER 2008 35 http://www.powereng.com http://www.APPAnet.org

Table of Contents Feed for the Digital Edition of Public Power - September 2008

Public Power - September 2008 Contents Perspective 10 Questions What’s Good About RTOs? Capturing Coal’s Carbon Carbon Safety Valves Greater Glass, Greater Savings Getting Customers to Embrace Compact Fluorescent Lights LEEDing Green Kansas City Shows How to Build Green For Governing Boards Safety Community Broadband Hometown Connections Parting Shot

Public Power - September 2008

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