CLIMATE: Researchers pitch 'coupons' as new cost-containment strategy

Darren Samuelsohn, E&E senior reporter

October 7, 2009

Lawmakers seeking to minimize costs of a new global warming law should consider giving out coupons to industrial firms that can later be used should compliance prices from a cap-and-trade system get too high, according to a *policy brief* <http://www.eenews.net/features/documents/2009/10/07/document_daily_02.pdf> from Duke University's Nicholas *Institute* for Environmental Policy Solutions.

The Duke-led research team builds its proposal off language already included in both the House-passed climate bill, *H.R. 2454* <http://www.eenews.net/features/bills/111/House/060709182643.pdf>, and *legislation* <http://www.eenews.net/features/documents/2009/09/30/document_gw_07.pdf> introduced last week by Sens. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.).

There, sponsors have set up what they call a "price collar" that allows U.S. EPA to release allowances into the carbon market via an auction once permits hit a $28-per-ton level. But rather than auction off all of the allocations, the Duke group proposes giving away coupons to companies allowing each the right to purchase an allowance from the reserve at a pre-set price over a 5-to-10 year period.

Authors say their approach would have several advantages over the strategic reserve auction found in the House and Senate bills. For one, it could allow Congress to target the industries that need help the most by giving them more coupons. It also could give firms more price certainty compared with an auction by using the coupons on their own schedule, rather than waiting for a quarterly EPA auction.

"Cost containment in climate policy is a bit like the search for the holy grail," the authors wrote. "Approaches have been critiqued as either too sharp (price caps) or too dull (small, price-floored, strategic reserve auctions). In our continuing search for the proper balance, the concept of strategic reserve coupons holds promise as a more precise, and more targeted policy solution."

The proposal marks the latest entry into an already crowded debate over what is the best way to give price certainty to industry while also avoiding price volatility in a U.S. carbon market that by some estimates could be worth $2 trillion per year.

Senate Energy and Natural Resources Chairman Jeff Bingaman (D-N.M.), for example, has advocated a "safety valve" that places an absolute ceiling on the price of carbon allowances. That idea often has drawn outright opposition from environmental groups who say it would not do enough to stimulate low-carbon energy technologies.

Nathaniel Keohane, a co-author of the report who works at the Environmental Defense Fund, said he helped float the coupon idea without any guarantee it will make it into a legislative proposal on Capitol Hill.

"This is an alternative to throw out on the table and to see what people think," Keohane said. "The more ideas we can have out there that people can chew on, the better."

But an industry official tracking the climate debate questioned the coupon approach.

"It appears the coupons would simply allow some emitters to pay a fixed allowance price while others would have to pay a higher price," the source said. "But the overall cost to the economy would not be reduced. This seems like cost-shifting rather than cost-containment."

The House bill's strategic reserve auction starts at $28 and increases 5 percent per year plus inflation. The Kerry-Boxer measure would start with the same formula for the first five years and then increase after 2018 by 7 percent plus inflation.

To keep carbon prices from bottoming out, Kerry and Boxer also opted for an $11 floor on carbon credits. That is a small increase compared with the House-passed $10 floor.

*Click here* <http://www.eenews.net/features/documents/2009/10/07/document_daily_02.pdf> for the Duke University cost containment proposal.

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