Blog

In a recent paper for E3 Network, Elizabeth A. Stanton and Frank Ackerman present the seven key questions that the public should ask about any proposed climate legislation. The answers to these questions will determine whether the proposed legislation will be successful in reducing emissions and how it will impact households.

Today we address question two from this paper: will price ceilings on carbon prices interfere with emission reductions?

A cap on carbon emissions will drive up carbon prices. A ceiling on carbon prices means that there is an upward bound to how high carbon prices can climb.  A ceiling removes some of the uncertainty regarding carbon prices; businesses and households can expect that carbon prices will not exceed pre-determined levels. But does a price ceiling, or what is often referred to as a safety-valve, make it less likely that carbon policy will deliver the emissions reductions we need? According to Stanton and Ackerman:

All the recent legislative proposals include low price ceilings, $32 to $41 per metric ton of CO₂ in 2020. Staying below these ceilings will make it impossible to meet even the modest proposed emission reduction targets, unless large-scale non-price efficiency and clean energy measures are also undertaken. We found that achieving a 17-percent emission reduction below 2005 levels by 2020 would require a $75 per metric ton CO₂ carbon price and a vigorous program of investment in energy efficiency (Stanton and Ackerman 2010). All three current bills, however, treat their low price ceilings as absolute limits, and would release additional permits when the ceiling is reached; more permits in the system would allow higher emissions, ensuring a failure to hit the reduction goal.

Enforcing a strict emissions cap under a market-based climate policy requires either that the carbon price can vary freely (i.e., without a ceiling) in response to the supply and demand for permits; or that non-price measures such as government regulation and green investments be used to reduce demand if the market hits the price ceiling.

The insistence on price ceilings is based on the mistaken notion that a higher carbon price has to mean a greater economic burden on consumers. Our model shows that even with very high carbon prices, equal per capita rebates of most of the revenue can ensure that there are net benefits to all but the richest households (Stanton and Ackerman 2010). With that in mind, it is worth considering a much broader range of carbon prices. In much of Western Europe, gasoline prices are $4 a gallon higher than in the United States. We would reach that level if we had a carbon price of $400 per metric ton of CO₂ that was passed on in higher prices at the gas pump. European countries with high-priced gasoline have a quality of life much like ours – but they have lower carbon emissions per capita, and use energy much more efficiently than we do.

Unfortunately, all of the Congressional proposals to cap carbon emissions included a safety-valve. The Cantwell-Collins bill actually proposed the lowest price ceiling of $32 per ton of carbon. Price ceilings in the Waxman-Markey and Kerry-Lieberman proposals were $41 per ton and $37 per ton, respectively.