Why Safety Valves Are Very Dangerous

Under a cap-and-trade program, legislation would determine the size of an overall cap on greenhouse gas emissions in the US and would issue allowances equal to the number of tons allowed under the emissions cap. (Congress would likely establish a cap in the billions of tons, and so would create billions of allowances.)

Regulated entities would have to show in any given year that they have a number of emission allowances equal to their annual emissions. If they make greater reductions, they can earn surplus credits which they can keep for future years or sell to others covered by the program. If they have exceeded the emissions allowance they were given, they must buy surplus credits from others or pay a penalty and have the shortfall added to their next year’s target.

Some parties concerned with the cost of climate policy believe the way to manage costs is to establish a so-called "safety-valve." The "valve" provides that when emissions allowance prices reach a pre-determined dollar value, emitters no longer have to rely on the established supply of allowances available in the market. Instead the federal government will print new credits for sale at a specified price—potentially in an unlimited quantity. It's like printing more money when the government runs a deficit to pay off the deficit.

In reality, the mechanism does not limit the cost of actual climate pollution reductions, but it does unfortunately serve as a valve to let more greenhouse gases into the atmosphere. The safety valve uses price controls to "bust the cap."

"Price caps would be a disincentive to technological growth on the sweeping scale needed to address global warming," says the US Chamber of Commerce. Environmental Defense agrees with the US Chamber of Commerce that price controls will impair the American market's ability to provide the innovation we need to achieve success.

An Example of the Emissions Growth Under a Safety Valve

The Energy Information Administration’s analysis of the National Commission on Energy Policy (NCEP) proposal (shown in the diagram above) demonstrates the damage that can be done to emission levels by a safety valve. In the example above, the blue line labeled "No Safety" represents the emissions path that would be expected to occur if Congress adopted the NCEP cap and trade program without a safety valve.

 The emissions path represented by the green line, (confusingly labeled "Cap-and-Trade") shows the emissions trajectory that would result if Congress decided to include a safety valve in the NCEP cap and trade program. Without a safety valve, emissions flatten out and begin to dip down, but with a safety valve, emissions continue to grow higher and higher.

There are Smarter Ways to Address the Cost of Climate Policy

Market-based environmental policies that are specifically designed to honor cost-controlling concerns while delivering full environmental results are available for climate policy. The landmark U.S. Acid Rain cap-and-trade program has been an outstanding model of success - providing a true cap on emissions while beating even optimistic cost projections by 40%.

Drawing from this experience, there are a number of provisions within a climate change cap and trade program that would allow regulated entities to manage their costs. These provisions include:

• The ability to borrow allowances from future time periods
• The ability to bank excess emissions reductions in the current year to be used in future years
• The ability to purchase extremely cost effective emissions reductions from farmers undertaking agricultural practices that store carbon in the soil
• The ability to purchase emissions allowances from international markets

There are also many ways to tailor economic support for individual firms, communities, or regions of the country if they are disproportionately impacted by the implementation of climate policy. All of these tools can provide the cost management results we desire without the innovation dampening effects of the safety valve and its inherent damage to the emissions cap.

The bottom line: A safety valve is "failure by design."

Posted: 12-Feb-2007; Updated: 12-Feb-2007