September 23, 2009
Kerry-Boxer Carbon Price Will Remain at Price Floor According to First Modeling of Draft Bill
By Yael Borofsky and Jesse Jenkins
Initial modeling of the Kerry-Boxer climate bill (full text), the Senate sibling of the House-passed Waxman-Markey bill (aka ACES), reveals that carbon prices are likely to remain at the floor price set by the legislation through at least 2019, averaging just $15 per ton (in nominal dollars) through that period. According to E&E (subscription req'd), Point Carbon, the Norwegian consulting and carbon market analytics firm that released the analysis, was the first firm to model and analyze future carbon prices under the proposed legislation, and their findings corroborate Breakthrough's own analysis of Congressional climate legislation (see full series here).
In the Senate version of the bill, the Point Carbon model, which the firm dubs its "holistic" model because it accounts for major policy pieces within the legislation, identifies supply of domestic and international offsets as a major carbon price driver:
"Point Carbon analysts identified what they see as the major price drivers, including the supply of domestic and international offsets. The Senate bill, compared to the House version, includes more domestic offsets and allows fewer international credits into the system. Offsets are credits companies can buy for emissions reductions they contribute to in other parts of the country or globally."
Point Carbon concludes that the supply of permits and offsets will be sufficient to hold market prices for carbon to the lowest levels permitted by the legislation, a $10 per ton (in 2005 dollars) floor price, rising each year at 5% above inflation.
"The price of carbon emissions permits is expected to stay at the price floor through 2019. A price floor, if adopted, would provide an incentive for industrial plants and utilities to save, or "bank," their pollution permits in the early years, so they can be used in the later years as prices rise."(emphasis added)
As Breakthrough has shown in a series of analyses on the emissions cap under House climate legislation, banking of excess permits during early years helps delay required emissions reductions under the cap and trade program for many years into the future.
Point Carbon's Emile Mazzacurati apparently agrees:
"The size of the bank in the early years of the program has a huge impact on the price five years down the road."
Elsewhere, E&E reports that Point Carbon's analysts "project that carbon will average $15 per metric ton between 2012 and 2019." This creates a bit of a contradiction with the statement that prices will remain at the bill's price floor, which starts at $10 per ton in 2005 dollars, or roughly $11 per ton in today's dollars, rising at 5% in real, inflation-adjusted dollars each year. In real terms, the floor price yields an average CO2 price below $15 per ton for 2012-2019. However, if Point Carbon is assuming average annual inflation of 4%, that would yield a roughly $15 per ton average CO2 price between 2012-2019 in nominal dollars (i.e. not adjusted for inflation), so we are assuming that Point Carbon is reporting figures in nominal terms, not real terms.
For those keeping score at home, Breakthrough's analysis of Waxman-Markey allowance allocations assumed $15/ton would be a likely average price over the same time period, 2012-2019. At the $15/ton average, Breakthrough analysis demonstrates that just $1 billion dollars would be dedicated under the House bill for investments in clean energy R&D, an order of magnitude less than what President Obama and other experts have deemed necessary to make clean energy abundant and cheap and accelerate the transition to a clean energy economy, not to mention completely insufficient to fill the massive energy innovation gap left by paltry private-sector investments in energy R&D. Let's hope the Kerry-Boxer Senate bill changes that picture.