August 20, 2009
Transparency in a Cap and Trade Regime
A guest post by David Douglas.
Cross-posted from his Near Walden blog.
One of the common arguments for a cap and trade system for GHG is that it establishes a price for carbon which will drive changes in investment and behavior. However, the current draft of the proposed Waxman-Markey bill (W-M) has introduced a wide range of allowances, offsets, and other mechanisms which may alter the actual price of carbon on a case-by-case basis. So even though there may be a market price for allowances that are traded among large emitters, that price will usually have nothing to do with the price for carbon that is actually paid by an energy consumer. As a result, the system has not created a useful price signal for large sectors of our economy, including US households.
Furthermore, once the European cap and trade system was put in place, there were many cases of energy prices actually rising more than the cost of the corresponding emissions allowances. With the lack of consumer price transparency in W-M, it becomes impossible to to determine if energy price increases are a result of fluctuating emission prices or not. To rectify this I would like to propose the following addition to any proposed US cap and trade legislation:
Consumer Energy Price Transparency Amendment: whenever a consumer (individual or organization) is billed for energy, the bill must explicitly identify the portion of the bill which was used to pay for emissions allowances, and the effective price per ton of CO2e that the amount represents. In cases where the exact amount is difficult to allocate, or that the information is not available at the moment of billing (such as at a gas station), then aggregated averages or estimates based on past time periods are allowable, provided that the sum of allowance charges presented to all consumers is within x% of the actual total.