Carbon Trading Program Could Profit from Consignment Sales

WASHINGTON—A new paper and a new blog posted today by Resources for the Future (RFF) both warn that a promising option for reducing carbon emissions under the Obama administration’s Clean Power Plan could run into unintended problems. But they also note that another provision—one tested in pollution trading programs over 20 years ago—may offer a correction.

The authors, RFF Senior Fellow Dallas Burtraw and Research Assistant Kristen McCormack, write that under the Clean Power Plan, states have flexibility in developing their own carbon reduction programs for power plants emissions within parameters set by the US Environmental Protection Agency. One option provided to the states is the establishment of a cap-and-trade program—an effective, market-based approach for reducing emissions from participating power plants, who buy and sell pollution allowances to reach reduction goals.

According to the authors, in any cap-and-trade system, the initial distribution of emissions allowances is important. Economists generally favor auction-based mechanisms to distribute allowances to reflect markets. However, under the specific Clean Power Plan requirement, allowances are to be given away for free.

Although this free allocation was likely meant to be a placeholder for states’ allocation choices, the suggestion has been treated as a default in many state conversations. But according to the authors, free allocations can affect the fairness and efficiency of allowance markets.

In response, the authors point to another option that the Clean Power Plan provides—an option that may mitigate any damage. It is called a consignment sale. In it, recipients of free allowances are required to sell those allowances and then repurchase as many as they need for compliance.

In the 1990s, when the US Acid Rain Program successfully aimed at reducing levels of sulfur dioxide, consignment sales were used and helped reveal a stable price, and within a couple of years, prices in the secondary market converged to consignment sale prices. A consignment sale, according to the authors, may be needed again to help set properly priced markets for reducing carbon.

Read the full blog post and paper:

• Consignment: A (Partial) Solution to the Clean Power Plan’s Free Allowance Allocation Problem (blog post)
• Consignment Auctions of Free Emissions Allowances under EPA’s Clean Power Plant (paper)

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