WASHINGTON, DC—An issue brief from Resources for the Future (RFF) released today finds that the success of the Transportation Climate Initiative, a program to reduce carbon dioxide emissions from transportation, may depend heavily on stabilizing proceeds from the cap-and-trade auction. The authors find that this can be achieved by tethering the supply of emissions allowances to the price in the allowance auction.
The Transportation Climate Initiative (TCI) is a regional effort among 12 Northeast and Mid-Atlantic states and the District of Columbia to coordinate investment in cleaner transportation and infrastructure. It will likely include a cap-and-trade program for carbon dioxide emissions from transportation, with allowance auction proceeds used for investment.
“The auction could yield billions of dollars for investment to modernize transportation infrastructure,” state authors Dallas Burtraw, Maya Domeshek, and Derek Wietelman, “but allowance price volatility could affect the revenues that are collected and undermine planning for the type of investments needed to induce long-term reduction in the demand for allowances.”
To reduce revenue variability, the authors suggest that TCI could introduce a price staircase over which the supply of emissions allowances would gradually increase, so that greater reductions are made when it is cheap to make them. They note that the credits can also be traded in a secondary carbon market, keeping the cost of emissions reductions as low as possible.
The key findings of this study are as follows:
- One of the most important design features for limiting allowance prices and accelerating emissions reductions is the investment of revenues from the allowance auction to modernize transportation infrastructure.
- Allowance price and revenue variability pose a challenge to investment planning for state agencies. Several elements of market design could mitigate this variability in TCI and generally help constrain allowance prices.
- Emissions and cost containment reserves provide the most direct mechanisms to govern allowance price and auction revenue variability, helping to create a more predictable, effective program, and to automatically increase the stringency of the program if costs are lower than expected.
- A price staircase with quantities of allowances made available at many different price steps would provide the greatest stability for the market.
To learn more, read “Managing Investment Revenues and Costs in the Transportation Climate Initiative Region,” by RFF Senior Fellow Dallas Burtraw and Research Assistants Maya Domeshek and Derek Wietelman.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.