New carbon pricing initiatives in Washington set ambitious price targets that may not fly in the current political climate. Existing cap and trade markets may show what pricing will work - until the pols catch up.
But the challenge isn’t simply one of getting the number of allowances to be offered in an auction right. There are unforeseen developments that can rob a market of its ability to impact climate well after allowances are auctioned off.
The last decade is abundant with examples, including an economic recession that cut energy demand and the demand for allowances. And, when RGGI rolled out in 2009 the shale gas boom had yet to really materialize and displace heavily polluting coal generation. Robust growth in renewables and energy efficiency, some due to chance and some to determined policies, also caught market designers off guard.
Yet moving forward, cap and trade's ability to more actively respond to forces outside the market will be crucial to meeting robust climate targets. RGGI, housed within the climate progressive Northeast, has set a more ambitious climate goal for its second decade.
RGGI’s price reserve reflects a reality that “you’re going to have companion policies continuing to play a really important role going forward,” says Burtraw. And even a modest carbon price plays an important role. “It sets a signal that we are committed to moving away from an economy that does not put any constraints and entering a carbon constrained future.
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