To avoid that, key economic problems must be resolved, including:
• Proper allocation of pollution allowances. In Europe nearly all of the valuable emission allowances – permits that each allow one ton of CO2 emissions – were given away to power companies. Those free permits became a windfall for the companies. And because an excess of permits were issued, market trading has seen carbon prices remain depressed or unsteady, driving only tiny gains in pollution reduction.
"If the amount of the allowances allocated for free exceeds the cost of reducing emissions, then you've given away a windfall gain and undermined the emissions program," says Richard Newell, professor of energy and environmental economics at Duke University in Durham, N.C.
• Do companies need a "safety valve"? Many corporations say they need protection against dramatic spikes in carbon-emission prices. A climate bill sponsored by Sen. Jeff Bingaman includes such a safety valve. When the cost of emissions reached $7 a ton, his bill would issue more emission allowances, effectively capping their price at $7. But environmentalists argue that the provision sets the price too low and would undermine emissions goals. As an alternative, they suggest that power companies and other carbon emitters should be able to borrow from their own future years' emissions allowances. That would allow businesses to plan long term without worrying about spikes due to weather or other factors.
Borrowing is a new feature of a climate bill by Sens. John McCain (R) of Arizona and Joseph Lieberman (I) of Connecticut, which is strongly endorsed by some environmental groups. "We're adding borrowing to help smooth out spikes in the price of carbon emissions," says David Doniger, policy director of the Natural Resource Defense Council in New York. "We think this makes far more sense than a safety valve approach."
But the economic impact of this borrowing feature is not well understood, others say.