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The Rise of the Safety Value — Cost Containment and Rising Emissions

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While academic economists have long argued for a carbon tax, the political realities have driven policy to cap and trade. In response, those smart folks thinking of good policy design came up with the “safety valve” to allow for cost containment. The safety value concept has political appeal since it essentially caps the upside costs of a cap and trade system and so takes away the uncertainty of what cap and trade may end up costing emitters. It also has had appeal in the past since the climate fight was thought to be a marathon and not a sprint where cost containment seemed more important than short term action. But this has changed as new climate science points to the need for deeper action sooner. And so the rise of the safety valve is worth considering and needs a closer look.

The safely value is a significant component of Canada’s current climate policy in the form of the technology fund (payments to the feds for technology development and deployment) and the recently refined pre-certified projects mechanisms (i.e. payments for CCS). Both of these allow for some share of emissions to be paid into the two compliance mechanisms on a declining balance to 2018. They are in effect a tax that is accessed 100% up to 2018 if compliance costs or permit prices rise above the access price of these compliance mechanisms, capped at about $23 in 2017 (see thumb below). How the 65$ per tonne cost announced recently by the feds interacts with the pre-certified projects list is not yet clear to me, but still it is well below the costs of CCS for the reductions required under the government’s 2020 target of -20% below current emissions.

Given its prominence in Canadian climate policy and indeed worldwide, it is useful to better understand the safety value. An excellent article emerged recently on the history and development of the safety value (see here),

What started as an obscure, almost monastic dispute among economists three decades ago has now emerged as a potential make-or-break point for the proposed legislation. Tracking its tangled history may now be essential to outsiders who want to understand this issue — and the huge economic stakes involved — as champions on both sides of the political arena saddle up to do battle over it.

As well as a good post at Common Tragedies (see here),

The key issue with the safety value will be the tension between those that want it to be very high, and so ensure emission reductions and those who define cost containment as no cost at all and so want a low value. In the Canadian case, the safety value has been set very low, and so emission reductions during to 2012 to 2018 period will be correspondingly low. This is not pure conjecture but rather based on modelling, where Canadian compliance costs indicate that the technology fund will be fully subscribed at the current price caps.

And so, we are left with a tax layered on a cap and trade system. While the policy skeptics decry that a tax will not work, by extension neither will cap and trade, at least not how it is being implemented in Canada. And with the science arguing for more reductions, the current design of the safety value will leave Canada with a growing stock of high emitting technology that will be costly to alter in future years. That is, if politicians eventually decide to take action, future compliance costs will be higher due to short-term inaction. Canada’s use of the safety valve, it seems, is about shifting the cost and therefore political burden in time.

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Written by Dave Sawyer

March 21st, 2008 at 3:25 pm

One Response to 'The Rise of the Safety Value — Cost Containment and Rising Emissions'

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  1. .

    thanks for information!…

    darrell

    27 Jul 14 at 1:34 am

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