The Case for a Price Collar. This entry was submitted by Jim Kerr and his colleague, Neal Cabral, a partner with McGuireWoods in Washington, D.C.

A price collar (price ceiling and floor) is an appropriate mechanism to provide needed consumer price mitigation, in the event our technology bet on GHG reduction capabilities and time frames proves wrong.

There are two primary reasons that a price cap is part of the legislative discussion. First, there are serious and legitimate concerns about whether we can produce the level of reductions needed in both the short- and medium-turn to meet the Waxman-Markey cap. Second, while the House bill added several needed cost mitigation measures, it also retained a rather aggressive 2020 reduction target of 17%.

Indeed, the initial 3% step down below 2005 levels by 2012 is effectively about a 10% reduction when growth between 2005 and 2012 is factored in. That level of reductions is not going to be produced by capped entities in that time frame (hence, allowance purchases). While that rate of reduction to 2020 can, and probably should, be reduced in the Senate closer to President Obama’s original proposed levels of 14-15%, that change alone will not be sufficient.

The political debate following passage of Waxman-Markey, which targeted swing voters on the bill, makes two points crystal clear. First, a climate change bill that actually becomes significantly more costly than projected will not last. Second, a climate change bill that has the potential to become significantly more costly than projected (because it does not have adequate cost mitigation measures) is going to be hard to vote for in the Senate.

Economic models predict allowance price changes based on differences in technology deployment, and therefore provide an appropriate range of prices at which to set the price cap. But there are a number of price points within these ranges from which to choose (EIA’s recent Waxman-Markey analysis has six sensitivity cases that change the rate of technology deployment).

Selecting a price cap within these ranges should be based on political considerations and should be done by politicians. The ultimate objective of the price cap is to ensure that climate change legislation is as robust as it can be consistent with acceptable costs, which means politically acceptable costs to consumers and industry (i.e. voters/workers).

In this manner, a price cap provides a prearranged self-correcting mechanism to adjust the emissions cap when the political costs become too high to sustain it. Such a limited and temporary correction seems preferable to trying to defend the legislation from reversal in 2015, if allowances prices are at $50 ton and every congressman who voted for the bill is out of office.

A price cap can be set either to avoid disaster (a high cap), or to promote a relatively smooth glide path to a clean energy economy (a more moderate cap based on deviations from base case modeling expectations). Those opposed to a price cap will argue for a higher price; those who focus on consumer mitigation will prefer a more moderate price cap to ensure it hedges against technology deployment risk. I would argue that the price cap should start in a manner to promote a smooth glide path and then transition to a disaster-based cap over time, largely paralleling the phase-put of free allowances (if technology has not deployed by that time, there are bigger problems to address).

Finally, in addressing the issue of cap integrity, the real issue is not cap integrity, but rather achieving the level of reductions committed to. This is the issue that should be addressed in the legislation. I note that a price cap is not new. We already have one in the House and Senate RES requirements, which provide for an alternative compliance payment in lieu of meeting the assigned renewables mandate. Revenue from the alternative compliance payments is then recycled into programs to mitigate the renewable shortfall. Following that model seems sound with respect to the price cap as well.

A cost cap is a loophole that can undermine the pollution reduction goals of the program and hold back the innovation and investment needed to solve global warming, reduce dependency on oil and build the clean energy economy. The American Clean Energy and Security (ACES) Act passed by the U.S. House this summer had much better solutions to make sure the bill is affordable without undermining the environmental integrity of the program. ACES:

• Has a reserve pool of allowances that are set aside and can be used to avoid price spikes
• Rebates money to consumers
• Allows industry flexibility to innovate and find low cost solutions through a regulated emissions trading market

According to a non-partisan Congressional Budget Office report, the bill will keep household costs at under 50 cents a day -- even less if you count energy savings from the legislation. That's a price well worth paying for clean energy and our children's future.

As a White House official in the late 1990’s, I was tasked with soliciting feedback from leading environmental, energy and financial experts on the issue of price caps. A leading environmentalist disliked price caps, because the emissions cap could be breached. A leading energy executive dismissed price caps, because “price caps have a way of turning into price floors” – meaning, he thought allowance and offset prices would rise to the level just below the cap. And a leading financial expert told me, “A price cap will create financial distortion and send mixed signals to the market. ” For me, the idea had served its purpose – it illustrated that environmentalist think the costs might be higher than they want to admit, and industry thinks the price could be lower that models predict!

Fundamentally, a “hard” price cap that allows the government to print unlimited amounts of carbon permits at a given price is a bad idea. It would weaken the environmental effectiveness of the program, slow investment in new energy technology and stifle the transition to a new “green job” economy. Worst of all, it would leave our children and grandchildren a tougher problem to solve later.

That said, a “soft” price collar, which appears in the ACES bill, has some merit. It institutes a price floor for federal auctions at $10 (escalating with inflation), giving an important price signal to covered industries to plan investments – and for offset project owners to develop projects. It creates a federal compliance reserve of limited amounts of allowances, effectively borrowed from future year emission budgets, to be made available at a price linked to prior-year market prices. This approach sends the right market signals, and ensures environmental integrity.

While a soft collar is better than a hard cap, policymakers should work to create conditions where the compliance reserve will be unnecessary. This means setting the right targets and achievable timelines and, above all, making sure that the key cost savings mechanisms, like offsets, are developed and implemented in a manner that allows them to begin strong and reach their full potential. Creating conditions that foster early offset creation will give our nation a head start in reducing emissions, whereas price controls would undermine environmental objectives and drive up future costs. So, while it may it make sense to have some form of “soft collar” as a cost containment insurance policy, the policy approach should rely on other tools to lower the likelihood of needing to draw on it.

In our view, a cost-containment mechanism is essential to ensuring that consumers will not be unduly burdened in a carbon-constrained environment. While NARUC has not taken a position on a particular mechanism, we do believe that some form of cost-containment is necessary.

As an initial matter, the House bill has important cost-containment provisions through its allocation of a sizeable portion of free emission allowances to regulated Local Distribution Companies. As we have said in this forum and elsewhere repeatedly, allocating free allowances to LDCs gives retail rate-setting entities, such as NARUC member commissions, an opportunity to share the value of emissions allowance with gas and electric utility consumers.

Beyond that, implementing additional cost-containment measures will be critical, particularly in an era of economic uncertainty. Energy prices are increasing without this legislation, and the adoption of a cap-and-trade program will undoubtedly put additional upward pressure on prices. So although I understand many believe containing costs could defeat the purpose of putting a price on carbon in the first place, we need to recognize that there are limits on the ability of energy consumers to quickly absorb increased costs of basic energy service.

Moreover, cost-containment measures will ensure a level of stability in what could be a very complicated market. As we saw in the Western energy crisis of 2000-2001 and, more recently, in the general economic downturn, market volatility can have dramatic societal consequences. An effective cap-and-trade program needs some kind of cost-containment in order to prevent undue economic harm.

Generally, we believe any cost-containment mechanism should provide clarity and certainty about when it is triggered and how it works. The policy must provide strong incentives for reducing greenhouse gas emissions over the long term while also ensuring that ratepayers are treated fairly.

In addition, energy efficiency and other State clean energy programs can play an important role in lowering the overall cost of compliance. NARUC’s Board of Directors just passed a resolution encouraging both State and Federal officials to support the expansion of clean energy programs as an essential part of any effort to reduce greenhouse gas emissions at the lowest cost to consumers.

Frances Beineke has some excellent points that take the very long view. She correctly points out that what we do today on cap-and-trade and the prices of emissions could have significant long term effects. By pricing carbon too low there will indeed be a market response in industry. They will not reduce their emissions enough, and emissions will grow much more than if the right prices were established (but in a flexible market way). This could also develop feedback and follow-through responses in households and others in their choices of products to buy, cars to purchase, appliances to use, and so forth. This is just plain business sense given that most businesses do not look at the next 40 years as their decisions time frame. The other responses from households and others would be simple common sense based on the prices they see for what they buy and purchase. Incentives do work, and relative prices are significant incentives.

Picking too low prices for carbon emissions will also lead to their being more carbon emitted in the future. Hence, as she also correctly points out, the costs of mitigating carbon at those later dates could be much higher than they would otherwise have been if more correct prices were determined. Some may remember the case of the Boston Harbor cleanup. There is an analogy here. If Boston’s harbor were cleaned up many years prior to when it was then it would have been a lot cheaper. Leaving environmental problems to build can also lead to tipping points. We still do not know where the tipping points for climate change might be. By choosing the wrong relative price signals we might be just rushing headlong into a tipping point that could increase the costs of climate change and of climate change mitigation far beyond what we might imagine today.

Another argument for flexible prices on carbon is that as we all learn more about the costs of carbon and climate change this information will have to be incorporated into the prices of the carbon market. Mitigation of dynamic problems requires dynamic markets.

Then, of course, there is her point on how other countries might react to our “weakening” on climate change legislation. The US should be a leader, not a follower, on this. We are the #2 producer of carbon into the atmosphere. Yet, in the past, we have hardly taken the reigns to be a leader on solving this problem. The time to be a strong nation and a flexible nation on this issue has come. We need to be a diplomatic leader as well as a business, invention and innovation leader. Climate change is a global issue. It will require global solutions. The American people can gain a great deal in the quality of their future lives and the lives of their next generations if we make the right decisions today, and not wait until the tomorrows to come to have our future generations pay a much heavier price than they otherwise would have.

Tough tradeoffs need to be made, but I have faith that the US can be a leader in the changes that are needed. Those changes also will include industrial changes, technological changes, and changes in the way we think and do things in a very broad sense. There are many business and other opportunities in these changes to come. The US has proven to be a great change maker in the past, and we can do that again. American business can regenerate itself by focusing on the changes that can be made, and, frankly, making gigantic returns on these changes. There is money to be made in environmental protection. There is money to be lost in trying to hold on to the old ways. The transitions will not be easy, but since when have American industry and the American people been timid in the face of challenge.

To Francis Beinecke's otherwise vaild comments might be added a few thoughts. What if a coal-fired power plant doesn't have a viable abatement technology - and depends on allowance purchases (above and beyond free ones) for a decade or so? If co2 prices spike, couldn't they face financial distress? In the long-run abatement will likely happen just fine. But then again, in the long-run credit default swaps may have been fine too - they just didn't get the chance to play out. Coal dependant emitters are "short" technologies to replace coal - giving them "long" FlexOptions to hedge this risk ensures their solvencey - and leads them to prudent (rather than panicky) abatement decisions. A fixed amount of emissions flex, at a pre-determined price, and only for those who really need it - might be the right cost-containment compromise.

A cap-and-trade program has the potential to thwart the competitiveness of many U.S. manufactured products. As a result, careful consideration should be given to mechanisms that can cushion against economic disruption.

Like many other U.S. manufacturers, paper and wood products companies face competition from companies in developing nations that are not even contemplating climate legislation, let alone writing it. Protecting American jobs and industrial capabilities, and preventing increased greenhouse gas emissions overseas, means making sure pending climate legislation allows U.S. manufacturers to continue to operate here at home.

Ensuring adequate allocations for energy intensive, trade exposed industries is where it starts, but the rate at which these allocations decline cannot be too rapid or compliance and increased energy costs will swamp manufacturers. Given that proven carbon capture technologies are still years away, and their implementation costs are unknown and likely to be high at first, an adequate and sustainable supply of allocations will help provide our economy with an orderly transition to a new, untested regulatory scheme.

Increased costs may be unavoidable, but every effort needs to be made to protect American manufacturers’ global competitiveness and the idea of a price collar, among other options, may be a tool to help achieve that.

Setting an absolute ceiling on how high allowance prices can increase in a cap-and-trade program is both unnecessary and bad policy. We think there are far more effective ways of keeping costs reasonable. An allowance price cap or ceiling (sometimes also called a safety valve), would allow more allowances to be issued if prices exceeded some predetermined level. By issuing more allowances – or “busting” the cap – we undermine one of the core attractions of cap and trade: the certainty of achieving our environmental objective.

Understandably, companies desire some degree of predictability when it comes to allowance prices and costs. Short-term price volatility and sustained high allowance prices can’t be ruled out, though the economic impacts projected by the EPA and CBO analyses suggest that allowance prices are likely to be moderate. Should price volatility occur, fortunately, there are other options for controlling costs that won’t lead to busting the cap. One policy is to allow ample offsetting credits from sources that are outside the cap, both domestically and abroad. These can be win-win propositions if these “offsets” provide regulated sources with cheaper abatement options and at the same time encourage emission reductions in sectors where none would otherwise occur. Of course, credible mechanisms must be in place to ensure that offsets truly are additional, verifiable, permanent, measurable, and enforceable.

Another policy would enable unlimited banking of allowances. Allowance prices are expected to rise in the future because the emissions cap will be tightened over time. With banking, companies can purchase more allowances than they currently need and bank them for future use when costs are higher (say, due to weather-driven fluctuations in fuel prices). In this way, the system front loads emission reductions by encouraging companies to over-comply with the cap in early years. Allowing for multi-year compliance periods is another way to add flexibility into the system, enabling companies to smooth their costs over time without compromising the overall cap.

The use of a strategic reserve pool can also be an effective means to help contain costs. If allowance prices reach some threshold level, companies are allowed to buy allowances from the pool at the threshold price. The strategic reserve is fundamentally different from a typical safety valve, however. For one, the pool could be stocked with government-certified offsets and allowances borrowed from future compliance periods. This means that these allowances are not additional to the cap but represent real emission reductions either outside the cap (through offsets) or in the future (allowances borrowed under the cap). In addition, there would be a limit as to how many allowances could be purchased from the reserve pool, and also on the number of allowances that could be borrowed from the future for this purpose.

We do believe that an allowance price floor would be desirable. Preventing allowance prices from dropping below some threshold would provide price certainty that would spur investments in clean energy alternatives.

All of these sound policies are supported by the U.S. Climate Action Partnership (USCAP), of which the Pew Center on Global Climate Change is a founding member. USCAP members include five environmental NGOs and 25 major corporations. A more detailed description of these policies, and the design of a cap-and-trade program more broadly, are available in USCAP’s consensus Blueprint for Legislative Action, which can be found at the USCAP web site (www.us-cap.org).

The cap-and-trade approach to combating global warming is designed to limit our cumulative global warming emissions from now until 2050. The cap will regulate the quantity of dangerous pollution released, providing the highest possible level of certainty that our environmental goals will be achieved.

If a cap-and-trade program were to allow emitters to ignore the cap and buy an unlimited number of carbon allowances at a ceiling price, we would be forced into making one of two bad choices.

Either we abandon our emissions budget, intensifying the severity of global warming. Or we make steeper emission reductions in the future, causing the program to be far more expensive than necessary.

Here is how that second bad choice would play out. While a ceiling would lower carbon costs in the short run, it would send a false price signal to the market. Companies would be lulled into thinking they can delay making low-carbon investments, and in the absence of those early investments, the cost of the technology will never go down.

But if companies have a clear incentive to invest promptly, we can keep carbon prices low over the long term, as well as to spur technological innovation and create clean jobs.

The final problem with creating a price ceiling in the US is that it would make securing a global agreement on carbon emissions more difficult, since the rest of the world would demand that they be allowed to abandon their emissions budgets as well.

Updated at 11:52 a.m. on Aug. 4.

As an economist I am very uncomfortable with the ideas of floors and ceilings on prices of anything. It may be good politics in the short run, but in the long run such floors and ceilings can distort markets to the point that any gains to a policy change could be nullified or, even worse, the costs to society of the policy would be higher than the costs of the problem it was intended to solve. I am even more uncomfortable with leaders and others discussing "the price of carbon emissions" with seemingly minimal knowledge about what this really means. "Who determines this price?" should not be the question. A proper market needs to be set up to help determine what the costs of carbon emissions should be. But this would still be a very messy and uncertain solution on many angles. What, for example, are the actual climate, health, and other costs to the presence of increased carbon? How could a market made up of non-experts in the numerous fields needed to determine the social costs of increased emissions actually work? Having otherwise very smart leaders in very difficult situations guess at these costs is worrisome indeed. My sense is that adding in emissions costs to help alleviate some of the externalities involved in some production methods could be a good thing, but we need to do this in a correct way where the cure is not worse than the illness. There should be carrots added to the sticks as well, and in similarly thoughtful ways. Maybe further investment tax credits for refitting of electrical utilities, R&D, innovation efforts and more could increase the effectiveness of any carbon emissions tax when the investment incentives are linked to reduced emissions as a percentage of emissions that exists at the date of the bill's signing. None of this is simple and there are lots of powerful interests involved. However, the most important interest for American leaders is the American people. Our political and other leaders need to consider this above all else. And they need to consider this in a very long term perspective that goes into the effects what we do today could have on the many generations of the future.

This is one of those situations that produces a “yes” and “no” answer. Regarding whether or not it makes sense to limit emission credit costs, the answer is “yes.” If there is to be a cap-and-trade program, limiting the cost of credits would reduce volatility and, perhaps, would limit the chilling effect on investment in new technology. But the larger response is “no,” because we shouldn’t implement such a system at all. It’s the least effective way to limit the growth in carbon emissions.

Given these facts about climate policy, Senators would be well served to spend their August recess doing two things. First, read Fredric Hayek’s “Fatal Conceit.” Second, reflect on how poorly planned and executed the Cash for Clunkers Program has been. If the government failed with this relatively simple program, it’s a highly likely that Washington will fail on a much larger scale at something as complex and complicated as cap-and-trade.

Cap-and-trade policy may be well-intentioned, but it’s misguided. Advocates of this approach to control greenhouse gases may be using good intentions to deflect serious questions about the policy’s “caps”: the rationale for setting specific emissions levels, the practicality of getting them right, and the possible costs of getting them wrong.

Take for instance, the cap-and-trade system outlined in the House bill which calls for a 17% reduction in U.S. greenhouse-gas emissions by 2020 -- targets not based on economic or technological realities.

The factors that lawmakers would have to know in order to effectively set emissions caps are essentially unknowable much beyond the present. Since emissions are the result of fossil fuel consumption and land use changes, setting realistic caps requires a comprehensive knowledge of all the factors influencing them. These include:

· changes in population, age distribution, and family size;

· population density and distribution;

· economic growth rates and the mix of economic activities;

· the mix of energy sources, energy prices, the growth in nuclear power and alternative energy; and

· technological advances and breakthroughs and the rate at which new or existing technologies are adopted.

Some factors like population growth and energy prices can be estimated reasonably well over the short-term. However, as the planning horizon moves further away, the ability to accurately assess all of these factors diminishes greatly.

The probability of knowing most of them well enough to set realistic caps is -- statistically speaking -- zero.

The presumption of sufficient knowledge for central planning is not new. It’s what Nobel laureate Fredric Hayek termed the “fatal conceit.” There is no historical evidence that any government has ever planned a major economic intervention that worked as planned, even with mid-course corrections. The failed oil and price allocation system of the 1970’s clearly demonstrates the futility of such attempts.

Inevitably, well-intentioned bureaucratic interventions have unintended consequences that prove economically disruptive and damaging.

In consideration of these inherent problems with cap-and-trade, its advocates should offer a clear and reasoned answer on why a complex carbon market is preferable to a simple carbon tax. The overwhelming body of analytical literature supports a straightforward tax; indeed one study concludes that a carbon tax is 5 times more cost-effective than a cap and trade system.

And with climate policy expected to carry a price tag of 100 billion or more, a variable of five-fold could easily make the difference between going “green” or falling in the red.

Collar the Cap to Strengthen the Final Bill
In “Safety Valves Are Very Dangerous,” Environmental Defense tells us “The safety valve [a price ceiling] uses price controls to ‘bust the cap’.” This argument attacks a straw man—the real policy to argue with is a collar. Its ceiling weakens the cap, but its floor adds strength, so together they need not “bust the cap” at all.

But let’s pursue the idea of a price ceiling “busting the cap.” This assumes we have a cap to bust and that the cap is indestructible. In that case, adding a price ceiling can only result in more emissions—busting the cap. True enough. But what if a ceiling helped with passing a stronger cap or, after passage, protected the cap from political backlash? Looking into this tradeoff—perfect capping vs. acceptance and durability—shows that it pays to limit risk. But could there be a better way? A check of proposed alternatives shows that a collar is the sensible approach.

Risk Is a Cost. First, consider the tradeoff. Suppose the public is willing to spend up to a certain amount on climate security. Call that amount $100. If one climate bill costs $95 for sure, and another bill costs an expected $80—plus or minus $50—it’s quite likely the public will avoid the risky one and choose the sure $95 cost. That cost is acceptable. Taking a chance on a $130 cost ($80 plus $50) is beyond the public’s willingness to pay. The $95 climate bill is like a cap with the tightest price collar and pre-determined prices. The risky bill is like a cap with no collar and untamed prices.

Now which bill would give us the more effective cap? The $95 climate bill wins on three counts. First, it spends $15 more on average than the $80 bill. Second, if carbon reduction is unexpectedly costly, so that the $80-plus-or-minus bill turns out to be a $130 bill, it will likely be reined in or scuttled. Third, the risky bill imposes more risks on investors as well as on the public. This delays investment because risky investments cost more, and because uncertain prices confer an option value on waiting to invest.

The $95 bill with the collar is more politically acceptable and stronger. By looking at only one side of the issue, environmentalists have accidentally picked the weaker approach to designing a cap. In short, the more risk you attach to an abatement plan, the less abatement the public will buy and the slower investors respond. Even a ceiling strengthens a cap. Combining that with an equally strong floor makes a collar that’s all upside.

Waxman-Markey. Now, turn from theory to practice. In the House bill, we find (1) domestic offsets, (2) foreign offsets, (3) a strategic allowance reserve, (4) allowances being sold in advance, (5) banking, (6) borrowing, and (7) a price floor. Each serves only to reduce price risk. With a price collar, the first four could be eliminated.

Does this complexity provide some advantage compared with a collar?

The best first step for reducing risk is generally agreed to be some form of banking and borrowing. That’s a help, but the E.U.’s carbon market, with full banking, has three times the volatility of the S&P500. Banking relieves short-term supply-and-demand problems, but it turns carbon pricing into a guessing game about emission abatement costs in the distant future. And that will lead to volatility.

Offsets are the only strong remaining option for reducing risk. But unlike a collar, offsets are one-sided and only serve to weaken—dramatically—the domestic effectiveness of a cap. Internationally they’re even worse. They are plagued by exaggeration and corruption, but their worst effects stem from the incentives provided by the growing $13-billion-per-year foreign-offset payments under the Waxman-Markey bill.

Even the hope of such payments discourages commitment from developing countries and encourages demands that the industrial countries accept tighter caps—so that we will buy more offsets. Moreover about half of this money will likely go to subsidize China’s takeover of the global renewable-generation market. That will create a domestic backlash. Against offsets, a collar wins hands down.

Back to Basics. But this whole discussion would be unnecessary had we started with the basics. A cap is just a supply curve for the supply of atmospheric carbon dumping. Any cap-based supply curve says that, up to the cap, dumping does no harm and should be absolutely free. It also says that if the United States dumps one ton more than the cap, the price of dumping should be unlimited. A collar only serves to tame these wild extremes. A floor of $10 says that emissions should still cost $10 even if they fall below the cap. And a ceiling says that if they rise above the cap, that’s worse but not by an unlimited amount. A collar just turns an unbelievable supply curve into something a little bit more sensible.

A cost-containment compromise between environmentalists and industry would be for the Government to issue FlexOptions. Say, for example, 10 billion tradable FlexOptions - each entitling purchase of 1 newly-issued allowance for $25 in 10 years - were distributed pro-rata to baseline emissions (or, alternatively, to baseline emissions from coal). If all FlexOptions were exercised, emissions would be 8% higher than the ACES 2050 target - but with $250 billion of Government revenue in exchange. Using the EPA’s initial carbon price of $15 and assuming 26% volatility (today’s VIX) - these FlexOptions would be worth $4 each, or $40 billion in aggregate. While this sounds large, it is small relative to the $5 trillion+ in industry’s estimated abatement cost to 2050. FlexOptions outperform traditional price caps by avoiding both open-ended emissions and Government-derived carbon prices. And they would be a valuable hedging tool for emitters in a float-starved U.S. carbon market with few vintage years initially outstanding. Feedback on FlexOptions is welcome at jon.anda@duke.edu.

One of the key issues in the debate over climate legislation is how to contain costs for consumers. Inclusion of a price collar, along with other measures to help protect electricity customers and other energy consumers, is critical to building lasting support both within Congress and outside the beltway for a national climate strategy.

By setting a floor and ceiling on the cost of emission allowances, a price collar would help achieve two critical goals—ensuring a strong price signal to encourage the development of climate-friendly technologies and protecting consumers against price volatility and market manipulation. The price collar should be narrow at first and expand over time as emerging technologies become available.

While critics contend that a price collar or similar cost-control measures would undermine the effectiveness of the legislation, we believe the opposite is true—failure to adequately protect consumers will undermine the public support necessary to sustain U.S. climate policy over the long haul. But a price collar does not by itself provide adequate customer protection.

Also essential to reducing price increases for electricity customers is allocating emissions allowances, rather than requiring utilities to purchase allowances through a government auction. The Edison Electric Institute worked for more than two years to devise a formula for allocating allowances based on emissions and sales—an approach we believe is fundamentally fair, because it helps reduce price increases for all customers. We commend the House for incorporating this approach in its legislation and urge the Senate to do the same.

We also recommend that the Senate provide a gradual transition from allocations to a full auction in order to help shield consumers from energy price spikes.

In addition to these cost-containment measures, the Senate should ensure that emissions reduction requirements are aligned with the availability of new greenhouse gas-cutting technologies and limit restrictions on the use of emission offsets. Harmonizing federal and state climate policies to avoid multiple and overlapping regulations also would help contain consumer costs.

Recognizing the importance of addressing consumer costs proved essential for building support for climate legislation in the House, and it will be every bit as crucial in the Senate. Incorporating a price collar, along with other consumer protections, will significantly improve prospects for enacting workable and effective climate legislation.