Market Design Principles

Best practice policies to achieve lowest cost emissions reductions while preserving environmental integrity

A market based mechanism

Provides environmental visibility - concrete targets and measurable reductions;
Operates with sensitivity to the economic environment - industrial output levels, effects of supplementary actions, and economic circumstances are reflected in the market price of allowances;
Most efficient permit allocation mechanism because it is based on supply and demand dynamics;
Allows for eventual linkage into an international carbon market, paving the way for even wider carbon abatement possibilities through economies of scale, resulting in lower abatement costs for industry;
Spurs behavioral change, adding incentive to reduce emissions further and creates enduring competition to develop low cost technologies that drive down future costs.

Emissions caps should necessitate significant reductions consistent with the best available science;
An ambitious target will send an enduring price signal to drive large scale investment into low carbon technologies and infrastructure.

An efficient and effective cap and trade system is characterized by unfettered access to high quality offsets;
Offsets are the single most powerful cost containment mechanism;
To give compliant entities with lowest cost compliance optionality, broad access to domestic and international emission offsets should be provided.

The policy framework and regulatory structure should provide sufficient certainty and stability to sustain the level of capital deployment needed to achieve the environmental goal;
A program characterized by long term regulatory uncertainty, unpredictable changes to the emissions cap, or ad hoc price interventions will discourage, if not stall, investment and increase compliance costs.

Regional cap and trade systems should recognize and facilitate coordinated international action;
A global carbon market is the optimal outcome to ensure a credible basis for investment, to contain compliance costs, and to avoid economic distortions.

The trading of allowances and project credits should be open to all market participants;
In conjunction with broad participation, vigorous oversight and an appropriate level of reporting regulation through existing frameworks will provide transparency, stability, and ensure public confidence.

The method of allowance distribution, whether through auctions or free allocations, ought not to influence the underlying efficiency of the market or its ability to deliver the environmental objective.