Market Design Principles
Principles for Lowest Cost Emissions Reductions
Our principles of best practice policy for reducing emissions are:
1. Market based: A cap and trade system clearly defines and ensures that the environmental objective will be achieved and reduces emissions at the lowest available cost. Market mechanisms efficiently price emissions reductions and create enduring competition to develop low-cost technologies that drive down future costs.
2. Cap: The cap should require real emissions reductions consistent with the best available science and send a persistent price signal over time to drive investment in low emissions technology and infrastructure.
3. Trading and Transparency: Trading of allowances and project credits should be open to all market participants. In conjunction with broad participation, vigorous oversight of the market through existing regulatory frameworks should provide transparency to the market and ensure public confidence.
4. Investment and Market Stability: 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 unpredictable changes to the emissions cap or subject to price interventions will discourage investor risk-taking necessary for long term investment in emission reduction technology and projects.
5. Maximize Sources of Emissions Reductions: A broadly based cap and trade system will ensure the greatest opportunities for low cost emission reductions thereby reducing compliance costs. For sectors that are not covered by the cap and trade system, other policy instruments and incentives should be available to deliver emissions reductions.
6. Global Carbon Market: The U.S. cap and trade system should recognize and facilitate coordinated international action as this is the best means to ensure a credible basis for investment, to contain costs and to avoid economic distortions that could result in a net global emissions increase.
7. Allowance Distribution: 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.
8. Cost Containment and Emissions Offsets: A properly structured cap and trade system that allows unfettered access to high quality offsets is the single most powerful cost containment mechanism. To maximize the efficiency of a cap and trade system and provide emitters with lowest cost compliance, broad access to domestic and international emission offsets and linking to other emissions markets should be provided.