Memo on H.R. 2454: Strategic Carbon Reserve

Nicholas Institute Discussion Memo on H.R. 2454, American Clean Energy and Security Act of 2009

Author(s): Brian Murray

Published: August 2009

download: memo (.pdf) >

What it does? The legislation sets aside allowances in a reserve and makes them available to the market to rein in unexpectedly high or extremely volatile allowance prices. By fixing the size of the reserve, long-term cap targets can be maintained while dealing with short-term variation in prices.

Why it is necessary? Cost concerns are probably the single largest barrier to adoption of climate legislation, especially for regions and sectors with high fossil fuel use. Compliance costs, as indicated by allowance prices, may be higher than anticipated if low carbon technologies are slower to materialize, or if offsets are slower to come to market, or economic growth and energy demand fluctuations lead to allowance demand spikes. Stakeholders see the need for some form of insurance against runaway price escalation and disruptive price volatility. The reserve can address this need by releasing more allowances into a tight market on a selective basis.