A brief Politico article last week titled "Time for a Price Collar on Carbon" argued that a price ceiling should be included in the Senate version of climate legislation as a way to better ensure the bill's passage. While the authors of the article believe a price ceiling is necessary to get the bill over the finish line, they fail to weigh the costs a price ceiling would impose on 1) the cap's integrity; 2) low carbon investments; 3) the price of carbon allowances in later years; and 4) our ability to negotiate a binding global agreement on emissions reductions over time.

Simply put, the cap and trade program is designed to limit our cumulative emissions over the period from now to 2050 through a declining cap. 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 would have to abandon our emissions budget, leading to more dangerous climate change, or we would have make much steeper emission reductions in the future, causing the program to be much more expensive than necessary.  

While the authors argue that the cost containment provisions used under the ACES bill are "merely moving stringency from one year to another without actually limiting the overall cost" of the program, they are not taking into account the cost savings generated by accelerating low carbon investment under a market based approach. Lower carbon prices under a price ceiling may save emitters money in the short run, but they would be doing this by sending a false price signal to the market, delaying the low carbon investments needed to grow clean jobs and keep carbon prices low over the long term.  

Lastly, creating a price ceiling in the US would also make securing a global agreement on carbon emissions more difficult as the rest of the world would demand that they be allowed to abandon their emissions budgets as well.

In sum, putting a price collar on carbon emissions would serve to limit the integrity of the cap, reduce investment, make securing a global agreement more problematic, and leave us with expensive carbon debt that could only be paid back by raising carbon prices over the long term and should be avoided under cap and trade legislation.