A Serious Flaw in the Waxman‐Markey Discussion Draft

The draft version of the American Clean Energy and Security Act of 2009 released in early
April (the Waxman‐Markey discussion draft) is emerging as the focal point of the US climate
change discussion at the federal level. The draft bill covers a wide range of topics. This
comment focuses on one aspect of the draft bill, namely the handling of existing regional
programs, particularly the Regional Greenhouse Gas Initiative (RGGI) covering much of the
Northeast.

The current proposal allows the conversion of RGGI allowances into federal allowances in a
way that RGGI bidders face no risk from paying too high a price for an allowance. This would
create strong incentives for speculative bidding that would push the RGGI price much higher
than its economic value. Such a price distortion would also negatively impact the federal
cap‐and‐trade program.

The draft approach is readily fixed by limiting the exchange rate of RGGI allowances for
federal allowances to 1‐to‐1. Without such a limit, price distortions in the RGGI program
would be unacceptably large.

To read the full article, click here.