Climate Change Legislation: Allowance and Revenue Distribution

Aug 4, 2009 | Dallas Burtraw
U.S. Senate Committee on Finance


This testimony focuses on the allocation of emissions allowances to consumers through their local distribution companies. This provision and some other features of the proposal are designed to protect consumers from the adverse impacts of price increases and reduceregional inequities. However, this approach also raises the overall cost of achieving emissions reductions. The degree to which it raises the costs will depend on how public utility commissions at the state level incorporate the allowance value into their ratedesign. The outcome at this juncture is uncertain and beyond the reach of legislative language included in H.R. 2454.I consider incremental changes to the allocation formula. A simple per-household rebate of allowance revenue raised by the government through auction, coupled with a more moderate allocation to local distribution companies, can achieve distributional and regional goals at less cost and with greater administrative simplicity and predictability. In this framework, there may still be a role for limited allocation to local distribution companies on behalf of residential-class consumers to correct for regional differences inthe cost burden of the program.However, any implementation of free allocation to local distribution companies needs some amendment to the way it is described in H.R. 2454. In addition, the allocation to local distribution companies should phase out a decade earlier than it does currently.

The allocation of emissions allowances through local energy distribution companies (LDCs) could reduce regional inequities in the financial burden of cap-and-trade regime on rate payers, RFF Senior Fellow Dallas Burtraw said before the Senate Finance Committee August 4, 2009. But truly protecting consumers from the adverse impacts of price increases will require some minor changes in the approach put forth by H.R. 2454 – “The American Clean Energy and Security Act of 2009.” An archived webcast is available on the Senate website.

Administrative procedures could be streamlined and consumer protection goals may be more-easily realized by replacing some portion of the LDC allocations with a direct consumer rebate.

In his testimony, Burtraw points out that directing emissions allowances to LDCs to return to households – as outlined in Sec. 783 of the bill – will help to address concerns surrounding regional disparities. However, as it is written, the bill leaves plenty of room for interpretation as to what such a process would look like and imposes a significant cost on middle-income households, he said.

“State public utility commissions will play the determining role in how households are affected, not Congress, and this will be done in 50 different ways. In fact, there is great uncertainty about how the allowance value directed to local distribution companies will flow back to consumers,” Burtraw said.

He explained that while free allocation of allowances to local electricity distributors is designed to protect consumers from price increases, it will actually increase consumer expenses in other sectors. By giving electricity generators what amounts to a free pass to emit CO2, the bill puts the reductions onus on other sectors of the economy. While consumers may pay the same amount for electricity they could see increased prices in other goods and services, since manufacturers and distributors have to reduce their emissions to compensate for continued emissions from electricity generation.

“Detailed modeling results show that on average, households are made worse off by the effort to protect them from electricity price changes because it will lead to greater electricity consumption,” Burtraw warned. “Consequently, greater emissions reductions will be necessary, at higher cost, in other parts of the economy.”

Nonetheless, Burtraw admitted, “free allocation to local distribution companies may have a justification in reducing regional disparities.” He argued that a reduction in the allocation to local distribution companies, with the difference returned directly to households as per capita dividends, would lower the overall cost of the program, protect middle class families, and retain the regional balance reflected in the bill currently.

Watch Burtraw's testimony (starting at 36:30)