At first blush, the allocation language in S. 1733 is very similar to the language in H.R. 2454. In 2016, the first year all covered sources are part of the program, local distribution companies (LDCs) receive 30% of allocations, merchant coal and long-term contract generators receive 5%, natural gas LDCs receive 9%, and trade-vulnerable industries receive about 14.4%. These allocations are either exactly the same as they were in H.R. 2454 or are very similar.

There are, however, some notable differences that have implications for distribution. First, S. 1733 specifically identifies percentages to be auctioned for the benefit of certain constituencies. For example, S. 1733 stipulates that 15% of allocations be auctioned and the revenues be used as consumer rebates for low and medium-income households. The result is that in 2016, 77.78% of allocations are given away and 23.15% are auctioned. Comparatively, H.R. 2454 gives away 84% of allocations and auctions 16% in 2016.

Second, and perhaps more important, is that S. 1733 establishes an ‘initial reservation’ of allowances. Sec. 771(d)(1) states:

In general.–Before allocating emission allowances under subsections (a) through (c) for each calendar year, the Administrator shall reserve from the total quantity of emission allowances established for the calendar year under section 721(a) the percentages for allowances specified in paragraphs (2) through (9), for use for the purposes described in those paragraphs.

Sections (a) through (c) include the language “Subject to subsection (d), of the total quantity of emission allowances established for each vintage year under section 721(a), the Administrator shall allocate…” The corresponding effect on allocations could be one of two things, depending on your interpretation of Sec. 771(d)(1) and the qualifying language in subsections (a) through (c):

1. The initial reservation is simply allocated first, then the other allocations are distributed or auctioned according to the designated percentage for that vintage year. If this is the case, then in 2016, 15.75% of allocations are initially reserved, 77.78% of allocations are given away, and 23.15% of allocations are auctioned. Allocations, according to this interpretation, are 116.68% of the 2016 emissions caps.

 

2. The initial reservation is taken from the total pool of allocations, then the corresponding percentages are taken from the remaining allocation total. Since the initial reservation is 15.75% of allocations, then 84.25% are still left over. This means in 2016, 65.53% of allocations (77.78% of 84.25) would be given away and 19.50% would be auctioned. The total for allocations in 2016 under this interpretation is 100.78% of the 2016 cap.

The second interpretation could have significant ramifications for entities that are given free allocations. For the constituents listed in the first paragraph, their allocations from the total cap in 2016 would be altered thusly: LDCs would receive 25.28%, merchant coal and long-term contract generators would receive 4.21%, natural gas LDCs would receive 7.58%, and trade-vulnerable industries would receive 12.13%. For comparison, H.R. 2454 gives 30% of allocations to LDCs, 5% to merchant coal and long-term contract generators, 9% to natural gas LDCs, and 14% to trade-vulnerable industries in 2016. It is important to note that these changes may represent the writers of the legislation’s intent to provide more direct transfer of the value of allocations to taxpayers. Put simply, rather than shrinking the whole pie for firms and consumers, these changes give another piece to taxpayers.

Daniel F. Morris is a research assistant at Resources for the Future and regular contributor to Common Tragedies.