May27

Defogging Kerry-Lieberman’s Transportation Allowance Allocations

After looking over Danny’s post on allocations in Kerry-Lieberman, you might be relieved to see that it has less allocation categories than Waxman-Markey or Kerry-Boxer. While this is true, the authors have also thrown a curveball in the form of a substantial allocation to “Transportation Infrastructure and Efficiency” over the first 30 years of the program. The tricky part with this allocation is that it receives a percent of emission allowances, but is also subject to a dollar cap. Interestingly, the cap is likely to be binding for many years of the program, leaving additional revenue to flow to debt reduction (Kerry-Lieberman directs all unused allowances to debt reduction to be compliant with the CBO haircut).

Using 2020 as an example, we can see that Transportation Infrastructure and Efficiency receives a generous 6 percent of allowances. This amount, however, is split into thirds and allocated to three separate transportation related funds and grants. The Highway Trust fund, discretionary transportation grants under the stimulus plan and Transportation Greenhouse Gas emissions reduction programs receive a maximum of 2.5, 1.875 and 1.875 billion dollars annually.

While these are significant amounts of money, a simple numerical example shows how these caps will most likely be reached.

Consider an allowance price of $20 in 2020 (EIA projects $32/ton in 2020 under Waxman Markey).

5.095 billion allowances x $20 = $101.9 billion

.02 * 101.9 = $2.038 billion

This means that both of the programs which cap out at $1.875 billion cannot use all of their allocations in 2020. The leftover funds would flow into deficit reduction.

Using EIA’s estimate of $32/ton in 2020 yields

5.095 billion allowances x $32 = 163.04 billion dollars

.02 * 163.04 = 3.2608 billion dollars

Looking at all three transportation funds, this allocates an additional 3.5 billion dollars (2% of allowance value) for deficit reduction.

There is nothing fundamentally wrong with putting these monetary caps on allocations, it is simply important to note them in allocation tables. It is difficult to know why these were added to this most recent round of legislation. I would guess that it might have to do with CBO scoring, and that these additional funds for debt relief might help the bill satisfy Senate deficit rules. It is also possible that the bill authors did not realize how binding these monetary caps would end up being. Modeling can give us a few clues as to how this will pan out, but in the end we may not know until the legislation is in effect.

Photo credit: bart_everett on Flickr.

Josh Blonz is a research assistant at Resource for the Future.

Published: May-27-10 | 0 Comments

May26

How Kerry-Lieberman Slices the Pie

Allocations, Cap and Trade

In theory, the effectiveness of a cap-and-trade system for greenhouse gas emissions is not determined by how allowances are allocated. Whether allowances are distributed by auctions or giveaways shouldn’t really matter in terms of emissions results. Theory and politics, however, are two very different things. When it comes to the politics of cap-and-trade, who gets a slice of allocation pie is a big deal. The House bill (Waxman-Markey) allocated allowances to a number of industries and public programs through a combination of gratis (free) and auctioned allocations. Kerry-Lieberman takes a similar approach, though it is less complex and has different priorities. Here (PDF, Excel) is a comprehensive breakdown of the allocations in the Kerry-Lieberman bill.

What are some of the important things to look for on this table? Like Waxman-Markey, Kerry-Lieberman chooses to subsidize consumers’ energy usage to the tune of 30 percent of allocations in 2016 to electricity local distribution companies (LDCs) and 9 percent in 2016 to natural gas LDCs. There are a couple of interesting implications from these distributions. Congress is very concerned about raising consumers’ electricity prices, which explains why they have given so many allowances to the LDCs for the benefit of ‘retail ratepayers’ (that includes you, me, and most anyone who pays a monthly electricity bill). The electricity sector, however, is widely seen as the sector that will have the cheapest reductions. The allowance subsidy will in many cases be equal to or possibly more than the extra carbon cost, so consumers will have little to no incentive to reduce their energy use and in fact may end up using more electricity than before. The result is consumers using more electricity leading to more emissions from that sector and the system will have to find reductions from more expensive sources.

If you look at the table, you’ll see that along with electricity LDCs, merchant coal generators and long-term contract generators receive a combined 5 percent of allocations in 2016 as part of the 35 percent of the ‘electricity consumers’ allocation. The problem with allocating to merchant coal plants and long-term contractors is twofold: 1) the way these firms operate and how they sell electricity means that retail ratepayers will not see the benefit of the allocated allowances and 2) they may generate higher emissions from the electricity sector. Here’s how it works: merchant coal generators will receive a subsidy in the form of emissions allowances, allowing them to produce more megawatts more cheaply. This could have one of two effects – either these generators become more competitive and crowd out less-carbon intensive energy sources, like natural gas, or they increase their supply of megawatts, leading to higher demand for electricity. This effect will not be as substantial as the effect from electricity LDC allocations I discussed above. Bottom line: the free allocation of allowances to ‘electricity consumers’ will lead to more emissions in the electricity sector, meaning that we will have to find more expensive emissions reductions in other sectors.

Other notable aspects include treatment of trade-sensitive industries similar to Waxman-Markey, markedly lower allocations to international adaptation efforts (with no specific funds for deforestation/REDD) and multiple allocations to the transportation sector, which was not treated well by Waxman-Markey. Josh Blonz has a follow-up post that gets into some transport-related intricacies, so I won’t comment on them here. The question is: does this pie make enough people happy enough to move the bill forward? Stay tuned…

Daniel F. Morris is a Research Associate at RFF. He’s a regular contributor over at the Progressive Fix and has been know to write a thing or two for Common Tragedies.

Published: May-26-10 | 2 Comments

Apr16

Does Money Grow on Trees After All?

Allocations, Offsets, Forests

Consumers. Households. Citizens. Loyal subjects. The American people. The emergence of cap and dividend as a key piece of the Senate climate debate—either as a stand-alone bill or more likely a core principle of the Kerry-Graham-Lieberman process—can be directly traced to increasing awareness of how climate policy impacts the U.S. economy and the average “Joe Coal.”

However, direct rebate checks are not the only way to make climate policy more economically-friendly. Sens. Cantwell and Collins have acknowledged this by devoting 25 percent of the auction revenues in their bill to clean technology development and other purposes. It does not take a Ph.D. in economics to understand that lowering the cost of key emissions reduction technologies makes it less costly for companies to comply with climate regulations, savings which are then passed on to the broader economy and households in the form of lower allowance prices. Any U.S. government analysis of climate policy that assumes higher costs or delayed implementation of clean technologies shows higher allowance prices and more substantial economic impacts.

Climate policy, costs and international offsets

In bills like the House-passed Waxman-Markey, this is equally if not more true for the supply of international emissions offsets, a majority of which are expected to come from reducing tropical deforestation in developing nations. Indeed, EPA analysis of the House bill shows that average annual allowance prices would be 89 percent higher and average annual net present value costs of climate policy to households would be 75 percent higher without international offsets. In part to help ensure these offsets would be available, policy makers set aside 5 percent of allowance auction revenues to reduce emissions from deforestation and help developing nations prepare for U.S. offset programs.

Since it is such a key driver of costs, why shouldn’t policy makers think of international offsets as just another “technology” that is essential to bring on line in order to manage the costs of climate policy?

While early rumors indicate that the Kerry-Lieberman-Graham bill will allow companies to purchase international offsets for compliance purposes—at least in the electric utility and manufacturing sector cap-and-trade program—the push for returning revenues to households directly is squeezing down the space for a 5 percent set-aside of auction revenues for tropical forests. Removing this set-aside is likely to reduce the supply of international offsets because, without funding to develop measurement, monitoring and verification systems and reform institutions, fewer nations will be prepared to meet U.S. compliance standards.

This raises a number of interesting economic (and political) questions. First, because of a more limited supply of offsets, what would be the impact on allowance prices of removing this set-aside? Second, would the higher allowance prices caused by removing this set-aside make the U.S. economy and households worse off than the benefit they would receive from a direct rebate of auction revenues?

Saving households money by investing in tropical forests

We set out to answer both questions using Resources for the Future and Climate Advisers’ Forest Carbon Index (FCI) model and EPA modeling scenarios of the House climate bill (which can be used as a rough proxy for the electricity and manufacturing sector emissions trading program in the Kerry-Lieberman-Graham “hybrid” bill).

The first step was determining how international offset supply would respond to a reduction in new public funding. Making a qualitative assessment based on the FCI and other studies, we analyzed three possibilities: that reducing public funding would lead to small initial drop in supply and delay in reaching full capacity (“Optimistic” case), that reducing public funding would lead to a large initial drop and longer delay in reducing public funding (“Medium” case), and that reducing public funding would lead to about a ten-year delay in any forest sector offset availability and a slow ramp-up thereafter to full capacity (“Pessimistic” case). These scenarios were intended to be illustrative of a range of possible responses and were based on political and economic judgments about key countries including Brazil and Indonesia.

Across these scenarios, in our analysis eliminating the set-aside could lead to a cumulative reduction in international offset supply of between 6 and 32 percent, which the proportional relationship between international offset supply and allowance prices in EPA scenarios indicates could increase average annual allowance prices by 4 to 27 percent.

Using the proportional relationship between allowance prices and GDP impacts shown by EPA’s modeling scenarios this would lead to a 3 to 24 percent increase in the annual average net present value costs of climate policy (2012-2050). In more concrete terms, even when accounting for the cost of the set-aside, net savings from setting aside new public revenues for tropical forests (in terms of GDP impacts) could range from $317 million to $18 billion per year. This means that under all scenarios each $1 in set-aside spent could yield greater than $1 in savings.

The picture with households is more mixed, and overall the impacts are less significant. Net changes in the average annual net present value cost of climate policy per household range from a $9 per-year increase in costs from eliminating the set-aside under a “Pessimistic” offset supply response case to a $5 per-year reduction in costs under an “Optimistic” scenario. Under a “Medium” scenario households would face roughly the same costs whether the set-aside for forests or a rebate is provided.

Overall, these findings highlight the potential risk to the U.S. economy of not providing a new public funding set-aside for tropical forests. If offset supply is sharply reduced by not providing the set-aside, the economic impacts of climate policy could be much more severe. If offset supply is only reduced a small amount, the annual GDP savings could still exceed the cost of the set-aside. Under either scenario, in economic terms households would be largely indifferent whether they receive these cost savings in the form of a rebate check or in the form of lower allowance prices.

Returning revenues to households or supporting technology development is not the only way to make the American people better off in a cap-and-trade program. Even beyond the vast environmental and foreign policy benefits of investing public revenues in reducing tropical deforestation, it appears to be a winning economic strategy as well.

Read the technical report The Economic Benefits of Public Investments in Tropical Forest Conservation (PDF) here. Andrew Stevenson is a research assistant at Resources for the Future and regular contributor to Common Tragedies.

Published: Apr-16-10 | 0 Comments

Oct28

The Implications of Allocation Language in Kerry-Boxer

Allocations, Kerry-Boxer, Waxman-Markey

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.

Published: Oct-28-09 | 0 Comments

Oct27

Would Weaker Targets Reduce Allowance Prices?

Kerry-Boxer, Congress, Allocations

Smokestack image courtesy LibraryofCongress via Flickr The recent spate of hearings in the Energy and Natural Resources Committee and those planned this week for Environment and Public Works Committee signal the Senate’s re-engagement on comprehensive climate legislation. Surely, one of the front-and-center issues will be the higher energy prices resulting from a cap-and-trade program for greenhouse gases (GHGs). The magnitude of the energy price increase is directly linked to the price of GHG allowances—the permits firms must have to emit GHGs—, which in turn depends on the severity of the cap. Generally, the more strict the cap, the greater the allowance price and therefore the greater the energy price increase.

Clearly, higher energy prices are politically undesirable and therefore some legislators are likely to argue for weaker early-year emission caps than those in the Senate’s Kerry-Boxer bill. But would weaker caps in, for example, the first decade of a program actually lower allowance prices?

Like far too many questions in economics, the answer is maybe. The logic behind the answer has to do with banking of allowances and expectations of future allowance prices.

Kerry-Boxer grants emitters the right to bank allowances. An emitter of can buy allowances when the program begins, hold on to them indefinitely, and use them for compliance purposes at any point in the future.

Why would an emitter do this? The emitter may expect the cost of reducing future emissions (reflected in allowance price) to be very high due to tight future caps. If the emitter expects the allowances price to rise faster than the rate of return the emitter can earn on its capital, the emitter will save a portion of the allowances it purchases or is given today, and use them in the future, thereby profiting on the rise in the allowance price.

This savings is precisely the behavior one sees in analyses of the House’s Waxman-Markey (America’s Clean Energy and Security Act) by both The Environmental Protection Agency and Energy Information Administration where emitters build up a very large bank of allowances. Since they are not using the allowances for compliance, they actually reduce their emissions by an amount greater than that called for by the cap—termed over compliance. This over compliance results in allowance prices greater than they would be if emitters simply complied with the year-by-year caps.

If all emitters have the same and accurate expectations about future compliance costs, the price of allowances will rise at the rate of interest. Again, this is exactly what you see in the EPA and EIA analyses.

Now suppose you weaken the early-year emissions caps, but future caps remain unchanged. If expectations of future compliance cost are unchanged, the weaker caps simply lead to an even larger bank and greater over compliance, and allowance prices generally will not decline. Thus, weakening the early period caps seemingly does not make allowances cheaper and therefore will not dampen the resulting energy price increases.

Why, then, did I say the answer is maybe when I just argued above that the answer is no? Because we are not sure that real emitters act as the models assume. Emitters in the models, 1) have perfect foresight, i.e., they know what the future holds with respect to the cost reducing emissions, 2) are long-run maximizers, i.e., will sacrifice short-term gains in favor of larger long-term gains, and 3) all share the same rate of return on capital that is equal to the rate of interest in the model.

Obviously, in the real world the future is not known and everyone must guess. Those guessing that future compliance costs will be high will be savers, those expecting technology breakthroughs to lower cost will use their allowances now. As the recent recession has demonstrated, not all (perhaps none) of the emitters may be long-run maximizers, choosing instead to focus on near term gains, in which case they will be less likely to bank allowances for use in the future. Finally, emitters may have investment hurdle rates (the rate of return they require on capital) that differ from emitter to emitter. Those with lower hurdle rates will bank; those with higher rates may not.

So, if you believe in the assumptions of the models, weakening near term caps is unlikely to lower the near term price increase in energy. However, if you reject those assumptions, one can argue that weakened near term targets will dampen energy price increases.

Of course, none of this touches on the important issue of short-run price volatility in the allowance market which can lead to short run spikes in energy prices. This too is liable to be of considerable concern to senators as they consider climate and energy legislation.

Raymond J. Kopp is a senior fellow and director of Resources for the Future’s Climate Policy Program.

Published: Oct-27-09 | 0 Comments

Oct21

Much Ado About Allocations

Allocations, Testimony

Pennies image courtesy StormchaserMike via Flickr A week before Sen. Barbara Boxer kicks off a three-day-climate-and-energy hearing marathon, the Senate Energy and Natural Resources Committee convened to take a closer look at the impact of allowance allocations on consumers under a cap-and-trade system.

RFF Senior Fellow Karen Palmer was among the panelists asked to testify on the most efficient approach to easing the financial burden consumers are likely to face from a policy to cap carbon. In her testimony, Palmer outlined several methods to keep costs under control for consumers including giving allowances to electricity generators, channeling allowances through local electricity distribution companies (LDCs), and providing a direct rebate to consumers to offset the higher costs.

According to Palmer, the free distribution of emissions permits to electricity generators could unfairly burden some customers, since there isn’t a nationwide structure for electricity generation market regulation. Accordingly, regulators in individual states typically set rates making them highly variable.

Allocating polluting rights to LDCs, a plan that would take into account regulatory differences across the country, could also have some negative side effects. Palmer points out that in asking LDCs to pass the allocation value along to consumers, the price signals customers need to change their energy use behaviors are lost. Rather than noticing energy prices have gone up, customers see the same (or lower) rates on their monthly bills and don’t change their use. Moreover, she notes through LDC allocation:

Consumers will not be insulated from higher overall costs. The smaller increases that they see in their electricity bills as a result of allocation to distribution companies will come at the cost of higher increases in the price of gasoline and goods and services that have a high transportation cost component.

Hence, it is important to ask the question: Are households better off because of the effort to subsidize their electricity prices? In fact, on average, they are worse off because the value of other goods and services will be higher as a result and households will face a greater overall cost from climate policy.

To meet the goal of easing the financial burden associated with a climate policy, Palmer suggests a rebate given directly to consumers—an approach known as cap and dividend—may be the most efficient. According to Palmer:

Such an approach redirects the portion of the allowance value going to local distribution companies (both electric and gas) intended for ultimate distribution to commercial and industrial electricity consumers, as well as the portion scheduled to go to home heating and low-income households, to a cap-and-dividend allocation, leaving only the residential portion of allocation to local distribution companies intact. Such a reform of the [the House climate bill] H.R. 2454 policy would improve its efficiency, reducing the CO2 allowance price by roughly 14 percent in 2015, and lowering the annual cost to households by nearly $80, roughly half of the cost they incur under allowance allocation to local distribution companies as specified in the legislation.

Read Palmer’s complete testimony here, and Energy and Natural Resources Committee Chairman Bingaman’s remarks here.

Published: Oct-21-09 | 0 Comments

Sep15

What’s Driving the Senate Debate?

Congress, Waxman-Markey, Price Collar, Allocations

With action punted deeper into the year by Senate leaders, the future of climate and energy legislation in this congressional session seems uncertain at best. And though the wildly-popular (and widely-debated) Cash for Clunkers vehicle retirement program kept the whisper of energy policy on America’s lips, health care reform dominated the public discourse this summer and threatens to keep it up well into the fall.

Will looming Post-Kyoto Protocol treaty negotiations and the EPA’s preparations to regulate greenhouse gas emissions if Congress fails to pass its own plan motivate action this session? The factors listed below could well determine the answers to those questions and provide insight into what’s on the horizon for U.S. climate legislation.

Industry Interests: Natural gas could be the loser in the Senate as lawmakers concede it is coal-state votes that will swing legislation to passage but the future of coal has its own uncertainties, as Rob Stavins explains. And oil industry leaders have been accused of mobilizing astroturf campaigns to drum up discontent, unhappy with their share of emissions allowances in the House version of the bill.

Oversight and Regulation: Creating a new marketplace for carbon emissions permit trading undoubtedly calls for new structures to oversee its functions. The bill that passed the House in June would give oversight to the Federal Energy Regulatory Commission but another bill has been introduced in the Senate to give that control to the Commodities Futures Trading Commission.

Allowance Distribution: Just who got what out of Waxman-Markey made for plenty of horse trading in House negotiations of the bill. It’s clear allowance distribution (and the mechanisms used) will be the subject of Senate debate. For her part Sen. Maria Cantwell, D-Wash., is drafting a proposal calling for a 100 percent auction of allowances.

Cost Containment: Senators will search for the best mechanisms to ensure that a plan avoids some of the pricing pitfalls of the E.U.’s ETS or RGGI. The House bill opts for a “safety valve” to take effect when and if permit prices hit a certain threshold. Sen. Barbara Boxer, chair of the Environment and Public Works Committee, said she would consider utilizing a price collar, to keep price volatility in check. A Natural Resources Committee hearing today is scheduled to tackle this issue, exploring these tools and others as members work on their contribution to the Senate’s bill.

EPA: While Congress has been working out the details of its plan for climate change and energy, the Environmental Protection Agency was working on its own plan to regulate the emissions of carbon dioxide, which a 2007 Supreme Court ruling says can be covered under the Clean Air Act. The agency has spent recent months sketching out the specifics of a plan to cover emissions from the electricity and transportation sectors if Congress fails to pass legislation.

Trade & Tariffs: Suggestions to preserve border adjustment provisions—included in the legislation approved by the House and called for by ten Democratic senators in this letter–in the Senate’s version of the bill sent some searching for the right ratio of carrots to sticks and led others to wonder whether an international treaty could be negotiated without U.S. legislation.

At the Negotiating Table: Bringing commitments on emissions reductions, approved by the president and Congress to Copenhagen could make the task ahead of U.S. climate negotiators easier to tackle and provide a strong leg to stand on when asking other nations to take action. Leaders in India, one of several nations expected to factor prominently in negotiations, say if the U.S. commits to action they would be hard pressed not too as well.

Of course, whether these or any other factors come to bear will depend heavily on the amount of political capital (and time) President Obama and Congressional leaders are forced to use on health care reform and other legislative priorities.

Are there other factors lawmakers should take into account as they work on their plan?

Tiffany Clements is managing editor of Weathervane. Contact her at clements@rff.org.

Published: Sep-15-09 | 0 Comments

Aug17

Lessons from the E.U.'s Emissions Trading Program

Border Adjustments, International, Cap and Trade, Carbon Market, Allocations

Image courtesy IFCCI Since 2005 major power generation and industrial emitters in the European Union have been monitoring their emissions and paying for the right to release CO₂ and other greenhouse gasses into the atmosphere. While a landmark moment in multi-national environmental cooperation, observers have found that in its early years the E.U.‘s emissions trading scheme (ETS) has not been without its flaws.

Most observers agree that excessive distribution of free allocation permits has led to windfall profits for some entities, and there have been inadequate measures in place to curb price volatility. But according to RFF Senior Fellow Dallas Burtraw in this Weekly Policy Commentary, many of those early problems have been addressed and will be changed in later phases of the program. And, importantly, substantial shifting of industrial production and jobs overseas—as has been feared by many under a U.S. system—has not occurred in the European Union.

Hopeful that U.S. policymakers could learn from the early missteps of the E.U.’s program—especially in the critical areas of allowance allocation and industrial competitiveness—the German Marshall Fund recently released this report offering 10 key lessons from the E.U. ETS.

The paper makes as strong a case for moving quickly from free allowances to full auctioning in the electricity generation sector. By handing out free allowances, the government has a choice between windfall profits if it allows costs to be passed through (which the E.U. initially chose), and a distortion of incentives for consumers to conserve energy if it does not (which the U.S. has essentially chosen with its allocation to local distribution companies). Burtraw made a similar argument in his recent testimony before the Senate Finance Committee, calling for auctioning permits and returning these revenues to protect low-income consumers in vulnerable regions of the United States that face energy price increases.

The report also addresses one of the hottest debates in climate policy design— border adjustments:

Discussion of border adjustments in Europe has been accompanied by extreme nervousness about their potential political impact, both on the world trade system and on the international climate negotiations. The issue was greatly down played in the negotiation of the EU ETS Phase III in favor of free allocation to exposed sectors (though a clause in the E.U. Directive could provide a basis for enacting border adjustments in the future). However, recognizing the imperfections of free allocation as a solution, the French government in particular has raised the issue again, particularly as a way of protecting the integrity of an international environmental treaty.

Although the European Union may not strictly need border adjustments to protect industry at the current low price of carbon, given their seeming inevitability in the U.S. bill, it may be worth considering whether they could be part of a “transatlantic climate partnership” for creating leverage in international negotiations.

As the details of U.S. domestic schemes and an international plan emerging, experience with emissions trading is clearly becoming a “public good” that will be of great value around the world.

Tiffany Clements is managing editor of Weathervane.

Published: Aug-17-09 | 1 Comment

Aug05

Ensuring Effective Allowance Allocation in Climate Legislation

Allocations, Testimony, Waxman-Markey

Image Courtesy turtlephotography via Flickr. Despite rumblings that health care may eclipse all other legislation this session, the Senate Finance Committee continued its work on climate and energy legislation Tuesday by exploring possible mechanisms for emissions allowance allocation and revenue distribution in H.R. 2454.

How exactly the government goes about giving away permits and allocating proceeds from allowance auctions will prove to be important to both consumers and industry. But the implementation of the tool and the transparency of the process will also go a long way toward ensuring understanding from regulators, policymakers, and consumers.

Local electricity distribution companies (LDCs) are slated to receive some 35 percent of free allowances in the early years of a cap-and-trade program on the condition that they pass the benefit onto their consumers to help cushion the blow of increased energy prices.

According to testimony from RFF Senior Fellow Dallas Burtraw, the LDC provisions in H.R. 2454 neglect to spell out exactly how that value will be returned to energy consumers. He encouraged the Senate to assert its authority and streamline regulatory controls to prevent the excessive complexity that would arise under state-level rule making.

“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 said that while channeling allowances through LDCs may help curb disparate regional effects, it could ultimately hurt consumers.

By giving electricity generators what amounts to a free pass to emit carbon dioxide, the bill is putting 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 lower reductions from electricity generation.

Instead, Burtraw suggested the Senate consider incorporating a per-capita energy refund to ease consumer energy burdens. He said H.R. 2454 does a good job protecting the lowest-income consumers, along with those in the highest income deciles, but may not be so good for those in between.

“It would do a good job of protecting the bottom 20 percent of households and the top 10 percent. The increase in costs associated with the inefficient allocation to local distribution companies falls hardest on the middle range of household incomes,” he said. “In contrast, direct dividends to households allocate the value of allowances in a way that does not disadvantage the middle class, is less costly and administratively simpler.”

He argued that a reduction in the allocation to LDCs, 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 currently reflected in the House bill.

Burtraw's full testimony is available here. An archived webcast of the hearing can also be accessed from the Senate Finance Committee.

Published: Aug-05-09 | 0 Comments

Jun18

Is Free Allocation to Electricity Consumers the Best for Households?

Allocations, Cap and Trade, Waxman-Markey

Free allocation of allowance value to electricity local distribution companies (LDCs) could offset the lion’s share of the increase in electricity prices that would otherwise arise under a cap-and-trade program. However, the ultimate effect on households is uncertain: Does free distribution to LDCs make households better or worse off compared to other approaches to compensation?

To consider this question we examined three compensation options using detailed electricity market modeling coupled with a distributional analysis of impacts across regions and income groups. Analysis accounted for changes in supply and demand side investment and behavior in the electricity sector that could be expected by 2015.

Our models included:

Assuming conventional electricity pricing and behavior for all customer classes.

Separating fixed and variable charges and assume rational behavior by industrial and commercial customers.

Returning value that would be given to LDCs to households as a per capita, nontaxable dividend.

Our simulation modeling indicates that the assignment of 30 percent of allowance value to LDCs raises the costs of climate policy by $157 per household compared to providing a dividend of the same magnitude directly to households. If there is widespread reform of electricity pricing by separating fixed and variable charges, and if industrial and commercial customers respond rationally, the cost per household (as compared to providing a dividend of the same magnitude) falls to $66. There is significant redistribution of income from lower income to upper income households because of the allocation to LDCs when compared to providing dividends.

Read a detailed report of our latest modeling here.

Rich Sweeney and Josh Blonz are a research assistants at Resources for the Future and regular contributors to Common Tragedies.

Dallas Burtraw is a senior fellow. His research interests include the design of environmental regulation, the costs and benefits of environmental regulation, and the regulation and restructuring of the electricity industry.

Published: Jun-18-09 | 0 Comments

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