Senate Returns with No Clear Plan for Climate Bill Allowances

The U.S. Senate returns from its summer recess today with climate change, and particularly the debate over how to distribute emissions permits and protect consumers, coming up on the agenda.

As Sens. Barbara Boxer (D-Calif.), John Kerry (D-Mass.) and Finance Chairman Max Baucus (D-Mont.) begin writing their chamber's versions of a climate bill, they'll be wrestling with the questions of whether companies should receive permits to emit greenhouse gases for free or whether these “allowances” should be sold through an auction. Also on the table is what the government should do with the auction proceeds.

Baucus mentioned several options — from a full auction with the proceeds going into tax cuts or rebates to consumers, to allowances given for free to industries — when he opened his committee's Senate hearings on allowances just before the Congressional recess in early August.

"Whatever the approach, we need to devise a system that both meets environmental goals and passes political muster," he said. "That won’t be easy. The close vote in the House tells us that. But it is something that we can — and must — do."

Across Capitol Hill and out to the White House, there is still no clear agreement on the best approach.

The American Clean Energy and Security (ACES) bill passed by the U.S. House in June gives most allowances freely in the initial years of the program, then scales back. President Obama’s updated budget, on the other hand, still calls for the government to raise $627 billion by selling allowances in a cap-and-trade program and for nearly 80% of those dollars to be returned to consumers.

The Pew Center on Climate Change argues in a recent policy memo that the allowances shouldn't be allowed to drag down climate legislation — what's most important, it says, is that the final bill puts a cap on greenhouse gas emissions:

“From an environmental perspective, the price of the allowances is irrelevant, as is whether the allowances have been freely granted or auctioned."

Economists see a clear importance in those allowances, though, and they differ on the best policy outcome.

Supporters of the ACES bill first introduced by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) say the way emission allowances would be distributed by the bill would protect consumers. Opponents argue that the ACES method would do more to protect industry and divert dollars from real carbon reductions; during House negotiations, they had watched members fight for every scrap they could hand their local industries.

While the House bill would freely allocate about 80% of allowances at first (see Pew summary, page 93 for year-by-year breakdown), many of these would be given to state regulated local distribution companies. These LDCs would be required by the law to pass on the value of the allowances to ratepayers. However, those ratepayers aren't just households — the largest consumers are businesses and some of the same industries whose emissions would be capped by the bill.

Dallas Burtraw, a senior fellow at Resources for the Future, a nonpartisan think tank, is among those who don’t believe giving allowances away for free to LDCs will protect consumers.

The first problem is that LDCs are regulated by 50 state public utility commissions that will have 50 different ways of determining how to pass on the value to households, Burtraw said in testimony before the U.S. Senate Committee on Finance Aug. 4.

“In fact, there is great uncertainty about how the allowance value directed to local distribution companies will flow back to consumers,” Burtraw said.

• 1
• 2
• 3
• next page »