How Congress Threatens to Undermine the Clean Energy Future: Handouts and Offsets

The new Greenpeace report Business as Usual describes "five maximum points of danger" in the House and Senate climate bills. SolveClimate will be reposting each of those arguments over the course of the week.

“Handouts and Loopholes.” Those three words constituted the headline that The Economist used on its May 21 article on the American Clean Energy and Security Act (ACES). “America’s climate bill is weaker and worse than expected,” the magazine elaborated in the sub-head.

This should come as no surprise. One of the consequences of imposing a price on carbon is that it creates a new currency called carbon credits, and everyone on K Street wants to get their hands on this new money. Congress has complied with one of the biggest proposed giveaways in American history.

There are three fundamental industry giveaways that individually and together constitute an existential threat to the cap and trade system the bill is aiming to create:

1. The scheme for allocating carbon credits;
2. The set of provisions permitting an enormous number of offsets to substitute for pollution reduction; and
3. The forest offset mechanism that will undermine the effort to protect the world’s tropical forests, whose continuing destruction contributes to 20% of annual global carbon emissions.

Carbon Credit Allocations

Pending legislation creates a new carbon currency, and then proceeds to give most of it away for free to polluters.

The single largest share goes for free to companies that distribute mostly coal-fired electric power, and another large slice goes for free to merchant coal generators and local natural gas distribution companies. The polluters have done a good job of getting the lion’s share of this new currency, worth hundreds of billions of dollars.

This is not what President Obama asked Congress to do in his speech to the joint session in February 2009, just weeks after taking the oath of office. The president asked lawmakers to craft climate legislation with 100% of credits being auctioned off to the highest bidders. His public budget request assumed $650 billion in new government revenue from these auctions between 2012 and 2019.

Obama understood that these auctions would raise the money needed to implement the climate legislation and uphold the fundamental principle that polluters must pay for the pollution they cause.

Every American traveler knows that when you enter a new territory, you need to take your dollars and buy the local currency. No one expects to be able to walk up to the window at the currency exchange and receive a handout for free, but that is exactly what will happen as we enter the new territory of carbon regulation under the current provisions of pending legislation. Freshly minted currency is about to be handed over to polluters for free in the form of free carbon credit allocations.

The pending legislation attempts to hide this act of brazen robbery from public coffers by adding a vague proviso that the free carbon credits given to power distributors must be used “for the benefit of consumers.” And so in the summary of the bill’s allocation structure and in the ensuing spin, supporters of the bill claim that all those allocations will go “for the benefit of consumers.” Just how, precisely, no one knows, so it is nothing more than an enormous instance of wishful thinking.

It will be up to the Public Utility Commissions in each of our 50 states to individually decide how they will use the windfall influx of billions of dollars “for the benefit of consumers.” It will require a Herculean effort of policing to make sure this open invitation to corruption is not wholeheartedly embraced.

Economists have been deployed to make the common-sense-defying argument that it really doesn’t matter whether the credits are auctioned off or given away. They assert instead that what really matters is what happens to the value of the credits, and in a purely abstract and theoretical realm, they are probably right.