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.
Second, allocating allowances to LDCs for free essentially gives the utilities a free pass to emit greenhouse gases, putting more pressure on manufacturers and distributors to reduce emissions. While prices for electricity may not change, prices for other goods and services would rise to pay for their higher costs of reducing emissions.
Burtraw argues the number of free allowances should be reduced, leaving big emitters to buy the extra allowances they need at auction, and that the difference should be given directly to households as a per capita rebate of revenue raised.
Nathaniel Keohane, director of economic policy and analysis at Environmental Defense and a supporter of the House bill, says Burtraw's concerns can be addressed within the legislation instead.
First, Congress can ensure state public utility commissions protect consumers by clarifying the language in the bill and laying out what it means to use the allowance value for the benefit of consumers.
"The solution here is to have strong oversight conditions to make sure state regulators have the tools they need to see this through," Keohane says.
Keohane does believe Burtraw has a point in that consumers would gain a clearer idea of the benefits of capping emissions with a rebate.
"If you end up giving back the value of allowances so people no longer see a higher price of electricity at all, or don't see the true cost, then you will have less reductions in electricity power use," he says.
Keohane's solution would be to preserve the "price signal" utility companies face for emitting greenhouse gases and compensate consumers at the same time. While the House bill would require the allowance value to be included in the fixed part of a consumer's utility bill, consumers would understand this value better if their electricity price reflected the cost of carbon emissions and they got a separate check to compensate them.
"A ratepayer would get a check in the mail that would represent the per household share of the allowance value," Keohane says.
An even simpler solution would be a cap-and-dividend program, an idea introduced in legislation by Rep. Chris Van Hollen, (D-Md.), in April and supported in various forms by Rep. Markey and Sens. Diane Feinstein (D-Calif.) and Maria Cantwell (D-Wash.). Van Hollen's bill didn't make it through the House, but elements of a cap-and-dividend policy are in the House climate bill beginning in 2020.
"By the 2030s, the dividend accounts for about half of the total allowance value," says James Boyce, an economist at the University of Massachusetts. "Waxman-Markey is like cap-and-dividend on a slow fuse."
In a policy centered on cap-and-dividend, 100% of allowances would be sold at auction from the start, and as much as 80% of the proceeds would be distributed back to households as an equal per capita dividend.
"Politically, my own view is what you want to do is not only have as fair as possible a distribution of the revenue but you want it to be as transparent as possible, so people will know exactly what they are getting back and how they are getting it back, and won't have to take some economists word for it," Boyce says.
In an August report co-authored by Boyce, the Political Economy Research Institute at the University of Massachusetts argues a cap-and-dividend policy would raise the real incomes of low-income and middle-income families, while higher-income households would pay more because they use more energy. The differences in dividend distributions across the states would be relatively small, according to the report.
A cap-and-dividend policy also would eliminate the need for a secondary market to trade allowances. Companies would buy the number of allowances they needed at periodic, but frequent auctions; companies that reduce emissions will simply need to buy fewer permits.
"Rather than opening a system to the profits of traders, one of the great attractions of a 100% auction is you can leave them out of the picture," Boyce says. "I think politically that could be a rather important point."
Greenpeace takes a different tack, saying 100% of allowances should be auctioned and revenue should be used to further cut carbon dioxide emissions by funding efforts to stop tropical deforestation and to develop green technology.
"I'm not opposed in principle to redistribution to people, especially in the short and medium-term," Greenpeace's Rolf Skar says. "But ultimately energy needs to be more expensive for people to be motivated to conserve."
Supporters of any climate bill this year are facing a tough fight against misinformation in the public, as well. In Utah last week, Republican Sen. Orrin Hatch and Gov. Gary Herbert, who has publicly questioned the science of climate change, released a report written by the state's electric, oil and agriculture industries that lays out a doomsday scenario of tens of thousands of lost jobs, lost state revenue, rising gas prices and high costs to families, numbers far higher than federal estimates