Climate policy myths A Grist Special Series

Follow the money, not the mechanism

Myth: Waxman-Markey gives away 85 percent of allowances to polluters 16

Posted 3:28 PM on 15 Jun 2009
by David Roberts
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Comment

As the Waxman-Markey climate/energy bill nears a make-or-break vote in the House, those who work to improve it need more than ever to understand it first. Smart strategy is based on sound information. On that note: one of the central critiques of the bill is a red herring at best and at worst simply false.

Here’s the critique, which should sound familiar from endless media repetition: Waxman-Markey gives away 85% of emission allowances to polluters, instead of auctioning them like Obama wanted.

This, it is said, will enrich dirty-energy shareholders at the expense of consumers. It is evidence of the bill’s corruption by special interests; evidence that cap-and-trade is just the fiasco critics warned; evidence that Democrats are just as beholden to big corporations as Republicans. And so on.

Two problems with the critique: it asks the wrong question and offers the wrong answer.

The wrong question

By capping greenhouse-gas emissions, the bill transforms them into a finite commodity, thereby giving them monetary value. In effect, it creates a huge new pool of value, in the form of emission allowances.

How should that value be distributed?

On this subject, discussion has been dominated by the “allocation vs. auction” debate: should the government distribute the allowances or auction the allowances and distribute the resulting revenue? Allowance auctioning has taken on a kind of iconic quality—it’s become a rallying cry for progressives. I’ve indulged in that cry myself, more than once.

But ultimately it’s the wrong question. It just doesn’t make a ton of difference.

Imagine the government had a big pile of vouchers, each of which could traded in for $5. It could trade in the vouchers itself and distribute the cash, or it could just distribute the vouchers. Now ask yourself: is the mechanism—the system governing who trades in the vouchers—the most important policy question here? Obviously not. A voucher and a $5 bill are of equal value.

What matters in a cap-and-trade program is who receives the value of the allowances. Follow the money, not the mechanism.

(One note: Alan Durning makes the argument here that auctioning the allowances and distributing the cash is more transparent—that distributing allowances somehow hides what’s going on. But it’s not a secret who’s receiving the allowances; here’s a PDF laying it out. I don’t see why a procedural disagreement should be the central battle. Procedural issues don’t have a record of success rousing the public.)

The wrong answer

Now that we’re talking about the right thing—the value itself, rather than the procedural mechanism that produces it—let’s ask: who does get it in the bill? Is it really “polluters”? Is this bill nothing but a porkfest full of special interest giveaways?

The answer to that is a qualified no. The Lieberman-Warner climate bill from 2008—that was a porkfest. It handed out allowances like candy, with no particular policy rationale aside from which constituencies had the most political muscle. Perhaps that bill colored media and public perceptions of cap-and-trade to the point that everyone’s just predisposed to see that dynamic at work no matter what. Once a storyline is established, it’s hard to uproot it.

But Waxman’s staff is a storehouse of incredible policy acumen, and the allowance distribution scheme in the bill, while certainly not perfect, is surprisingly policy-driven.

There are a variety of ways of breaking down the allowance allocations. Here’s how staff of the House Energy and Commerce Committee group the distribution in 2014:

Consumers: ~50%
Jobs & Competitiveness (i.e., industry handouts): ~23%
Clean energy and public purposes: ~25%

You can question those latter two categories. To some people (i.e., me), money for carbon capture and sequestration (CCS) looks more like an industry handout than a clean energy investment. There are other allocations you could frame differently.

Point is, roughly half the allowance value goes to consumers. Roughly a quarter goes to Clean Stuff like clean energy, prevention of international deforestation, adaptation, state efficiency programs, and the like. And roughly a quarter goes to Dirty Stuff like merchant coal generators, oil refineries, and trade-exposed, carbon-intensive industries like steel. Not how I’d do it, but not “giving away 85% of allowances to polluters.” The bulk of the value is going toward protecting consumers and transitioning to a clean energy economy.

Another way of breaking it down is to ask how much value will go to various purposes over the lifetime of the bill. Nat Keohane, an economist at the Environmental Defense Fund, has worked up some numbers based on EPA projections for the value of allowances. Here’s what he’s found (note that he categorizes things somewhat differently than above):

Households: $703 billion
This includes the value returned to customers via electricity and natural-gas local distribution companies (LDCs), the tax credit and refund programs, and the climate-change consumer refund program.
Small business: $118 billion
This includes the portion of LDC value that would be returned to commercial ratepayers.
Public purposes: $350 billion
This includes green jobs training, efficiency and renewables funding, building codes, clean energy innovation centers for R&D, adaptation, clean tech transfer, and international deforestation reduction.
Industry: $362 billion
This includes merchant coal, long-term contract generators, oil refineries, trade-exposed industries, CCS, advanced vehicles, and LDC allocations to big industrials.
Deficit reduction: $86 billion
TOTAL: $1.62 trillion

Again, not how I’d do it, but not “85% of allowances to polluters.” Somewhere around 22% of allowance value is going to big, polluting industries over the lifetime of the bill. Given the amounts we’re talking about here, that’s a huge amount of money, but it’s nowhere close to 85%.

Other debates

I suspect it’s futile to say so, but this is not meant to cheerlead for the bill. There are plenty of legitimate debates to be had over how it’s structured. Some beefs:

I’d like much less allowance value given to polluters and consumers alike, and more devoted to investing in clean energy and efficiency.
The 2020 target—reducing emissions 17 percent below 2005 levels—is far too weak, especially given the uncertain effect of offsets. (See Jesse for more on this.)
The renewable energy and efficiency mandates (the RES and the EERS) have been mooshed into a Combined Efficiency and Renewable Energy Standard (CERES) and weakened to the point of uselessness. Separate them back out and strengthen them.
The soon-to-be-gargantuan carbon market doesn’t have the regulations in place to keep from entering the bubble-bust cycle so familiar in financial markets in recent years. (See Friends of the Earth’s “Subprime Carbon” report.)

I’m ambivalent about the strategy of using LDCs to get value to consumers, though I think Joe Romm’s contributors mount a pretty convincing defense. You need some way of accounting for regional disparities, and the dividend crowd hasn’t, to my knowledge, offered anything plausible.

Anyway, point is, these debates and many more are worth having. Yay for debate and dissent!

But lots of progressive time and energy are being devoted to what is effectively a fake controversy and a false charge against the bill. The bill is not entirely a pork party for polluters. It’s only a quarter pork party!

Comments

David Roberts is staff writer for Grist. You can follow his Twitter feed at twitter.com/drgrist.

Peter Wood Posted 6:29 pm
15 Jun 2009
For Waxman-Markey to address climate change effectively it needs to facilitate international cooperation. The US, through its historical emissions, has already imposed a large net external cost on the rest of the world. It should therefore increase the amount of permits allocated to fund international adaptation assistance and clean technology transfer.I fully agree with David that the 2020 target is far too weak. The bill could be significantly strengthened by improving the target.Carbon price volatility is also a serious issue. The minimum reserve auction price should therefore be significantly increased. By doing so, it would also provide incentives for emission reductions on top of the target specified in the bill.
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Chris@CarrotsandSticks Posted 7:56 am
16 Jun 2009
The title of this post is both wrong and misleading. The 35% of emissions permits given to utilities companies are still ‘giveaways’ in a non-debatable sense. They will be given free of cost to corporations not consumers. Even if it were good policy, which it is not, it would still be subject to this line of attack.

It’s not good policy or good politics. While it’s perfectly true that the utilities provisions will accrue cost saving to consumers, but it’s bad policy because it will create a cost dampening effect and force greater changes and thus greater costs in other areas of the economy. Resources for the Future recently released a technical paper regarding the problems of this approach. Further the entire idea that this could be good policy, despite being widely misunderstood is folly. Good policy nobody can understand is bad policy.

When Republicans attack Cap and Trade as costing consumers money, do you want Democrats to respond with, “I talked the House E&C committee and this Harvard economist and they assure me the public benefits in the end.”

Chris

http://www.carrotsandsticks.org
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ids Posted 7:57 am
16 Jun 2009
Congressman Doucher, the architect of "Waxman-Markey" has a better summary, from http://energycommerce.house.gov 05/21/09 hearing transcript. It's obvious de-carbonizing the grid is delayed until 2020. Any "enviro" who supports that is a douchebag, DR.Line 2399 Boucher: First of all, we have obtained the provision of 90 percent of the emission allowances to electric utilities without charge, and that was truly a major step forward that helps to cushion any effect on electricity rates because of the process by which emission allowances are allocated. Secondly, we have obtained 2 billion tons of offsets that will enable the emitting entities to obtain their reductions while continuing to use coal. Utilities will be able to continue their existing fuel mix by taking their reductions off site by investing in agriculture, by investing in forestry and through other steps, 2 billion tons of offsets available every year for that purpose. The target for emission reductions by the year 2020 has been reduced from the original target that was set in the draft that Mr. Waxman circulated down to a target of 17 percent. I continue to have some concerns about that target. I believe a lower number actually is appropriate, and under the agreement that we have achieved, I intend to work at future stages of this process in order to obtain improvement and I believe that is potentially possible. We also have bonus allowances for carbon capture and sequestration deployment by utilities at the time that these technologies become available and those bonus allowances are valued at somewhere between $75 and $100 billion, depending upon what the then-current value of emission allowances happens to be. We have embedded within the legislation our separate bill that assures the flow of $1 billion annually in research, development, and demonstration funding to the development of carbon capture and sequestration technologies and the Electric Power Research Institute tells us that with that level of assured funding, we can count on available, affordable and reliable carbon capture and sequestration technologies being made available by the year 2020.
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Bill Hewitt Posted 9:20 am
16 Jun 2009
Simple? No. But I want to note here a post from my blog on climate change for the Foreign Policy Association that references the work of Robert Stavins - one of those "Harvard economists." He not only makes the whole thing slightly easier to grasp, but verifies Dave's analysis too: “…the totals become 79.9% for consumers and public purposes versus 20.1% for private industry, or approximately 80% versus 20% - the opposite of the ‘80% free allowance corporate give-away’ featured in many press and blogosphere accounts. Moreover, because some of the allocations to private industry are - for better or for worse - conditional on recipients undertaking specific costly investments, such as investments in carbon capture and storage, part of the 20% free allocation to private industry should not be viewed as a windfall.” (See The Wonk Zone.) At the end of the day, it's about getting the GHGs down. I am very much in the group of those who'd like to see more cuts and sooner, but you need to also remember the stunning success of the 1990 Clean Air Act acid rain title in getting the precursor pollutants down and out much quicker and more cheaply than even the whiz kids at EDF thought possible.
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setb Posted 9:40 am
16 Jun 2009
Shouldn't the right question be whether or not ACES reduces climate pollution to the levels scientists say are necessary? The answer is a no & it's bad politics to boot.100% auction and dividend has always been about politics first and foremost--how do we get the real reductions we need and make it last for the 30+years necessary.Obviously, Waxman has decided to go with a scheme of buying votes through giving away permit. Does that help you pass a strong cap? The answer up until now has been no--and the evidence on ACES isn't promising. Once Congress starts giving away permits, they're picking winners & losers--and they're pissing people off. It may make the industries with friends on E & C happy--but everyone else will be angry. Now its just the AG folks saying "Where's mine?" tomorrow it could be retail, airlines, banking or construction--and there just isn't enough money to give away to everyone. And when they run out of allocations Congress gives away offsets--or screws consumers (voters). So you get a watered down bill that founders its way through Congress with enemies on all sides. Maybe it's just the way things need to get done--but, I'm concerned about what's going to happen when prices actually go up and Republicans demagogue the issue like we know they will. Nat can explain to the public how they're really getting 50% of the money back, but I think that will work about as well as explaining that offshore drilling wouldn't lower gas prices back in summer of '08.
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Sean Casten Posted 10:01 am
16 Jun 2009
I think you oversimplify, David. If we know a priori that a ton of carbon is worth $5 then your allowance vs. $5 voucher logic holds. But we don't know that - worse, the actual price of a ton of emissions is set by a market mechanism that will necessarily factor in supply and demand. The problem that arises from allowances to CO2 sources is that you now have what ought to be a component of the demand side of the equation that suddenly finds themselves on the supply side. So the coal plant - as an example - not only doesn't have to buy a CO2 credit (therefore reducing the demand-pressure, and hence price of CO2 emissions rights), but can find themselves in a situation where they may well have a resource to sell. In theory, they can only exercise that right if they curtail their CO2 production. But in practice, it's way more muddy than that, since CO2 allowances are not necessarily given out pro rata to CO2 signature. (Indeed, this is clear in your example - why do consumers get CO2 allowances, if they are not a CO2 source? If they are tied to one's CO2 emissions, how do we quantify?) This disconnect showed up in RGGI, where allowances were set as much by political pressures as by actual CO2 emissions, so that different New England states had very different economic impacts of CO2 allowance distribution, per ton. Broadly characterized, giving allowances away essentially shifts the risk of regulatory inefficiency onto the public and away from the source. If the rights are auctioned and the methodology is flawed, the owner of those auctioned rights may have over/under paid. But if the rights are given away and the methodology is flawed, society has over/under granted allowance rights. (This is seen in Europe where the failure to connect feed-in tariffs with Kyoto meant that increased renewable pentration = more rights to emit CO2 from coal plants, so no net change in CO2 from all those renewables.)Clearly, the universe of optionality is not limited to auction v. allocation, and I agree with you that there is a richness to the conversation that we ought to be considering rather than categorically taking one side or the other. That said, it's not accurate to presume that an allowance or auction will have the same effect on CO2 pricing - and hence economic incentive to reduce CO2 emissions for anyone who wasn't fortunate enough to get an allowance early on.
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Chris@CarrotsandSticks Posted 10:48 am
16 Jun 2009
Robert Stavins - one of those "Harvard economists." He not only makes
the whole thing slightly easier to grasp, but verifies Dave's analysis
tooStavins post was highly convoluted, even adjusting his numbers in response to the first comment.It's terrible politics, and at best debatable policy.Also they're mandating clean technology research which would likely be necessary to survive a cap and trade. That's a windfall. These companies have contributed to this problem for decades all the time advocating delaying action and spreading misinformation. The bearing the cost of clean technology research is the very least they can do.-Chriswww.carrotsandsticks.org
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enviroperk Posted 12:29 pm
16 Jun 2009
I continue to believe an across the board tax based on actual emitted tons of CO2 will be most effective. Will it be passed on? Does it negatively "impact" the poor, the public and others?
Yep. So will global warming.

A tax per ton simply prices that energy correctly on a present-value basis. The price will include future costs of global warning remediation. Much like a tax-fine on polluting sources in the past began to reflect the cost of massive clean-up efforts ala Superfund.

A tax per ton is an automatic subsidy for non-co2 energy sources and rewards all types of possible CO2 reductions with minimal political manipulation potential from our most honorable politicians.

The "cap" maneuvering is simply politicians catering the their "resource base", whoever that may be. It will do little good to reduce Co2 emissions.

Direct and clear financial disincentive to emit co2 will be most fair and effective.
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Sean Casten Posted 12:50 pm
16 Jun 2009
Enviroperk,That's not quite right, although it's a ubiquitous assumption. Specifically, when you say that:"A tax per ton is an automatic subsidy for non-co2 energy sources"You're implicitly assuming that a stick imposed on one's competition is the same as a carrot. That's not true, as is clear from a half a second's thought. Does BP get to charge more for gasoline today on account of the $507M fine to Exxon for the Valdez? Is your house suddenly worth more if your neighbor is fined for violating a zoning ordinance? Would you find it easier to justify an investment in a solar panel for your roof on account of the local coal plant getting hit with a $25/ton tax for their CO2 emissions?Clearly, the answer to all those questions is no. Companies and individuals who have to pay fines/taxes/fees may or may not raise their prices as a result. If they don't, they may or may not see their profit margins fall below the levels of their competition. In all cases, the worldview of their "better" competitors doesn't really change. In other words, it isn't a subsidy for the low-CO2 folks, except in the very very long term. Which is time we don't have.That's not a disparagement of carbon taxes per se, as the flaw is ubiquitous in every CO2 policy proposal I'm aware of that is all stick, no carrot. It's a good way to slow the economy down - but it's not at all clear that it's a good way to lower CO2 emissions - and certainly not a way to do it cost-effectively.
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enviroperk Posted 3:58 pm
16 Jun 2009
Probably a more comparable analogy than you offer would be trade tariffs. Imported cane sugar being tariffed certainly does spur domestic production. Even of beets for sugar.
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Sean Casten Posted 4:28 pm
16 Jun 2009
EP,I'm not suggesting that it is impossible for fees to one's competition to provide you with economic advantage - simply that it is not guaranteed. In the case of sugar, we have massive tariffs in place which are too large to be borne solely by producer's shareholders. Moreover, those tariffs were developed primarily to enhance the economics of domestic producers (Florida sugar lobby, etc.) So yeah - if the tariff is big enough, and if it is designed with the primary objective to enhance the competitive position of a specific sector, it can work as in the sugar example. And lead to massive unintended consequences (see: High fructose corn syrup). But that doesn't mean that CO2 will work the same way, nor even that it's being set out with the intent of working the same way.(Indeed, there is an ongoing policy debate going on as to whether coal companies in regulated states should be allowed to pass CO2 costs along in rates or have shareholders bear those costs, for the purposes of state rate making processes. That's a reasonable policy argument, but note that it implicitly means that the competition will not have any economic advantage with respect to pricing if coal-company customers see no increase in power costs.) Bottom line is that there is still a simple, two-part logical test to determine whether (and to what degree) CO2-release sticks will translate into CO2-reduction carrots:1. Are the costs of compliance borne by CO2-releasers customers or shareholders?2. If the answer to (1) is anything less than 100% on customers, will the resulting reduction in profit margins make the enterprise more or less attractive to investors than competiting zero/low carbon alternatives?Anything short of 100% customers in response to 1 means that the carrot is smaller than the stick. And if the answer to 2 is no, then it's done nothing to change the investment thesis for the clean stuff.Is that guaranteed? No. But the key point is this: if you want to give a carrot to CO2 reduction, make the carrot implicit. But don't presume that sticks are carrots.
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ngapsis Posted 6:58 pm
16 Jun 2009
David,I think it's good that you are exposing this myth of the 85%; its repetition takes away from the credibility of environmental groups and outlets doing good work. If you look at the PDF of the allocations, you can see why it's confusing. It says, "15% of allowances will be auctioned each year and the proceeds of these allowances will be distributed to low- and moderate-income families to protect them from other energy cost increases." It's easy to jump to the conclusion that that only 15% of allowances are being auctioned off in total. Thanks for clearing that up.But i think you miss the point, which is, this bill still sucks. Let's go back to the PDF. 35% of allowances are to be given to the electricity sector; 9% to natural gas; oil refiners receive 2% starting in 2014. Most importantly, as stated in the 1st paragraph, "these allowances will be distributed according to a formula recommended by the utility industry…" Hmmm. Still sounds like a pretty good amount of pandering is going on here. Using Nat Keohane's numbers as you have above, 362 billion dollars given away to industry, along with the increase of the price of their services due to the carbn capping itself, is going to generate windfall profits for these companies. And you know that these utilities are going to set the price of their commodities at what the market will bear, not what is fair for the consumers.Have they ever done anything else? This is exactly what happened in the Euro Zone when they instituted cap-and-allocate in 2005. If the bill really was protecting consumers, it would offer up a lot more than the revenue generated by auctioning a meager 15% of allowances. Add this to the weak target level of 17% below 2005 (didn't the IPCC state that we need to be at 25% below 1990 levels to stave off catastrophic temp rises?); the LDC-to-consumer stuff (i'll trust Stavis on this one, but when he says " the allocation of allowances affects neither the environmental
performance of the cap-and-trade system nor its aggregate social cost…" he definitely didn't take into account the 2 billion offsets which prevent a true move to lower carbon emissions OR the weak target level); the very limited investment in clean and renewable tech and TRAINING for godsakes; the large giveaways to CCS; and we have a bill that is straight up lacking. I agree this is a start. But now is not the time to be saying, "its not THAT bad"; now is the time to be pushing for a BETTER bill. Grist seems to be one of the only "environmental news" sites that was willing to give the bill a B+ ( http://www.grist.org/article/2009-03-31-waxman-markey-bill-gets-a-b ) rather than effuse praise all over it (ahem…sierra club ), so stick to your guns, tell people to get involved and push for a better bill. And of course, to not use myths to do the pushing.
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enviroperk Posted 7:14 pm
16 Jun 2009
I do not disagree with your statements. However, I believe that a mechanism that prices CO2 emissions at their real cost ( that is the future cost of the environmental effects or the cost to remediation those effects ) will allow the users to make more intelligent decisions.For example: there is really no reason to cushion low income families or countries from the real cost of CO2 emissions, as they will certainly soon bear the cost in the future anyway. Using this crisis to re-distrubute wealth muddies the issue beyond the understanding average consumer of the fruits of this bad practice even further.Capping emissions at the levels that are already causing problematic climate change is hardly worthy of being called a "solution" either."Carrot" ? No. I believe that financial pain is a behaviour-changer. Pessimistic ? Maybe I am. But it will work. There is no painless solution at this stage.
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Sean Casten Posted 7:28 pm
16 Jun 2009
EP,The issue that is too often overlooked is that the goal of CO2 policy is not to instill pain - it is to lower CO2. Which in turn requires major investments in clean energy infrastructure. Which in turn means that there must be some incentive to make those investments. That's why we need carrots - not because favored industries need gifts, but because if we're going to trigger the kind of massive reinvestment that we need to shift away from inefficient fossil use to efficiency & renewables, there has to be something in it for investors in those technologies.That's not a pessimistic or optimistic viewpoint, but simply an observation on human behavior. Give an incentive and people will respond. But don't presume that penalties equal incentives. Prison may deter murder, but it doesn't encourage altruism. So too with CO2 policy, although you'd never know it from the current status of the debate.
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enviroperk Posted 8:22 pm
16 Jun 2009
Sean,I think we only differ on definitions of carrots and sticks. My question to you is in the form of an example:To fund CO2 reduction-type investments, we are going to raise taxes. However, if you install solar panels, you will recieve a substantial tax credit.Is the government effort above, a carrot or a stick? Or ..? As an off-topic side note: I moved from engineering to sales in a company based on the simple concept a brilliant salesperson selling the products I engineered making 100 times my income showed me :"Contrary to logic, the company that buys your product is NOT the one I show will INCREASE their profits most by having it, it is the one that has big problems that you solve with it, the pain reduction motivation is greater than the ( lets say altruistic ) motivation. That is just how most people and companies are wired"Maybe, understanding the sometimes dark side of human behavior is the thing we need to understand to make this work.Dare I get very un P.C. and say that sticks work better than carrots in the real world? Now you can justifiably label me "pessimistic" with my full cooperation.
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Sean Casten Posted 6:14 am
17 Jun 2009
EP,Good point. We certainly have plenty of carrots for clean energy. The problem is that the carrots are not tied to CO2 explicitly, and therefore send wildly inappropriate signals. Take your solar panel example. We give them a 30% ITC, plus RECs. Let's say a 15 year life for the solar panel at $6000/kW installed cost. So the ITC is worth $2000/kW, or 2000/15 = $133/kW/year. The panel will have a capacity factor of something like 20%, so each installed kW will generate 20% x 8760 = 1752 kWh/year, and the $133/kW/year is therefore worth 8 cents/kWh. Tack on another 2 cents or so for the REC and the panel is getting 10 cents/kWh.Depending on where you are in the country, your actual displacement of CO2 from displaced central generation will vary (see EPA estimates here), but average about 0.65 tons of CO2/MWh. Thus, the $0.10/kWh paid to the solar panel (=$100/MWh) is a carbon "carrot" of $100/0.65 = $153.68/ton. By any measure, that is a massive carrot. And to be sure, if we paid everyone who reduced CO2 $153/ton of CO2 reduction, we'd see a huge shift in behavior. But we don't. We pay it to solar PV panels, based on non-CO2 metrics such that we skew capital investments towards that particular solution, but really don't go after meaningful reductions in lower cost CO2 reduction paths. That's the point. Not that we don't have carrots per se, but that we don't have carrots associated with CO2 reduction. Maybe we'll pass regulation that has sticks, but we won't change behavior until we also get the carrots in place.Re: your sales point. I agree partially. Read Strategic Selling if you haven't already - does a great job of explaining many things, but has a particularly insightful section to your point about the different ways people buy. Some are indeed motivated by fear, but others are motivated by gain. (For example: though they no doubt regret it now, when Cerebrus bought Chrysler, it wasn't out of fear. Nor when I bought my iPod.) This isn't to disagree with your observation - just that in my experience, it's not a universal truth. Sticks are motivators for some, Carrots are motivators for others... but neither are sufficient without the other.
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