When Kerry and Boxer introduced their clean energy bill earlier this month, it contained a huge gap: it said almost nothing about the allocation of pollution allowances under the cap-and-tr… er, pollution reduction and investment program. The reason for the omission is simple: Doling out what is effectively a huge new pot of money is a subject of considerable interest to many senators, and it’s expected to help bring some recalcitrant Democrats on board. The Energy & Natural Resources Committee, under Jeff Bingaman, is holding a hearing on the subject today.
The politics around allowance allocation are interesting. The key fact to understand is that the distribution of allowances doesn’t change the overall cost or environmental effectiveness of the program (at least according to mainstream economics). Here’s how Harvard economics prof. Robert Stavins puts it:
the allocation of allowances—whether the allowances are auctioned or given out freely, and how they are freely allocated—has no impact on the equilibrium distribution of allowances (after trading), and therefore no impact on the allocation of emissions (or emissions abatement), the total magnitude of emissions, or the aggregate social costs.
Since allowance distribution doesn’t affect the overall costs of the program, you won’t get deficit hawks nagging you about it. Since it doesn’t affect the cap on carbon, you won’t get environmentalists nagging you about it. (I’ve had numerous people at bigtime green groups tell me straight-up that they don’t care how allocation goes as long as the cap is preserved.) It’s basically a special interest free-for-all, and econ-minded enviros like Stavins see that as a feature, not a bug—it is, he says, a “useful, important, and fundamentally benign mechanism.” Having free money to hand out means that “ordinary political pressures need not get in the way of developing and implementing a scientifically sound, economically rational, and politically pragmatic policy.” Translation: you can buy off everybody you need and still get the CO2 reductions you want, all with the CBO’s official stamp of deficit neutrality.
Your honor, I object! Here’s the thing about handing out money: it may not affect long-term macroeconomic outcomes, but it does leave its recipients with more money. It may not affect how much we collectively pay, but it does affect who pays, particularly in the short-term. Resource distribution involves fundamental questions of economic fairness. Are progressive greens really happy to dismiss those issues as insignificant diversions? What would that signal to their potential allies in labor, social justice, religious, and anti-poverty groups? Distributional issues may seem like an addendum to affluent, highly educated white folks in universities, think tanks, and green NGOs, but they are central to the economic fate of today’s voters—not to mention the electoral fate of their representatives in Congress.
Happily, the politics of pollution permits are propitiously populist (yeah, I said it). Here’s why: pollution allowances handed out for free to private businesses and industries distort the carbon price signal and lead to consumers paying more than they otherwise would. In other words, many of the allocation provisions greens like least—the handouts to merchant coal generators, the LDC allocations—hurt the middle class.
This oughtta-be-legendary graph from CBO testimony tells the tale:
On the top left is a cap-and-dividend program, where all allowances are auctioned and the revenue is returned to taxpayers via a lump-sum rebate. On the top right is 100% free allocations to polluters. As you can see, the former policy helps low and middle income brackets; the latter almost exclusively benefits the rich. The bottom is the overall effect on GDP, which is the same in either instance.
The case is also made in a paper from the Center on Budget and Policy Priorities called, appropriately enough, “Changing Climate Bill To Give More Allowances To Electric Utilities Would Likely Hurt, Not Help, Consumers.” One of the co-authors, Chad Stone, will be testifying in front of Bingaman’s committee today.
Another economist who’s done good work in this area is Dallas Burtraw of Resources for the Future, who testified to Congress earlier this year on the issue: “The increase in costs associated with the inefficient allocation to local distribution companies falls hardest on the middle range of household incomes.” His colleague Karen Palmer, another specialist in the area, is also testifying today.
The other witnesses are Tufts economist Gilbert Metcalf and MIT’s Denny Ellerman, both fans of auctioning over freely allocating permits. It’ll be interesting to see if the hearing turns into an occasion to bash the allocation scheme worked out in Waxman-Markey—which could be prelude to ENR attempting to rewrite it.
Regardless, the political take-home message is: Corporate groups like the Edison Electric Institute, which are lobbying for more free allowances, are lobbying against, not for, the interests of most taxpayers in conservative Dem states. Yet Conservative Dem senators worried about the effect of the legislation on taxpayers in their states are often the very ones lobbying for more corporate handouts. If they can be made to see that ... well, it might not change anything. They get plenty of campaign contributions from dirty energy industries. But at least the fight should be joined, and the real nature of the dispute made clear: Free allowances to polluters do not contain costs for consumers, they increase them. They’re pure corporate handouts. Fighting to insure that the poor and middle class don’t get screwed is the sine qua non of progressivism. Greens neglect this issue at their peril.
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How will this crucial piece of policy architecture get worked out? It’s not quite clear yet. Boxer says the manager’s amendment of her bill is ready to go and will include a section on allowance allocations. That bill will be debated in Environment & Public Works Committee hearings next week, and likely marked up in early November. Finance chair Max Baucus has said that his committee will do a mark-up as well (they held a hearing on allowance allocation in August), but lately he’s backed off a little—it’s a toss-up whether he’ll get involved. And then there’s the Energy & Natural Resources Committee, under Jeff Bingaman, which is holding a hearing today on “the costs and benefits for energy consumers and energy prices associated with the allocation of greenhouse gas emission allowances.” That may signal that ENR wants to throw its hat in the ring as well.
Ultimately Harry Reid is going to have to pull all the bills together into something that can survive floor debate. That’ll be a tough job, and there will be considerable pressure on him to bribe the holdouts with allowances. It would be nice if progressives starting putting some pressure on him in the other direction, so he doesn’t feel entirely free to give away the store.
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Comments
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Peter Wood Posted 2:40 am
21 Oct 2009
Firstly, if allowances are added to the 'Market Stability Reserve', emissions will be reduced if the carbon price is low.
Secondly, if allowances are used to fund emission reductions for sectors that are not covered by the scheme, such as land use and agriculture, then there will be additional reductions. The alternative option, domestic offsets, does not have this advantage and adds risks to the credibility of the scheme if they are not well regulated.
But global warming is a global problem, so there is a third way that allocations can be used that it important: they can be used to fund adaptation in developing countries.
All three of the above forms of allocation should be increased, compared to the Waxman-Markey bill.
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Ken Johnson Posted 9:18 am
21 Oct 2009
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Chris Pratt Posted 7:07 am
21 Oct 2009
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setb Posted 7:17 am
21 Oct 2009
Don't they get that they need to run again next year? Didn't they learn that the corporate donations can be dwarfed by small donations from the public? Why aren't they following the FDR model?
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Jesse Jenkins Posted 9:55 am
21 Oct 2009
I've also read you rail in the past at the shortsightedness and idiocy of "mainstream economics" and call for significant investments in the establishment of a clean energy infrastructure and new clean technologies.
You should know (you've said as much before) that a price signal from a carbon cap and trade system alone will not drive the deep reductions in emissions and rapid transition to a clean energy system we need. Given that fact, the use of the allowances to further additional efforts that spur those emissions cuts or drive that transition to clean energy clearly influences the overall cost and environmental effectiveness of the program.
If we were maxing out investments in clean energy technology and infrastructure, forestry preservation, global clean tech transfer etc. separately from the cap and trade title, your statement may be true. But we're not and you know that. Besides allowance allocations, where are we going to get the tens of billions annually we need to invest in a clean energy economy here at home and the tens of billions more we should be contributing to clean global development and forestry preservation abroad? Tell me that, and I'll be fine with your parroting "mainstream economics" talking points that the allocation of allowances doesn't matter. Until then, I have to assume we both know that's bunk.
All the best,
Jesse Jenkins
p.s. none of that is to undercut your very valid points about allowance allocations clearly involving the redistribution of wealth, and therefore having clear social justice ramifications. In agreement there.
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David Roberts Posted 10:21 am
21 Oct 2009
I DON'T believe in the ivory tower notion that allowance distribution doesn't effect overall cost or environmental effectiveness. I would like to see most of the investments we need drawn from outside the C&T program, but as you say, it's not happening, so I'd love to see more allowances go to investment, tech transfer, efficiency, and reductions in non-capped sectors.
I'm talking here about a narrow political fight: how to empower Senators who want to push back against efforts to have more allowances given for free to polluters (on the basis of cost concerns). This is a weapon in their arsenal: they can say, with the backing of Very Serious Economists, that more allowances to polluters means more money out of the pockets of the middle class.
They should be fighting for other, better uses of allowance value too (I've always seen dividends as a second-best option, but better second-best than first-worst). But on this point, they shouldn't allow concerns about cost be used as cover for further enriching polluters.
In other words, this post is about an instrumental argument.
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Jesse Jenkins Posted 10:33 am
21 Oct 2009
Thanks for the reply. I of course agree with you in all of that. I just get concerned when you and other writers repeat uncritically statements, like those of Stavins here, that retrench bogus assumptions only true, as you note, in ivory tower economic thought. I knew you didn't agree with that kind of thinking, which is why I pushed back.
We also shouldn't forget that every dollar of auction revenue re-invested in emissions-reducing clean energy technology is a dollar less we need to pay in direct compliance costs. It makes the carbon dollars due double duty, first as a price signal, and second as a direct investment in emissions abatement and clean energy, which lowers the overall CO2 price needed to do the same job. That in turn reduces the economic dislocations associated with higher energy prices and the wealth transfers associated with allowance value (which is now reduced since CO2 prices would be lower) which cause the economic and social justice issues you discuss above.
You could say then that there's a strong instrumental argument for much greater reinvestment of allowance revenues in clean energy: it reduces CO2 prices needed to accomplish the same climate and clean energy objectives; reduces increased energy prices that are the greatest concern for both industrial energy users and low-income folks; and, since we know carbon prices need some serious help to be effective, it should ultimately lead to a more rapid transition to a clean and prosperous energy economy.
So sure, dividends are better than money for frakin' merchant coal plants! But reinvestment in clean energy technology and infrastructure is by far the best use of allowance revenues, once direct protections for low-income Americans are ensured.
Jesse
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Green Energy Reporter Posted 10:56 am
21 Oct 2009
Interesting post and good food for thought.
I have posted a rebuttal here. http://www.greenenergyreporter.com/2009/10/are-emissions-allowances-in-cap-and-trade-bills-really-so-bad/
In short, I think you gloss over some key issues Dennny Ellerman raises in his analysis of the EU's cap and trade program. Specifically, I think his point that electricity generators have prior claims on the ability to emit is a strong one.
Thanks,
Matt, Greenenergyreporter.com
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David Roberts Posted 12:53 pm
21 Oct 2009
"It’s worth noting, however, that Stone approves of the allocations in Waxman-Markey. It’s reasonable to think the senate will mimic, if not outright copy, that model."
The Senate will probably mimic the House, but it's odd to say that Stone approves of W-M. He may think it's good enough, or the best political compromise possible, but the thrust of his paper and the rest of his work is clearly that the the goals of the LDC allocations would be better served by direct dividends.
Secondly, Ellerman's point is that giving allowances away makes a political deal possible. I don't deny that -- it's in my piece. But that's not to say that the number of free allowances can't be reduced, or efforts to increase them blocked. One way to do that would be to point out how it hurts the middle class!
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rsmith02 Posted 2:17 pm
21 Oct 2009
Prior use is a ridiculous assertion that emitters have a right to pollute. As they do not own the atmosphere they have no such right and are entitled to no recourse. In the northeastern US, under the Regional Greenhouse Gas Initiative, states have auctioned closed to 100% of permits and reinvested the revenue in efficiency (and renewables) programs for consumers. I don't see why RGGI isn't a more direct precedent for a federal cap and trade system than the EU ETS precedent.
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Ken Johnson Posted 2:44 pm
21 Oct 2009
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David Roberts Posted 2:38 pm
21 Oct 2009
I agree with rsmith02 that the prior use claim is absurd. Before Seattle implemented a littering fine, I could litter for free. Does that mean the city is obligated to pay me off when it wants to prevent littering?
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rsmith02 Posted 4:02 pm
21 Oct 2009
The price reflects uncertainty about the program's future as ACES and the senate bill would suspend it until 2017, and the fact that the RGGI cap is inflated, especially with the recent decline in both electricity demand and natural gas prices which have seriously reduced power plant CO2 emissions. The low price reflects a low demand for allowances.
At this point I think the best precedent from RGGI is the auction which has raised tens of millions of dollars that are now helping households and businesses cut their fossil fuel use.
Read more from a top EPA official here:
Hartford Courant, Former Connecticut DEP Chief Says State's Emission Auction Works
http://www.courant.com/news/connecticut/hc-mccarthy1015.artoct15,0,3297819.story
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Ken Johnson Posted 6:26 pm
21 Oct 2009
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Green Energy Reporter Posted 5:49 pm
22 Oct 2009
Great discussion (though it would be nice if you left a comment on Green Energy Reporter, too. Struggling blogger here folks!)
I have two responses.
First, I don't think prior use claims are ridiculous at all. If you're engaged in a valuable and recognized public enterprise like, say, generating power, it's reasonable that you would be compensated in some way if the government acts to limit your ability to continue doing so.
I don't think your littering analogy really obtains, since it's an act that has no societal value.
As Ellerman writes, "Nearly all societies grant considerable deference to prior use claims, in this case to entities that had been freely exercising the right to emit prior to the implementation of the policy."
Second, as Slavins writes today, and Joe Romm cites:
"There may be sound reasons for concern about the developing Senate bill, but the so-called “free allocation†should not be one of them. Indeed, this debate is unfortunately repeating the confusion which was prevalent in the press and the blogosphere about the allowance allocation in the Waxman-Markey legislation in the House of Representatives (H.R. 2454).
Rather than being a “massive corporate give-away†of 80% of the allowances to private industry — as it was frequently characterized — the H.R. 2454 allowance allocation would result in precisely the opposite, namely, about 80% of the value of allowances accruing to consumers, small business, and public purposes, and some 20% accruing to covered, private industry (a split which is roughly consistent with the recommendations from independent economic research).
Matt
Greenenergyreporter.com
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rsmith02 Posted 9:08 am
23 Oct 2009
On whether ACES got the auction right, 80% of the revenue returns to the public *only* if you believe that the LDC allocation was done right and the state public utilities commissions will define consumer benefit in a way that actually returns value to ratepayers. They could possibly dump it into pet utility projects rather than rebates, for example.
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rsmith02 Posted 10:17 am
22 Oct 2009
Not really. RGGI states went to 100% auction before the first auction took place so there was no clear price.
I think you're mistakenly thinking that auctioning allowances raises the cost to consumers. If you auctioned all allowances and rebated all the proceeds, consumers would gain or lose nothing (cap and dividend). If you invested it into not just rebates but also consumer energy efficiency (cap and invest), rates might be higher but total consumer energy costs would be lower and the CO2 price would be lower with less demand for permits.
The most expensive way to go for consumers is handing out permits for free as it transfers wealth from consumers to corporate shareholders. See the distributional charts above. So high allowance prices are actually a reason to auction permits if you care about consumers.
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