America’s electric utilities (PDF) are waging a no-holds-barred campaign to get 40% of carbon emission permits allocated free to local distribution companies and merchant coal generators. They argue that free allocation will protect consumers better than auctions and cash back. Just give us free permits, they say, and we’ll pass through the savings to our customers.
Sounds appealing. But beware: this is not what happened in Europe. There, utilities got free permits and raised rates anyway, earning billions in windfall profits. See the study by the Energy Research Center of the Netherlands (PDF), which found that a significant part of the value of freely allocated pollution permits resulted in higher electricity prices for consumers and windfall profits for power producers.
And be aware that to get a different outcome in America, 50 state public utility commissions, which regulate over 3,000 local distribution companies, will have to perform with exceptional vigor. Don’t hold your breath.
Also recognize that, even if utilities do pass through the value of free permits by not raising electricity rates, that defeats the purpose of a pollution cap. The purpose of a pollution cap, let’s remember, is to send a price signal that spurs conservation and innovation throughout the economy. To send that signal, the cap must actually raise prices. Without higher prices, we just keep burning cheap, polluting coal.
And here’s another fact: electricity accounts for only about 25% of the average household’s carbon use—the rest comes from gasoline and the carbon embedded in a multitude of products. Giving free permits to utilities does nothing to protect families from price increases outside the electricity sector. Indeed, it may actually raise prices outside the electricity sector and simply shift the economic pain around. That’s because, as economist Dallas Burtraw recently told the House Ways and Means Committee, “The protection of one sector of the economy from changing prices means greater emission reductions must be achieved in other sectors. This raises the cost of using other fuels even further.”
A favorite utility argument is that cash rebates or tax credits don’t address the disproportionate hikes in electricity prices that consumers in coal-dependent states will face, an alleged inequity that only utility-based relief can remedy. But this claim is muted by the relatively even distribution of non-electric energy costs, and the likelihood that these costs will rise faster if electricity is shielded.
Moreover, there are better ways to address regional differences than by giving free permits to utilities. For example, transition assistance could be focused on coal-dependent states, or residents in such states could receive more cash back.
In short:
- Giving free permits to utilities prolongs the burning of coal and delays the deployment of clean alternatives. Along with so-called “carbon offsets,” it makes scientifically driven pre-2020 emission reductions unlikely.
- For purposes of both efficiency and fairness, the price of carbon should be uniform throughout the economy. We shouldn’t favor one sector—much less the dirtiest one—over others.
- If we want to protect consumers, the best way is to raise prices first, then return the higher prices to consumers directly.
What’s most disturbing about the utilities’ campaign isn’t that they’re waging it—that’s what you’d expect them to do—but that the opposition has been so feeble. Barack Obama during the presidential campaign came out for auctioning 100% of pollution permits, and recently his budget director, Peter Orszag, declared, “If you don’t auction the permits it would represent the largest corporate welfare program that has ever been enacted in the history of the United States.” Obama’s budget calls for auctioning 100% of permits and returning most of the revenue to consumers through tax credits. But now the White House seems to be waffling on auctions, and the silence on Capitol Hill has been stunning.
So we may be heading for yet another giveaway of public wealth to private corporations—first banks, then auto companies, now utilities. The irony is that utilities aren’t failing and won’t be hurt by a carbon cap with auctions—they’ll surely pass permit costs through to customers. What we’re seeing here is simply a well-organized interest group trying to draw cash from the public till, and almost no one in Washington minding the store.
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Comments
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Ken Ward Posted 7:43 am
09 Apr 2009
53 organizations issued the "National Call to Action on Global Warming" just one month ago, attempting to cut a political fire break that would stop the wet noodle agenda of the EDF/NRDC/GE/Dow Chemical cartel (USCAP), tossing out the precautionary principle and endorsing a ridiculous 450 ppm standard in a desperate move to appear moderate. Well that didn't work. The Markey/Waxman draft released last week explicitly credits the US Climate Action Partnership, but what did the 53 organizations do? They collapsed. “An incredibly powerful and hopeful sign” (Sierra Club); “comprehensive” and “key first step” (1 Sky), "a historic opportunity to unleash clean energy" (State Environment). Why not just join USCAP?
The global energy infrastructure cannot be fundamentally and quickly overhauled without some measure of dislocation, disruption and pain. With "billions and billions" at stake (to misquote Carl Sagan), the largest treasure ever seen, this will be the penultimate struggle between the two natures of humankind. The only basis on which the forces of greed, sloth, pride and gluttony might be overcome is self-preservation. We must overturn the present order of things to save our asses and no other argument is worth a tinker's damn.Peter Barnes' cap & dividend proposal is a hugely important contribution to strengthening our weak position, in my view, for two reasons. First, for considering the atmosphere as one aspect of the public commons, rather than a free resource for pollution, which is what the allocation/auction/dividend debate is about, and second, for proposing to cap carbon "where it enters the economy, not where it enters the atmosphere." If and when a serious drive is undertaken to avert cataclysm, you can bet that the action will be at the refineries and mine heads, not smokestacks.
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sindark Posted 1:03 pm
09 Apr 2009
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Ken Johnson Posted 3:06 pm
09 Apr 2009
To illustrate the benefit of output-based allocation, suppose that you have 10 power plants, all with the same generation output, with 9 plants being coal-fired and one using renewable sources. If the auction cost amounts to 1 cent/kWhr for the coal plants, it will create a 1 cent/kWhr marginal incentive to substitute renewables for coal. With output-based allocation, the coal plants would get a 0.9 cent/kWhr refund, reducing their net costs to 0.1 cent/kWhr, while the renewable plant would get a 0.9 cent/kWhr subsidy. Regulatory costs for the coal plants are reduced by a factor of 10 without reducing the 1 cent/kWhr cost differential between coal and renewables. Furthermore, any attempt to pass regulatory costs on to consumers would make renewables even more cost-competitive and would just hasten the demise of coal power.
A primary limitation of output-based allocation is that with our current generation mix, most of the net revenue transfer would go to legacy renewables (mainly large hydro and nuclear) and to natural gas, not to new renewable sources that are most in need of investment capital. However, grandfathering could be employed to limit the transfer of "windfall profits" to legacy renewables, making it politically feasible to adequately subsidize new renewables expansion. For example, the allocation between new renewables and all other energy sources could be output-based, while the allocation between other sources is based on a grandfathering formula (which would gradually phase out).
Regarding disproportionate impacts on coal-dependent states, such inequities can be avoided by making the allocation formula revenue-neutral within those states. A system that creates large revenue transfers from the east coast to California would not make good policy sense unless you are trying to induce California energy utilities to supply east-coast service districts, or are trying to induce everyone back east to move to California.
Bottom line, I think the quickest and most politically expedient way to achieve carbon neutrality at minimum cost to consumers is to invest revenue from GHG regulation in expansion of renewable energy sources, and not squander it on free handouts (aka "tax shifting").
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