Today in Greenwire, Darren Samuelsohn rightly notes that the big -- and by big we're talking multi-billions of dollars -- question around a cap-and-trade system is how the credits are initially allocated. Do you give more to utilities with lots of coal plants, because they need help transitioning to a low-carbon future? Do you give more to utilities with gas and hydro, to reward their low-carbon ways? Do you auction them all? Some mix? You can be sure lots of utility lobbyists are rapidly becoming experts on the subject.
You need a subscription to read the article, so here's a good chunk -- a nice little primer on how various bills handle credit allocation:
Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) coauthored a bill that has EPA making the most critical decisions, with a qualifier that any allowance allocations would be geared toward people and companies most affected by global warming and its policies. Sen. John Kerry (D-Mass.) introduced his own legislation that caps CO2 but puts the details in the hands of the president and EPA.
Sponsors of other legislation are proposing far more specific allocation methods.
Sen. Lamar Alexander (R-Tenn.), for example, mirrors the 1990 Clean Air Act Amendments in his bill that sets emission caps just for power plants -- the source of about one third of U.S. greenhouse gas pollution. The Alexander bill gives about 75 percent of the pollution credits away for free to utilities based on their historic pollution levels -- a method favoring the biggest and oldest of the coal-fired power plants.
A bill by Sen. Tom Carper (D-Del.), on the other hand, would give away about 85 percent of the credits to power plants for free based on their energy use. This system, known as an output-based approach, rewards gas companies, nuclear power plants and "clean coal" plants that run more efficiently and produce fewer tons of CO2.
Both the Alexander and Carper plans also phase out the free allocations after about 20 years and turn the credit distribution over entirely to an auction with revenue geared toward technology development and adaptation.
Hybrid approaches also are in play for bills covering the entire U.S. economy, including proposals from Sens. Joe Lieberman (I-Conn.) and John McCain (R-Ariz.), and most recently from Sen. Jeff Bingaman (D-N.M.).
Under Lieberman-McCain, EPA gets to pick how many credits to give away for free and how much to auction. Through the Bingaman bill, about half of the credits go for free to utilities based on historic emission levels. Both the Lieberman-McCain bill and the Bingaman approach gives auction revenue to climate-related adaptation, technology and agriculture efforts.
To date, congressional leaders have not signed off on any idea, so industries have launched a lobbying blitz aimed at designing a program that best suits them. Bingaman told state electric utility regulators in New York yesterday that he was open to changing his allocation approach.
Some of the heaviest lifting on the issue is expected to fall on Lieberman and Sen. John Warner (R-Va.), members of the Senate Environment and Public Works Committee who have vowed to produce a compromise bill from among many different proposals. Lieberman has said he would have a bill ready for introduction by the end of the month.
"They have a big pair of scissors out and they're ready to cut and paste," said Bob Baugh, director of the Industrial Union Council at the 9-million member AFL-CIO. "And that's not me talking." Baugh, a supporter of the Bingaman approach, said he met last week with staff to Lieberman and Warner.
John McCain’s troubles are the world’s troubles
George Voinovich (R-Ohio) [UPDATED]
Al Franken (D-Minn.)
Comments
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Sean Casten Posted 1:05 pm
17 Jul 2007
In actual practice, it can be even worse because it is so politically tempting to overallocate, thus swamping the market with credits (and sticking that excess in exactly the wrong places).
Really dumb policy - but really tempting politics. It is an issue that was grossly flawed in Kyoto, where many have noted that the biggest winner from Kyoto was coal plants that suddenly found themselves sitting on an asset. Not what carbon policy intended. This is a case where the environmental community should be pushing much harder to get those devilish details right. Every cap & trade proposal out there includes an allocation provision. And therefore, everyone of them includes a provision that will, by design, create a big gift to those lucky coal plants. All in the name of carbon reduction.
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Brendan Patrick Posted 9:34 pm
17 Jul 2007
Well Cap & Share, which was modelled after Contraction and Convergence, does NOT allocate credits to companies OR to government. It allocates credits directly to the people and gets the fossil fuel producers and importers (importers until the system goes worldwide) to buy the credits from the citizens - through the banks. Citizen takes emissions entitlement to bank. Fossil Fuel company cycles to bank to purchase emissions entitlement. It's simple, transparent and effective.
www dot cap and share dot org
http://www.capandshare.org
Still waiting for ANYONE from Grist to write about this new proposal.
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Sean Casten Posted 9:39 pm
17 Jul 2007
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Brendan Patrick Posted 10:24 pm
17 Jul 2007
of all the ideas out there, which do you think would be the best?
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wiscidea Posted 11:47 pm
17 Jul 2007
From what I understand, the Feds auction of the opportunity to cut timber or extract minerals from Federal land. Correct? If an environmental organization comes along and actually posts the highest bid, presumably so they can leave the forests alone and the minerals in the ground, the Feds won't accept it! Is this correct? Only corporations or other organizations interested in traditional economic development are allowed access to natural resources. You cannot buy them to preserve them.
Is the same thing going to happen in the carbon credit market? Could average folk pool their resources, buy the credits, and just sit on them or even eliminate them from circulation? Or are the credits going to go only to corporations willing to actually emit CO2 for the sake of "economic development"?
If I could go to Whole Foods today and buy a $20 carbon credit and not use it, that would be a REAL offset and perhaps worth supporting!
Forward!
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Sean Casten Posted 12:09 am
18 Jul 2007
Great question, and too big to answer on a blog. Generally speaking though:
Auctions are preferable to allocations, because they force all emitters to pay the same amount.
Full participation is preferable to partial participation, but rare because of regulatory complexity. Most rules start with electric emissions because they're the easiest to identify and regulate, but they're only 1/3rd of the total emissions. Leaving out heat (boilers, furnaces, etc.) and transportation leaves 2/3rds of the economy exempt. In theory, you can get these other ways (CAFE, etc.) but economic dislocation occurs when a ton reduced in one venue is not worth the same as a ton reduced in another. The simple test here is "a ton is a ton is a ton". To prevent leakage to low cost sources, we need to make sure that all carbon sources face the same costs to pollute. And it's really hard to implement this piece.
The point of regulation should be closest to the point where action can be taken. This is not precisely the same as the point where the release takes place. For example, there is much more that can be done to reduce electricity consumption than there is to reduce fuel combustion in remote central plants (more efficient appliances, opportunity fuels, etc.). Models like RGGI that regulate only at the central plant provide no easy way for these reductions to be paid. Models that regulate at the load like California's are better.
All models should preferentially deploy resources to the lowest cost carbon reduction approaches since all wallets are finite. Any model that cherry picks winners inevitably limits total carbon reduction.
Much more detail on each of those points, obviously, but those are pretty good guiding principles to test whether a regulatory model will lead to rapid carbon reduction AND minimal economic disruption. (The latter absolutely critical for political uptake, and far too often overlooked. And please note that I am not for a second suggesting that there ought be some tradeoff betweeen these two objectives. You can have your cake and eat it.)
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wiscidea Posted 12:12 am
18 Jul 2007
Figure out how much carbon dioxide the human species can safely add to the atmosphere each year.
Divide this number by the number of people on the planet.
Give each person their share of carbon credits... or, if it is easier, each municipality their share based on the number of inhabitants.
Industries wishing to emit CO2 must purchase the credits via the free market. Individuals or municipalities can hold onto their credits or sell them to the highest bidder.
So... fair distribution of the resource to everyone. Let the market take it from there.
The credits would, of course, have to be distributed several years before industries are required to follow the new rules so there is time for them to either purchase the number they need or reduce their CO2 emissions.
What am I missing? Seem pretty fair and simple to implement. Just have to decide if the credits should go to individuals or communities. If communities, how large?
Forward!
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JMG Posted 1:42 am
18 Jul 2007
Timber sales are hardly competitive auctions; typically they have few bidders, and the US Forest Service ("Serving up forests since 1900") even has REJECTED bids from groups determined to buy the cutting rights but not exercise them. So, no, timber is not auctioned. It's basically a monopsony situation (rule by single buyer, rather than rule by a single supplier, which is a monopoly).
And there is NO AUCTION AT ALL for mineral patents--you pay the $2.50/acre set by the 1872 Mining Act and NOT RAISED SINCE and you can mine yourself some gold (cynanide heap leach mining, anyone?) or whatever ...
And then you can use your profits to buy politicians who will ensure that these goodies are never touched and who will reliably rail against WELFARE.
Save the world: Reduce greenhouse gas emissions 5% annually.
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ac5p Posted 1:56 am
18 Jul 2007
Anything international is hard, unfortunately.
Do you picture getting bids on your phone from various companies and then deciding who to sell to?
Also if your local coal burning power plant can't afford the credits, will the government just end up giving them a loan to keep the lights on?
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wiscidea Posted 2:27 am
18 Jul 2007
I realize I simplified the process quite a bit. I'm not completely delusional. In fact, my point is that once the government is involved in auctioning something off, it will not necessarily be a fair process. No free market. The auctions of timber or sale of minerals does not permit everyone equal access. It depends on who you know and how much you are willing to pay them -- not how much you are willing to pay for the resources.
The same will happen with carbon credits. Those not willing to reduce carbon emissions will find a way to avoid paying for the right to emit carbon. It will depend on who you know and how much you are willing to pay THEM.
Forward!
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Sean Casten Posted 4:53 am
18 Jul 2007
Broadband auctions are actually a close model of how carbon auctions could work, where (I believe, but am not certain) that they did auction off band width that was previously being used as a public good rather than simply allocating to those who were able to pitch their tents first.
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wiscidea Posted 5:03 am
18 Jul 2007
Forward!
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Sean Casten Posted 5:43 am
18 Jul 2007
So then the question is can you buy a credit and lock it up. Frankly, I don't see why not, but I wouldn't delude yourself into thinking that therefore the emissions disappear. You simply limit the supply of emissions credits and therefore - to the extent you're buying up enough to affect price - driving up the cost of pollution. In the short-run, the coal plant still has to emit, still has to buy the right to emit and therefore you are simply increasing their operating costs. In the long run, perhaps you withhold enough to drive them out of business.
But I would heavily caution against this thought process. Once you satisfy yourself that you are morally entitled to such behavior (assuming you have the money, of course), it is a slippery slope to self appointed godhood. What else might you withhold in the interests of driving up the price. Hell, Enron withheld power in California to drive up spot prices and make more money for their shareholders. Are you more moral than them? What if the coal plant that's forced to shut down forces a hospital to stop providing critical services to their patients? Still moral?
I don't mean to rant, but be really careful with where you go.
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wiscidea Posted 6:21 am
18 Jul 2007
Corporation regular control resources, including patents, and sitting on them to drive up the cost of the resource or suppress competing technology. Here is an opportunity for individuals to voluntarily, using their own money, purchase credits and essentially remove CO2 from the atmosphere. It is up to industry to decide how to continue prroviding their product or service.
I'm not suggesting I'm more moral, wise, or special. But neither is big business. The goal is to limit CO2 emissions. And guess I think it should be up to each of us to decide how to limit our share of the problem. Give my credits and I'll decide what to do with them.
Forward!
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Gar Lipow Posted 8:47 am
18 Jul 2007
With allocation this has to be true but not with cap and auction (such as the Sky Trust) - especially if permits are required as far upstream as possible.
If permits have to be bought by extractors or importers of fossil fuel -- this is a huge percentage of emissions permitted in a very tiny portion of the economy. Everyone who uses the fuels (directly as with power companies or indirectly as with manufacturers, transport, consumers) buys their permits indirectly. Even electric companies buy permits indirectly - included with the fossil fuels they buy. (If an electric company or other fuel user manages to sequestor some of the carbon produced while burning the fuel - they get a refund, provided they find a really safe place to store it. (Tough but not impossible.) Mind you it is not just fossil fuels. F5 gases (such as SF6) would also require permits. Agriculture and forestry, to the extent they are not managed in at least a carbon neutral manner would as well. Air craft would have to buy additional permits for the warming effect of vapor trails over and above what their fuel use would normally create. The only part of this that would be really hard to measure and sell permits for is agriculture and forestry. It is possible that some sort of regulation or subsidy that is not dependent on knowing exact numbers would be preferable. Basically the key here is you either require or subsidize or both net increases rather than decrease in carbon, and net building rather than erosion of soil.
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wiscidea Posted 8:58 am
18 Jul 2007
This would help a lot. Isn't agriculture's contribution to global warming gases around 30 percent?
Forward!
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Gar Lipow Posted 10:51 am
18 Jul 2007
However I'm suspicious of getting all this appropriately with permits or carbon tax. The emissions specifically from soil erosion, and from animal husbandry over and above those from already permitted inputs are fairly hard to measure - especially when you are trying to compare to results to what would have happened in a natural ecosystem that no longer exists.
Still you can argue having to buy some permits is more reasonable than not having to buying any. That is we know that for agriculture that does not preserve soil and biodiversity zero is definitely the wrong number.
But you can also argue that this is good case for a regulatory approach. Measure all you can, run-off, soil erosion, soil carbon (which is expensive to measure precisely). But also look at the inputs. Are you using some soil conservation method? Are you minimizing chemical inputs that will end up in run-off? Are you using biodiversity rather than mono-culture?
So you probably end up with a binary - allow/not allowed, or maybe rough permitting system - no permits required, few permits require, medium permits required, large number of permits required. (These being defined per acre for various regions.)
In either case -- a messy, imprecise process, which would reflect an industry where you have messy imprecise information.
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