Giving utilities free allocations is a much maligned strategy to go by comments here. So I thought that when Bill Johnson — CEO, president and chairman of Progress Energy, “which serves 3.1 million customers in the Carolinas and Florida” — offered his reasonable-sounding defense in Energy Daily (subs. req’d), readers might be interested in hearing the other side. Seemed only fair since I so recently dissed Progress (see “What do you get when you buy a nuke? You get a lot of delays and rate increases”¦.“)
To the casual observer, it might seem logical to assume that coal-burning electric utilities would be opposed to regulating greenhouse gas emissions. But while we are often conveniently cast as the villains by some in the debate, Progress Energy and other coal-based electric utilities strongly support a federal cap-and-trade program to reduce carbon emissions.
We also believe strongly that to succeed, such a program must have clear objectives and achievable targets based on science and technology, and it must be affordable for customers.
In short, utilities support getting the biggest reductions at the least cost to consumers. And we believe that if federal policy changes are developed and implemented in the right way, the carbon-reduction targets that President Obama has laid out are potentially achievable.
Here’s the right way: Establish a cap-and-trade program, administered through state regulatory commissions, that allocates allowances to utilities based on historical emissions, and reduces allowances over time. This is a proven method that drives significant emission reductions and technological innovation, and ensures consumers get the benefit of all reductions and allowances.
In other words, all revenues generated by the program are used to fund carbon reductions. Regulators will ensure that only utilities in full compliance with reduction targets would be allowed to sell excess emission allowances, and that the proceeds of those trades benefit the customers, not the utility.
The Clean Air Act sulfur dioxide (acid rain) trading program from the 1990s is a prime example of how initial allowance allocation works to drive real emission reductions at the lowest cost to consumers. Under the acid rain program, Congress distributed 97 percent of the SO2 allowances, at no charge, to utilities. Utilities, with oversight from state regulators, are required to use the allocated allowances, and any gains from allowance trading, to mitigate price increases for consumers.
Allocation of allowances is supported by diverse groups and organizations, including the U.S. Climate Action Partnership, the Pew Center on Global Climate Change and the National Association of Regulatory Utility Commissioners, among many others.
Meanwhile, many environmentalists, as well as President Obama, propose to auction allowances to industry, particularly the power sector. Some have portrayed coal-based utilities as the bad guys, arguing that auctioning allowances will “force polluters to pay.” While this makes for a good bumper sticker, an auction will not reduce carbon emissions faster, and auction costs will go directly to the consumer.
Auctioning allowances would result in an $80 billion per year consumer tax on electricity that saddles Americans with significantly higher energy prices but produces no additional reduction in carbon emissions.
The last point is worth repeating””auctioning allowances does not result in any emission reductions. In fact, to the extent auctions increase the cost to the consumer, their imposition will actually impede utilities’ ability to develop a less carbon-intensive infrastructure.
The issue of climate change legislation is important and will transform the energy industry. As our nation moves forward with sweeping change, it is imperative that we do so with clear objectives based firmly on what’s achievable and affordable for consumers.
Even in this economy, we can achieve real climate change improvements and meet the president’s aggressive targets. But to do so, we must ensure that every dollar raised from our citizens to reduce greenhouse gas emissions goes to that purpose.
Previous in TP Climate Progress
Language Intelligence: Lessons on persuasion from Jesus, Shakespeare, Lincoln, and Lady Gaga
More promises of indirect effects of government giveaways to the rich which will “trickle down” to substantive reductions in climate change, according to people who will personally and directly profit from those giveaways.
Instead of giveaways, we should have takeaways. These guys have forfeited any moral right to continue to run their utilities, and we simply need to seize these power plants and forcibly convert them to carbon negative power plants, IMO.
We are out of time for giveaways to the rich, which will eventually bring substantive “trickle down” change, according to them.
Markets will generally find a way to innovate around government regulation, in search of personal profit.
We need to take personal profit out of the equation, for massive well established power plants, but leave it in place for the new innovators in alternative energies, in my opinion.
When can we expect Progress Energy to renounce its membership in Americans for Clean Coal Electricity group?
The clearest problem with the free allocation model is that it creates an incentive to defer investment to reduce carbon reductions. Companies under the cap would be silly to reduce their emissions now and create a lower, more expensive cap for themselves. Projects would be deferred and rolled out only as needed to meet caps as they ratchet down.
[JR: Not really true. Companies have the same exact incentive to invest in strategies that reduce emissions at whatever price is below the permit price, since it makes them money.]
However, I believe it behooves us to get whatever scheme in place that the politics allow us. AGW is a very abstract concept to most people. In a few years a satellite will take a picture of the earth with no polar cap. At that point, hopefully, people will be willing to make a serious commitment. If we have a well tested cap and trade structure in place we’ll be able to tighten the screws.
The climate refugees from low lying islands and coasts, as well as others (see the flooding in Alaska due to unprecedented warm temperatures leading to ice jams) are going to start making a lot more noise.
http://green.yahoo.com/news/afp/20090512/wl_asia_afp/environmentoceansclimateindonesia.html
Such people along with the victims of other disasters – those who lose their homes in wildfires, farmers whose fields are too dry to grow crops or feed livestock – will insist that governments take real action.
This industry-sponsored incremental pace is soon going to be buried under public demand. It’s kind of like the pharmaceutical and insurance companies proposing health care “reform”. Hahaha.
One point I think Johnson missed in his argument is that the proceeds from any auctioning of carbon credits could fund further research into developing and commercializing alternative energy technologies. Public investment into this sector, as many have said before me, will drive down the costs of producing and implementing these technologies…utlities’ cost benefit analysis could shift significantly in favor of switching over to cleaner forms of energy production, which could actually be cheaper than purchasing credits for older, dirtier plants. This WOULD result in real reductions in GHG emissions.
This is what we need!
http://www.sciencedaily.com/releases/2009/05/090505202912.htm
The way to distribute any government auction money is to give it back to the states from which it came and allow them to reduce their taxes by the same amount. If 5 billion came from Texas, give Texas 5 billion and have them reduce other taxes by 5 billion. If Wyoming’s electricity producers are charged 200 million from the carbon auction, give Wyoming the 200 million with the catch that they have to reduce taxes by the same amount.
Have it handled just like it should be handled with a carbon tax. Have the money that is taxed in a state go to the state and have that state reduce other taxes, whether they are property, sales or income taxes.
Thanks for that Gail. So it looks like Concentration Solar Power can scale down!
This is huge. Joe you need to blog on this for the small guy.
I don’t think the acid rain reduction program is a useful model for carbon emissions. That involved retrofitting existing plants with pollution control equipment. Carbon reduction seems to require construction of a completely different type of power plant in a different location.
[JR: Untrue. There are many strategies for reducing GHGs that don't involve building new power plants. Let's start with energy efficiency. Then go to biomass cofiring in coal plants. And then of course there is running existing coal plants less and running existing combined cycle gas turbine plants more. Those just happen to be the three lowest cost strategies and will, together, do most of the heavy lift by 2020, I imagine, with wind.]
[JR: I confess I don't follow your argument. Yes, the cap will tighten over time as the science gets stronger. That's completely separate from the allocation issue. Now we did give away 97% of the permits to utilities for sulfur trading under the Clean Air Act. It simply doesn't affect the price of the permit.]
Ahhh, to have your cake and eat it too…how “reasonable-sounding”…
Unfortunately, we have to choose.
*EITHER* you have your conversation trapped inside your economics text book where the cap is static and real world happenings don’t have the political power to change the cap to make it bolder or weaker… Roughly: “auctioning allowances does not yield additional emissions reductions.”
*OR* you venture out in the real world… Roughly: “to meet the President’s targets, we need to put the value of the pollution permits to work toward cutting emissions (and/or generating the political will to enact a bolder cap, moving forward)”
But it makes no sense to claim both positions in pretty much one breath.
When someone does, it makes me wonder if I want them to be in charge of making sure we get the best emissions-reducing value for our money.
Especially if the person also appears to lump all polluters together, implying that there’s little difference between giveaways to energy-intensive industry, to regulated power distributors, to coal plants.
Give me a break.
If you want to play inside the all-other-things-being-equal text book, then–apart from issues with how regulated entities can and can’t pass costs on to consumers, issues that presumably could be resolved outside of any consideration of auctioning pollution permits–then here’s a bumper sticker for you:
Permit giveaways don’t lower costs
Meanwhile, here’s my favorite:
Everything affects the cap! (H/t Heraclitus)
I do not see a clear argument from this guest poster for giving away the carbon credits. It is not explained. I don’t understand why Joe thinks that this is a good argument.
Just saying this doesn’t argue for it -
“An auction will not reduce carbon emissions faster, and auction costs will go directly to the consumer.”
After a statement like that I expect to see the reasoning, or the proof, or the evidence from past experience or …something – more than this:
“Auctioning allowances would result in an $80 billion per year consumer tax on electricity that saddles Americans with significantly higher energy prices but produces no additional reduction in carbon emissions.The last point is worth repeating—auctioning allowances does not result in any emission reductions.”
Isn’t that the usual generalization? Why does Joe think that this is a significant or persuasive argument?
When will the US get its first place like this?
In German Suburb, Life Goes On Without Cars
http://www.theledger.com/article/20090512/COLUMNISTS/905125004/-1/WIRE13?Title=Climate-Change-Could-Affect-Inland-Fla-
VAUBAN, Germany — Residents of this upscale community are suburban pioneers, going where few soccer moms or commuting executives have ever gone before: they have given up their cars.
Really Joe- You think this is reasonably well argued? Because it’s not. Giving away the permits is clearly more an issue for consumers than environmentalists–
Maybe next time you should do an interview instead of cross posting….
[JR: Don't follow you. I thought it was a reasonable statement of their position. Since most readers strongly disagree with this position, they are not inclined to see the argument is reasonable. Not being an environmentalist, I usually let them speak for themselves. I'd prefer to give the money directly to consumers, but Johnson's view is not absurd.
In fact, Johnson left out one of the best arguments for his position -- the one that is politically most potent -- which is that allocating the permits this way deals with the regional equity issue.]
“Establish a cap-and-trade program, administered through state regulatory commissions, that allocates allowances to utilities based on historical emissions …”
Translation: Create a state-sanctioned energy cartel that drives up prices through enforced scarcity and limitation of competition.
This policy approach does not require free allocation of allowances; the same result can be achieved with a 100% auction by returning all auction revenue exclusively to polluters, and none to renewables or new sources.
“… and reduces allowances over time … all revenues generated by the program are used to fund carbon reductions.”
Why not cut to the chase and include new sources, including renewables, in the allocation from day 1? Rather than encouraging scarcity, use output-based allocation to motivate maximum MWh per MT-CO2. If we want the policy to be protectionist of the coal industry, then exclude legacy renewables (large hydro, nuclear) from the allocation – don’t exclude new renewables.
“The Clean Air Act sulfur dioxide (acid rain) trading program from the 1990s is a prime example of how initial allowance allocation works to drive real emission reductions at the lowest cost to consumers.”
Not so. An additional investment of $1 in SO2 abatement would yield $25 in societal benefits (according to CAIR projections), yet the SO2 trading program creates no incentive for such additional investment.
“… auctioning allowances does not result in any emission reductions.”
It could if a price floor is imposed (a real price floor – not the RGGI’s $1.86/MT price floor). If the SO2 program had been implemented with a price floor comparable to initial price expectation levels, it might have actually solve the acid rain program, obviating the need for CAIR.
Joe:
Thanks for your response. I’ll try to make my most straightforward claim more straightforwardly.
I think Progress Energy’s final paragraph implies this:
What we do with auction proceeds can affect the cost of emissions reductions. Trivially, giving away permits to X is like giving auction proceeds to X. Who X is and what X does with the proceeds can affect the cost of emissions reductions.
The question becomes, what should we do with auction proceeds so as to move as rapidly as possible along learning curves, create new markets, deploy solutions?
Progress Energy’s answer is: distribute the auction proceeds according to historical emissions.
Interesting approach. How does anything else that’s said in the post support this approach?
Many people have been tinkering with using fresnel lenses to concentrate sunlight on a collector plate, but this is the first attempt to make a commerical product from the concept that I’m aware of (of course, it too is still only a prototype and not yet available at retail, like so many other wonderful technology applications). Still, the process is real and does hold tremendous potential.
Here’s a link to the PDF with details on this particular concentrator (it’s in Spanish… you’ll have to translate):
http://www.udl.cat/export/sites/UdL/serveis/oficina/documents-premsa/Dossier_Modul_Termic_UdL.pdf
and the tiny URL for it:
http://tinyurl.com/r2ykcz
I agree with Susan Kraemer. I also would respectfully submit that Joe is right to allow the power industry to make its best case to CP readers.
However, I disagree with Mr. Johnson’s unsupported argument that the states should have exclusive jurisdiction to regulate coal emissions. The effect would be to take jurisdiction away from the EPA, despite the fact that the EPA’s jurisdiction (over CO2 emissions under the Clean Air Act) was recently affirmed by the Supreme Court. Do we really believe the states will do a better job? Or that Congress, in disarming the EPA, will help reduce CO2 emissions? Or will we have a race to the bottom to attract jobs? Consider Tennessee’s record of regulating coal ash, which resulted in George W. Bush National Park being created by the spill last December.
The “acid rain” mitigation experience is often cited in support of cap-and-trade for carbon dioxide. Switching to low-sulfur coal, such as the sub-bituminous coal from Powder River Basin, and installation of SO2 scrubbers, has indeed had an effect on reducing SO2 emissions. It has also resulted in manufacturing being moved out of the heartland and over to China and places with less stringent emissions regulation.
I don’t buy the argument that the SO2 experience (including lots of free allocations) can be extended to CO2. For one thing, the necessary CCS technology (post-combustion CO2 capture and storage or conversion of the captured CO2) is not available yet, and there are no incentives to develop it. As for switching the energy source for power generation (as readers of this site often hear about), coal is irreplaceable in the near term because it has a high energy density and is abundant. There are no incentives to replace coal.
And let’s not forget about the European experience with cap-and-trade and liberal allowances. Despite good intentions, CO2 emissions did not go down. The “trade” part of cap-and-trade is particularly disturbing. We don’t want to create another junk market in offsets and other indulgences for Wall Street to swindle with. Better a straightforward penalty as a stick, and tax credits as a carrot.
Three questions for Bill Johnson:
1) What is the incentive for a utility to cut their carbon emissions quickly if they derive no financial benefit from the sale of superfluous permits?
(“…the proceeds of those trades benefit the customers, not the utility”)
2) Isn’t there value in auctioning off the permits so as to put the building of efficient new combined cycle and cogeneration plants by IPPs on equal footing with dirty, “grandfathered” coal plants?
3) If the law mandated the auctioning of permits, but prohibited utilities from passing on all or some percentage of those costs to customers through a rate pass-through or a new rate case, wouldn’t utilities reduce carbon emissions faster to boost their earnings?
Completely agree with Wilmot. Making the individual state regulatory commission enforce the Fed. cap-and-trade program would only benefit individual polluters, who have more leverage at the state level and who can play one state off another. In short, it would be a disaster from the perspective of protecting the long-term climate. Which makes me question the credibility of Progress Energy
Also, aren’t we already addressing the cost-to-consumers issue by returning 85% of auction proceeds to individuals via tax cuts? Also also, it’s not true that all consumers will have to pay the full cost of the allowances in higher electricity prices. Consumers of regulated utilities, perhaps — but only if they don’t change their behavior to decrease their usage (eg, upgrade to Energy Star appliances). Consumers of non-regulated utilities, no — you just switch your subscription to whichever provider is decarbonizing first / fastest.
Giving away allowances for free does not benefit consumers. Yes, if an energy company has to buy an emmissions permit for $x, they will pass that cost on to the consumer. However, if they get the permit for free, they still have an opportunity cost — they could sell the permit instead of produce the electricity, so electricity will be priced to allow them to make more profit than they would by selling the permits. For the claim of lower costs to consumers to be correct, the market price of a permit under the giveaway scenario would have to be lower than under an auction scenario. It isn’t clear that this would be the case, and anyway consumers certainly won’t do nearly as well as they would under an auction+rebate plan. Another way to think about it is, why would a company with a certain number of free permits lower their prices? In a competitive market, this is done to gain market share — you sell more but at a lower price. However, to sell more coal generated electricity than your allotted permits, you have to buy permits from one of your competitors. And ultimately the market price for electricity will be determined by the aggregate supply, but the supply of coal generated electricity isn’t going to increase much if there is a cap on CO2 emissions. So a giveaway scheme essentially turns coal based electricity plants into a cartel — instead of them colluding in secret to cut back on total production and pocketing a windfall profit, the government tells them to cut back on total production and lets them pocket the windfall.
Any cap will raise prices until consumers cut back enough to meet the cap or some non-carbon-based electricity becomes cost competitive and fills the gap. The price increase is determined by the cap, the allocation determines where the money from the price increase goes. If you want to protect consumers, you do auction+rebate. If you want to minimize the impact to utility companies, you do a partial giveaway. But why full giveaway? And how much of the windfall do we really expect to be invested in new energy sources?
Eric L -
“So a giveaway scheme essentially turns coal based electricity plants into a cartel …”
That would be true of allocation based on historical emissions, but not so if new sources, including renewables, receive an equitable allocation based on output.
“Any cap will raise prices until consumers cut back enough to meet the cap or some non-carbon-based electricity becomes cost competitive and fills the gap.”
With output-based allocation, non-carbon-based electricity could become cost-competitive on day 1.
Continuing this conversation…
The argument in the post seems to be:
Given a specific cap, auctioning will not let us strengthen that cap or subsequent ones sooner (does not cut emissions faster) , but free allowances will enable us to meet it…
This seems odd. The first part relies on the text book claim that allocation method doesn’t matter to permit price or cap. The second part suggests allocation method does matter to (our ability to meet) the cap.
If the argument simply is, no free allowances, no deal i.e. no cap, then, trivially, allocation method affects the cap… But the post seems like a convoluted greenwashy way to make that threat/state that position.
(Again, since Progress Energy is not here distinguishing between types of polluters (regulated LDCs, energy-intensive manufacturers, coal utilities, etc.), neither am I.)
For anyone interested, from Hepburn et al. 2006 “Auctioning of EU ETS phase II allowances: how and why?” some of which applies:
“One of the widest economic misconceptions about auctioning is that it would simply add costs which would be passed through to ‘downstream’ companies and consumers.14 Yet if firms maximize profits, then even with free allocation they pass on the opportunity costs of allowances
to downstream prices. Changing from free allocation to auctioning will have little impact on product prices.15 However, because auctioning raises revenue that may be reallocated, it has, prima facie, the potential to correct distributional impacts.
If auction revenues are employed to reduce general taxes, the distributional impacts will depend upon the nature of these other tax changes: for example, a reduction in income tax would tend to
shift revenue from the electricity consumer to the taxpayer, and if focused on the base rate might be somewhat progressive. Alternatively, direct dedication of the auction revenue to domestic consumers would give consumers an income stream that increases with higher CO2 prices, thereby compensating for product (especially electricity) price increases. This might also increase public interest in and support for the ETS. Few generalizations are meaningful at this level, however, since each country will have different political preferences and considerations in the context of
wider tax and consumer debates.”
More from Hepburn et al:
“Thus, in practice, given that there is an emissions trading system in place,
it is obvious that auctioning has the potential to improve the macroeconomic efficiency of the system. Of course, efficiency considerations are merely the beginning, and we now examine five
other considerations relevant to auctions, namely: the distribution of the economic rents created by CO2 limits in the economy; competitiveness effects of auctioning compared to grandfathering; legal considerations; dynamic incentives; and transaction costs….”
When you read between the lines, it’s all so predictable. CEO of energy companies don’t want to pay more than they have to. From a single business perspective, this makes sense.
When you bring in the entire economy, it makes less sense. Allocating based on historical emissions (grandfathering) has the advantage of complying with the status quo, helping acceptability, but comes at the serious expense of hampering innovation (by making it more difficult for new innovative startup companies to get into the market) and bringing in a stronger lobbying component (not the “best” company or product comes out stronger, but the one with the politically strongest position).
These things will almost certainly harm the economy over the long term.
There is also an ethical issue: grandfathering is paying the polluter: you’ve polluted before so you can go on today with doing that. It feels wrong, and it gives the wrong incentive to the market.
Revenue generating policies like auctioning carbon credits or real carbon taxes also give another oppertunity: using the revenues to more actively reward efficient clean performance from the public, and help reduce income inequality in the process (by a progressive revenue returning policy)
I advise readers to consider critically where people are coming from. What’s good for the utility may not be optimal for the entire economy. Auctioning is obviously more efficient than grandfathering and has a number of revenue recycling oppertunities. This is not about company rhetoric, it’s simple textbook environmental economics. But the point someone else made is very important: to have a system of carbon pricing or trading in place is better than having no such system at all.
As for me, I consider this political bullshit one of the main reason to go for a simple transparent carbon tax. There are no issues of dividing credits there. Simple is better when it comes to schemes that involve large amounts of money – and carbon pricing represents one of the biggest potential markets for the future.
Being cynical, I am afraid that a straight tax is less likely to happen precisely because the transparency allows little manipulation, and the lower overhead costs mean less income sources for middlemen etc.