Waxman and Markey divvy up the goods — I wish my parents had given me allowances like this!

UPDATE:  Full bill is here.

Henry Waxman (D-CA) and Ed Markey (D-MA) have circulated a draft proposal of allowance allocations for their landmark energy and climate legislation (see here and below).  They explain:

Emission allowances will be allocated to accomplish three primary goals: (1) to protect consumers from energy price increases; (2) to assist industry in the transition to a clean energy economy; and (3) to spur energy efficiency and the development and deployment of clean energy technology. A small amount of allowances will be allocated to prevent deforestation and support national and international adaptation efforts and for other purposes.

No doubt many environmentalists and progressives will be unhappy with the amount of money that appear to go to polluters.  But in fact, most of that money goes to regulated entities, and the regulators can and will make sure that the money goes to consumers and businesses, as well as energy efficiency programs, and not windfall profits.  One of the progressive community’s leading experts on utilities has agreed to write a guest blog post on this very subject for me next week.

While giving most of the money directly back to consumers is certainly my preference, that is just not the way the politics plays, at least at first.  I will say that giving the money to the regulated utilities does have the added benefit of regional equity.  One of the greatest sources of opposition to giving most of this money back through the tax system comes from Midwestern and Southern politicians who see that strategy as taking money from their constituents and giving it to those of us who live on the coasts.

If you still think this is a rip-off and/or don’t think the public utility commissioners will get the money into the hands of consumers, I’d urge you to read (or watch) this E&E TV interview of Richard Morgan, a DC commissioner and leader of the National Association of Regulatory Utility Commissioners’ Task Force on Climate.  He explains that regulated utilities “can’t just set prices wherever they want and, in fact, as utility regulators we’re obligated to pass along to consumers any of the benefits of free emissions allowances that these regulated utilities might receive.

Morgan further explains

We can use these funds to lower their rates or we could direct the funds to be spent on energy efficiency programs, low income assistance, or perhaps research on new clean technologies to help us find better ways to address the climate situation.

The bottom line for me is that I just don’t see the allocations as a reason to oppose this bill or indeed as a reason not to strongly support it.

I would also add that the price of one ton of carbon dioxide is going to be very low at first maybe around $5 to $10 a ton in the first few years, and then no more than, say, $15 a ton in 2020.  Why?  We are cramming vast quantities of renewables into the marketplace (see “I predict U.S. carbon dioxide emissions peaked in 2007!” and “total of 8500 MW of concentrated solar thermal planned for 2014 in U.S. alone“).  And we have so many low-cost strategies for cutting greenhouse gas emissions (see “Intro to the core climate solutions” and “If Obama stops dirty coal, as he must, what will replace it? Part 1” and “Part 2: An intro to biomass cofiring“).  And, of course, oil will probably be well above $150 a barrel by the end of the next decade.

That means the total amount to divvy up in 2020 will only be some $70 to $80 billion.  Now, admittedly, that ain’t your father’s allowance, but it really can’t have that much impact one way or another since it’ll be under 0.5% of GDP.  A CO2 price of $14 a ton only adds 1.5 cents per kwh to 100% coal power.

Anyway, here is how the allowances are split up — summary courtesy of Greenwire (subs. req’d):

  • The electric utility industry, which produces the largest share of U.S. greenhouse gas emissions, would receive 35 percent of the allowances for free. More specifically, state-regulated local electric-distribution companies will get 30 percent of the credits, with a stipulation that they must use the funds to protect consumers from electricity price increases. Merchant coal and long-term power producers will get the remaining 5 percent of the allowances. All of the utility sector credits will be distributed according to a formula suggested by the industry, split along historic emission levels and retail sales. Credits will be phased out between 2026 and 2030.
  • Local natural gas distribution companies would get 9 percent of the allowances, with a requirement that state-regulated firms use the funds to protect consumers from natural gas price increases. The free allowances will be phased out between 2026 and 2030.
  • States would get 1.5 percent of the allowances for programs to benefit users of home heating oil and propane, an issue of primary concern in the Northeast. The free allowances will be phased out between 2026 and 2030.
  • Democrats plan to begin auctioning 15 percent of the allowances around 2011, with the proceeds directed toward low- and moderate-income families. The funds would be distributed via tax credits, direct payments and electronic benefit payments — which is similar to how states now process food stamps and other low-income assistance programs. Unlike the free credits, the payments will not phase out. U.S. EPA would have a year to set up the program following enactment, with the first compliance auction beginning in 2012. The House Ways and Means Committee must sign off on this provision.
  • Energy-intensive industries, including pulp, paper, cement and steel, would get free credits — 15 percent starting in 2014 but phasing out by about 2 percent per year. The allowances will be phased out after 2025. Also, the bill would give the president authority to impose tariffs on carbon-intensive goods from developing countries.
  • Oil refiners will get 2 percent allowances for free, starting in 2014 and ending in 2016.
  • Carbon capture and storage efforts would get a boost from the bill, with 2 percent of the allowances from 2014 to 2017 and 5 percent from 2018 and beyond. Democrats say the allowances will help electric utilities “cover the cost of installing and operating carbon capture and sequestration technologies.”
  • States would get free allowances to invest in renewables and energy efficiency. More specifically, they would get 10 percent from 2012 to 2015, 7.5 percent from 2016 to 2017, 6.5 percent from 2018 to 2021, and 5 percent after that.
  • The battered auto industry would get 3 percent of the allowances through 2017 and 1 percent from 2018 to 2025. The allowances must be used for increased production of electric and advanced vehicles. Rep. Bart Stupak (D-Mich.) said today several Democrats were considering an amendment on this provision that would set additional criteria on auto manufacturers to keep them from shifting their production out of the country.
  • “Clean Energy Innovation Centers” would get 1 percent of the allowances for research and development at universities and institutions.
  • Efforts to prevent tropical deforestation would see 5 percent of the allowances from 2012 to 2025, 3 percent from 2026 to 2030, and 2 percent from 2031 and beyond. Democrats said the free allowances would lead to the equivalent of a 10 percent reduction in U.S. greenhouse gas emissions by 2020, compared to 2005 levels.
  • Domestic adaptation efforts would get 2 percent of the allowances from 2012 through 2021, increasing to 4 percent between 2022 and 2026 and to 8 percent in 2027 and beyond. Half of the allowances will go toward wildlife and natural resource protection, while the other half are directed to other areas, such as public health.
  • International adaptation and clean technology transfer would get 2 percent of the allowances from 2012 to 2021, increasing to 4 percent from 2022 to 2026 and then to 8 percent in 2027 and beyond. Democrats would split the allowances 50-50 between the two goals.
  • Worker assistance and job training would get 0.5 percent of the allowances from 2012 to 2021, increasing to 1 percent after that.
  • Democrats say that some of the remaining, unallocated allowances will be auctioned off, with the revenue directed to the Treasury to ensure the bill is deficit neutral. “We’re taking our CBO haircut,” a House Democratic aide said yesterday, referring to the Congressional Budget Office. Any additional allowances would also be used for consumer protection.

The rest of the 1000-page bill will be out soon — and then come the amendments!

Next week is going to be a busy one for climate junkies!

28 Responses to Waxman and Markey divvy up the goods — I wish my parents had given me allowances like this!

  1. Aaron says:

    This may be a rather dumb question but humor me. When you refer to X% of the allowances go to X industry; does this directly refer to X% of the emissions cap? Or is this X% of the allowances, which amount to X% of the total emissions cap? Or am I completely off the mark?

  2. Robert says:

    Normally CNN is quite green. How did this piece come to grace their website?

  3. hapa says:

    So how does Waxman-Markey rate on architecture? It’s a loser. The single biggest flaw, one which is fundamentally not fixable, is the decision to issue permits on an industry-by-industry basis — to cap the uses of carbon fuels rather than their sources. This is an invitation to never-ending bickering over who is allowed to emit how much. Every little tweak of the system — whether to include freight transportation or agriculture (which crops!) — has to be hammered out separately. Reductions are calculated from a baseline, but there are acres of wriggle room about how to measure who emitted how much in the base year and therefore how much should be reduced tomorrow. Enforcement is complex, expensive and full of loopholes. Only lawyers (and politicians with extortionary campaign finance strategies) could love this.…

    Mainstream environmental groups are not blind to these problems, but they see them as second-order. Above all, they are soooooo happy that climate deniers are not in command of politics any more.… But they are losing today’s battle to put into place a viable means to get from here to there, and judging from their public statements they don’t even know it.

  4. Dave says:

    I believe it means X% of the total U.S. emissions cap would be allocated to X industry. So 30% of the cap given the the electric industry would actually mean utilities only need to buy about 10% of their allowances to meet their compliance obligations. Correct me if I’m wrong here folks.

  5. mark h says:

    I don’t understand the reason behind rebating the money back to certain income classes of consumers. The energy prices should rise in order to encourage conservation and efficiency upgrades. I’m more in the denier camp than the followers of this blog but I support cap and trade or a straight carbon tax, provided all the money collected is invested in sustainable energy. Using the money collected to fund other programs only lends credibility to the agruement that AGW is a just an agenda driven power grab.

  6. djrabbit says:

    Thanks as always, Joe, for your timely reporting. Climate junkies indeed!

    Two concerns:
    (1) Doesn’t this just kick the can down the road? How are we going to divy up these allocations among members within each of these silos? 15 percent to pollution-intensive industries and 2 percent to the oil refiners sounds great until you realize there are scores or perhaps hundreds of players within each of those silos. At an auction, those players would just buy as many as they need — no need for all the fighting and posturing we’re likely to see under this plan.

    (2) If the allocations fully cover a given industry (or entity), what incentives do those entities have against gaming the system by inflating their historic emissions numbers (as happened with the EU ETS)? A benefit of auctions is that polluters would only buy the allowances that they actually need. That said, it looks like electric utilities, at least, will have to buy a portion of their needs at auction or on the market.

  7. Pat Richards says:

    The potential for windfall profits from this new program are much larger than anything previously attempted. Although I suppose you could argue if that potential encourages utilities to retire some older, marginally-profitable coal-burning plants that it’s worthwhile to bribe them to do so.

    Hey, wait… there are approximately 600 coal-fire plants in the U.S. right now. Maybe we should just forget about the 20 years this Cap and Trade program will take to reduce emissions by a lousy 17% and just flat out offer — not require, but offer — to *buy* the 200 oldest coal-fired plants from the utility companies right now for, say, maybe a cool $333 million each? That would only take about $66 Billion — much less than what we paid for all those worthless assets at AIG and Fannie Mae — and over the next decade we could then phase out all 200 plants… only 20 per year… for a total CO2 reduction of 33% in just 10 years!

    Offering to pay someone a whole lot more than their old coal-fired plant is worth is the purest form of capitalism. How could the conservatives object to that? If we don’t require them to sell — just make them an offer they would be nuts to refuse — it ain’t socialism, it’s just a business transaction.

    This would not only reduce emissions much faster, but the resulting electricity shortage (phased in over 10 years), would be a tremendous incentive for private industry to really ramp up a lot more clean energy plants to meet the predictable increase in demand guaranteed by taking 20 plants a year off line. A utility company could take the $300 million we paid them for their old, decaying coal-fired plant, pocket $100 million and spend the other $233 million building a new solar thermal storage power plant. Probably score some additional Federal clean energy grants money on top of it, as well.

    What, too simple? Too cheap? Quick enough to have a meaningful impact on reducing in CO2 emissions? Yeah, I suppose so… never mind…

  8. Tim says:

    There is a huge difference between giving the money back to consumers and giving it to utilities to keep prices low. The first sets a price on carbon so that consumers know the true cost of their energy and can regulate their use accordingly. The latter continues to subsidize CO2 and thereby fails to use a competitive market to regulate emissions.

  9. Pangolin says:

    This is the kind of legislation that Enron purchased from the California Legislature. A lot of complicated provisions that nobody but insiders can understand that is going to make them, the insiders, money and screw the rest of us.

    Promoting this kind of sausage legislation is going to further split the AGW debate into reality deniers and doomers. When the middle ground is occupied by cynical profiteers there really isn’t much point in doing anything but eat, drink and be merry.

    I spent a day this week in last summers fire zone in California. Thousands of acres of standing dead trees. This is a scene that will repeat with increasing frequency as the planet warms and Congress hands yacht money to the coal and oil people.

  10. Peter says:

    I was startled to read your sentence, “We are cramming way too many renewables into the marketplace already.” Would you care to elaborate on that?

    [JR: Just inapt phrasing. We are already cramming so many renewables into the marketplace (even without the bill) that the emissions trajectory is going to stay lower than people thought.]

  11. Under the Waxman-Markey bill, the vast majority of allowances given to the electric power sector would be given to the local distribution companies. These companies are overseen by state regulatory agencies, which ensure that the value of the allowances is used to benefit the customer – not the utilities nor their shareholders.

    If, on the other hand, utilities were required to buy a large percentage of allowances from the federal government, the cost of the allowances (in addition to the cost of achieving actual emissions cuts) would be shouldered by the customers in the form of higher electricity rates. It’s true that a federal auction of allowances would produce government revenue, some of which could be used for take breaks – but why take that money from consumers in the first place? Besides, tax breaks don’t reach everyone, including very low-income customers who don’t file taxes.

    Recent concern about “windfall” profits stems largely from the troubled EU emissions trading system, which was undermined by the introduction of too many allowances into the market early in the program. In the US, companies that emit greenhouse gases would be allocated one allowance for each ton of greenhouse gases they were allowed to emit. As the emissions cap gets tougher, the number of available allowances is reduced. This is how the US acid rain program has worked since 1990 – crafted by the same committee as the Waxman-Markey legislation – and with no complaints about windfalls.

    The allocation approach works, and it works to the customers’ benefit.

  12. PaulK says:

    Thank you, Joe for linking to the full text. No one who has not at least read the contents pages should have an opinion on its merits.

    So many progressive voices express opposition to this bill. Many of those for whom climate is the most important issue are opposed.

    The cap trade portion of the bill is an open opportunity for cronyism, graft, fraud, theft, waste and Enron like market perversions.

  13. Phil says:

    We need policies which benefit the planet, and not big business or consumers (both of whom are the problem).

  14. Anne says:

    I had to work to get to this place — but — it’s my understanding that it really doesn’t matter if the initial set of allowances are auctioned or given away for free, at least in terms of the effect on how quickly and efficiently overall CO2 emissions will be reduced. It was explained to me this way: a person is walking down the street, and finds a dollar bill. Let’s assume the person picks it up, and keeps it, puts it with all of his/her other bills and moves on. That person will be no more likely to “waste” that dollar than any other dollar in the wallet — the same spending decisions will be made for a freebie dollar than for a dollar earned or purchased. The important thing to keep your eye on is the cap — the cap needs to be set at a level that is ratcheted down commensurate with what the science is telling us needs to happen to avoid catastrophic climate consequences. That said, allowances have cash value (we hope!) and therefore many of them should go towards programs for the good of society – and I would say that a small fraction going to “adaptation” (a euphemism for barely coping) is not sufficient. Especially for poorer communities. Send dollars/allowances their way so that can buy themselves out of their misery by investing in ways to make their communities more resilient. Make sense?

  15. Anne says:

    Rick Morgan is great, by the way. I knew him when he was at EPA. Brilliant and dedicated. Another good thinker on this issue is Dallas Burtraw at Resources for the Future. I think much more of an effort could have been made to educate the public on how cap and trade works, and what it can mean for our economy. There is so much misinformation and misperception out there that it boggles the mind!

  16. Leland Palmer says:

    If I hear the video right, local utilities have to pass on the savings.

    But big merchant generators like Duke Energy are under no obligation to pass on the savings from free allowances.

    [JR: LDCs get 30%, merchants just 5%. Duke Energy has 4 million customers and has a regulated business.]

    We need to just seize the coal plants, and forcibly convert them to biocarbon fuel, oxyfuel combustion, a HiPPS topping cycle, and deep injection of the resulting CO2. This “carbon negative” strategy could have a significant, even decisive impact on the global warming problem.

    The proposed technological changes to the combustion process could pay for carbon capture and storage with increased themal efficiency, giving us essentially free carbon capture.

    Carbon negative electrical power generation is hugely synergistic, because it displaces fossil fuel use, generates useful electricity, fire protects forests by clearing them of combustible undergrowth, minimizes methane production from landfills and municipal waste, and actively transfers carbon back underground at the same time.

    The climate system is experiencing multiple positive feedbacks that are threatening to send it out of control. We need to apply negative feedback to it, to keep it in control. Carbon negative production of electricity could be that negative feedback.

    Waxman/Markey is a useful bill, in that it encourages carbon neutral generation of electricity. This is good. Waxman/Markey also rewards alternative energy development, and this is also good.

    WM should hugely reward carbon negative energy strategies, because these strategies are capable of generating electricity, and providing true carbon offsets, not fake ones, simultaneously.

  17. Modesty says:

    Morgan says:
    “…as utility regulators we’re obligated to pass along to consumers any of the benefits of free emissions allowances that these regulated utilities might receive. But it’s important that these benefits have to go to only the local distribution companies which are regulated in every instance in the U.S. and NOT to other types of electric companies like the merchant generating companies for example that would not be under any obligation to pass along those benefits to consumers….”

    The performance standard for new coal is–in effect–delayed some ten years in the new version of the bill. Plus merchant coal gets windfall profits for which they are not eligible if they co-fire with biomass at more than 15%.

    What am I missing?

    [JR: Where is the cofiring provision — I can’t find it in the bill, but I’m for almost anything that encourages cofiring!]

  18. As you recall, Joe, when they did this in Europe, the price of electricity went
    up to cover the extra cost that the utilities were NOT paying and the fat cats
    pocketed both extra incomes. What you are missing is: Any bill this long is
    a crime. It does the opposite of what it says it is supposed to do. Over
    600 pages means 600 pages are there for the purpose of hiding the true purpose.
    Remember the “low carbon coal” clown act? This is another clown act in lawyers’
    clothes. My guess is that this bill encourages the building of more coal fired
    power plants. In any case, it is too little too late and we are doomed if it
    becomes law. The one thing you can be sure of is that Waxman/Markey has nothing
    to do with shutting down coal fired power plants. Make them get it down to 5
    pages that very simply say “All coal fired power plants WILL be shut down as of
    midnight, 31 December 2015.”

    [JR: Try reading the Clean Water Act or Clean Water Act. Seriously. And this is more complex and wide-ranging. This bill is all but fatal to new coal. You have proposed a terrific bill that will get maybe 10 votes. Go for it! Not what this blog is about, though. BTW, they didn’t do “this” in Europe.]

  19. Modesty says:

    It’s not a provision, just a consequence of the definition of the merchant coal generator having to get 85% of its “heat input” from coal and/or coke. But I could be missing something.

  20. Nancy says:

    Some on the right are worried about costs to business. The prices are “skyrocketing” they point out, for industry which must now pay for their usage.

    It will not hurt to make corps more aware of their power consumption. There are windows with solar cells which generate electricity. Most large corporate buildings have tremendous amounts of windows, all of which could be generating electricity — enough to take the building off the grid during daylight hours. Maybe they could skip their “free” summer picnic and put in some solar windows instead of complaining.

    There is also concern about job losses. If a US company begins to build solar equipment such as windows and roof solar cells, and the equipment for feeding it into the building’s electrical system, and excess back out through the meter, then we won’t have a net loss of jobs.

    But, there must have been some jobs lost in the carriage industry when Ford began mass producing cars, and there must have been some jobs lost in the whale blubber processing industry when Edison invented the electric light bulb. No doubt the Heritage Foundation wrote a dire report on those industry changes as well.

    For DIY info on getting your own home off the grid,


  21. Davian says:

    “The bottom line for me is that I just don’t see the allocations as a reason to oppose this bill or indeed as a reason not to strongly support it.”

    So are you a supporter of free market economics?

    [JR: Where is there a free market? Seriously. Certainly not the U.S. energy market. This is about government doing what is needed to set put a price on pollution that starts to reflect its cost to society.]

  22. Modesty says:

    To clarify, merchant coal generators–ie unregulated coal plants–precisely those Morgan says must NOT receive free allowances because such allocation will lead to windfall profits, receive free allowances (5% of all allowances) in the new version of the bill. Not pretty. And why is this in the protection of electricity consumers part of the bill?

    [JR: Yes, I wouldn’t have given out those 5%. As I’ve said, the bill ain’t perfect.]

    Furthermore, should those power plants try to push the envelope and co-fire with more than 15% biomass (in terms of heat input), then they don’t qualify for those free allowances. What’s up with that?

    [JR: Again, where is that in the bill. I can’t find it.]

    This seems like such a stark buying-off of the coal plants, with an added bizarre anti-co-firing twist, that I feel surely I am missing something.


  23. Pat Richards

    Regarding buying out coal plants and closing or converting them. I like the way you think.

    Regarding the CNN interview of John Christy. Christy is resurrecting the heat island argument and suggesting that we don’t have to worry about global ice melt, which he calls hysteria.

    He claims that:
    “As you and I are talking today, global sea ice coverage is about 400,000 square kilometers above the long-term average – which means that the surplus in the Antarctic is greater than the deficit in the Arctic.”

    Apparently he hasn’t seen this:

    “Climate Change and Black Carbon Causing ‘Super-Rapid’ Melt of Himalayan Glaciers”

    “These are the world’s greatest repositories of snow and ice outside of the polar regions, and yet they may melt away in just 20 to 30 years, leaving more than a billion people desperately short of water, experts concluded in San Diego this week.”

    “Kennel told IPS that nearly all of the 20,000 glaciers in the Himalaya-Hindu Kush mountain ranges are in retreat and the meltwater from some has created enormous lakes held back by rockslides that will inevitably burst, endangering anyone living in the valleys below. The World Wildlife Fund calculates there are 2,000 glacial lakes forming in Nepal and around 20 are in danger of bursting. Several have already flooded valleys in the past two decades in Nepal and Tibet.”

  24. Modesty says:

    Re the 85/15, see my 1.57PM comment and the definition of merchant coal generator.

  25. Phillip Huggan says:

    A way to appease the coal and oil sands lobby might be to ramp up long term carbon sequestration funding, if these regions recognize such long-term industry sustainability as an industrial subsidy.
    Might be a good (spare employment in recession) time to begin charting the world’s aquifers and where they overlap with potential CO2 sequester sites. Treat some aquifers like national/regional parks or otherwise protected areas.

  26. David B. Benson says:

    Phillip Huggan — The plan is to use deep saline formations for carbon sequestration, not freshwater aquifers.

  27. Phillip Huggan says:

    If sequestered CO2 won’t ever leak, no problem. If it might leak you probably want to keep it out of rock formations adjacent to aquifers used by cities at least.

    CCS uses freshwater so in China/India may not be economical assuming depleting water tables like in Mexico City. I don’t care about these piece-meal projects but if you scale entire coal industry minus carbon price, you get another large consumer of stressed Asian water supplies.
    My point about CCS R+D funding was there are “right wing” ways to address one’s political base and address AGW too; cellulose ethanol is another.

  28. Phillip Huggan says:

    …right now there are sites or planned sites in an active earthquake zone in Washington or BC. Doesn’t matter for a demo coal plant but as an industrial policy to sequester say, California’s electricity emissions, it isn’t a plan. Are the saline formation degassing risks known (over centuries)?