Everything you wanted to know about Waxman-Markey allocations PLUS why the allocations do not undermine energy efficiency efforts

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"Everything you wanted to know about Waxman-Markey allocations PLUS why the allocations do not undermine energy efficiency efforts"

UPDATE:  At the end, I’m going to respond to what has now become a widespread myth that because Waxman-Markey supposedly mutes the electric price signal to consumers, it hurts the cause of energy efficiency.

The Subcommittee on Energy and Environment will hold a hearing titled, “Allowance Allocation Policies in Climate Legislation:  Assisting Consumers, Investing in a Clean Energy Future, and Adapting to Climate Change” on Tuesday June 9, [at 9:30 am, info here, webcast here].  The hearing will examine allocation policies under the American Clean Energy and Security Act (ACES).

The allocation of the greenhouse gas emission allowances is certainly one of the most controversial and complicated parts of the Waxman-Markey bill.  Here are some key overview posts:

But if you really want to become an expert on the pros and cons of the issue, I would suggest that you tune into the hearing, where both sides will get a full airing of their views, with the following expert witness:

  • Thomas F. Farrell II, on behalf of the Edison Electric Institute
  • Rich Wells, Vice President, Energy, Dow Chemical Company
  • Nat Keohane, Economist, Environmental Defense Fund
  • Reverend Dr. Mari Castellanos, Minister for Policy Advocacy, United Church of Christ, Justice and Peace Ministries
  • G. Tommy Hodges, on behalf of the American Trucking Association
  • David Sokol, Chairman of the Board, Mid American Energy Holdings Company
  • David Montgomery, Vice President, Charles River Associates

E&E Daily (subs req’d) explains the origin of this somewhat unusual House Energy and Commerce hearing — unusual since it comes after Committee approval of the bill:

House Energy and Environment Subcommittee Chairman Ed Markey (D-Mass.) will follow through tomorrow on a promise to hold a hearing on the emission allocation provisions included in the comprehensive global warming bill the Energy and Commerce Committee approved last month.

Markey agreed during the markup for the hearing on perhaps the most contentious piece of H.R. 2454, the allocation language that distributes hundreds of billions of dollars worth of allowances to industrial firms that emit greenhouse gases.

Democrats held several general hearings on the emission allowance issue, but they did not give the committee a chance to publicly vet the actual legislation released less than a week before the 33-25 vote that sent the bill to the floor. Republicans objected to the procedural gap but were unable to force a delay in the markup, which Democratic leaders pledged to conclude before the Memorial Day recess.

TOUGH QUESTION POSED BY A READER

In the earlier post — “Preventing windfalls for polluters but preserving prices” — two of the country’s leading experts on the electric utility industry and energy economics, Peter S. Fox-Penner and Marc Chupka, wrote:

Here’s where W-M got it right.  It forbids distributors from giving customers the value of the free allowances as a “per unit price rebate.”   So retail customers will still have to pay a price for power and natural gas that includes a carbon price signal.  The free allowance value must be given to them as a lump sum rebate.

A reader writes:

Your discussion overlooks a HUGE loophole in the Bill that eliminates any assurance that the carbon price signal will make it thru to LDC customers. Here is the key text from the bill including the key loophole (the word “solely”):

“An electricity LDC shall not use the value of the emission allowances distributed under this subsection to provide to any ratepayer a rebate that is based SOLELY (emphasis added) on the quantity of electricity delivered to such ratepayer.”

Fox-Penner and Chupka reply:

The commenter is correct — the language in W-M is not “airtight,” and does leave open the possibility of state regulators giving partially quantity-based rebates, if they choose to use rebates at all.  The unfortunate history here is that the states in general, and state utility regulators in particular, are sensitive about being told exactly how to regulate their charges.  They believe their duties are set forth in their enabling statutes, and that the federal government should not “micromanage” them with a “one size fits all” solution.  Undoubtedly the savvy drafters of W-M understood that being overly prescriptive would jeopardize too many votes on this basis.

Nevertheless, we think the law, common sense, and elementary economics all make it pretty clear that quantity-based rebates are a bad idea and I will wager that most regulators will avoid them. We sure hope so.  Even if they do have some partial quantity rebates, however, the cause is far from lost.  First, the carbon price signals are still intact at the wholesale level, and it is at this level that decisions to build new supplies and dispatch them are made.   Carbon price signals impact customer energy efficiency decisions, but these are (unfortunately) not terribly price sensitive due to so-called market imperfections in the energy marketplace (see Energy Efficiency Economics and Policy).

[JR:  I consider this to be an essential point that many people get wrong.  Energy efficiency is cost effective today in every state.  The primary reason most states are not doing much energy efficiency is market imperfections -- in particular, utilities are strongly discouraged from promoting energy efficiency (indeed, most are rewarded for promoting energy and efficiency).  Price is important, but secondary -- especially since, as I've noted many times, the carbon price under W-M is going to stay low for at least a decade because there are so many underutilized clean energy strategies available to this country.  If you want more energy efficiency, you need multiple government programs to promote it, including incentives and standards, such as are found throughout Waxman-Markey.  Also, you should empower public utility commissions to use money from allowances to fund energy efficiency programs, which W-M does.]

Finally, the most important price signal to send retail customers is the time-based or dynamic price, which easily varies across the course of a day by a factor of three — much more than carbon prices will change retail power prices for many years. (See The Power of Five Percent: How Dynamic Pricing Can Save $35 Billion in Electricity Costs, and The Impact of Informational Feedback on Energy Consumption – A Survey of The Experimental Evidence)

Finally, this thoughtful writer reminds us of something we often repeat:  The state energy regulatory community is the single most important policy actor in the United States — moreso as we electrify transportation and our transport fuels flow through state-regulated grids as well as nearly all the rest of our energy.   State regulators do as well as they can with agencies whose missions and capabilities are often greatly under-resourced and face a huge array of issues and cases.   The federal government does astonishingly little to help these agencies cope with policy issues or provide technical assistance (though what little is provided is often extremely valuable).   Our transition to a low-carbon economy hinges to a very large extent on how well regulators carry out not just this particular provision of W-M, but also on dozens if not hundreds of other decisions they will make, often with only a handful of utilities and activists engaged in obscure regulatory proceedings that lead to these actions.

The Obama stimulus package had a $60 million line item we are told is reserved for assistance to state regulatory commissions.  If so, we applaud this overdue initiative.  We hope the money is used wisely, and that this is only the beginning of the Obama Administration’s deep energy policy engagement with governors and state regulators towards a shared purpose of economically transforming our energy infrastructure.

For completeness sake, here is one more brief overview of the allowances, from E&E News:

… lawmakers decided to give away 85 percent of the emissions permits in the early years of the cap-and-trade program, with the remaining 15 percent of permits auctioned.

The largest share of the free permits, 35 percent, goes to the electric utility industry in 2012 and 2013. More specifically, 30 percent is given to local companies that distribute power to residences and businesses. The sector’s free permit portion shrinks every few years after, and the allowances phase out completely between 2026 and 2030.

Energy-intensive industries receive the next biggest share of free permits at 15 percent. The allowances are aimed at helping companies most vulnerable to international competition from developing countries that won’t have such stringent environmental requirements, including steel, paper and cement makers. The free allowances start in 2014 and drop by about 2 percent per year, ending in 2025.

Another 10 percent of the free allowances would go to states for investments in renewable power sources and energy efficiency. That share decreases starting in 2016, dropping to 5 percent by 2022.

Natural gas distribution companies also get 9 percent of the allowances in the early years, ending between 2026 and 2030. The smallest and shortest-lived number of allowances goes to oil refiners, who get 2 percent starting in 2014. Their allowances end in 2016.

Other free allowances are divided among the auto industry, efforts to capture and sequester carbon emissions, clean energy efforts, work to prevent deforestation and adaptation programs.

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10 Responses to Everything you wanted to know about Waxman-Markey allocations PLUS why the allocations do not undermine energy efficiency efforts

  1. Modesty says:

    Joe:

    You’ve had experts come on CP to comment on the circa 35% of allowances to be given to the ELDCs. Could you or one of these other experts explain what is at stake in giving allowances rather than auction proceeds to the ELDCs? What forms the basis for the current choice (ie distributing allowances)?

    Also, the term “free permits” or “free allowances” suggests that otherwise these companies would have to pay for allowances. For some of the companies receiving “free allowances” this is certainly the case, and the terminology is apt. But for the companies that are not required to hold allowances, ie are not covered entities, namely the ELDCs, the terminology is confusing. Auctioning these allowances and then distributing proceeds to ELDCs for various targeted purposes seems conceptually much simpler. So, again, why are the ELDCs getting allowances rather than auction proceeds?

    Thanks.

  2. This is an allocation of deck chairs on the Titanic.

    [JR: Too cryptic to be intelligible. Nor, even if I understand what you are saying, does the point make any sense. YOU could say that about any one thing any country is doing -- or any individual. What is the point of such a statement?]

  3. Point taken.

    My poetic jab that this bill appears to have no readily apparent connection with reducing CO2 emissions. It is about permits and prices and percentages – but I am unconvinced that either CO2 emissions will fall, or that warming will be mitigated.

    And yes I should be more expressive.

  4. paulm says:

    Possible in a transition stage of grief.

  5. Bill Woods says:

    “The unfortunate history here is that … state utility regulators … believe their duties are set forth in their enabling statutes, …”

    Such arrogance!

    ————
    “… utilities are strongly discouraged from promoting energy efficiency (indeed, most are rewarded for promoting energy and efficiency).”

    From context, I’m guessing that last phrase should be ‘energy and inefficiency’.

  6. Jim says:

    Studies by Jay Apt and others have suggested that a minimum of $35/t CO2 is necessary for utilities, regulators, etc. to change investment strategies. At lower prices they simply pay fees, as that’s what’s economically rational.

    Waxman-Markey’s $28 per ton cap assures that this will never happen. The owners of coal mines, railroads, and others committed to scorching the planet can rest easy: this bill will not perturb their business in any way.

    “Rearranging deck chairs on the Titanic” was at least a harmless activity; nobody thought it was the solution to the problem. Here, well-meaning people are being deluded that this bill will somehow cause actions leading to climate mitigation.

  7. Ben W. says:

    I understand your experts viewpoints, but I STILL don’t feel good about the LDC distribution schemes, solely because so many authoritative voices on this subject are disagreeing that going through the LDCs is the best way to act:

    In it’s analysis of W-M, the EPA says “Returning the allowance value to consumers of electricity via local distribution companies in a non-lump sum fashion prevents electricity prices from rising but makes the cap-and-trade policy more costly overall….since greater emission reductions have to be achieved by other sectors of the economy.”

    The Center on Budget and Policy Priorities says “On both economic and policy grounds, there are at least three significant flaws with the proposal to give local distribution companies free emissions allowances and to have them deliver the bulk of consumer relief by holding down increases in consumers’ bills. First, holding down increases in consumers’ utility bills would address less than half of the impact on consumers’ budgets from placing a cap on greenhouse-gas emissions. Second, state utility regulation across the country is too uneven to ensure that LDCs deliver the relief as policymakers intend. Third, artificially suppressing increases in utility bills would raise the overall cost of meeting the emissions cap and push up prices still more for other forms of energy and energy products. There also is no convincing evidence that a utility-based approach is substantially better than other approaches would be in reducing regional differences.” (http://www.cbpp.org/cms/index.cfm?fa=view&id=2800#_ftn7)

    [JR: I utterly disagree with the first and third, largely for reasons that I have said above. Frankly, I just don't think the authors understand what this bill does and what is happening to the energy market. As for the second, the two authors are not just friends of mine, they are two of the country's leading experts on this subject and they work closely with electric utilities and PUCs. So while I like the Center's work, it's just not on area they are expert on.]

    RFF’s Dallas Burtraw says, “ree allocation to electricity consumers will mitigate the change in electricity bills, however the ultimate effect on households is uncertain. The lower electricity prices that result lead to increased electricity consumption and associated emissions in the electricity sector. To achieve the same level of emissions reduction from the overall economy would require greater emission reductions in other sectors such as personal transportation,industry, etc. In turn, this raises the costs of goods and services from these sectors. Second, the allocation of free allowances to electricity consumption erodes the allowance value that otherwise might be returned to households or firms or directed to other purposes.”

    [JR: Again, I think he's just dead wrong on the first key point, as I've said above.]

    Maybe this is just a moot point, and maybe it was a necessary product of the compromise needed to get this bill out of committee, but I know that I will be at the hearing tomorrow with other members of the youth climate movement trying to get my message across that this is an inefficient, ineffective, and unjust to “protect” consumers. A greater percentage auctioned and then either rebated/dividend or recycled through the tax code accomplishes the same goals in a more efficient, progressive way.

    Just my (long) two cents,
    Ben

  8. Pat Richards says:

    Tune in to the hearings? Man, if they could just cut off debate on Waxman-Markey right now — both in the House and the Senate — and just send the thing to the President to sign we would reduce CO2 emissions from political yammering enough to meet the bills reduction targets for the first couple of years at least :)

  9. Peter Wood says:

    According to Stavins, approximately 17.1% of permits will be allocated for free to greenhouse gas emitting industries. The Waxman-Markey bill is far better in terms of permit allocation than cap and trade schemes in other countries.

    But there is an opportunity cost associated with allocating permits to polluters. Under Waxman-Markey, 1-4% of permits will be allocated for funding of international adaptation; 1-4% will be allocated for funding international low emissions technology. What is needed in terms of permit allocation is for these figures to be much higher — then we might even get an international agreement.

  10. Mike S. says:

    Could you remind me again why the allowances are not just given directly to consumers, instead of to corporations? Because the people do not have lobbyists. If the allowances were given to people (equivalent to an auction with dividend), then Congress could avoid this whole debate, and Congress would look like heroes with a new form of stimulus package. But no, they are captive to corporations, and the percentages supported by each member show who owns them and how much they own.