The Pie in the Sky: Emissions Allowances Under Power

Plant Legislation

David Doniger

Policy Director, NRDC Climate Center

Sustainable Energy Institute

February 28, 2005

Time for Real Reductions• President’s air pollution plan weakens public health

protections of Clean Air Act, does not stop rising global warming pollution

• Public knows industry self-policing will not work– 75 percent of Americans favor “mandatory controls on

carbon dioxide and other greenhouse gas emissions” (Gallup poll)

• Business and political leaders know carbon caps are inevitable and needed to end uncertainty

• Huge cost of delaying carbon caps. Time to act is now

Carbon Cap Proposals

• Major proposals in Congress:– Four-pollutant power sector bills (Jeffords-

Collins-Lieberman, Carper-Chafee)

– McCain-Lieberman, covering CO2 and other global warming pollutants from power sector, major industry, and transportation

• All bills use “cap-and-trade” approach from acid rain program

Basics of Cap-and-Trade

• Emissions cap of X million tons• X million “emissions allowances”• Each covered source continuously monitors

emissions and annually turns in one allowance for each ton of pollution

• Allowances are tradeable – Control costs revealed in allowances’ market

price– High-cost sources buy; low-cost sources sell

Allowance Allocation is Crucial

• Cap-and-trade programs are efficient – they help minimize program resource costs.

• But for carbon they can cause large wealth transfers.Allowance market values can greatly exceed program

resource costsAllowance value is passed on to consumers in

electricity and product prices It really matters who gets the allowances

• Allowance allocation has not gotten the attention it deserves

Windfall Profits for Industry?…

• Research by RFF, others, shows “grandfathering” all allowances to industry leads to massive windfall profits – at consumer expense.– Power sector carbon allowances worth >13 times more

than power industry assets are reduced.

– Only 7.5% of all allowances needed to offset power industry asset reductions.

– Greater grandfathering leads to tens of billions of dollars in unjust enrichment

…Or Protection for Consumers, Workers, and Communities?

• The allowance to pollute is a public resource.• Allowances for tradable pollutants should be used

to incentivize technology deployment and protect consumers, not unjustly enrich generators.

• Use slices of the allowance pie to accomplish specific public purposes, e.g.: – Promote efficiency, renewables, and cleaner generation– Assist vulnerable workers and communities – Protect consumers

Key Concepts from Jeffords and McCain-Lieberman Bills

• Some allowances allocated directly to power sector – Mix of forward- and backward-looking, output and

input bases

• Major share of allowances allocated to a Climate Change Credit Corporation – a public trustee.

• CCCC/trustee uses allowances for defined public purposes.

Promoting New Technology

• Allocate a slice of the allowance pie to incentivize efficiency, renewables, and cleaner generation

• Allocations could be based on electricity output (lbs/MWh) for first 10 years of facility life– Megawatt-hours generated for renewables– Negawatt-hours “generated” by efficiency– New cleaner fossil sources also receive output

allocations (e.g., CHP, combined cycle gas, coal gasification (IGCC))

– Extra allocation to incentivize geologic sequestration

Transition Assistance

• Slice of allowances for “just transition” assistance.– Adversely affected workers in specific

industries– Disproportionately affected communities– Most electricity-intensive industries

Protecting Consumers

• Protecting consumers against excessive cost increases– In competitive model, electricity costs rise by

more than carbon-control costs. – Who gets this windfall? Consumers or

shareholders?– Allocating allowances (or allowance proceeds)

for consumer rebates can offset excess electricity cost increases

62%

20%

6%

10%

1.6%

ResidentialConsum ersEE/RE/CleanerGenerationTransitionAssistanceExisting Gens

Bio- & Geo-Sequestration

Example: Allowance Distribution in

Clean Power Act – 2008

78%

20%

1.6%

ResidentialConsum ers

EE/RE/CleanerGeneration

Bio- & Geo-Sequestration

Example: Allowance Distribution in Clean Power Act – 2018

Future Directions?

• Global warming pollution problem not going away

• Industry’s business problem – uncertainty –not going away

• Solutions must be both efficient and equitable

• Allowance allocations are a key tool to meet both objectives