A closer look at the Kerry-Lieberman cap-and-trade proposal

[ProSense]

A closer look at the Kerry-Lieberman cap-and-trade proposal

by Robert Stavins

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Is the Kerry-Lieberman allowance allocation a corporate give-away?

Perhaps unintentionally, there has been some potentially misleading coverage on this issue. At first glance, about half of the allowances would be auctioned and about half freely allocated over the life of the program, 2012-2050. (In the early years, the auction share is smaller, reflecting various transitional allocations that phase out over time.) But looking at the shares that are auctioned and freely allocated can be very misleading.

Instead, the best way to assess the real implications is not as "free allocation" versus "auction," but rather in terms of who is the ultimate beneficiary of each element of the allocation and auction, that is, how the value of the allowances and auction revenue are allocated. On closer inspection, it turns out that many of the elements of the apparently free allocation accrue to consumers and public purposes, not private industry. Indeed, my conclusion is that over the period 2012-2050, less than 18 percent of the allowance value accrues to industry.

First, let's looks at the elements which will accrue to consumers and public purposes. Next to each allocation element is the respective share of allowances over the period 2012-2050:

I. Cost Containment

a. Auction from cost containment reserve, 3.1 percent

II. Indirect Assistance to Mitigate Impacts on Energy Consumers

b. Electricity local distribution companies, 18.6 percent

c. Natural gas local distribution companies, 4.1 percent

d. State programs for home heating oil, propane, and kerosene consumers, 0.9 percent

III. Direct Assistance to Households and Taxpayers

e. Allowances auctioned to provide tax and energy refunds for low-income households, 11.7 percent

f. Allowances auctioned for universal tax refunds, 22.3 percent

IV. Other Domestic Priorities

g. State renewable and energy efficiency programs, 0.6 percent

h. State and local agency programs to reduce emissions through transportation projects, 1.9 percent

i. Grants for national surface transportation system, 1.9 percent

j. Auctioned allowances for Highway Trust Fund, 1.9 percent

k. Domestic adaptation, 1.0 percent

l. Rural energy savings (consumer loans to implement energy efficiency measures), 0.1 percent

V. International Funding

m. International adaptation, 1.0 percent

VI. Deficit Reduction

n. Allowances auctioned for deficit reduction, 7.4 percent

o. Remaining allowances auctioned to offset bill's impact on deficit, 6.1 percent

Next, the following elements will accrue to private industry, again with average (2012-2050) shares of allowances:

I. Allocations to Covered Entities

a. Energy-intensive, trade-exposed industries, 7.0 percent

b. Petroleum refiners, 2.2 percent

c. Merchant coal-fired electricity generators, 2.2 percent

d. Generators under long-term contracts without cost recovery, 0.9 percent

II. Technology Funding

e. Carbon capture and sequestration incentives, 3.8 percent

f. Clean energy technology R&D, 0.7 percent

g. Low-carbon manufacturing R&D, 0.3 percent

h. Clean vehicle technology incentives, 0.3 percent

III. Other Domestic Priorities

i. Manufacturing plant energy efficiency retrofits, 0.1 percent

j. Compensation for early action emissions reductions prior to cap's implementation, 0.1 percent

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Moreover, because some of the allocations to private industry are -- for better or for worse -- conditional on recipients undertaking specific costly investments, such as investments in carbon capture and storage, part of the 18 percent free allocation to private industry should not be viewed as a windfall.

I should also note that some observers (who are skeptical about government programs) may reasonably question some of the dedicated public purposes of the allowance distribution, but such questioning is equivalent to questioning dedicated uses of auction revenues. The fundamental reality remains: The appropriate characterization of the Kerry-Lieberman allocation is that about 82 percent of the value of allowances go to consumers and public purposes, and 18 percent to private industry.

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[ProSense]

1. This is really good information. n/t

[karynnj]

2. bottom line 82% go to help the consumers - and DU unrecs this solid piece of analysis

Not too clever.

Thanks you for posting. It really looks like some really smart decisions were made as to who to protect and to prevent speculation.