Does the Waxman-Markey Bill "Give Away 85% of Allowances to Polluters"?

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As the Waxman-Markey climate/energy bill nears a make-or-break vote in the House, those who work to improve it need more than ever to understand it first. Smart strategy is based on sound information. On that note: one of the central critiques of the bill is a red herring at best and at worst simply false.

Here's the critique, which should sound familiar from endless media repetition: Waxman-Markey gives away 85% of emission allowances to polluters, instead of auctioning them like Obama wanted.

This, it is said, will enrich dirty-energy shareholders at the expense of consumers. It is evidence of the bill's corruption by special interests; evidence that cap-and-trade is just the fiasco critics warned; evidence that Democrats are just as beholden to big corporations as Republicans. And so on.

Two problems with the critique: it asks the wrong question and offers the wrong answer.

The wrong question

By capping greenhouse-gas emissions, the bill transforms them into a finite commodity, thereby giving them monetary value. In effect, it creates a huge new pool of value, in the form of emission allowances.

How should that value be distributed?

On this subject, discussion has been dominated by the "allocation vs. auction" debate: should the government distribute the allowances or auction the allowances and distribute the resulting revenue? Allowance auctioning has taken on a kind of iconic quality -- it's become a rallying cry for progressives. I've indulged in that cry myself, more than once.

But ultimately it's the wrong question. It just doesn't make a ton of difference.

Imagine the government had a big pile of vouchers, each of which could traded in for $5. It could trade in the vouchers itself and distribute the cash, or it could just distribute the vouchers. Now ask yourself: is the mechanism -- the system governing who trades in the vouchers -- the most important policy question here? Obviously not. A voucher and a $5 bill are of equal value.

What matters in a cap-and-trade program is who receives the value of the allowances. Follow the money, not the mechanism.

(One note: Alan Durning makes the argument here that auctioning the allowances and distributing the cash is more transparent -- that distributing allowances somehow hides what's going on. But it's not a secret who's receiving the allowances; here's a PDF laying it out. I don't see why a procedural disagreement should be the central battle. Procedural issues don't have a record of success rousing the public.)

The wrong answer

Now that we're talking about the right thing -- the value itself, rather than the procedural mechanism that produces it -- let's ask: who does get it in the bill? Is it really "polluters"? Is this bill nothing but a porkfest full of special interest giveaways?

The answer to that is a qualified no. The Lieberman-Warner climate bill from 2008 -- that was a porkfest. It handed out allowances like candy, with no particular policy rationale aside from which constituencies had the most political muscle. Perhaps that bill colored media and public perceptions of cap-and-trade to the point that everyone's just predisposed to see that dynamic at work no matter what. Once a storyline is established, it's hard to uproot it.

But Waxman's staff is a storehouse of incredible policy acumen, and the allowance distribution scheme in the bill, while certainly not perfect, is surprisingly policy-driven.

There are a variety of ways of breaking down the allowance allocations. Here's how staff of the House Energy and Commerce Committee group the distribution in 2014:

• Consumers: ~50%
• Jobs & Competitiveness (i.e., industry handouts): ~23%
• Clean energy and public purposes: ~25%

You can question those latter two categories. To some people (i.e., me), money for carbon capture and sequestration (CCS) looks more like an industry handout than a clean energy investment. There are other allocations you could frame differently.

Point is, roughly half the allowance value goes to consumers. Roughly a quarter goes to Clean Stuff like clean energy, prevention of international deforestation, adaptation, state efficiency programs, and the like. And roughly a quarter goes to Dirty Stuff like merchant coal generators, oil refineries, and trade-exposed, carbon-intensive industries like steel. Not how I'd do it, but not "giving away 85% of allowances to polluters." The bulk of the value is going toward protecting consumers and transitioning to a clean energy economy.

Another way of breaking it down is to ask how much value will go to various purposes over the lifetime of the bill. Nat Keohane, an economist at the Environmental Defense Fund, has worked up some numbers based on EPA projections for the value of allowances. Here's what he's found (note that he categorizes things somewhat differently than above):

• Households: $703 billion
  This includes the value returned to customers via electricity and natural-gas local distribution companies (LDCs), the tax credit and refund programs, and the climate-change consumer refund program.
• Small business: $118 billion
  This includes the portion of LDC value that would be returned to commercial ratepayers.
• Public purposes: $350 billion
  This includes green jobs training, efficiency and renewables funding, building codes, clean energy innovation centers for R&D, adaptation, clean tech transfer, and international deforestation reduction.
• Industry: $362 billion
  This includes merchant coal, long-term contract generators, oil refineries, trade-exposed industries, CCS, advanced vehicles, and LDC allocations to big industrials.
• Deficit reduction: $86 billion
  
• TOTAL: $1.62 trillion
  

Again, not how I'd do it, but not "85% of allowances to polluters." Somewhere around 22% of allowance value is going to big, polluting industries over the lifetime of the bill. Given the amounts we're talking about here, that's a huge amount of money, but it's nowhere close to 85%.

Other debates

I suspect it's futile to say so, but this is not meant to cheerlead for the bill. There are plenty of legitimate debates to be had over how it's structured. Some beefs:

• I'd like much less allowance value given to polluters and consumers alike, and more devoted to investing in clean energy and efficiency.
• The 2020 target -- reducing emissions 17 percent below 2005 levels -- is far too weak, especially given the uncertain effect of offsets. (See Jesse for more on this.)
• The renewable energy and efficiency mandates (the RES and the EERS) have been mooshed into a Combined Efficiency and Renewable Energy Standard (CERES) and weakened to the point of uselessness. Separate them back out and strengthen them.
• The soon-to-be-gargantuan carbon market doesn't have the regulations in place to keep from entering the bubble-bust cycle so familiar in financial markets in recent years. (See Friends of the Earth's "Subprime Carbon" report.)

I'm ambivalent about the strategy of using LDCs to get value to consumers, though I think Joe Romm's contributors mount a pretty convincing defense. You need some way of accounting for regional disparities, and the dividend crowd hasn't, to my knowledge, offered anything plausible.

Anyway, point is, these debates and many more are worth having. Yay for debate and dissent!

But lots of progressive time and energy are being devoted to what is effectively a fake controversy and a false charge against the bill. The bill is not entirely a pork party for polluters. It's only a quarter pork party!

Comments

[kjr10]

Climate change is an important issue and needs to be addressed, but we have to be prepared for and find a way to mitigate the extra costs that the necessary regulation will impose on lower-income families.

http://www.policymattersohio.org/CarbonCapInvest2009.htm

[rumsblogger]

I still don’t understand why, if Congress’ goal was to help consumers pay for the potential increase in energy costs, that they don’t just give the proceeds of the sale of allowances (the dividend) to consumers, or allocate the allowances themselves, as in www.carbonshare.org, directly to consumers.
If the bill had done this, then I would agree with the contention that 50% was for consumers. But no. The allowances go to utilities, who produce or deliver 50% coal-fired electricity. The price of coal needs to go up relative to the price of renewables, and giving utilities free allowances will probably not achieve that result.
The value should go to the people, not to their utilities.
Regarding the regional disparities, the answer is simple: have the dividend vary by state. Were you just waiting for someone else to say it?

[NormDePleum]

The Waxman-Markey bill is nothing more than the creation of another burdensome beaucracy playing an expensive shell game that is infuriating our farming states and their democrat congressmen.
I think the bill has as much chance passing into law as an Argentine glacier has to retreat!

[JeandeBegles]

Reading your article and also Joe Romm's summary, it is really very complicated to understand how really works this bill. I hope you are right and that this bill is the best possible one for Obama to lead USA toward the huge CO2 reductions that the climate rescue project needs.
For me, the main question is not about how much allowances are given for free (it is however an important question), but how can a cap and trade system drive and stimulate the individual efforts to cut one's CO2 consumption?
There are 2 different questions in this one:
1) How can we cap the gasoline consumption? At the end of the year, parking my car in an Exxon gas station, will I hear something like: sorry, our CO2 quota for 2010 has been over since yesterday. Try with Shell next door, they may have some quota left!
2)My individual effort to cut my gasoline consumption will create some more quota available with the consequence of decreasing the CO2 price (what is more common is less valuable, this is basic economy). So the individual effort counts for NOTHING to reduce the CO2 emission under a cap and trade system. Isn't this very worrying if we really want to cut by 85% the CO2 emissions?
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[Rhetticent]

You're surprised that the lobbyists are gutting the legislation? Can you not see that this is reflective of the government's cynicism, that they really don't believe in global warming but can't wait to get a revenue stream in place? That this is all about money and power, and nothing to do with the environment? And they're using the environmental movement to get what they want, but they'll sell you out in a heartbeat once they get their taxes in place?