Free Allowances to Utilities Are Not Dividends to Consumers

07/25/2009 05:12 am ET | Updated May 25, 2011
  • Mike Sandler Political economist, climate change professional and sustainability advocate

The allocation section of the Waxman Markey bill, also called the American Clean Energy and Security Act (ACES), aims to distribute permits representing our national greenhouse gas emissions for decades into the future.

That section of the 900+ pages of climate legislation, to be debated on the House floor as soon as next week, has kept politicians, lobbyists, and bloggers busy: how much to auction, how much to giveaway, and to whom?

The Obama Administration campaigned behind a 100% auction of permits, and included auction revenues in a draft budget proposal. Environmental groups support auctioning 100% for many reasons, including that it avoids the government picking winners and losers, avoids the windfall profits to fossil fuel industry seen in Europe's ETS, and the auction revenues can be used for public goods and to lower the costs to consumers.

However, the House Energy and Commerce Committee chose to divide the spoils to powerful constituencies instead of auctioning 100%. This could lock in a 30 year giveaway of allowances, with very little public understanding of what is happening. It would be as if the Federal Reserve Act of 1913 legislated monetary policy through 1940. Ridiculous, right? I mean, who had the crystal ball to predict that Great Depression thing?

Some well-regarded groups, including NRDC, Joe Romm, and David Roberts of Grist have been implying that the giveaway of permits to utilities (also called "local distribution companies" or LDCs), representing 30% of permits (trillions of dollars), is equivalent to giving the money directly to consumers. Even the Congressional Budget Office's latest report assumes that the free LDC allocations will appear as a rebate on household utility bills.

Will the utilities use their free permits to keep costs to consumers low? The ACES currently states they must use the windfall "for the benefit of the retail ratepayer," but what is "benefit"? A previous President might have said that a highly profitable utility benefits ratepayers through trickle-down economics. One hopes the current administration can see the similarities between giving Duke Energy and Peabody Coal free permits and those bank bailouts and AIG bonuses paid for with taxpayer money.

For example, would LDCs invest the free permits into carbon sequestration from coal? Let's apply what we know from the government funding in the U.S. auto industry's R&D for the "Supercar concept cars" of the last decade. The U.S. companies claimed the technology was not ready yet. 10 years passed. Toyota took the initiative, and suddenly hundreds of thousands of Priuses are on the road. GM lost market share, finally came up with a nice design for the Volt (but no actual cars), then the government gives it billions of bailout money, and GM declares bankruptcy. This looks like a plausible model for how utilities will react when they receive free permits, and the government asks them, sweetly, pretty please, to invest in carbon sequestration or other breakthrough technology. They'd prefer to pocket the dough.

If Congress' real goal was to help consumers pay for the potential increase in energy costs, they could just give the allowances (or the proceeds of the sale of allowances) directly to consumers, and let them sell them to the utilities, either through their electricity bills or through a mediated transaction like eBay. If the allowances were given to people (equivalent to Rep. Chris Van Hollen's Cap and Dividend proposal that sells the allowances to companies and then returns the proceeds to consumers as a per capita dividend), then we 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, and we, the people, do not have enough lobbyists roaming the marble corridors, demanding their dividend or share.

The allowance value should go to the people, not to their utilities.