Free Allowances to Utilities Are Not Dividends to Consumers

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.

 

Comments

[JohnCanfield]

Great summary of the dangers of locking in free allocations, Mike.

What ever happened to Chris Van Hollen's Cap & Dividend proposal?

[Russycle]

Corporate utilities have no interest in passing savings to the consumer. My electric co. has all kinds of incentives for investing in efficient appliances and home improvements, but they make you jump through so many hoops I'll bet hardly anyone takes advantage of them. The non-profit co-op down the road, on the other hand, makes it insanely easy to to take advantage of their incentives.

If these idiots give our utilities a break so they can "pass the savings on to consumers", I won't hold my breath waiting to see 'em. At least the execs will be able to give themselves a nice bonus.

[Thermodynamics]

I guess there are about three levels of green in electric power. It is about centralized vs distributed production and carbon vs no carbon

1. The groups aligned with the NRDC only get one green. They recognize the threat posed by CO2 and are willing to work with the power companies via cap and trade and other legalistic approaches that maintain the central production of power. That is the key - centralized production of power. The power companies like this because they get to keep their primary position. ---- central and still burning coal,

2. The green, green view brings new players into the power biz - players who make supergreen power in huge facilities- huge PV arrays in the desert, giant wind farms, solar thermal steam generating plants. supergreen but centrally produced in huge facilities. ---- much better: central but no coal

3. The green, green, green view is that we should maximize distributed power production -- rooftop solar, local wind farms, lots of individual and community production of power that hooks up to the grid and makes it more reliable and redundant. --- power from and to the people