06/29/2009 05:12 am ET | Updated May 25, 2011

The Terminator's Salvation for Allocation in Waxman-Markey

Just in time for the summer blockbusters, a group of robots (lobbyists) run by evil machines (coal-fired powerplants) have infiltrated the highest levels of government (Congress' Energy and Commerce Committee). Only (the ideas in a recent letter from) California Governor Arnold Schwarzenegger can stop them.

On April 2nd, when the Waxman Markey bill (H.R. 2454, the American Clean Energy & Security Act) was first introduced, nearly every environmentalist in the country beamed a bright smile. But since then, it was altered to accommodate lawmakers including Reps. John Dingell (D-Mich.) and Rick Boucher (D-Va.), and something changed. By May 21st, when the bill passed out of the Energy and Commerce Committee by a 33-25 vote, some of their press releases contained words such as "unfortunately," "politically feasible," "disappointed," and "certain provisions need improvement." (some groups' public pronouncements are still all positive)

Which provisions are they talking about? Waxman Markey has 4 parts: clean energy, energy efficiency, reducing global warming pollution, and transitioning to a clean energy economy. They all sound great, but in part 3, the allocation of allowances had been co-opted.

The current version now gives about 25% of the allowances, which are basically money, for free to fossil fuel companies and energy-intensive industries, and 35% of the allowances, freely, to utilities. In this blog I won't discuss the other 40% of allowances, which seem to be split among well-intentioned causes such as lump-sum rebates to low-income consumers, state energy efficiency programs, climate adaptation, preventing tropical deforestation, green jobs programs, and more.

The emission reduction targets have also been diluted, from 20% below 2005 levels to 17%, which might sound like a palatable change until you find out that the IPCC, comprised of the world's best climate scientists, recommend reaching 20% below 1990-level emissions by 2020, and this new Waxman-Markey version will reach the equivalent of just 4%. Others have complained about how the offsets provision could undermine the incentive to reduce for decades.

This capitulation to the fossil fuel industry is surprising because the current Congress and President are the best case scenario for strong climate legislation that we've had in decades. Even the dire economy can be seen as helping the cause. GM and Detroit are not there to lobby against it, the banks that like to fund coal fired powerplants are too busy drinking from the public trough, and the oil companies' "inside man" Dick Cheney is safely on the outside.

As people, Reps. Waxman and Markey are both committed to addressing climate change. So why did they let 60% of allocations go the wrong way? Most climate advocates recognize the importance of getting something passed before the international climate convention in Copenhagen in December. But a pollution subsidy is not the type of leadership other countries are looking for.

Why not remove the allocations portion, add in a few guiding principles for allocation, circumvent the lobbyists by delegating the specific allocation formula to an EPA Climate Allocations Board, and pass the rest of the bill? Just make sure the bill doesn't lock in long-term giveaways to the very companies that are causing the problem.

In California, the AB32 market discussions around allocation have been all about design principles: compensating consumers, protecting low-income households and communities, getting maximum emission reductions at reasonable costs. The slow pace of market development in California has been frustrating because many advocates just want a carbon price, any carbon price, right now. But watching Waxman Markey turn into a giveaway provides some justification for California's slow pace. There's still hope that it won't be totally co-opted by special interests in the name of political expediency.

I mentioned in a previous blog that the EPA's analysis of Waxman Markey assumed dividends returned to households, and that California, for all its leadership with AB32 hasn't conducted any such analysis yet. That may be changing. The Governor recently wrote a letter to new advisory committee asking them to consider it. As the Governor stated,

Among other tasks, you must carefully consider various options for freely distributing or auctioning allowances potentially worth billions of dollars and, if auctioned, for distributing or deploying auction revenues. In that regard, there is one idea in particular I would like you to explore among other options: the concept of returning the value of allowances back to the people, including through an auction of allowances and distribution of auction proceeds in the form of a rebate or dividend, in order to minimize the cost to California consumers and maximize the benefits to the state's economy.

Terminator Salvation?