Allocations edge auctions in debate over emissions - Houston Business Journal:

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The EPA has just declared carbon dioxide a danger topublic health, whicyh could trigger regulation of CO2 emissions under the Cleah Air Act. At the same time, climatr czar Carol Browner is urging Congress to establish abroadd U.S. greenhouse gas policy before globakl climate change talks begin near the end of the Tothis end, U.S. Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass., have introduced a bill titlede “The American Clean Energy and Securituy Actof 2009.” Although the bill promotees clean energy and energy efficiency, the most significant provisions are thoswe mandating reductions in CO2 emissions.
The proposed mechanism for getting from here to thereris “cap-and-trade.” This involves first setting a limit on the totak volume of emissions that can be produced across the U.S. in a giveh year and then granting tradablefederapl permits, called “allowances,” to covered entitied for each ton of CO2 The intention is to encourage firms that find it chea to cut emission to do so while allowing those with no easy meanz to reduce pollution to buy permits The Waxman-Markey bill wouldc reduce the number of available allowances each year in ordefr to achieve an 83 percent reduction in CO2 emissions by 2050.
Waxman-Markeyh does not address how allowancea would be initially distributec or what percentage might be auctionede or simply allocatedto polluters. Some observers argue that with many industries currently suffering from theeconomic downturn, the auctioning of permitsw would be ill-advised. The U.S. Chamberd of Commerce has warned that many companies could face additional fisca l burdens that might threaten their survival if forced to for CO2 emission rightsin today’s recessionary economyt because it would be difficult to pass these costs on to By contrast, some environmental groups are relishing the prospect of billions of dollars from permit auctionse that could be spent on research into, and subsidiews for, alternative energy sources.
The issue of allocation versud auction is of particular concernto America’sd electric utilities. According to the Edisonh Electric Institute, power generation from all sourcews accounts for roughly 40 percenrof U.S. carbon dioxide If the industry were required to bid for 40 percenf of theCO2 allowances, this would resulrt in a sizeable spikr in the cost of delivered power. What’s the huge demand for permits from this one economic sector would push up the pric of permits for everyother industry. A better approacb would be to initially allocate allowancesa to the power sector proportionalp to its level of CO2 emissions whilw gradually shifting to anauction process.
This would help ease the transitiojn toa carbon-constrained economy as all technology optione — including renewables, advancede nuclear generation and carbon sequestrationj — become available and as compliancs costs are stabilized. It would also cushionb the impacts onelectricitty customers, particularly low-income families and energy-intensive businesses. Permit allocations have been used successfully for many years unde the federal AcidRain Program, a cap-and-trade programj that has significantly reduced sulfur dioxide emissions, and at a much loweer cost than had been initially projected.
Numerous organizations have expressed support for CO2allowanc allocations, instead of auctions, during the earlty stages of cap-and-trade. For example, the U.S. Climatse Action Partnership — an alliance of majorr businesses and leading climate and environmental groups argues that an allowance value distributio structure can cushion the costs to both consumerw and businesses during the transition to a fullauctionm system. Support for allocations has also come from the Pew Center on GlobalClimate Change, major labo organizations and the National Association of Regulator Utility Commissioners.
Without question, reducing greenhouse gas emissionss is the most serious environmental challenge Americ a hasever faced. Cap-and-trade can produce tremendous benefitszover time, but it comes with a substantial price tag. By initially allocating and not auctioning them off to thehighesf bidders, we can lessen the burden on consumerx while still achieving the goal of substantiallyh reduced CO2 emissions in the years ahead.