1. The Pie in the Sky: Emissions Allowances Under Power Plant Legislation David Doniger Policy Director, NRDC Climate Center Sustainable Energy Institute February 28, 2005

2. Time for Real Reductions President’s air pollution plan weakens public health protections of Clean Air Act, does not stop rising global warming pollution Public knows industry self-policing will not work –75 percent of Americans favor “mandatory controls on carbon dioxide and other greenhouse gas emissions” (Gallup poll) Business and political leaders know carbon caps are inevitable and needed to end uncertainty Huge cost of delaying carbon caps. Time to act is now

3. Carbon Cap Proposals Major proposals in Congress: –Four-pollutant power sector bills (Jeffords- Collins-Lieberman, Carper-Chafee) –McCain-Lieberman, covering CO 2 and other global warming pollutants from power sector, major industry, and transportation All bills use “cap-and-trade” approach from acid rain program

4. Basics of Cap-and-Trade Emissions cap of X million tons X million “emissions allowances” Each covered source continuously monitors emissions and annually turns in one allowance for each ton of pollution Allowances are tradeable –Control costs revealed in allowances’ market price –High-cost sources buy; low-cost sources sell

5. Allowance Allocation is Crucial Cap-and-trade programs are efficient – they help minimize program resource costs. But for carbon they can cause large wealth transfers.  Allowance market values can greatly exceed program resource costs  Allowance value is passed on to consumers in electricity and product prices  It really matters who gets the allowances Allowance allocation has not gotten the attention it deserves

6. Windfall Profits for Industry?… Research by RFF, others, shows “grandfathering” all allowances to industry leads to massive windfall profits – at consumer expense. –Power sector carbon allowances worth >13 times more than power industry assets are reduced. –Only 7.5% of all allowances needed to offset power industry asset reductions. –Greater grandfathering leads to tens of billions of dollars in unjust enrichment

7. …Or Protection for Consumers, Workers, and Communities? The allowance to pollute is a public resource. Allowances for tradable pollutants should be used to incentivize technology deployment and protect consumers, not unjustly enrich generators. Use slices of the allowance pie to accomplish specific public purposes, e.g.: –Promote efficiency, renewables, and cleaner generation –Assist vulnerable workers and communities –Protect consumers

8. Key Concepts from Jeffords and McCain-Lieberman Bills Some allowances allocated directly to power sector –Mix of forward- and backward-looking, output and input bases Major share of allowances allocated to a Climate Change Credit Corporation – a public trustee. CCCC/trustee uses allowances for defined public purposes.

9. Promoting New Technology Allocate a slice of the allowance pie to incentivize efficiency, renewables, and cleaner generation Allocations could be based on electricity output (lbs/MWh) for first 10 years of facility life –Megawatt-hours generated for renewables –Negawatt-hours “generated” by efficiency –New cleaner fossil sources also receive output allocations (e.g., CHP, combined cycle gas, coal gasification (IGCC)) –Extra allocation to incentivize geologic sequestration

10. Transition Assistance Slice of allowances for “just transition” assistance. –Adversely affected workers in specific industries –Disproportionately affected communities –Most electricity-intensive industries

11. Protecting Consumers Protecting consumers against excessive cost increases –In competitive model, electricity costs rise by more than carbon-control costs. –Who gets this windfall? Consumers or shareholders? –Allocating allowances (or allowance proceeds) for consumer rebates can offset excess electricity cost increases

12. Example: Allowance Distribution in Clean Power Act – 2008

13. Example: Allowance Distribution in Clean Power Act – 2018

14. Future Directions? Global warming pollution problem not going away Industry’s business problem – uncertainty – not going away Solutions must be both efficient and equitable Allowance allocations are a key tool to meet both objectives