Changing Political Landscape and Paths Forward Dallas Burtraw February 9, 2010

Alternatives for US policy Waxman-Markey/Kerry-Boxer Energy leg., electricity-sector only leg., standards Cantwell-Collins (dividends) Clean Air Act

The current situation? The Waxman-Markey/Kerry Boxer approach solves many problems (competitiveness, low income, electric utilities, cost) and suffers under the biggest one (allocation).

Partial Equilibrium Costs in Cap-and-Trade PAPA How households are affected depends much more importantly on what happens to the rectangle than on the size of the triangle.

Common Pool Resource 1. Nonexcludable 2. Depletable Philosophical reference: the resource is owned in common.

Public Antagonism 1.Wall Street shouldn’t get it 2.Government shouldn’t get it 3.Whose money is it anyway? 4.Uncertainty…

Climate change poses an extraordinary coordination and cost-sharing challenge. That challenge is amplified by the fundamental uncertainty about climate science. Economic response and technological change add additional uncertainty about costs. We find that policy implementation adds further uncertainty with respect to the effects on households. The more complex the policy, likely, the greater will be the uncertainty for individual households. Does Policy Propagate Uncertainty?

Three Uncertain Aspects (2016): LDC Provisions, Renewables & Technology, Energy Efficiency* Modeling H.R. 2454: Net Avg CS Loss per hh Allowance Price OPTIMISTIC WAXMAN- MARKEY $137$13.20 PESSIMISTIC WAXMAN- MARKEY $421$ % CAP-AND-DIVIDEND$228$17.37

Consumer Surplus Loss by Income Quintile Avg The Middle Class Energy Tax

Uncertainty fuels the notion that the technocrats don’t know what they are doing. If the little guys can’t understand what is happening, the big guys win. …The devil is in the details.

Options for Allocation 1.Interest group politics 2.Surgical allocation to address leakage 3.Invest 4.Return to consumers a. dividends b. tax reform

National Comparison Dark Blue: Effect of cap/tax Light Blue: Net effect after accounting for revenue - National Tax Journal 2009 Cap and Dividend (nontaxable) Income Deciles Permit Price $20.87

Public finance view: achieve efficiency use other tools to achieve distributional goals For example, couple climate policy with separate tool for income redistribution Common pool resource view: achieve fair, popular climate policy use other tools to achieve efficiency For example, couple with reform of the tax preference for home mortgages

Strategy: Reinvest Dividends  Couple with existing education, incentive programs  Tax preferred expenditures  Borrow future year dividends at zero-interest  Tax-free revolving loan funds (Nudge)  More How will households designate the value that may be returned to them through dividends?

Thank you

LDC Provisions and Energy Efficiency/Technology Development in 2016 Modeling H.R. 2454:

Remaining Provisions Held Constant

Electricity Price Effects of Allowance Allocation Auction Free Allocation to Generators Free Allocation to Consumers (LDCs) …But, Allowance Price Increases by 12-15% With Subsidy to Elec. Consumption Reduces Price only in Regulated Regions Efficiency Advantage Lowest Social Cost but Higher Prices