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The Pie in the Sky: Emissions Allowances Under Power Plant Legislation

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

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The Pie in the Sky: Emissions Allowances Under Power Plant Legislation

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  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 CO2 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. ProtectingConsumers • 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

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