Common Tragedies

Thoughts on Environmental Economics

Sense is elsewhere

Posted by Rich Sweeney on April 24, 2009

Clearly I’m not doing a very good job of quitting CT. That’s because there’s too much insanity going on in DC these days and, honestly, I need to vent. Today I’m particularly riled up by this report from the WSJ on the “cap and haggling” going on behind the scenes of the Waxman-Markey bill.

By all accounts, load based allocation (LBA), which is the free assignment of carbon permits to electricity ratepayers, has emerged at the most likely winner of the permit allocation sweepstakes. Both US-CAP and EEI support allocating 40% of permits to ratepayers, and from the looks of the WSJ report, Congress is falling in line. And you know what? LBA is fine. Sure it goes against the full auction Obama pledged repeatedly during his campaign, but this is politics, and compromises must be made to get things done. However, we should understand the implications of this decision:

1) LBA is a subsidy to electricity consumption. It will reduce the price impact felt by electricity consumers (relative to 100% auction), but INCREASE the price impact everywhere else in the economy. That means you, drivers.

2) One thing to keep your eye on is just how these permits will be allocated to ratepayers. There are three possible determinants: per capita, per unit consumption, or per emissions, with combinations also possible. And which dimension we choose to allocate along dramatically affects the outcome for a given region. California has lots of people and few emissions – ei it does really well along one dimension and really poorly along another. Politically, LBA is also being billed as a way to compensate coal dependent regions. That means emissions is looking like the front runner here, which is the least efficient allocation scheme possible. As I’ve written before, when you consider all of the work eco-friendly states have done over the past 20 years, this seems like a pretty effed up definition of equitable allocation.

3) 40% is a lot of permits to give away for free and 10 years is a long friggin time. Even though electricity accounts for 40% of current emissions, the electric power sector is supposed to account for the bulk of emissions reductions in the early years of a climate program. Either we don’t want the electricity sector to do any work (then who will?) or we feel the need to lavishly compensate them for doing so.

So, in sum, who benefits? From a political-realist perspective it clearly says something that electric utilities are lobbying for LBA. And as I described in point 2, any allocation scheme within LBA is going to benefit some states more than others. There’s no free lunch, and somebody is clearly getting pwn3d here.

Yet this is DC, and we only like our policies if they promise that 2+2 can be greater than 4. In that same article compensation is also promised for cement and steel producers and low income families. At the end Nancy Pelosi is quoted as saying: “There should be no cost to the consumer”. Keep telling yourself that, Madame Speaker.

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7 Responses to “Sense is elsewhere”

  1. What, no ponies?

    I want a pony.

  2. Hydra said

    If we want the electricity companies to do something for us, the we should expect to pay for it.

    No matter how you slice it, equitable allocation is going to be a tough problem. As Glaeser points out, California is able to redcue its consumption largely because it has a benign climate. Should they be more compensated for their previous efforts if they succeeed by an accident of climactic geography?

    ———————————————

    “Yet this is DC, and we only like our policies if they promise that 2+2 can be greater than 4.”

    What is the point of having a policy if it doesn;t produce a net social benefit greater than the policy costs?

    Given that you have a policy that creates a net social benefit, what it wrong with structuring them so that losers from the policy are compensated by the winners?

    Why promote a policy that is supposed to be good for everyone and then insist on it being paid for by “the bad guys”. Doesn’t this just amount to stealing? (From the “bad guys, sure, but it is still stealing.) Where did the environmntal movement lose its ethical compass and its economic common sense?

  3. Rich Sweeney said

    hydra,

    i’m not saying we shouldn’t expect a net social benefit, i’m saying that the dollars collected and the dollars doled out have to add up. the benefit comes in the form of reduced co2 emissions, which do justify the costs of the policy.

    however, all of the allocations schemes being talked about amount to our ability to somehow keep everyone economically whole (in $ terms) on top of that, which simply isn’t possible. and its even less possible when you subsidize electricity consumption, which raises the cost of the program (and increases the dwl of the tax). seriously though, if you find a way to raise revenue with a tax and the distribute it in a way that both producers and consumers are better off (ignoring climate benefits), please let the world know.

    finally, you should take a look at the geographical distribution of retail electricity prices. whatever california and the northeast’s “ability” to mitigate co2, they currently pay the highest electricity prices in the country, yet actively shun dirty sources of generation that would reduce their rates. for that, i think they deserve some credit.

    but please consult your ethical compass and your economic common sense, and get back to me.

  4. Hydra said

    “the benefit comes in the form of reduced co2 emissions, which do justify the costs of the policy”

    I don’t doubt that.

    “amount to our ability to somehow keep everyone economically whole (in $ terms) on top of that, which simply isn’t possible.”

    Like Michael said, “I want a pony”. Keeping everyone economically whole in this case amounts to buying climate damageinsurance. We ae going to get the benefits of fewer hurricanes, less flooding and so forth. The people who get the benefit of the insurance should not object to paying for it. Even if the insurance vendors, in this case, turn out to be polluters.

    Now, if you mean that we cannot keep everyone economically whole because the premiums are too high, then we have to ask if it is worth it. Where is the net benefit, really?

    I don’t think we should have to ignore the climate benefits as part of this equation, but if they are not actually there,or people don’t believe theyare actually there, then WE are the ones with a problem because WE are the ones who have to sell this policy. assuming we are successful in selling it, we also have an obligation to distribute the costs fairly. We might think we are going to get a pony by “sticking the costs to” somebody, but that just means we are unethical environmentalist. I like green stuff as much as the next person, but I’m unwlling to do anything that looks like stealing to get it.

    ———————————————————–

    The Northeast and California pay high electricity prices because they shunned dirty sources and nuclear sources and now New England is now famously fighting offsore wind as well. The Northeast is now depending on a new northeast power corridor to ship power form dirty plants located someplace else all the way into new England. One New England coal plant was even dismantled and re-assembles somewhere in Central America.

    I don’t see any reason they should get special credit for having “given up” something previously when they were acting in self interest all along. The fact their rates are high just means they did a bad job of it.

    Naturally, that new England Transmission line corridor is going to get built through the most unpopulated areas, where they can use eminent domain to get what they want most cheaply: the very areas that have so far been preserved the longest.

    I don’t claim this is easy to figure out. This is going to be complex, confusing, and politically difficult. But having lost valuable and historic family property, on four different occasions, for someone else’s public benefit, I think we need to work a little harder at getting it right. We can start with the idea that when you want something, plan on paying a fair price for it.

  5. Rich Sweeney said

    hydra,

    sorry to hear you’ve lost property in pubic takings before. i was actually about to say that we don’t necessarily have to compensate the losers, as the government does this sort of thing all the time and the threshold of harm required for legal recourse is very very hard.

    that being said, i don’t want to get all New London here. but the benefits of avoiding climate change are uniform (basically), and co2 emissions in one coal state hurt people everywhere. how is it more ethical to avoid harming the polluter?

    as for the northeast, it has a cap on carbon with a non-negative permit price. therefore its abaiting some carbon, and peeps in coal states are free riding.

    and i get mike’s point about the pony which was the point of my post. at the end of the day the democratically elected congress can assign permit value however it sees fit. but it can’t have its cake and eat it too, which is what the comments in the wsj article amounted to. you simply cannot allocate to ratepayers, protect harmed industries and ensure no cost to households.

  6. Aaron said

    I’m confused as to why you think the LBA strategy represents a subsidy to electricity consumption… I think of it as an endowment, or a lump-sum subsidy, which should not affect the price of electricity, nor the level of electricity consumption (are you worried about income effects?). If you believe in Coase (and don’t you have to believe in Coase if you believe in Cap-n-Trade?), the allocation of the permits shouldn’t have an impact on the price of the permits. It certainly should not “reduce the price impact felt by electricity consumers (relative to 100% auction), but INCREASE the price impact everywhere else”… What am I missing?

  7. Rich Sweeney said

    aaron,

    lba distributes free permits to local distribution companies, which are all regulated. these companies then sell the permits and use the revenue to reduce retail electricity prices. i don’t see how this could be called anything but a subsidy. in fact the impetus for the program is to lessen the burden on electricity consumers. however, by artificially lowering the post-carbon policy price of one carbon intensive sector, other sectors must pick up the slack and the overall program becomes less efficient (at least if you use $/ton co2 as a metric of efficiency). coase doesn’t hold when prices don’t reflect marginal costs.

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