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.