A closer look at the Waxman-Markey allocations

By Felix Salmon
May 26, 2009

John Kemp has a very handy summary of exactly how emissions allowances are going to be allocated under the Waxman bill. And it turns out that while only 15% of the allowances are certainly going to be auctioned — at least in the first instance — another 14% or so are going to go towards pushing clean-energy objectives. As Kemp notes, this is

in effect granting valuable, saleable rights to companies promoting new technologies such as carbon sequestration and storage, energy efficiency and renewables, and clean vehicle technologies.

We’re talking a lot of money here: the “clean vehicle technology” line item gets 139 million tons of emissions allowances in 2012 alone, on top of 440 million tons slated to go to “energy efficiency and renewables”. Your guess is as good as mine when it comes to the secondary-market value of emissions rights in 2012, but we’re talking billions of dollars annually here.

I like the way that this clean-technology subsidy rises is essentially tied to the successful passage of Waxman-Markey — that’s a good way of aligning incentives. But isn’t the whole point of a cap-and-trade bill that it provides a way to monetize clean energy even without dedicated subsidies? And if we go down this road, aren’t we going to get even more sillybuggery surrounding the reclassification of various forms of energy as “clean” or “renewable”?

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Let’s see: Here’s Leigh Caldwell on Knowing And Making:

“There’s a specific reason why a carbon tax might not work, and why it might not stimulate the optimal levels of R&D investment that economic theory indicates.

That reason is the inability of governments to credibly bind themselves in the future.”

That’s great. Then I read the Kemp post. I’m glad that you and Kemp can understand that bill since it seems to me to be designed for future finagling:

“The government could have allocated allowances in proportion to the volume of carbon dioxide emitted by different industries and firms in the baseline period (2005-2010) and then gradually reduced the allocations pro rata. That would have been the “neutral” approach.

Instead the bill opts for a discretionary allocation of emissions allowances that reflects a complex mix of environmental objectives and the need to secure support from coal-producing and heavy industrial states.

By divorcing the initial allocation from emissions in the baseline period, the bill has in effect created a new form of “currency” and an alternative “carbon budget” that can be used to reward particular industries by granting them valuable emissions rights that can be used to support business activity or sold for conventional dollars. ”

This quote produces in me a feeling not unlike being taken for a fool. I was for either alternative. Now, I haven’t a clue. I’d much rather talk about simpler things, like Gaussian Copulas and CDSs and CDOs and Systemic Risk, for example.

I’m reminded of the paper company tax play on the alternative energy tax subsidies http://www.thenation.com/doc/20090420/ha yes

There needs to be an analog to the word “gerrymandering” for referring to the (endogenous) dislocations that these sorts of tax/subsidy undertakings engender.

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