Slicing and dicing to gain support for cap-and-trade
House of Representatives Energy and Commerce Committee Chairman Henry Waxman will this week publish a full text of proposed climate change legislation, including details of a cap-and-trade scheme for regulating and pricing emissions of greenhouse gases.
Press reports suggest the Waxman bill will give away as many as 75 percent of the permits free to power utilities, coal-producers and other industrial users in the first stage of the plan to defuse opposition and buy support from congressional Democrats representing industrial and coal-producing states.
Free allocations would be phased out eventually, but only after a lengthy transition period that could last as long as 10-15 years.
Free allocations will undermine the immediate impact — and demonstrate the depth of opposition — to cap and trade but the real question is whether any transition to full permit auctions is automatic or requires further congressional action.
Commentators have focused on the budgetary implications of giving away permits for free. The president’s own budget plan anticipates revenues of $646 billion from permit auctions over 8 years from fiscal 2012 to fiscal 2019. The White House has already “spent” these revenues on tax breaks for low-income families as well as energy research and development.
Critics allege that giving away permits for free will blow a hole in the budget calculations and lead to even worse deficits over the next decade.
This is wrong. The White House included revenues from permit sales in its budget plan for symbolic reasons — to show it was committed to implementing cap-and-trade; it would spend the political capital needed to get legislation through Congress; to showcase the benefits auctions could bring; and to show how low-income groups could be protected against the impact of rising permit and energy prices by redistributing the proceeds.
But officials have been careful not to rely on the anticipated revenues too heavily. The president’s plan allocates the money to discrete tax breaks and research spending rather than general government revenues. If the permit revenues do not materialize, the tax breaks and research funding will be cancelled, and there will be no implications for the deficit.
Instead, the decision to give away most permits for free demonstrates that the shallow political consensus surrounding climate change and emissions pricing is forcing even supporters to take a very cautious approach to the issue.
Giving away 75 percent of the permits and phasing in a full auction system over a decade or more will limit the program’s effectiveness early on. But it is probably the only way to build support from Democrats in the industrial Midwest and Appalachian coal states needed for a House of Representatives majority and a 60-vote super-majority in the Senate.
More importantly, the administration wants to get agreement on the principle of cap-and-trade so that it can start building the necessary infrastructure (an inventory of emissions sources, supplementary regulations, and permit exchanges).
Once the infrastructure is in place, free allocations can be gradually reduced and the permit system can be tightened over time. Crucially, once trading starts, it will create vested interests among traders and permit owners, making it almost impossible to reverse or relax the scheme. So even a small-scale limited program will benefit from a ratchet effect.
The administration and its supporters in Congress are employing “salami tactics” — slicing a big controversial decision on which it may not have sufficient support into lots of small steps which are not objectionable in themselves but which, taken together, will eventually accomplish the same goal.
CAP-AND-TRADE NO MORE?
In another sign of increasing political sensitivity, the Wall Street Journal reported the administration is consulting on how to rebrand its cap-and-trade program to lessen opposition from voters and legislators.
Until recently, advocates of emissions control favored cap-and-trade rather than an emissions tax because it was seen as more “market-friendly” and obscured the impact of raising the cost of both permits and energy paid by consumers.
For political reasons, cap-and-trade has been favored even though research by the non-partisan Congressional Budget Office suggested a tax would be a better choice because it is more straightforward and offers the certainty about emissions costs that utilities and other heavy energy users need to make long-term investment plans.
But as voter awareness of how cap-and-trade will work and will increase energy prices has grown, popular support has eroded. According ecoAmerica President Robert Perkowitz, interviewed in the WSJ, less than half the respondents in a voter survey said they would support a cap-and-trade policy. So the administration is keen to rebrand the process.
AUTOMATIC OR NOT?
When the full bill is published, the focus will be on the number of permits given away free in the first stage. The real interest, however, is how quickly the free permit allocations will be replaced with permit sales and whether the transition is automatic or will require further congressional action.
Environmental groups will support a fairly substantial allocation of free permits in the first phase to get the bill through Congress, provided there is a clear timetable for moving to a full auction system and the transition is automatic and not subject to further congressional votes. In contrast, coal producers and power utilities will lobby hard to ensure Congress must vote again before free allocations are reduced and the trading program is tightened further.
Crucial points to watch out for:
(1) Whether the actual text of the legislation sets out a timetable for withdrawing free permit allocations in binding language, or whether a move to full auctions is set out in a non-binding “sense of Congress”.
(2) If the legislation mandates a transition to full auctions in binding language, is it conditional on further congressional approval or automatic?
(3) If the phase out of free permits is conditional, does it require positive action by Congress (legislators would have to vote in favor of reducing free allocations, something which could be hard to achieve) or negative approval (free allocations reduce automatically unless Congress specifically votes to block the reduction, which would be equally difficult)? Positive approval would make a full auction system hard to achieve. Negative approval would make it hard to block.