Despite rumblings that health care may eclipse all other legislation this session, the Senate Finance Committee continued its work on climate and energy legislation Tuesday by exploring possible mechanisms for emissions allowance allocation and revenue distribution in H.R. 2454.
How exactly the government goes about giving away permits and allocating proceeds from allowance auctions will prove to be important to both consumers and industry. But the implementation of the tool and the transparency of the process will also go a long way toward ensuring understanding from regulators, policymakers, and consumers.
Local electricity distribution companies (LDCs) are slated to receive some 35 percent of free allowances in the early years of a cap-and-trade program on the condition that they pass the benefit onto their consumers to help cushion the blow of increased energy prices.
According to testimony from RFF Senior Fellow Dallas Burtraw, the LDC provisions in H.R. 2454 neglect to spell out exactly how that value will be returned to energy consumers. He encouraged the Senate to assert its authority and streamline regulatory controls to prevent the excessive complexity that would arise under state-level rule making.
“State public utility commissions will play the determining role in how households are affected, not Congress, and this will be done in 50 different ways. In fact, there is great uncertainty about how the allowance value directed to local distribution companies will flow back to consumers,” Burtraw said.
He said that while channeling allowances through LDCs may help curb disparate regional effects, it could ultimately hurt consumers.
By giving electricity generators what amounts to a free pass to emit carbon dioxide, the bill is putting the reductions onus on other sectors of the economy. While consumers may pay the same amount for electricity they could see increased prices in other goods and services since manufacturers and distributors have to reduce their emissions to compensate for lower reductions from electricity generation.
Instead, Burtraw suggested the Senate consider incorporating a per-capita energy refund to ease consumer energy burdens. He said H.R. 2454 does a good job protecting the lowest-income consumers, along with those in the highest income deciles, but may not be so good for those in between.
“It would do a good job of protecting the bottom 20 percent of households and the top 10 percent. The increase in costs associated with the inefficient allocation to local distribution companies falls hardest on the middle range of household incomes,” he said. “In contrast, direct dividends to households allocate the value of allowances in a way that does not disadvantage the middle class, is less costly and administratively simpler.”
He argued that a reduction in the allocation to LDCs, with the difference returned directly to households as per-capita dividends would lower the overall cost of the program, protect middle class families, and retain the regional balance currently reflected in the House bill.
Burtraw's full testimony is available here.
