A week before Sen. Barbara Boxer kicks off a three-day-climate-and-energy hearing marathon, the Senate Energy and Natural Resources Committee convened to take a closer look at the impact of allowance allocations on consumers under a cap-and-trade system.
RFF Senior Fellow Karen Palmer was among the panelists asked to testify on the most efficient approach to easing the financial burden consumers are likely to face from a policy to cap carbon. In her testimony, Palmer outlined several methods to keep costs under control for consumers including giving allowances to electricity generators, channeling allowances through local electricity distribution companies (LDCs), and providing a direct rebate to consumers to offset the higher costs.
According to Palmer, the free distribution of emissions permits to electricity generators could unfairly burden some customers, since there isn’t a nationwide structure for electricity generation market regulation. Accordingly, regulators in individual states typically set rates making them highly variable.
Allocating polluting rights to LDCs, a plan that would take into account regulatory differences across the country, could also have some negative side effects. Palmer points out that in asking LDCs to pass the allocation value along to consumers, the price signals customers need to change their energy use behaviors are lost. Rather than noticing energy prices have gone up, customers see the same (or lower) rates on their monthly bills and don’t change their use. Moreover, she notes through LDC allocation:
Consumers will not be insulated from higher overall costs. The smaller increases that they see in their electricity bills as a result of allocation to distribution companies will come at the cost of higher increases in the price of gasoline and goods and services that have a high transportation cost component.
Hence, it is important to ask the question: Are households better off because of the effort to subsidize their electricity prices? In fact, on average, they are worse off because the value of other goods and services will be higher as a result and households will face a greater overall cost from climate policy.
To meet the goal of easing the financial burden associated with a climate policy, Palmer suggests a rebate given directly to consumers—an approach known as cap and dividend—may be the most efficient. According to Palmer:
Such an approach redirects the portion of the allowance value going to local distribution companies (both electric and gas) intended for ultimate distribution to commercial and industrial electricity consumers, as well as the portion scheduled to go to home heating and low-income households, to a cap-and-dividend allocation, leaving only the residential portion of allocation to local distribution companies intact. Such a reform of the [the House climate bill] H.R. 2454 policy would improve its efficiency, reducing the CO2 allowance price by roughly 14 percent in 2015, and lowering the annual cost to households by nearly $80, roughly half of the cost they incur under allowance allocation to local distribution companies as specified in the legislation.
Read Palmer’s complete testimony here, and Energy and Natural Resources Committee Chairman Bingaman’s remarks here.
