Cap & Trade Should Not Be Designed To Raise Prices

There is speculation among economists and some energy experts that free allocation of allowances will still lead to an increase in energy prices. Of course, external factors could also affect energy prices. The price of oil is rising again and that can affect the prices of other energy types and services. Regardless, the cap and trade program should be designed to achieve efficiencies without unduly raising energy prices. The Center supports the production of abundant supplies of energy distributed at reasonable prices. The point of the program should be to reduce greenhouse gases, but hopefully not by using price to force reductions. The program should spur innovation in order to reduce greenhouse gas emissions.

In the legislative version that passed the House energy committee, lawmakers give away 85 percent of the emissions permits in the early years of the cap-and-trade program. The remaining 15 percent of permits will be auctioned.

The largest share of the free permits, 35 percent, goes to the electric utility industry in 2012 and 2013. More specifically, 30 percent is given to local companies that distribute power to residences and businesses. The sector's free permit portion shrinks every few years after. The allowances phase out completely between 2026 and 2030.

Another 16 percent of the free allowances goes to R & D for renewables.

The next biggest share of free permits, 15 percent, goes to energy-intensive industries with international competition, including steel, paper and cement makers. Those free allowances start in 2014 and drop by about 2 percent per year, ending in 2025.

Natural gas distribution companies get 9 percent of the allowances in the early years, with allowances ending between 2026 and 2030.

The smallest and shortest-lived number of allowances goes to oil refiners, who get 2 percent starting in 2014. Their allowances end in 2016.

The rest of the free allowances are divided among the auto industry, efforts to capture and sequester carbon emissions, clean energy efforts, work to prevent deforestation, and adaptation programs.

EPA believes that price pressure could be lessened if businesses chose to buy green offsets instead of allowances to emit carbon. However, it is not clear how many offsets will be available or whether Congress or EPA will restrict their use.

Anyone should be allowed to hold and trade allowances as is the case in the Acid Rain Program.

(NYT, 5/29/09)