No Giveaways To Polluters

This is really bad news:

Bingaman said any Congressionally developed system capping and trading emissions probably will include carbon allowances given to polluters like cement factories and coal-burning power plants, along with permits that are sold.

Auctioning 100 percent of the permits would essentially make polluters pay quickly for emissions. In the European Union's Emissions Trading Scheme, emissions permits were given away to polluters at first. This led to a glut of permits and windfall profits for some emitters.

...."I think it's unlikely we will pass a cap-and-trade bill with 100 percent auction," Bingaman told reporters at the Platts Energy Podium. He said such a system has the risk of substantially increasing the burden on some utilities and major emitters.

100% auction is the only way to make cap and trade work. These permits have a value that needs to be set by the market rather than given away for free. Power generators are going to pass on the "cost" of reducing emissions to their customers whether they get permits or have to bargain for them. And Europe's history is instructive. Kevin Drum explains the economics.

The economic theory involved is a little hairy, but those permits have a value on the open market, and that means that in many cases marginal producers can make more money selling their permits than by producing power. They'll only be willing to produce power if they can raise prices enough to make the power-producing business more profitable than the permit-selling business, and eventually everyone will jack up prices to follow suit.

This may sound abstract—even a bit fantastical—but it's absolutely real. In fact, when permits in phase one of Europe's ETS system were handed out for free, electricity prices rose and power companies pocketed a windfall profit (which Britain's Department of Trade and Industry estimated at about $1.1 billion a year in the UK alone). Dale Bryk, an attorney with the Natural Resources Defense Council (NRDC), puts it bluntly: "If you ask them point-blank if they'll charge customers for free permits, they won't tell you. But they know they will."

A better way is for the government to hold an auction to set the price of permits. This has a couple of extremely salutary effects. First, it puts everyone on a level playing field (since Congress has no ability to allocate permits to favored interests). Second, and even better, the money from selling the permits goes to the federal government, not to the carbon emitters. That's a pretty useful revenue stream, one that would probably start out at about $20 to $30 billion per year and go up steadily as the cap came down and the price of carbon permits increased.

Barack Obama has consistently argued for a 100% auction, so special interests and existing power companies cannot game the system. Yet Bingaman is calling it "unlikely" because the lobbying against it would be too intense. Not because it would be the wrong policy, but because the entrenched interests wouldn't like it. This is a horrific way to approach this important point, and one that will fly right by the average person who doesn't know the intricacies of cap and trade. You cannot give away carbon permits and expect the program to be successful.