The Breakthrough Institute: Rep. Waxman Responds to Breakthrough Institute

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Rep. Waxman Responds to Breakthrough Institute

On a morning radio show, Congressman Waxman responded directly to the Breakthrough Institute. His response raises concerns about whether ACES can be significantly strengthened in the Senate.

Posted by Teryn Norris on June 29, 2009 at 9:56 PM
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Earlier today, Congressman Henry Waxman was asked to directly respond to the Breakthrough Institute's analysis of the American Clean Energy & Security Act (ACES) during an interview on the Montel Williams Across America radio show. His segment came after my interview on the same show, where I highlighted Breakthrough's analysis and spoke about some of our concerns with the bill.

Listen to Teryn Norris interview with Montel:

Listen to Rep. Waxman interview with Montel:

Below is a transcript of Waxman's response (starting at 5:00 minutes, podcast also available here). Rep. Waxman is Chairman of the House Committee on Energy and Commerce and lead author of the ACES climate bill:

Montel Williams: "Teryn Norris from the Breakthrough Institute and several other people say that this [bill] is based on credits that would be given out and traded by companies to meet their carbon footprint - I'm being told that 85% of these are being given away when they could have been auctioned off, which would have been a revenue source that could have been put toward more forms of renewable energy. Why did we decide to give away these credits rather than auction them off?"
Congressman Waxman: "We're giving away the credits to utilities in order to protect ratepayers. The credits they won't have to pay for won't be charged to ratepayers, both individual consumers and businesses... So this is a way to be fair to the consumers.

The essence of the legislation is that we're going to get reductions and we're going to have a limit on carbon emissions and those limits go down. As we try to squeeze down the amount of carbon year after year we want it done in a way that hurts the consumers as little as possible and we think for the most part we've protected most people. And we want it done in a way that can produce the result in the least expensive way, so there are offsets that can be purchased.

It doesn't make a difference that a coal-burning powerplant has to reduce its emissions if they have to do it by reducing their own coal, that could be more costly than just buying an offset and we still get the same environmental result. The environmental result is achieved, we do it in a way that would impact the economy in the easiest manner, and at the same time we're providing renewable fuels and greater efficiency and opportunities to get cars on the road that will pollute less.

It's going to transform our economy and in the whole process it's going to produce I think millions of new jobs, it's going to unleash investments that could be as much of an incentive and stimulus to our economy as anything the government could do, it's going to do more than the stimulus we passed because the investments are going to be made in the private sector."

Stay tuned for an upcoming post where Breakthrough Institute will address Rep. Waxman's points. To begin, however, it is worth noting that Rep. Waxman asserts that freely distributing carbon allowances produces the same environmental result as full auctioning and is specifically designed to protect ratepayers. Why, then, did President Obama and his Budget Director recently state the following about the importance of auctioning allowances?

Peter Orszag: "If you didn't auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States. In particular, all of the evidence suggests that what would occur is the corporate profits would increase by approximately the value of the permit."
President Obama: "If you're giving away carbon permits for free, then basically you're not really pricing the thing and it doesn't work -- or people can game the system in so many ways that it's not creating the incentive structures that we're looking for"

Filed under: Congress , New Energy Politics , Waxman-Markey Climate Bill

6 COMMENTS:

In this case, Waxman is right and Obama is wrong. Freely distributing the permits WILL produce "the same environmental result as full auctioning." Paul Krugman explains why: "Now, these handouts wouldn’t undermine the policy’s effectiveness. Even when polluters get free permits, they still have an incentive to reduce their emissions, so that they can sell their excess permits to someone else. That’s not just theory: allowances for sulfur dioxide emissions are allocated to electric utilities free of charge, yet the cap-and-trade system for SO2 has been highly successful at controlling acid rain." (from http://www.nytimes.com/2009/05/18/opinion/18krugman.html) I do agree that giving away permits for free transfers welfare from taxpayers to energy companies. But by keeping the costs lower for energy companies, it also keeps costs lower for consumers. Waxman is right again, he just doesn't tell the whole story. In sum, just because another elected official contradicts Waxman, it doesn't mean Waxman is wrong. Posted by: Stephen Collins at June 29, 2009 11:18 PM

Do you think people would drive the same amount if we gave them permits to drive equal to their current commute and let them buy or sell them to others or if everybody had to all of a sudden pay for every mile they drove? Sure, the incentive to bike or carpool or take public transit is technically the same, but you don't have that "Oh crap now I have to take money out my pocket every time I get in the car" experience if the permits are just given to you. Energy companies aren't any different. Posted by: Isaac Silverman at June 30, 2009 12:26 AM

You've set up an apples vs. oranges comparison. The utilities that Waxman is talking about are highly regulated. They receive NONE of the "corporate welfare" that Obama and Orzag decry, because they are not allowed to charge ratepayers more. Their financial inputs and outputs remain the same (except for a declining emissions cap they have to stay under). The situation Obama and Orzag attack is where you give the companies the permits, and then they raise their prices _as if they had to pay for them_, and reap the profit. That's just not the case with the permits Waxman's talking about here. Posted by: Asa at June 30, 2009 4:06 AM

Thanks for your comments. There are a number of reasons why free distribution of permits is problematic:

(1) Free distribution of allowances reduces or eliminates the single most important component of cap and trade, the revenue stream for direct public investments in clean energy technology. The world's top energy experts have consistently called for $30 billion/year of federal investment in clean energy RD&D, and our analysis shows that a full suite of RDD&D requires $50 to 80 billion per year in the United States. ACES would only invest around $10 billion due to the small number of auctioned allowances.

(2) Free distribution of allowances to utilities and other energy industries can enrich corporate polluters. That's why Budget Director Peter Orszag stated, "all of the evidence suggests that what would occur is the corporate profits would increase by approximately the value of the permit." Pew Environment Group(which ironically is a member of US-CAP) strongly emphasized this point in a review of the European ETS:

"Free credit giveaways can lead to windfall profits and do not guarantee that costs are not passed on to consumers. A significant portion, if not all, of allowances should be auctioned, generating revenue that can be used to protect vulnerable populations and spur clean technology innovations that ultimately lower the cost of compliance. Windfall profits in the electricity sector were another unintended consequence of free allocation within the EU ETS. In countries such as Germany, the power producers received permits at no cost but decided to charge consumers the full market price of these allowances.7 As a result, electricity prices rose, yielding large profits for utilities.8 If allowances had been auctioned, revenues could have been redirected to assisting low-income customers and other vulnerable populations, as well as to other beneficial purposes such as helping industries retool production and supporting the development of clean energy and carbon sequestration technologies"

Congressman Waxman argues that free distribution is designed to protect ratepayers, yet actual consumer advocacy groups like Public Citizen argue that the bill doesn't do enough to protect ratepayers. Public Citizen writes:

"Proponents of the legislation claim that the legislation shields electricity ratepayers from major rate increases by requiring them to only use the free emission credits for the benefit of ratepayers. But a careful reading of the legislative language suggests that the lack of any definition of what constitutes a "benefit" will be interpreted differently by the 50 state utility commissions that the legislation bestows wide latitude to design allocation of the allowances... it is clear that the decentralized, cumbersome nature of the LDC mitigation approach has been prioritized to preserve jurisdictional exclusivity for the Energy & Commerce Committee at the expense of superior mitigation mechanisms... that would leave competing congressional committees in charge of the disbursement of funds."

(3) As President Obama made clear in his statement, free allowance distribution doesn't produce the right incentives, not only because it is much more prone to gaming and windfall profits, but because it doesn't provide as strong of an incentive for polluters to reduce their emissions. Posted by: Teryn Norris at June 30, 2009 7:07 PM

"free allowance distribution doesn't produce the right incentives ... because it doesn't provide as strong of an incentive for polluters to reduce their emissions" This just isn't true. Money is money. Energy companies are going to try to maximize profits all the same (despite some, i.e., utility companies, being heavily regulated), and if they can reduce emissions for less than the market price of a carbon permit, they'll do so. Also, large companies aren't like ordinary people; they pay the utmost attentions to finances and the bottom line. Auction or no auction, emission reductions will be the same. Posted by: Stephen Collins at June 30, 2009 8:58 PM

(1) There's an important incentive in the pre-implementation phase here that isn't acknowledged. In the run-up to the implementation of a cap and trade system with free auctioning (and before the free allocation plans are defined), firms could have an incentive to increase (or not reduce) their emissions or perform other "gaming" techniques to maximize the number of allowances they receive. And this creates an extremely cumbersome bureaucratic process for allocating allowances, as compared to auctioning. Of course, this depends on how the allocation process is defined in the bill, and I haven't had time to take a deep dive into this part of the bill. If you do, let me know what you find.

(2) You're still not addressing my first point, which is that free allowance distribution significantly reduces what is arguably the most important component of cap and trade, major public investments in clean energy technology. Given that these public investments are likely to produce more developments in clean energy tech than the very low carbon price in ACES will -- and given that making clean energy cheap is arguably the single most important factor for achieving global emission reductions -- how does it make sense to argue that free distribution vs auctioning results in the same environmental result? Yes, in a closed system, free distribution and auctioning may achieve the same result, but the mass majority of future emissions will come from developing countries, and the public investments we make in energy technology are critical for addressing those. Posted by: Teryn Norris at June 30, 2009 10:55 PM

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