Center for American Progress

Effective Cap-and-Trade System Requires Credit Auction

Effective Cap-and-Trade System Requires Credit Auction

Experts say auction would foster green job growth, offset higher energy prices, and fund R&D in alternative energy sources and technology.

The right to pollute should not be given away for free,” said House Select Committee on Energy Independence and Global Warming Chairman Edward Markey (D-MA), setting the tone for a hearing held Wednesday on cap-and-trade emissions policies. Experts assembled to discuss the environmental and economic implications of auctioning pollution allowances. The panelists concluded that a 100 percent auction of pollution permits would not only stimulate the economy by fostering the “green” job market but would also raise money to help offset higher energy prices for vulnerable consumers and fund R&D in alternative energy sources and technology.

 The panelists echoed Chairman Markey’s sentiments, testifying that an auction scheme would best serve the needs of U. S. citizens, and create tangible reductions in carbon emissions. The committee heard testimony from Center for American Progress President and CEO John Podesta; Ian Bowles, Secretary of Energy and Environmental Affairs for Massachusetts; Dallas Burtraw, Senior Fellow at Resources for the Future; and Robert Greenstein, Executive Director for the Center on Budget Policies and Priorities. Peter Zapfel, Coordinator for Carbon Markets and Energy Policy for the European Commission, traveled from across the pond to discuss the lessons learned by the European Union’s own cap-and-trade system.

Podesta spoke of a warming planet in crisis. He pointed to the recent discovery that the western Antarctica ice sheet is melting faster than scientists had anticipated; costal erosion from rising sea levels; and increased water scarcity that will lead to population migrations, which could create instability and economic dislocation for millions of people around the globe. This resource scarcity, along with U.S. dependence on foreign oil, presents a significant national security and foreign policy concern. Oil prices already burden the average U.S. citizen with record costs for gasoline, and Podesta said that a time had come when the “cost of doing nothing is greater than the cost of doing something.” Shifting from a high-carbon economy to a low-carbon, sustainable economy is necessary, he said, to both restore U.S. economic growth and to ensure national security. A cap-and-trade system could deliver a one-two punch by reducing carbon emissions and generating additional government revenue to stimulate the economy and invest in sustainable energy programs.

A cap-and-trade system would require an initial scheme to allocate permits to carbon dioxide emitters who would then go on to buy and sell the permits to meet reduction standards. The European Union introduced a cap-and-trade system in 2005 but handed out allocations freely to pollution emitters. As Mr. Zapfel pointed out, the allocation scheme was complex, lacked transparency, suffered from constant rule changes that distorted decision making, and was unfair to some energy sectors. He also noted that European energy producers passed on the cost of lowering emissions to consumers, leading to “windfall” profits throughout the industry. These hard lessons led to a change in EU policy that will terminate free allocations by 2012 and make way for an auction scheme by 2020. An auction system will allow for greater simplicity, transparency, and efficiency. As Burtraw and Bowles pointed out, an auction scheme would be relatively simple for the United States, as the Federal Communications Commission has been auctioning broadcasting licenses for years, and electricity companies already bid on electricity on a daily basis.

There were concerns from ranking committee member Congressman James Sensenbrenner (R-WI) that a cap-and-trade system is actually just a carbon tax disguised in sheep’s skin. He believes cap and trade would hurt U.S. job markets, raise prices for consumers, and take money out of an economy already in recession. Podesta and other panelists were quick to point out that cap and trade would create green jobs and that relatively small increases in energy costs for consumers can be easily offset by more efficient energy use.

Since joining the Regional Greenhouse Gas Initiative, a conglomerate of northeastern states who began their own cap-and-trade system, Massachusetts has seen less than a one percent increase in energy bills, according to Bowles. Some economists and opponents suggest that higher costs incurred by electric companies will be passed on to consumers through higher rates. The $50-$300 billion likely raised from an auction could be reallocated to cushion the impact of increased energy costs for lower-income families. Mr. Greenstein’s analysis found that only 14 percent of the money would be required to offer assistance to low-income families and less than 15 percent should be allocated to help offset costs to businesses and shareholders of affected industries. To allay fears that the auction will pull too much money from the struggling economy, the panelists suggested stimulus measures using auction proceeds.

Podesta proposed that the government portion auction money into separate accounts, with 10 percent going to energy-intensive industries to compensate them for increased energy costs. The remaining 90 percent would be split between protecting vulnerable consumers from higher energy prices, and R&D for alternative and renewable energy sources. The money would go toward research to spur innovation in energy technology that will help decrease dependence on foreign oil, find novel ways to reduce emissions, and stimulate “green job” creation in the U.S economy.

The majority of committee members responded positively to the testimonies. Many of the members spoke in support of a cap-and-trade system and the auction scheme in their allotted time.

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