Grandfathering and Windfalls
This new NRDC report (co-released with some major electric utilites) is kinda cool: it looks at the potential financial windfalls to the nation's top 100 electric power companies under competing "cap-and-trade" bills currently being considered by the US Congress. A key difference among the proposals is how many emissions permits the government gives out for free, and how many are sold at a public auction.
The report puts a spotlight on two federal bills in particular: the Lieberman-Warner "Climate Security Act" (pdf summary here), represented at the top of the chart to the right; and the Bingaman-Specter "Low Carbon Economy Act," represented in the bottom of the chart.
In the images to the right, the blue wedges represent the carbon permits that are given out for free -- and obviously, the blue wedges on the top graph, representing Lieberman-Warner's approach, are smaller than on the bottom graph, representing Bingaman-Specter's.
As NRDC points out, even with a relatively low carbon price of just $10 per ton, grandfathering means big money to the biggest utilities:
"The ten largest investor owned utilities would receive an annual allocation valued at $6.2 billion, assuming a CO2 allowance price of $10 per ton [under Bingaman-Specter]. To provide a sense of the magnitude of this value, this is equivalent to 16 percent of the companies’ total earnings in 2006.
Wow. That's a huge earnings boost, and those utilities' shareholders will be sure to see some major gains in stock prices. Of course, that "value" doesn't just appear out of nowhere. It comes from the companies' customers, who have to pay higher prices for electricity without getting anything in return.
Of course, in the US west, many electric utilities are subject to government price regulations that may limit the kind of windfalls that this report talks about. But nationally, electricity-sector windfalls are a huge problem.
However, reading the NRDC report also raises an issue for me: if windfalls are such a problem in Bingaman-Specter, aren't they also a problem in Lieberman-Warner? All the arguments against the Bingaman-Specter approach apply, at least to some extent, to NRDC's favored bill too. There's just less money at stake -- making Lieberman-Warner the lesser of too evils, for sure, but still far from saintly.
As far as I can tell, free allocation is little more than a bribe to entice utilities not to fight cap & trade legislation. Maybe it's a necessary bribe, and the carbon cap would be dead without some freebies to the utilities. Still, we should call 'em like we see 'em -- a bribe's a bribe. But where bribes are concerned, size does matter. And sometime down the road, we may come to think of Lieberman-Warner's free allocation as a ridiculous excess, much as Bingaman-Specter seems now.
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