President Obama had campaigned on a cap-and-trade plan in which 100% of the emission allowances would be auctioned. His FY 2010 Budget also calls for a 100% auction system (pp. 21 and 100), generating anywhere from $646 billion to nearly $2 trillion in revenues over ten years.
Of course, the last thing companies subject to emission caps want to do is pay $646 billion or more for the right to produce or use energy. So U.S. CAP, the main corporate lobby for cap-and-trade, lobbied for a system with mostly free rationing coupons, and that’s what they got.
Under the revised Waxman-Markey bill, from 2012 through 2025, the electricity sector will receive 35% of the allowances gratis and natural gas distribution companies will receive 9%, with free distributions phasing out from 2026 through 2030. In all, 85% of the rationing coupons are allocated free-of-charge to industry and other interests.
The bill instructs gas and electric utilities to use the free allocations to “protect consumers” from “price increases.” This is odd. The whole point of cap-and-trade is to raise energy prices. As candidate Obama said in a moment of candor, electricity prices will “necessarily skyrocket.” That’s how cap-and-trade discourages consumption, which reduces emissions. It’s also how cap-and-trade rigs the market in favor of non-carbon energy, which also supposedly reduces emissions.
Perhaps what Waxman and Markey mean is that U.S. utilities will not be allowed to double-dip as European utilities did in Europe’s Emission Trading System (ETS). European utilities got emission allowances for free but claimed them as an expense and then passed the imaginary costs on to customers by raising electric rates (see pages 43-46 of Open Europe’s report on the ETS).
Does this mean Waxman-Markey would not have severe economic impacts of the sort the Heritage Foundation projects in its May 13, 2009 study? No!
The Heritage study estimates that by 2035, the Waxman-Markey cap-and-trade plan will:
- Reduce aggregate gross domestic product (GDP) by $7.4 trillion,
- Destroy 844,000 jobs on average, with peak years seeing unemployment rise by over 1,900,000 jobs,
- Raise electricity rates 90 percent after adjusting for inflation,
- Raise inflation-adjusted gasoline prices by 74 percent,
- Raise residential natural gas prices by 55 percent,
- Raise an average family’s annual energy bill by $1,500, and
- Increase inflation-adjusted federal debt by 29 percent, or $33,400 additional federal debt per person, again after adjusting for inflation.
The Heritage folks are undoubtedly going to re-crunch the numbers in light of changes made to the bill.
However, the big picture should not change just because Waxman and Markey have decided to distribute 85% of the ration coupons free-of-charge. What chiefly determines any cap-and-trade scheme’s macro-economic and energy price impacts are the stringency of the caps, not how allowances are distributed under the caps.
As the caps tighten, the number of ration coupons declines, and so does the supply of carbon-based energy. As the supply falls relative to demand, energy prices increase, which then reduces economic output and employment.
So don’t be fooled! Electricity and fuel prices will reflect allowance prices, which will be determined by supply and demand, not by whether the allowance was initially auctioned or handed out for free. Think of it this way. The price at which a scalper can sell Super Bowl tickets outside the stadium is the same whether he buys the tickets himself or finds them on the ground.
It is therefore noteworthy that although the caps are identical in both versions of the bill from 2030 through 2050, the caps are generally less restrictive in the revised bill from 2012 through 2029. For example, the original version caps 2020 emissions at 4,873 million metric tons, the revised version at 5,056 mmt.
I’m counting on our friends at Heritage to explain what these changes mean in terms of jobs, energy prices, and GDP. Once thing is certain. The bill is still a de facto energy tax; and if enacted, it will still be the biggest tax hike in American history.