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How to help consumers bear the costs of climate policy

Welcome to the Environment and Energy Insights blog of the Stanford Environmental & Natural Resources Law Program. Meg Caldwell, Deborah Sivas, Buzz Thompson, and I will all be regular contributors to this forum. We hope that you, the reader, will also be stimulated to participate in the unfolding discussion. For the first entry at the ENRLP blog, I thought I’d share some thoughts on the The Kerry-Boxer Climate Change Legislation, aka S. 1733, the Clean Energy Jobs and American Power Act,

On November 5th,, the Environment & Public Works Committee passed S. 1733 out of committee without the presence, let alone the support, of its Republican members. The EPW markup process was incredibly controversial and the bill’s future is uncertain.  Nevertheless, this bill shows, for the first time, the Senate take on what an allowance allocation under a US greenhouse gas cap and trade program might look like. Just as with the American Clean Energy and Security Act (ACES), passed by the House of Representatives in June, a significant fraction of S. 1733′s allowance allocation is directed towards reducing the costs of the program for consumers. This is a political requirement for a bill that will, of necessity, raise the costs of most forms of energy within the US economy.

The House’s approach under ACES would reduce costs to consumers via directing a portion of the GHG allowances it creates to the retail distributors, called local distribution companies (LDCs), of electricity, gas, and home heating oil. S. 1733 includes two methods for reducing costs to consumers. One is identical to the ACES approach. The other is via allocation to a treasury rebate program that auctions allowances and mails checks directly to consumers. Under S. 1733, the LDC approach operates through the mid-2020′s after which the direct rebate program phases in (see figure 1)

Allowance value dedicated to various purposes under the chairman's mark of S. 1733

Allowance value dedicated to various purposes under the chairman's mark of S. 1733. Shown in red is the LDC allocation to electricity, gas, home heating oil, and propane LDCs. Shown in light blue is the consumer rebate allocation. Values are in constant 2005 dollars and are generated using the S. 1733 allowance allocation and EPAs estimates for allowance prices under ACES (ADAGE model).

Which of these is the best way to help consumers bear the costs of climate policy, both from a financial and an environmental perspective?

The answer depends strongly on how 50 state utility regulators interpret the requirements of the LDC rebate program. As Karen Palmer of RFF nicely illustrated in her recent Senate testimony the current approach in the House and Senate bills is likely to significantly blunt the incentives that cap-and-trade will produce for consumers to change their energy consumption behavior. Be sure to check out how the RGGI consumer refund appears on her Maryland power bill. Palmer’s point is that busy residential consumers do not read their bill, they just pay it. So if the total bill amount goes down, they will (incorrectly) perceive that their marginal price for electricity has fallen. She argues that a cap-and-dividend approach to reducing the impacts to households, very similar to the Treasury rebate program that phases in after the LDC rebate phaseout under S. 1733 would more effectively reduce costs for households and preserve the incentive to reduce energy consumption.

But the problem with LDC rebates doesn’t end with consumer incentives to save energy. The current language might end up creating a situation in which few or none of the financial value of this allocation actually accrue to consumers. The outcome will be a function of what any particular utility can convince its regulator to approve in a Finding of Public Convenience or Necessity.

Palmer’s suggestion, of moving towards greater direct rebating is no doubt correct. However, political constraints may at this point in the process limit the ability to reduce or eliminate the LDC rebate and increase the treasury refunds. Perhaps more likely to be within the realm of political possibility is a legislative approach that more precisely constrains how LDCs may utilize the allowances/money they are being given. The current bill language mandates only that the allowances be used “for the benefit of retail ratepayers.” S.1733 §772(b)(1). This language provides broad discretion to an LDC to propose doing pretty much anything it wants with the allowances. It might choose to give the money to its ratebase. Or it might choose to give allowances to its upstream generators or to use the money from them to invest in its infrastructure. If to the ratebase, the money could be distributed in any of a number of ways that are likely to have widely varying impacts on consumer behavior. The truth is that the distribution of this allocation value will be the result of hundreds of different negotiations between state utility regulators and the LDCs. If an LDC can convince its regulator to issue a Certificate of Public Necessity or Convenience, then it can spend the money or use the allowances as it pleases.

A better approach would be to add language to the bill mandating that the allowance allocation to LDCs must be auctioned and the revenues provided directly to ratepayers. The bill should also specify that these rebates be mailed annually or at least independently of monthly billing statements. This amendment would accomplish two objectives. First it would guarantee that the value of the allowance allocation is actually delivered to those it is intended to reach – consumers that will be impacted by the legislation. Second, separating the rebate from normal billing preserves the downstream incentives of cap-and-trade for consumers – to reduce their energy demand. Karen Palmer wouldn’t have to puzzle through the flat-rate portion of her bill anymore (unless she wanted to) because she would just get a check once a year that she could take to the bank.  This check might, if branded correctly, might even do a lot to reduce the resistance to climate policy on the part of everyday citizens.  Just imagine how oppinions might change the day after Climate Change Dividend Checks worth a couple of hundred dollars landed in every Americans’ mailbox.

2 Responses to “How to help consumers bear the costs of climate policy”

  1. Wil Burns says:

    Michael,

    Trenchant analysis here, as usual. Unfortunately, while I agree that the LDCs have lots of latitude to play games with the allowances allocated for consumer benefit, I think the political exigencies would preclude implementing a system with more integrity, i.e. we bought off some very powerful opposition.

    • Michael Wara says:

      Wil,

      Thanks for being the first to comment on our blog!

      There’s no question that the politics may dictate giving the LDC’s quite a bit of say in how the implement the public benefit. That being said, it’s less clear to me that the politics precludes reducing this discretion along the dimensions that will blunt the consumer incentives created by a cost of carbon.