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Midwesterners are operating under the misimpression that the allocation formula in the House bill is unfair to them.  It doesn’t, although a new, flawed EPA “analysis” (”here“) suggests otherwise.

Certainly the formula is a tad ambiguous and that will no doubt be fixed in the Senate.  The figure above shows the results of analysis by MJ Bradley (click to enlarge, methodology here).

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I would note that the Bradley analysis does not appear to include the energy efficiency provisions in the bill, which are projected by independent analysts and EPA to deliver major savings (see “Waxman-Markey could save $3,900 per household and create 650,000 jobs by 2030“).  So even the small increase in bills that you see in 2012 would in reality be lower if the House bill became law.  But I digress.

The analysis is tricky for two reasons that the EPA appears to get wrong:

  • First, the House bill forbids a utility from getting more allowances than are required to offset their increased costs, but doesn’t quite spell out how to account for that.  The obvious thing to do is what MJ Bradley does:  “Excess allowances are withheld from states that receive more allowances than their delivered electricity related emissions. These withheld allowances are redistributed to the remaining states on the basis of their emissions.”

The EPA offers a long explanation for why the prohibition against excess distributions would be tricky to implement in practice — and then it seems like they just ignore the provision entirely.  So, as you can see, they claim California would get more allowances than it needs to cover its emissions.  But preventing that outcome is precisely why that provision was put in the House bill in the first place.

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  • Second, states import power — sometimes power that is more carbon-intense than the importing state as a whole.  An analysis must take into account.  It does not seem that EPA’s calculations of emissions of a state like California included its imported coal-fired electricity.

So I just think EPA got this is doubly wrong in a way that happens to fit the misperception of the Midwesterners.  I have also spoken to other independent utility modelers who say their results do not match EPA’s.

Bottom Line:  The allocation formula appears to be pretty fair, if a tad ambiguous.  EPA needs to spell out exactly how they did their analysis, and explain if they made one or both of these two major analytical errors.  The Senate needs to be clearer on how the prohibition-against-excess-distributions provision works.

For more background, here are some excerpts from Tuesday Climate Wire (subs. req’d) story:


A new U.S. EPA analysis requested by Sen. Russ Feingold (D-Wis.) is spawning a lobbying frenzy among Midwestern utilities that claim the document shows they will be treated unfairly under federal climate legislation.

They say the assessment reveals that states like California will receive a financial windfall under a global warming bill, while states like Wisconsin will not get enough help and will have to spike electricity rates as a result.

“The EPA document just confirms the formula will disadvantage Midwest states for decades to come while the coastal states will hit a ‘federal jackpot’ every year over the life of the new program,” said Zachary Hill, senior manager of federal government affairs at Alliant Energy, a Wisconsin-based utility.

Some environmentalists are counterattacking that the three-page report is flawed because its author relied on questionable methodology and analyzed only one part of a bill that passed the House earlier this year. They also say a Senate version of climate legislation is still being drafted and could make EPA’s statements moot.

“I have not been particularly impressed of certain aspects of EPA modeling,” said Joe Romm, a senior fellow at the Center for American Progress. “It looks to me like they’ve done what is easy for them to do, but isn’t accurate.”

At issue is the document’s focus on a section of the House legislation prohibiting utilities from receiving more carbon allowances than what is “necessary to offset any increased electricity costs” to consumers. The text was added as part of a late compromise in the House to help bring more coal-state lawmakers from states like Missouri and Indiana on board.

Under a mandatory cap on greenhouse gases like the one called for by the House measure, businesses would have to hold a limited number of allowances matching their annual greenhouse gas output.

Green groups claim EPA analysis is incomplete

Yet the EPA analysis argues that enactment of the bill’s ban against overallocation of allowances could be difficult because of the complexities in estimating electricity costs, among other things.

“The prohibition provision would be very difficult to implement because it would require a great deal of speculation,” the EPA document states.

Many Midwestern utilities and their supporters jumped on the data and argued that companies in some states like California would get an unfair financial boost with climate legislation. Kirk Johnson, vice president of environmental policy at the National Rural Electric Cooperative Association (NRECA), pointed to a chart created by EPA showing that coastal states fare far better than other ones in a mandatory climate regime.

A slew of utilities in the country’s interior have been protesting the House bill since its passage. Recently, the Edison Electric Institute, which represents large investor-owned utilities and helped draft parts of the House bill, called for more free allowances to flow to these small generators in states like Ohio to bring them on board.

But Romm and supporters of congressional action on climate are questioning whether the EPA data are valid in the first place.

Romm said it was not clear, for example, whether the calculations of emissions of a state like California included imported electricity from coal-fired power plants in Arizona. The EPA assessment simply states that estimates were based on 2006-2007 “retail sales” of electricity.

Dan Lashof, director of the climate center at the Natural Resources Defense Council, made the same argument and added that the analysis appeared to have been put together rapidly.

Others noted that a prior analysis from M.J. Bradley & Associates LLC, an environmental consulting firm, found costs to Midwestern consumers would be minuscule under the House bill sponsored by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.).

At the same time, Lashof said the document might be EPA’s way of saying “it’s nervous about the language” and needs clarity. He suggested the Senate could “go a long way” toward resolving confusion on the issue by adding specific wording that no utility can get more allowances than its emissions&h

EPA did not respond to criticisms from environmentalists about the document’s methodology yesterday. But in an earlier statement, spokeswoman Adora Andy questioned the idea that the new document shows the House bill would take money from interior states and give it to coastal states. She pointed to a larger investigation of the House bill performed by the agency earlier this year.

“In fact, EPA’s comprehensive analysis of the House-passed bill — an analysis that has been public since June — indicates that the bill would not impose hardship on any state,” Andy said.

The lobbying push started after Feingold’s office released the document to utilities in Wisconsin, which then began a mass e-mail chain. Feingold’s office provided the original EPA analysis to E&E after variations of the text with attached commentary starting circulating among lobbyists last Friday.

“I have heard concerns from my constituents about how the climate change bill could unfairly impact Wisconsin. The data from the EPA was requested as part of my effort to learn as much as possible about the bill and ways to improve it. I look forward to working with the administration and my colleagues in the Senate to ensure we address the serious problem of climate change without unfairly hurting Wisconsin,” Feingold said in a statement.