UPDATE:  At the end, I’m going to respond to what has now become a widespread myth that because Waxman-Markey supposedly mutes the electric price signal to consumers, it hurts the cause of energy efficiency.

The Subcommittee on Energy and Environment will hold a hearing titled, “Allowance Allocation Policies in Climate Legislation:  Assisting Consumers, Investing in a Clean Energy Future, and Adapting to Climate Change” on Tuesday June 9, [at 9:30 am, info here, webcast here].  The hearing will examine allocation policies under the American Clean Energy and Security Act (ACES).

The allocation of the greenhouse gas emission allowances is certainly one of the most controversial and complicated parts of the Waxman-Markey bill.  Here are some key overview posts:

But if you really want to become an expert on the pros and cons of the issue, I would suggest that you tune into the hearing, where both sides will get a full airing of their views, with the following expert witness:

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  • Thomas F. Farrell II, on behalf of the Edison Electric Institute
  • Rich Wells, Vice President, Energy, Dow Chemical Company
  • Nat Keohane, Economist, Environmental Defense Fund
  • Reverend Dr. Mari Castellanos, Minister for Policy Advocacy, United Church of Christ, Justice and Peace Ministries
  • G. Tommy Hodges, on behalf of the American Trucking Association
  • David Sokol, Chairman of the Board, Mid American Energy Holdings Company
  • David Montgomery, Vice President, Charles River Associates

E&E Daily (subs req’d) explains the origin of this somewhat unusual House Energy and Commerce hearing – unusual since it comes after Committee approval of the bill:

House Energy and Environment Subcommittee Chairman Ed Markey (D-Mass.) will follow through tomorrow on a promise to hold a hearing on the emission allocation provisions included in the comprehensive global warming bill the Energy and Commerce Committee approved last month.

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Markey agreed during the markup for the hearing on perhaps the most contentious piece of H.R. 2454, the allocation language that distributes hundreds of billions of dollars worth of allowances to industrial firms that emit greenhouse gases.

Democrats held several general hearings on the emission allowance issue, but they did not give the committee a chance to publicly vet the actual legislation released less than a week before the 33-25 vote that sent the bill to the floor. Republicans objected to the procedural gap but were unable to force a delay in the markup, which Democratic leaders pledged to conclude before the Memorial Day recess.

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In the earlier post – “Preventing windfalls for polluters but preserving prices” – two of the country’s leading experts on the electric utility industry and energy economics, Peter S. Fox-Penner and Marc Chupka, wrote:

Here’s where W-M got it right.  It forbids distributors from giving customers the value of the free allowances as a “per unit price rebate.”   So retail customers will still have to pay a price for power and natural gas that includes a carbon price signal.  The free allowance value must be given to them as a lump sum rebate.

A reader writes:

Your discussion overlooks a HUGE loophole in the Bill that eliminates any assurance that the carbon price signal will make it thru to LDC customers. Here is the key text from the bill including the key loophole (the word “solely”):

“An electricity LDC shall not use the value of the emission allowances distributed under this subsection to provide to any ratepayer a rebate that is based SOLELY (emphasis added) on the quantity of electricity delivered to such ratepayer.”

Fox-Penner and Chupka reply:

The commenter is correct – the language in W-M is not “airtight,” and does leave open the possibility of state regulators giving partially quantity-based rebates, if they choose to use rebates at all.  The unfortunate history here is that the states in general, and state utility regulators in particular, are sensitive about being told exactly how to regulate their charges.  They believe their duties are set forth in their enabling statutes, and that the federal government should not “micromanage” them with a “one size fits all” solution.  Undoubtedly the savvy drafters of W-M understood that being overly prescriptive would jeopardize too many votes on this basis.

Nevertheless, we think the law, common sense, and elementary economics all make it pretty clear that quantity-based rebates are a bad idea and I will wager that most regulators will avoid them. We sure hope so.  Even if they do have some partial quantity rebates, however, the cause is far from lost.  First, the carbon price signals are still intact at the wholesale level, and it is at this level that decisions to build new supplies and dispatch them are made.   Carbon price signals impact customer energy efficiency decisions, but these are (unfortunately) not terribly price sensitive due to so-called market imperfections in the energy marketplace (see Energy Efficiency Economics and Policy).

[JR:  I consider this to be an essential point that many people get wrong.  Energy efficiency is cost effective today in every state.  The primary reason most states are not doing much energy efficiency is market imperfections — in particular, utilities are strongly discouraged from promoting energy efficiency (indeed, most are rewarded for promoting energy and efficiency).  Price is important, but secondary — especially since, as I’ve noted many times, the carbon price under W-M is going to stay low for at least a decade because there are so many underutilized clean energy strategies available to this country.  If you want more energy efficiency, you need multiple government programs to promote it, including incentives and standards, such as are found throughout Waxman-Markey.  Also, you should empower public utility commissions to use money from allowances to fund energy efficiency programs, which W-M does.]

Finally, the most important price signal to send retail customers is the time-based or dynamic price, which easily varies across the course of a day by a factor of three – much more than carbon prices will change retail power prices for many years. (See The Power of Five Percent: How Dynamic Pricing Can Save $35 Billion in Electricity Costs, and The Impact of Informational Feedback on Energy Consumption – A Survey of The Experimental Evidence)

Finally, this thoughtful writer reminds us of something we often repeat:  The state energy regulatory community is the single most important policy actor in the United States – moreso as we electrify transportation and our transport fuels flow through state-regulated grids as well as nearly all the rest of our energy.   State regulators do as well as they can with agencies whose missions and capabilities are often greatly under-resourced and face a huge array of issues and cases.   The federal government does astonishingly little to help these agencies cope with policy issues or provide technical assistance (though what little is provided is often extremely valuable).   Our transition to a low-carbon economy hinges to a very large extent on how well regulators carry out not just this particular provision of W-M, but also on dozens if not hundreds of other decisions they will make, often with only a handful of utilities and activists engaged in obscure regulatory proceedings that lead to these actions.

The Obama stimulus package had a $60 million line item we are told is reserved for assistance to state regulatory commissions.  If so, we applaud this overdue initiative.  We hope the money is used wisely, and that this is only the beginning of the Obama Administration’s deep energy policy engagement with governors and state regulators towards a shared purpose of economically transforming our energy infrastructure.

For completeness sake, here is one more brief overview of the allowances, from E&E News:

… lawmakers decided to give away 85 percent of the emissions permits in the early years of the cap-and-trade program, with the remaining 15 percent of permits auctioned.

The largest share of the free permits, 35 percent, goes to the electric utility industry in 2012 and 2013. More specifically, 30 percent is given to local companies that distribute power to residences and businesses. The sector’s free permit portion shrinks every few years after, and the allowances phase out completely between 2026 and 2030.

Energy-intensive industries receive the next biggest share of free permits at 15 percent. The allowances are aimed at helping companies most vulnerable to international competition from developing countries that won’t have such stringent environmental requirements, including steel, paper and cement makers. The free allowances start in 2014 and drop by about 2 percent per year, ending in 2025.

Another 10 percent of the free allowances would go to states for investments in renewable power sources and energy efficiency. That share decreases starting in 2016, dropping to 5 percent by 2022.

Natural gas distribution companies also get 9 percent of the allowances in the early years, ending between 2026 and 2030. The smallest and shortest-lived number of allowances goes to oil refiners, who get 2 percent starting in 2014. Their allowances end in 2016.

Other free allowances are divided among the auto industry, efforts to capture and sequester carbon emissions, clean energy efforts, work to prevent deforestation and adaptation programs.