Don’t Give Away Carbon Permits

Via Kevin Drum, bad news from Sen. Jeff Bingaman:

“Sen. Jeff Bingaman, a New Mexico Democrat who chairs the energy panel, said earlier that any climate bill that passes the Senate is unlikely to adhere to the administration’s plan that the government auction all the permits to emit greenhouse gases because such a plan would be too harsh on big industry.

Instead, Bingaman said any Congressionally developed system capping and trading emissions probably will include carbon allowances given to polluters like cement factories and coal-burning power plants, along with permits that are sold.”

This is a very, very bad idea. The problem isn’t that the government would get less money if it gave permits away than it would if it auctioned them. A good cap and trade system will involve sending some or all of the money back to people. It’s that once you start giving away permits, it’s open season for lobbyists and special interests.

If Congress wants to help cement factories and coal-burning power plants, it can send them money directly and face the political consequences. Giving away permits under a cap and trade system does exactly the same thing, but without forcing Congress to admit what they are doing.

Moreover, as Kevin notes both in his post and in his article on the subject (which is very good), giving away permits can actually make prices go up:

“The economic theory involved is a little hairy, but those permits have a value on the open market, and that means that in many cases marginal producers can make more money selling their permits than by producing power. They’ll only be willing to produce power if they can raise prices enough to make the power-producing business more profitable than the permit-selling business, and eventually everyone will jack up prices to follow suit.

This may sound abstract — even a bit fantastical — but it’s absolutely real. In fact, when permits in phase one of Europe’s ETS system were handed out for free, electricity prices rose and power companies pocketed a windfall profit (which Britain’s Department of Trade and Industry estimated at about $1.1 billion a year in the UK alone). Dale Bryk, an attorney with the Natural Resources Defense Council (NRDC), puts it bluntly: “If you ask them point-blank if they’ll charge customers for free permits, they won’t tell you. But they know they will.”

A better way is for the government to hold an auction to set the price of permits. This has a couple of extremely salutary effects. First, it puts everyone on a level playing field (since Congress has no ability to allocate permits to favored interests). Second, and even better, the money from selling the permits goes to the federal government, not to the carbon emitters. That’s a pretty useful revenue stream, one that would probably start out at about $20 to $30 billion per year and go up steadily as the cap came down and the price of carbon permits increased.”

Giving away permits is just bad policy. It’s a handout to corporations hidden within the arcana of cap and trade legislation where members of Congress do not have to fess up to it. It opens the floodgates to everyone else who would like Congress to give them money, which is to say: to everyone in the country. And it raises costs to everyone else.

Jeff Bingaman: just say no.

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