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Allowances | Price Collar | Targets and Timetables | Offsets
No matter what legislative approach is taken, it is essential to include effective consumer protection measures that help to reduce price increases for consumers and avoid harm to U.S. industry and the economy, including:
- Allowance allocations that help reduce price increases to all electricity consumers;
- A "collar" on the price of allowances, with a price floor to assure the price of carbon does not fall below a certain level and a price ceiling to protect consumers and the economy from price volatility and market manipulation;
- Targets and timetables that align GHG emission reductions with the availability of "climate-friendly" technologies; and
- The flexible use of offsets to achieve the most cost-effective GHG reductions around the world.
Allocating Allowances
An allowance is a permit to emit a certain amount of GHGs. To implement a cap-and-trade program, the federal government would create allowances for regulated entities, adding up to the total emissions allowed under the cap. A regulated entity would be required either to cut emissions or to submit allowances (including offsets) to the federal government to cover the total emissions it was responsible for during the compliance period.
A key design element in a cap-and-trade program is the method by which emissions allowances are initially introduced into the market. The two major approaches under consideration are an auction or an allocation .
To help reduce electricity price increases for all consumers, allowances should be allocated to electric utilities as new technologies are being developed and deployed, before beginning a gradual transition to a full auction as more climate-friendly technologies become available and costs are more stable. A phase-out period of at least 15 years, beginning after new technologies are available, is needed to help protect consumers from sudden energy price shocks.
While consumers would be paying for the costs of compliance with GHG emission caps, they wouldn’t face the additional cost of paying for any allocated allowances as they would if all of the allowances were auctioned.
Allocations to the Electric Power Sector
The initial allocation to the electric power sector should be proportionate to its level of CO2 emissions (currently 40 percent). The vast majority of allowances to the power sector should be allocated directly to the local distribution companies (LDCs) or “wires” companies that provide local retail electric service. The value of those allowances would then flow directly to all electricity customers—residential, commercial, and industrial—under strict supervision of state public utility commissions, which closely regulate LDCs.
This approach would allow utility regulators to mitigate economic impacts in a way that takes into account the costs incurred by all customers—which will differ across the country—while still maintaining the environmental benefit of implementing a price on carbon.
Allocations Within the Electric Power Sector
Within the power sector, the vast majority of allowances should be allocated to LDCs based on an even split between base-year emissions (including emissions associated with purchased power) and retail sales.
The relatively small number of remaining allowances would go to merchant coal generators, which would receive allowances equal to 50 percent of their base-year emissions to help defray their compliance costs, to help mitigate price increases in wholesale electricity markets, and to help maintain a reliable electricity supply in the regions where merchant coal generators are located.
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