Public Power - September 2008 - (Page 33)

Under would limit, orprogram, policya cap-and-trade makers cap, the total emissions allowed over a specified period of time. Policymakers would then create emission allowances and a market for these allowances. Allowance owners could then emit a certain amount of greenhouse gases and trade any excess allowances on the open market as a commodity. The Low Carbon Economy Act of 2007 (S. 1766), introduced by Senators Jeff Bingaman, D-N.M., and Arlen Specter, RPa., and the Keep America Competitive Global Warming Policy Act of 2006 (H.R. 5049), introduced by Mark Udall, D-Colo., and Tom Petri, R-Wis., in the House would both implement a cap-and-trade program and use a safety valve to control costs. A safety valve would place an upper limit on the price of emission allowances. A cap-and-trade program without a safety valve would reduce CO2 emissions, with no inherent capability to limit the cost to the energy customer, the energy industry or, ultimately, to the American economy. As a result, many concerned about the negative economic impact a cap-and-trade program could have on the economy and U.S. competitiveness have advocated a capand-trade program with a safety valve. Although nearly everyone and every business in American society is an emitter, the most direct and least expensive way policymakers might implement a cap-andtrade program would be by placing an allowance requirement upstream on fossil fuel emitters and producers. Upstream emitters include: 991 coal mines, accounting for 99.5 percent of all U.S. coal production; 500 natural gas producers, accounting for 93.2 percent of all domestic natural gas production; 500 crude oil producers, which process 90 percent of all crude oil for the United States; and, fewer than 250 companies, accounting for all U.S. imports, according to Resources for the Future. With an upstream system, the cost of the emission allowances would, in all likelihood, be passed from suppliers and producers to consumers. As energy costs increase, consumers might reduce their consumption. Electricity generators are certain to www.APPAnet.org feel a greater financial impact than other industries. That’s why public power utilities are lobbying Congress for the allocation of free allowances. Giving the allowances away, initially, would help offset the costs of a cap-and-trade program for those most affected. Free emissions would put a commodity in the hands of utilities that they could readily convert to cash on the market. Not-for-profit public power utilities would pass the benefits through to their customer-owners. But giving allowances to electricity generators could actually raise the cost of carbon reduction, since large portions of the electricity industry are still regulated. Generators who received sulfur dioxide allowances under the Clean Air Act were not allowed by regulators to use open market pricing for their allowances, according to the Congressional Budget Office. Therefore, generators Banking would help ease some of the economic burdens of an auction by allowing emitters to save their unused allowances for use in the future, while borrowing would allow emitters to essentially take out allowance loans. Emitters would most likely be borrowing against their future emission allowances and would have to pay back the borrowed allowance, probably with interest. Banking has been used successfully in the SO2, acid rain, cap-and-trade program. Prices under that program remained stable until recently and the ability to bank allowances is generally credited with this price stability, according to William Pizer, senior fellow and director of research for Resources for the Future, a research organization specializing in environmental and energy issues. However, recent price spikes in the SO 2 market indicate that banking alone is probably not adequate and rein- Generators who received sulfur dioxide allowances under the Clean Air Act were not allowed by regulators to use open market pricing for their allowances. never got the full value for their allowances, making the cost of the program higher than if the allowances were sold rather than given away. Another way to allocate allowances is to simply auction them off. This would allow the market to decide where these allowances end up. Anyone needing allowances would have to pay the market price. However, this could potentially put smaller, less profitable utilities, and those that rely more on coal, at a significant disadvantage if prices on allowances were to rise too high in the open market. It is possible, though, that revenue raised from the initial allowance auction would be used to lessen the economic impact of cap-and-trade legislation. Revenue from the auctions could be used to offset marginal tax rates or to compensate more directly those affected by higher prices. forces the need for the use of a safety valve if a cap-and-trade program is used to control CO2 emissions. Free markets, though efficient and self-correcting, can be absolutely frightening. In a free market, the price of a traded commodity, like corn or silver or CO 2 , might seem perfectly reasonable one day, and then rise to vertigo-inducing heights the next. The European Union has had a trading market for carbon emissions for several years. Prices last year fluctuated from nearly $40 per ton of carbon dioxide emitted to less than $1 per ton of carbon, Scientific American reported “The loss in value resulted when it became clear that governments massively oversupplied the market with permits.” Whether allowances are distributed upstream or downstream, or to particular sectors or industries, the cost of allowances SEPTEMBER 2008 33 http://www.APPAnet.org

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Public Power - September 2008 Contents Perspective 10 Questions What’s Good About RTOs? Capturing Coal’s Carbon Carbon Safety Valves Greater Glass, Greater Savings Getting Customers to Embrace Compact Fluorescent Lights LEEDing Green Kansas City Shows How to Build Green For Governing Boards Safety Community Broadband Hometown Connections Parting Shot

Public Power - September 2008

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