The American Clean Energy & Security Act of 2009, better known as the Waxman-Markey bill, emerged from the House Energy and Commerce Committee on May 15. This complex 932-page legislation has been described as the most ambitious effort to re-engineer American social and economic behavior in decades. It contains risks and opportunities for practically every person and business in the U.S., so it is in everyone's interest to try and understand its implications.
To further the needed public understanding, La Plata Electric Association sent a letter April 27 urging members to ask their Congressional delegates for transparent feedback on the bill, especially about projected price increases. But such transparency will not be easy to come by because of the complexity and ambiguous language resulting from political compromises that have been - and will be made - as the bill evolves towards law.
Complexity and political compromises, of course, are indigenous to the legislative process. But the way President Obama has chosen to deal with Congress may have intensified the complications. Unlike most of his predecessors, he seems to prefer to send over a broad outline of what he wants accomplished, and let the lawmakers construct the legislation. He used that approach with the stimulus package and House Speaker Nancy Pelosi produced a long list of favorite Democratic programs, with little consideration for how or when they might stimulate the economy. The White House managed to convince enough members to modify the list to be more stimulus-focused without causing an overt split with Pelosi. Even so, many believe the package will not achieve the economic boost it potentially could have, considering the amount of money allocated.
Despite that experience, the president has used the same approach to fulfill his promise to control greenhouse gas emissions using a cap-and-trade scheme. What emerged is a set of legal procedures that resemble cap-and-trade in name only. Proponents explain that compromises were "necessary in order to get the bill out of committee and to the House floor for a vote." Critics say, "It is a tax by another name applied in a complex and costly way, and should have been left to die in committee".
In a textbook cap-and-trade scheme, the government sets a cap on the total reduction in emissions it wants to achieve (In this bill, the goal is to cut greenhouse gases by 83 percent from the 2005 level by 2050). A cap is then set for how many emissions will be allowed legally each year. Then the yearly cap is gradually decreased until the goal is achieved. Permits to emit greenhouse gases are sold at public auctions to polluters at specific time periods. Auctioning prevents energy companies from gaining windfall profits and allows the proceeds of the auctions to serve the public interest. Revenue from the auctions should first go to compensate households, particularly lower-income families, to ease the burden of increased energy costs. But they should not be compensated entirely because some price increase is necessary to induce households to conserve, and thus reduce the demand for energy.
President Obama always has maintained that auctioning off permits was essential, "otherwise you are not really pricing emissions." But the Waxman-Markey bill gives away free 85 percent of the permits until 2026. Giving away permits still can provide companies with an incentive to reduce emissions because those with excess permits can sell them, so they would want to reduce emissions further in order to sell more. And those whose emissions exceed their permits and who need to buy more will want to eliminate that need. But because companies - rather than the government - receive the money for selling permits, they will reap windfall profits, and there will be no protection for consumers from higher prices. The Waxman-Markey bill addresses both problems, and that's when things get complicated.
Windfall profits are not a problem where the government controls prices as it does with electrical utilities (It remains a problem with unregulated industries, but there is not space to explain those complexities). But electricity consumers still would remain unprotected from price increases because the bill assumes state regulators will allow prices to rise to encourage conservation. To minimize the effect of those assumed price increases, the bill gives 30 of the free permits to utilities with the assumption that the benefits from the permits will be passed along to their customers. The form in which the benefits are transferred is important. The bill assumes utilities will soften, but not eliminate, the increase in prices with quarterly or annual rebates. But, as Harvard economist Robert Stavins points out, "the political tendency of utilities is to insulate consumers from price increases, not to compensate," which would reduce the incentive to conserve.
So, what can one conclude about the cap-and-trade bill at this point in its development? First, that ambiguities resulting from the numerous assumptions in the bill will make it nearly impossible to inform electrical customers about expect price increases; and second, the $75 billion a year expected from the government auctioning emission permits, to be used in the administration's budget to help pay for health care, subsidizing alternative energy sources, etc., will not be available when 85 percent of the permits are given away free.
Garth Buchanan holds a doctorate in applied science and has 35 years of experience in operations research.
Reach him at email@example.com.