Climate Bill Passes Five Tests on Allocating Allowances

I was invited to testify yesterday in front of the House Energy and Commerce Committee on how allowances are allocated under HR2454, the American Energy and Security Act of 2009 (ACES). You can see my full testimony here.

I started with the broad economic arguments for passing climate legislation now: by doing so, we can harness American innovation, ensure leadership in making the next generation of clean-energy technologies, and unleash investment that will help pull our economy out of the recession.

Then I turned to the allocation provisions of the bill.  The allocation plan will preserve the environmental and economic effectiveness of the legislation, helping move us forward in solving the climate crisis in a way that is affordable, equitable and efficient.

Specifically, I outlined five major principles that any set of allocations should reflect, and illustrated how HR2454 fulfills each.

  • First, the bill protects consumers, particularly low-income consumers.  It does this through three channels: allowance value allocated to local distribution companies, who are required to pass that value on to customers in the form of lower utility bill; direct funding for rebates and energy credits directed specifically at low- and moderate-income households; and broader tax refunds, especially in the later years of the program. In total, nearly half (44 percent) of the total allowance value goes directly to households – amounting to an estimated $700 billion in present value.
  • Second, HR2454 includes provisions that preserve and strengthen the international competitiveness of U.S. businesses and workers during the transition to a clean energy economy, by directing about 12 percent of total allowance value (over the life of the bill) to energy-intensive and trade-exposed industries.
  • Third, the allocation plan respects differences across states and regions by allocating half of the allowances for electricity consumers on the basis of CO2 emissions and half on the basis of electricity generation.
  • Fourth, the integrity and credibility of the program is preserved since the bill ensures that consumers receive the allowance value intended for their benefit due to provisions specifically requiring utility companies to pass on the allowance value they receive.
  • Finally, HR2454 directs some value (26 percent over the life of the bill) to public purposes that are the objectives of the legislation, including clean energy innovation, carbon capture and storage, investments in renewables and energy efficiency, and climate change adaptation.

Overall, HR2454 passes these tests with flying colors.

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