Clearing the Air: How the American Clean Energy and Security Act Distributes Emission Permits

Sound science and economics create a smart and fair system

Posted: 11-Jun-2009; Updated: 15-Jul-2009

The American Clean Energy and Security Act (ACES) sets a cap on greenhouse gas emissions for major polluters across the whole economy. To do this, the program allocates emission permits, or allowances, to companies.

In the early years, to protect consumers against energy price increases, and to help companies make the transition to a clean energy economy, the bill allocates most of the permits for free. By 2050 three-quarters of the permits will be auctioned off.

How the bill allocates these permits is critical, and the system proposed for Waxman-Markey is smart and fair. It will keep costs low for consumers, ensure the competitiveness of American industry, and promote investment in a clean energy future—all while achieving the bill's critical environmental goal. Here's how:

Consumer protection. Much of the dollar-value of the allowances goes to consumers—particularly low-income households.

• In the early years, 40% of the allowance value goes to regulated local electricity and natural gas distribution companies. To ensure integrity, those utilities must demonstrate how they will pass the value on to consumers, including households, small businesses and industry, through reductions in utility bills.
• 15% goes directly to low- and moderate-income families. In combination with the reduction in utility bills, this energy tax credit will fully compensate them for higher energy costs, according to the Center for Budget and Policy Priorities.
• Nearly 20% goes to a broad-based tax refund for American families.
• In all, 44% of the total allowance value over the life of the bill goes to households. That amounts to an estimated $700 billion, using EPA's projections.

Business competitiveness. The allocation system will protect the competitiveness of American businesses and workers during the transition to a clean energy economy.

• Roughly 12% of the value of emission allowances will go to energy-intensive, globally competitive industries. This will compensate them for increased costs in the initial years of the program and help U.S. firms compete with companies in nations that have not capped their carbon pollution.

Regional equity. The bill includes safeguards to ensure that individual states and regions don't suffer disproportionate burdens.

• Roughly half of the allowances for electricity consumers will be allocated on the basis of carbon dioxide emissions and half on the basis of electricity generation. This formula assures that heavily coal-dependent states, like Ohio and Indiana, will receive a higher percentage of allowances.

Environmental protection. The allocation system will advance the overall environmental objectives of the legislation.

• 26% of the allowance value will fund public projects, like carbon capture and sequestration, and investments in renewable energy and energy efficiency, to achieve long-term environmental goals and protect American competitiveness.

Cost effectiveness. The true test of the allocation system boils down to just one number: the estimated cost to American households.

• EPA projects the annual cost to the average household will be $98 to $140. That is just 12 to 15 cents per person per day—less than the cost of a postage stamp. That is a small price to pay for cleaner air, greater energy security and helping to avert the devastating effects of catastrophic climate change.

Despite all the attention given to "auction vs. allocation," the method of distribution of allowances has no bearing on the cost-effectiveness of the program. That's because the value of allowances will be determined by the market. Companies that curb their emissions will profit by selling their permits to less efficient companies. This creates a powerful, bottom-line incentive to innovate and deploy cleaner technologies.

The method of distribution also doesn't affect the environmental effectiveness of the program. That's the job of the cap, which ensures we achieve the reductions scientists say we need.

The American Clean Energy and Security Act may not be perfect, but it uses sound science and economics to help put this country on a path toward an environmentally sustainable and prosperous future. The facts bear this out.