Cap and trade bill starts the Congressional trek

In the House Energy and Commerce Committee today, the American Clean Energy and Security Act of 2009 starts its long trip through Congress. Today it will be marked up in full committee, which is Congressional bill talk for entering into the bill all the deals that were done in backrooms in order it gets enough committee votes to assure continued passage.

Under a cap and trade system, a finite number of pollution permits are made available to polluting industries. That’s the ‘cap’. Entities can then trade these permits in a secondary market. That’s the ‘trade’. Emission of pollution without a covering permit is illegal.

The way cap and trade reduces emissions is by placing a monetary value on pollution, in this case greenhouse gases. Heavy pollution emitting industries – especially energy producers – will pass on the new cost of this pollution to consumers. The driving assumption is that consumer behavior will ultimately change because of higher prices for energy – the cost of energy will increase such that consumer demand for energy, be it directly through home and vehicle use or indirectly though consumption of goods and services, is consistent with the cap on pollution.

There are two issues around cap and trade that are of special concern to low and middle income Americans and that are at the center of negotiations between the 59 members of the House Energy and Commerce Committee. First, is the actual initial pricing of the permits. The second is to what degree and in what way low and middle income households will receive some household budget relief to offset increased energy prices.

With so much at stake, it still comes as no surprise that self interest is ruling corporate behavior with regards to the first issue, that of permit pricing. Energy producers are working hard in Washington to ensure that as many of the initial permits to pollute are given away for free. The other, much better option, is to auction them.

Why is it a better option? Aside from technical arguments over market efficiencies of auctions, the major argument stems from this simple observation: energy companies at any one point in time will have a finite number of permits to work with. Unless they switch off the supply of energy when their cap is reached (what a disaster that would be), then they must do something to slow the rate of consumption or buy more permits so that they can provide an uninterrupted service. Either way, if the initial supply of permits is designed to slow, stop or reverse emission growth, the price of energy they charge consumers must go up. Whether you auction or give away the permits makes no difference to this.

If you give away permits, the net effect is basically to give energy and energy-intensive corporations (read: Duke, Progress Energy, car makers, airlines) billions of dollars. That won’t be government money borrowed from somewhere else to be paid back whenever. That is your money in the form of higher energy bills and transportation costs.

If you auction the permits the price of energy increases but a large sum of money is pooled. This money can be used in productive ways, in particular to help low and middle-income families with their higher energy bills, to invest in alternative clean energy sources, and to help low and middle income people move from high carbon lifestyles to lower ones through rebates for cleaner appliances and vehicles and home weatherization. Auctioning is clearly the way to go.

The second controversy is over how to help low and middle income households cope with higher energy bills. The Center on Budget Policies and Priorities, using Congressional Budget Office methodology has estimated that if the cap were to lower emissions by a modest 15%, the purchasing power of the households in the bottom income quintile (average income of $15 000) would decrease by an average of $750 per year. A little under half of that would be through increases in utility and natural gas bills, one quarter in increases in gasoline prices and the rest through increases in the price of goods and services.

What this analysis makes clear is that low income people will need relief, that relief can be funded via permit auction proceeds and that relief can’t be channeled through utility companies alone. If consumers were to receive rebates on their utility bills that would mean that home energy consumption would see little change. But remember, the cap is still there – gasoline and prices of goods and services would increase such that demand is reduced and the cap preserved. Relief is best done through either refundable income tax credits for the low and middle-income earner, or through federal swipe card programs for those not in the tax system, including the sub- and unemployed.

North Carolina is fortunate to have Representative GK Butterfield as a high ranking Energy and Commerce member, and doubly fortunate that he is a advocate of the auction approach and low income relief. But with so much at stake, don’t be surprised to see a few permits handed out gratis, and income relief that goes way up the income scale.


  1. Steve Jackson

    May 18, 2009 at 4:42 pm

    Early indications from the mark-up process in Energy and Commerce are that most of the permits will be given away until 2026, with some auctioned to provide money for low-income household relief via the EITC or federal swipe card program for those not in the income tax system.

    Key committee members will need to keep hearing support for low-income relief throughout this mark-up week. Preserving the offset as it winds through Congress will be key.

  2. Dirk

    May 18, 2009 at 5:34 pm

    More EITC and swipe cards is just government hand outs. The unemployed will be given an incentive to look for work and the sub employed will demand higher wages.

  3. Steve Jackson

    May 18, 2009 at 10:47 pm

    A further update: Apparently under the Chair’s mark-up of the bill, the give-away of many of the pollution permits (or allowances as they are called in the bill) to utility, natural gas and home heating oil companies comes with some strings attached: they are supposed to protect consumers. More details on that in a later blog. Right now, I am sceptical, but the details on what that consumer relief would be and how it would be monitored are what matters. Needless to say, there are also still many many miles to go for this bill.

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