Don't Give Away Carbon Permits

by hilzoy

Via Kevin Drum, bad news from Sen. Jeff Bingaman: 

"Sen. Jeff Bingaman, a New Mexico Democrat who chairs the energy panel, said earlier that any climate bill that passes the Senate is unlikely to adhere to the administration's plan that the government auction all the permits to emit greenhouse gases because such a plan would be too harsh on big industry.

Instead, Bingaman said any Congressionally developed system capping and trading emissions probably will include carbon allowances given to polluters like cement factories and coal-burning power plants, along with permits that are sold."

This is a very, very bad idea. The problem isn't that the government would get less money if it gave permits away than it would if it auctioned them. A good cap and trade system will involve sending some or all of the money back to people. It's that once you start giving away permits, it's open season for lobbyists and special interests. 

If Congress wants to help cement factories and coal-burning power plants, it can send them money directly and face the political consequences. Giving away permits under a cap and trade system does exactly the same thing, but without forcing Congress to admit what they are doing.

Moreover, as Kevin notes both in his post and in his article on the subject (which is very good), giving away permits can actually make prices go up:

"The economic theory involved is a little hairy, but those permits have a value on the open market, and that means that in many cases marginal producers can make more money selling their permits than by producing power. They'll only be willing to produce power if they can raise prices enough to make the power-producing business more profitable than the permit-selling business, and eventually everyone will jack up prices to follow suit.

This may sound abstract—even a bit fantastical—but it's absolutely real. In fact, when permits in phase one of Europe's ETS system were handed out for free, electricity prices rose and power companies pocketed a windfall profit (which Britain's Department of Trade and Industry estimated at about $1.1 billion a year in the UK alone). Dale Bryk, an attorney with the Natural Resources Defense Council (NRDC), puts it bluntly: "If you ask them point-blank if they'll charge customers for free permits, they won't tell you. But they know they will."

A better way is for the government to hold an auction to set the price of permits. This has a couple of extremely salutary effects. First, it puts everyone on a level playing field (since Congress has no ability to allocate permits to favored interests). Second, and even better, the money from selling the permits goes to the federal government, not to the carbon emitters. That's a pretty useful revenue stream, one that would probably start out at about $20 to $30 billion per year and go up steadily as the cap came down and the price of carbon permits increased."

Giving away permits is just bad policy. It's a handout to corporations hidden within the arcana of cap and trade legislation where members of Congress do not have to fess up to it. It opens the floodgates to everyone else who would like Congress to give them money, which is to say: to everyone in the country. And it raises costs to everyone else. 

Jeff Bingaman: just say no.

Comments

[Ara]

Why would such permits be salable? I can't sell a building permit (independently of the property) or a tax credit. Why should I be able to sell a carbon permit on the open market?

[Gary Farber]

Cap and Trade 101.

[d'd'd'dave]

Kevin said this on page 2, item 4 of the linked Mother Jones article:
" If you set the overall carbon cap at 90 percent of current levels, and allocate only that number of permits, that should reduce carbon without raising prices for the consumer. After all, the power plants didn't have to pay for the permits, so there are no costs to pass along. Right?"

Wrong. The fact that producers get 10% less permits than their current emissions produces costs. They'll have to spend money on scrubbers in order to maintain the same production level with 10% fewer emissions. The costs will be passed through to consumers. How else could they pay for the scrubbers? Or, if the utility doesn't buy scrubbers but instead reduces production, unfilled energy demand will drive energy prices to consumers up. In either case, the higher energy prices will enable more expensive but cleaner technologies to compete.

I don't see how consumer prices will not rise under any emission control scenario.

If the govt charges for permits instead of giving them for free it will just add another increment of cost on top of the one I described above. The one I described above will happen in any case and will be larger or smaller depending on how much the emission cap is reduced.

[Free Lunch]

Permits have to be for limited time (say two to three years) and the price needs to increase for each renewal. Some zero dollar permits, maybe 25%, might be available for the first cycle, half as many for the second, but the zero dollar permits must be inalienable.

[Free Lunch]

Dave, remember the purpose is to cut down emissions. You assume that business will act in an irrational manner (certainly something that it has been known to do) and will refuse to find alternatives to expensive permits.

[Turbulence]

They'll have to spend money on scrubbers in order to maintain the same production level with 10% fewer emissions.

There are no scrubbers that remove CO2 emissions. None. If you don't know that, you really have no business participating in a discussion about carbon permits.

[d'd'd'dave]

" business will act in an irrational manner".

I don't think what I described is irrational. The business will maximize profit. The moment the command is given to reduce emissions by 10% a new profit equation arises. What combination of actions maximizes profit? Buying a scrubber, raising rates, and selling x amount of energy? Buying permits, raising rates, and selling y amount of energy? or raising rates and selling 10% less energy? The unknown in the equations is how much the demand will decline at each price level. It could be that the third option maximizes profits in the short term. While, at a later date when emission cap ratchets down again, it might then make sense to buy permits and increase production again.

[cw]

Cap & Trade is another one of those ideas I support in theory, but like RES's the devil is in the details. Here's a story about how they have not been successful in Europe.

[d'd'd'dave]

" If you don't know that, you really have no business participating in a discussion about carbon permits."

The discussion police have set a minimum standard. Will someone sell me a discussion permit?

Turdulence, Try to imagine a mechanism by which an energy producer can decrease its carbon emissions without decreasing its production capacity. Once you've imagined that mechanism please assign the name 'scrubber' to it or, if you prefer call it 'cookie' or 'tomato'. Now reread my comment using the term that pleases you.

If there is no mechanism by which such a thing can occur then it is stupid to talk about giving permits to existing emitters of carbon since they cannot clean themselves up - they can only reduce output.

If that is still too hard for you to do then go #&%^ yourself.

[gwangung]

Turdulence, Try to imagine a mechanism by which an energy producer can decrease its carbon emissions without decreasing its production capacity. Once you've imagined that mechanism please assign the name 'scrubber' to it or, if you prefer call it 'cookie' or 'tomato'. Now reread my comment using the term that pleases you.

Well, we're either walking close to a posting violations or you're a bad typist.

Given your rather sloppy use of terminology, I'd lean toward the latter...

[hilzoy]

d'd'd: The general idea is that you create a market for permits, and those companies that can save energy more cheaply will sell their savings to those who can't, thereby achieving whatever savings you want at a lower price.

When the government sells the permits, it can do any number of things with the money. One, which I favor, is returning some or all of it to consumers. If you returned all of it, an average person would break even; people who used less energy would got more money than they paid; people who used more would get less.

It's just about attaching a market price to something that is now a cost that the market does not capture, thereby bringing the financial cost of emitting carbon in line with its actual social cost.

[hilzoy]

And d'd'd: please respect the posting rules.

[Gary Farber]

"There are no scrubbers that remove CO2 emissions. None."

Prototype.

Other scrubbers.

The space shuttles have been using CO2 scrubbers for many years.

Picture of crewman repairing the non-existent scrubber.

[liberal japonicus]

The discussion police have set a minimum standard. Will someone sell me a discussion permit?

You see? We can only issue permits covering 90% of the conversation and still improve the quality of the product.

And d3dave has the habit shared by the elementary school bully to change people's handles, so I'm sure the turdulence slight is SOP for him.

Of course, now, the Cdave'sA move is to claim that scrubbers are a cover term for any type of technology that might cost money. Unfortunately, some technologies, when implemented, are actually cheaper (cf. aluminum recycling), and therefore, Turb's point that if you don't understand the technology, you might want to stop embarrassing yourself is to the point.

[Turbulence]

OK Gary, where can utilities purchase CO2 scrubbers for installation at large power plants today? I know exactly where to go in order to get a scrubber for SO2 removal for a large power plant today. The technology to reliably do the same with CO2 on a large scale in a cost effective manner does not exist today. You can talk about unreliable techniques that are not in production, but that's not relevant to the question at hand. Nor are obscenely expensive small scale techniques.

[gwangung]

It's just about attaching a market price to something that is now a cost that the market does not capture, thereby bringing the financial cost of emitting carbon in line with its actual social cost.

"Well, ma'am, that jes' sounds like some o' them funny new fangled progressive librul ideas. And I reckon as a conservative, that means I gots to oppose 'em from the git go.

"Beggin' yer pardon, ma'am."

[Slartibartfast]

There are no scrubbers that remove CO2 emissions. None.

It may be more accurate to say that there are no scrubbers that remove CO2 in an energy-efficient manner. I don't know if that's entirely true, but it's much more likely to be true than "None".

[Gary Farber]

"OK Gary, where can utilities purchase CO2 scrubbers for installation at large power plants today?"

Beats me. I was just responding to what you wrote, not to what you were thinking.

[d'd'd'dave]

Turbulence insists that I am too ignorant to understand this stuff. Liberal Japonicus says I am embarrassing myself. Clearly that's true because this doesn't make sense to me:

Hilzoy and Kevin Drum say it is better to sell permits than give them away. One of the reasons they give is that giving permits away raises prices for consumers.

"as Kevin notes both in his post and in his article on the subject (which is very good), giving away permits can actually make prices go up:" and

"Giving away permits is just bad policy. It's a handout to corporations ... And it raises costs to everyone else."

Yet selling permits will raise prices to consumers too. How else will the permit buyer pay for the permits if not by raising rates to consumers? Even if you auction the permits and return all the proceeds to the consumers energy/product prices would still rise because you have reduced the amount of overall emissions that can be produced with existing infrastructure. Money will have to be spent creating more efficient infrastructure and this will be passed through to consumers.

If prices will rise in either case, how does it make sense for Hilzoy and Kevin Drum to point at price increases as a reason to choose auctioned permits over free permits.

This argument does not seem useful to me. Yet the brilliant ones are persuaded by it. What am I not seeing? I haven't opposed cap and trade on this thread, whether permits are free or not. I've just opposed the notion that free permits raise prices and pay permits do not.

This conundrum was the gist of my 10:02p comment but we had to take a detour through 'is scrubbing feasible' instead of focusing on the 'which is cheaper' question.

[hilzoy]

d'd'd: Giving permits away will raise them more.

[gwangung]

Yet selling permits will raise prices to consumers too.

Um, yeah?

OF COURSE it raises prices...the whole point is to build in costs that are not now being built into the system.

Hilzoy is arguing that just giving permits away will be MORE expensive to consumers. She may be wrong, but you've yet to present any argument against her position---you're just comparing her position to the current system where there isn't a permit system.

Argue apples to apples.

[xanax]

Have the Reality Campaign's "Clean Coal Clean" TV spots made it to your markets yet? If not, watch them here.

The "Air Freshener" spot was produced by Joel and Ethan Coen.

[liberal japonicus]

If you don't think coming up with the zinger of 'turdulence' is embarrassing, maybe you should wait a bit before you come to the adult's table.

[Hartmut]

I think there is still a lot of room for improvement in plants even without carbon capture (especially older plants). Until now it was cheaper to invest in lobbying than improving the eco-balance of one's chemical or power plants. And energy companies will charge what they can get away with anyway (like the expensive gas at the start of the holiday season).
Come back complaining when all plants are state of the art.
I am currently reviewing the BAT regulations for chlor-alkali plants for the German equivalent of the EPA. Emerging techniques/improvements are expected to reduce energy consumption by 25-30%. Currently it is about 3 MWh per ton of chlorine and the production is several million tons per year in the EU alone, so we are talking about a lot of CO2 to be saved.

[Turbulence]

Turbulence insists that I am too ignorant to understand this stuff.

Yep, I do. You know what though? Ignorance can be fixed. You can go read a book on this stuff or go read some articles. But it is the height of rudeness to join a conversation when you don't understand the basic principles under discussion. It means you don't value anyone's time, including your own.

[TJ]

There are no scrubbers that remove CO2 emissions. None.

Been around for decades. Developed for removing H2S and CO2 from natural gas. Consist of packed or trayed towers using MEA or DEA solutions.

Now "cost effective" or "energy effective" is something different. The scrubbers do require capital and impose an energy penalty, so they obviously don't look too good compared to just venting it to the atmosphere.

[Bernard Yomtov]

I don't really get Drum's argument.

We have a marginal producer who is given a free permit, say. The producer sells the permit and presumably shuts down, since it can't operate without a permit. Either that or it keeps the permit and somehow raises rates to a level that produces more revenue than selling the permit.

Suppose you auction the permits instead. The marginal producer will either not buy one, and shut down, or buy one and raise rates to cover the cost. What's the difference?

The advantage of the auction procedure is that it is not an arbitrary award of permits. They go initially to those firms who would find it most expensive to reduce emissions. That's where they are supposed to end up anyway, of course, but this is quicker, and the revenue flows to the government rather than being a handout to companies whose only use for the permits is to sell them.

As for raising rates to consumers, any such system will do that. That's the whole idea - to make the private cost equal the social cost.

[d'd'd'dave]

Let me propose an even more radical solution. Instead of giving free permits to producers or auctioning permits to producers we should instead give rationing coupons to all residents. Divide the total desired tons of emissions by 300 million or so and hand out equal coupons to everyone. When you buy energy or beef or whatever you'd have to submit rationing coupons for the ghg rating of the product as well as money. A market for coupons would spring up. This way there is not an arbitrary handout to either companies or government. People will buy the mix of products / ghg efficiency that they value. Efficient producers will quickly rise and inefficient ones will quickly fail. This makes it even less likely that lobbyists, special interest, etc will disrupt things.

Whatever the system we use measuring ghg content of products will be an issue.

[Tony P.]

Instead of giving free permits to producers or auctioning permits to producers we should instead give rationing coupons to all residents. Divide the total desired tons of emissions by 300 million or so and hand out equal coupons to everyone.

Well, for once I can agree with d'd'd'dave. If he's really willing to give an equal share in the atmosphere's dumping capacity to every man, woman, and child in America, I applaud his egalitarianism. Whether the mechanism he suggests amounts to more, or less, fuss and bother than a 100% auction scheme coupled with distribution of the proceeds to our 300 million closest friends on a strictly per-capita basis, is a merely logistical question.

The ideological battle boils down, I think, to the acceptability of "equal" or "per-capita" ownership of the atmosphere. It's brave of d'd'd'dave to come down on the egalitarian side on this issue. Brave, because egalitarianism is a slippery slope: the atmosphere is just one natural resource, and I'm not sure he cares to apply the equal-ownership principle to all the other ones.

--TP

[liberal japonicus]

Nice point tony, I'd suggest d3dave start it as an experiment and report back to us.. The next mobile home park he wants to renovate, he should convince the local authorities to give each resident (every man, woman and child, I hope) a use permit so that he can then negotiate with each of them individually to obtain. When he gets enough, he can start working on his little slice of heaven. I just hope he can convince the old guy who lives on the one access road in the park...

[d'd'd'dave]

LJ
That is exactly what I did. I negotiated individual settlements with each and every mobile home owner in the park. An EIR-type study was done to describe the economic impacts that were likely to occur. This was distributed to each mobile home owner and was available to the public via the city as a public document. The EIR was an effort to educate the MH owners so that a reasonable floor price could be set. There was no top limit. Almost no one got the minimum. The ones that did lived in absolute squalor and realized that their mobile homes were worth less than the minimum.

[CTF]

Isn't this gaming of the system exactly why a revenue-neutral carbon tax is a better alternative?