Climate Change, LDCs, and American Households

To follow up on Jeremy’s analysis of the recent Senate Finance Committee Hearing on the allocation of carbon auctions and allowances I wanted to go over some of the testimony and why income protection is so important to the Climate Change debate.

As Bronwyn pointed out the big news from the hearing was John Kerry bringing up the threat of EPA regulation on Carbon dioxide emissions, but both the level and nature of the income protection measures in Waxman-Markey have some real problems and just putting those problems before members of the US Senate is worth examining. One big issue was reviewed by Resources for the Future Senior Fellow Dallas Burtraw, namely allocation of emission allowances to consumers through their local distribution companies(LDCs).

The primary middle class income protection mechanism in Waxman-Markey is allowances to LDCs and the core idea is pretty simple, give allowance to electric companies and have them pass the savings on to consumers.

Burtraw identifies three reasons to reconsider this approach. Firstly allowances to LDCs leaves the distributional outcome largely undetermined, leaving the final impact to be determined by State public utility officials. Secondly under LDC allowances consumers will face adverse impacts and increase the overall cost of the program. And finally it is possible to avoid disparate regional impacts and distributional impacts, which is the subject of Burtraw’s recent research, with a smaller and more quickly phased out program of LDC allowances.

The LDC approach is far from the worst compromise in the bill, it will provide real income protection for American households, but it’s real weakness is a failure to send the right signals either economically or politically.

Economically there is a real possibility that many businesses will be able to anticipate rebates or other costs protection mechanisms and subsequently not change their behavior and reduce their carbon footprint. Changing behavior is the whole point of any carbon reduction plan. Politically it’s even worse.

Using the LDC model you’re left telling voters Waxman-Markey didn’t raise your bills because we passed a convoluted system of allowances, which through regulation we’re sure will be passed on to you and they don’t agree refer them to the conditional, subject revision (in response to the first comment!), and incomprehensible endorsement of an Ivy League professor. That’s a terrible way to tell the American people you care about their pocket book. And there is no easier way to undermine the viability of the whole climate legislation project then to not assure people you’ll protect them from higher costs.


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