Cap and Trade Rules
Investing in a Green Economy

By Kit Batten, Benjamin Goldstein, Bracken Hendricks
Center for American Progress
June 2, 2008

Cap-and-trade programs, currently under debate, could provide much-needed
revenue to help the transition to a low-carbon economy if they auction permits
rather than giving them away for free to polluters.

The U.S. Senate will soon begin debate on a bipartisan bill to cap and reduce
greenhouse gas emissions economy-wide. The Climate Security Act, S. 3036,
sponsored by Senators Barbara Boxer (D-CA), Joe Lieberman (I-CT), and John
Warner (R-VA), is the most comprehensive piece of climate change legislation
with the potential for Senate passage. This is a watershed moment, and a sign of
our nation’s growing commitment and willingness to address the critical threat
of global warming. Regardless of its fate in 2008, the Lieberman-Warner bill
will help frame the legislative debate around “cap-and-trade” global warming
proposals, and lay a foundation for any future legislation to reduce our
nation’s greenhouse gas emissions.

Deliberations on cap-and-trade legislation have so far focused principally on
reduction targets, timetables, and where to implement the emissions cap. Another
critical question is still unfolding: whether emissions permits should be freely
allocated or auctioned, and who will benefit from this process.

The Congressional Budget Office estimates that the monetary value of emissions
permits created by a cap on global warming pollution in the United States would
range between $50 billion and $300 billion generated each year (in 2007 dollars)
by 2020. Deciding how many of these permits will be sold and how many will be
given away for free is one of the most vital components of a successful
cap-and-trade system. The permits’ valuable dividends will, if given away,
provide massive windfall profits for polluters, or, if auctioned, generate
capital for major public investment programs to ensure an effective, equitable,
and expeditious transition to a clean energy economy. In addition, revenue from
the program would also flow to low- and lower-middle income families to help
them cope with rising energy costs.

In this context, capping greenhouse gas emissions is as much landmark economic
legislation as it is environmental policy.

The Center for American Progress supports auctioning 100 percent of the
greenhouse gas emission permits from day one under a cap-and-trade program,
which would require large-scale carbon emitters to purchase a permit for every
ton of greenhouse gases they release. The resulting revenue could create a
dedicated source of public financing to invest in a just and equitable
transition to the low-carbon economy. This would include supporting new
investments in green technology and energy efficiency; sheltering American
households from any economic dislocations due to shifting energy prices;
alleviating higher costs for energy-intensive industries; adapting to some of
the effects of global warming that we are already experiencing globally; and
creating good, “green jobs” and more vibrant, healthier communities in this
process. A 100 percent auction will ensure that large polluters, and not the
hardworking Americans least able to foot the bill, are financing the investments
necessary to carry out these vital public projects.

The Climate Security Act gives away approximately 40 percent of the emissions
permits to polluting industries— carbon-intensive manufacturing, fossil
fuel-powered power plants, petroleum refiners, and natural gas processors—for
free. The remainder is auctioned in order to fund programs such as those listed
above. Not until 2032 would polluting industries have to purchase 100 percent of
the permits to account for their greenhouse gas emissions, although 1 percent of
the allowances would still be available as “bonus allowances” for coal-fired
power facilities that have installed carbon capture and sequestration.

The good news is that the Climate Security Act now auctions more of the
emissions permits than it did in earlier drafts, but we need to continue to push
for an even greater percent auction up front. Other proposals are also moving in
this direction; Congressman Edward Markey (D-MA) unveiled legislation last week
at the Center for American Progress Action Fund, for example, that advocates for
a rapid transition to 100 percent auction under an economy-wide cap-and-trade
system. It also supports channeling the auction revenue back into the economy
for public policy purposes similar to the ones laid out here.

The choice is ours: how policymakers design the transition to a low-carbon
economy will either benefit the economy as a whole and provide new jobs and
progressive growth for Americans, or it will reward historic emitters for
continuing to pollute. We know that the costs of inaction will be enormous. And
if we design our response to this transition correctly, the opportunities will
be tremendous. It is time to focus on the benefits—not just the costs—to
consumers and ratepayers as a result of taking action to avert the climate
crisis and of investing in an economic future built on clean energy.


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