Changing Political Landscape
and Paths Forward
Dallas Burtraw
February 9, 2010
Alternatives for US policy
• Waxman-Markey/Kerry-Boxer
• Energy leg., electricity-sector only
leg., standards
• Cantwell-Collins (dividends)
• Clean Air Act
The current situation?
The Waxman-Markey/Kerry Boxer approach
solves many problems (competitiveness, low
income, electric utilities, cost) and suffers under
the biggest one (allocation).
Partial Equilibrium Costs in Cap-and-Trade
Dollars
Marginal Cost Schedule
Area of Triangle
= Resource Cost
0
10
5
15
20
25
30
40
45
50
55
60
65
70
75
80
85
90
95
100
PA
35
Area of Rectangle
= Allowance Value
Percent of Emissions
How households are affected depends much more importantly on
what happens to the rectangle than on the size of the triangle.
Common Pool Resource
1. Nonexcludable
2. Depletable
Philosophical reference: the
resource is owned in common.
Public Antagonism
1. Wall Street shouldn’t get it
2. Government shouldn’t get it
3. Whose money is it anyway?
4. Uncertainty…
Does Policy Propagate Uncertainty?
• Climate change poses an extraordinary coordination
and cost-sharing challenge.
• That challenge is amplified by the fundamental
uncertainty about climate science.
• Economic response and technological change add
additional uncertainty about costs.
• We find that policy implementation adds further
uncertainty with respect to the effects on households.
• The more complex the policy, likely, the greater will
be the uncertainty for individual households.
Modeling H.R. 2454:
Three Uncertain Aspects (2016):
LDC Provisions, Renewables & Technology, Energy Efficiency*
Net Avg CS Loss
per hh
Allowance
Price
OPTIMISTIC WAXMANMARKEY
$137
$13.20
PESSIMISTIC WAXMANMARKEY
$421
$23.43
75% CAP-AND-DIVIDEND
$228
$17.37
The Middle Class Energy Tax
Consumer Surplus Loss by Income Quintile
Avg
Uncertainty fuels the notion that the
technocrats don’t know what they are
doing.
If the little guys can’t understand what is
happening, the big guys win.
…The devil is in the details.
Options for Allocation
1. Interest group politics
2. Surgical allocation to address leakage
3. Invest
4. Return to consumers
a. dividends
b. tax reform
National Comparison
.07
Loss In Consumer
Surplus / Income
.05
Cap and Dividend
(nontaxable)
Permit Price $20.87
.07
.05
.03
.03
.01
.01
-.01
-.01
-.03
-.05
Income Deciles
Reduce Income Tax
-.03
Income Deciles
-.05
Dark Blue: Effect of cap/tax
-.07
Light Blue: Net effect after accounting for revenue
-.07
 Public finance view:
achieve efficiency
use other tools to achieve distributional goals
For example, couple climate policy with separate tool for
income redistribution
 Common pool resource view:
achieve fair, popular climate policy
use other tools to achieve efficiency
For example, couple with reform of the tax preference for home
mortgages
How will households designate the value that may be returned
to them through dividends?
Strategy: Reinvest Dividends





Couple with existing education, incentive programs
Tax preferred expenditures
Borrow future year dividends at zero-interest
Tax-free revolving loan funds (Nudge)
More
Thank you
Modeling H.R. 2454:
LDC Provisions and Energy Efficiency/Technology
Development in 2016
Electricity LDC
Various electricity efficiency
provisions
Development of CCS technology
Renewable energy
OPTIMISTIC CASE
Allocated through fixed
charge on electricity bills
Electricity consumption
reduced at 2.8 cents/kwh
maps into $54/ton*
Abatement at $50/ton**
Abatement at $34/ton**
PESSIMISTIC CASE
Allocated through
variable charge on
electricity bills
Revenue lost
Percent
30.00
5.30
Revenue lost
Revenue lost
1.75
3.39
Clean vehicle technology
Abatement at $75/ton**
Revenue lost
SUBTOTAL
*
Affects households through both lower electricity bills and lower allowance price.
**
Affects households through lower allowance price.
3.00
43.44
Remaining Provisions Held Constant
Percent
Natural gas LDCs, home heating
oil, some energy efficiency, trade
vulnerable industries
Low-income consumers
Merchant coal, refiners
Adaptation provisions
International provisions
SUB-TOTAL
Captured in MAC curve
25.44
Per-capita dividend to low income households
Shareholders
Per-capita dividend to all households
Lost revenue overseas
15.00
7.25
2.64
7.00
57.33
Electricity Price Effects of Allowance Allocation
Auction
Efficiency
Advantage Lowest
Social Cost but
Higher Prices
Free Allocation
to Generators
Reduces Price
only in Regulated
Regions
Free Allocation to
Consumers
…But, Allowance
(LDCs)
Price Increases
by 12-15% With
Subsidy to Elec.
Consumption