Global Warming Reports
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Executive Summary
Global warming poses a serious threat to
the future of the western United States. Science indicates that in
order to avoid the most dangerous impacts of global warming, we must
act quickly to reduce global warming pollution.
The governors of Oregon, California, Washington, New Mexico and
Arizona established the Western Climate Initiative (WCI) in February
2007 to work together to reduce global warming pollution, with the goal
of reducing region-wide emissions by at least 15 percent below 2005
levels by 2020, a level consistent with the total reductions embodied
in states’ varying goals. In order to achieve this goal, WCI is
planning to cap global warming pollution from industrial sectors
representing most of the major pollution sources and to allow partners
to buy and sell permits that allow limited emissions. This type of
system is known as “cap-and-trade” and the permits for global warming
pollution emissions are called “allowances.”
Under a cap-and-trade system, polluters must hold allowances for
every unit of pollution they emit, and the total number of allowances
is limited by the regional cap. The cap declines on a timeline to meet
the region’s 2020 goal; the shrinking number of allowances results in
pollution reductions consistent with the goal. Polluters may choose to
reduce their pollution to lower the number of allowances they need, or
can trade allowances to match their pollution levels.
The structure of a cap-and-trade program is critical to its success.
One of the most important decisions WCI must make is how to distribute
allowances. Allowances can be given away for free to polluters or other
entities, sold at an auction, or distributed through a combination of
the two methods. This paper draws from recent studies on existing
cap-and-trade programs and economic models to show the important
advantages of auctioning pollution allowances under the WCI.
Auctioning all allowances under a cap-and-trade program is the
fairest distribution method for the public. Auctioning allowances
reduces the societal cost of achieving pollution reductions compared to
giving allowances to polluters for free, encourage energy efficiency
measures that can reduce energy bills for consumers and businesses, and
promotes a transition to a clean energy economy. For those reasons,
allowances should be auctioned in any global warming cap-and-trade
program.
Auctioning is the fairest means of distributing pollution allowances.
• The atmosphere is a public resource, and must be managed for the
benefit of the public. As a result, it is fair to require polluters to
pay the public for damaging that resource and to hold them responsible
for the costs their pollution imposes on society. Giving away pollution
allowances for free undermines that responsibility, but auctioning
allowances ensures that all polluters pay based on the amount of
pollution they release.
• If allowances are given to polluters for free, some companies earn
windfall profits, without regard to whether they take steps to reduce
pollution.
• Auctioning allowances removes the potential for political
favoritism and market distortion in the distribution of free allowances.
Auctioning allowances enables emission reductions to be achieved
at lower cost to society than if allowances are given away to polluters.
• Studies have estimated that auctioning allowances and “recycling”
the revenue to consumers can reduce the societal cost of achieving
emission reductions through cap-and-trade by as much as half.
• Auctioning allowances prevents polluters from gaining “windfall” profits as a result of cap-and-trade.
o When allowances—which are items of monetary value—are given to
polluters for free, it allows polluters to benefit financially without
having to take any action to reduce their emissions, since they can
increase prices to incorporate the value of the allowances.
o Europe’s emission trading system, which includes free distribution
of the vast majority of allowances, has resulted in power plant owners
receiving billions of dollars in windfall profits from the program. In
the United Kingdom alone, windfall profits from emission trading have
been estimated at nearly $2 billion. These profits come from the
pocketbooks of consumers.
o For rate-regulated utilities in the Western states, proper
regulation can prevent windfall profits from a cap-and-trade system,
but auctioning allowances is still an important way to encourage smart
investments in energy efficiency and clean energy technologies. Even in
states with well-regulated electricity markets, businesses in other
sectors of the economy may have the opportunity to obtain windfall
profits if given allowances for free.
o Auctioning allowances eliminates the potential for windfall
profits and requires polluters to pay for the right to emit global
warming pollution.
Auctions can protect consumers and maximize the economic benefits of global warming solutions.
• As demonstrated by an analysis of the regional cap-and-trade
program in the Northeast, using auction revenues to increase energy
efficiency while imposing a carbon cap can actually lead to lower
energy bills for consumers, even if the price per unit of energy
increases.
• Auction revenues can also be invested in low-carbon transportation
infrastructure such as public transportation— giving Westerners
additional ways to reduce their carbon dioxide emissions and curb
dependence on expensive oil.
• Consumers can be further protected from rising energy costs if a
portion of auction revenues is given to low-income consumers in the
form of energy bill assistance or to consumers generally in the form of
a rebate.
Auctioning allowances encourages a transition to clean energy sources.
• Giving allowances away to polluters for free based on their
historic emissions (often called “grandfathering”) rewards owners of
highly polluting facilities and discourages innovation.
Auctioning allowances treats all emitters—dirty and clean
facilities, and existing and new facilities—equally, placing them on a
level playing field and sending economic signals that encourage cleaner
sources of energy.
• Auctioning allowances will ensure that polluters receive the
proper price signals for investing in efforts to reduce their emissions
and that consumers receive price signals that encourage energy
conservation.
• Auctioning allowances can also generate revenue to support clean
energy technologies. Studies suggest that combining a cap-and-trade
program with aggressive efforts to develop clean energy technologies
can allow for greater emission reductions to be achieved at lower cost.
Policy-makers, environmentalists, businesses and consumer advocates
are increasingly supporting auctions as a fairer and less expensive way
to reduce global warming emissions under cap-and-trade.
• In the Northeast, where 10 states have agreed to reduce global
warming pollution from power plants through the Regional Greenhouse Gas
Initiative, all of the states have committed to auctioning nearly or
fully 100 percent of their pollution allowances.
• Most global warming bills currently in the United States Congress
include an auctioning component. The strongest of those bills requires
the auctioning of 94 percent of allowances initially, rising to 100
percent over time.
WCI should maximize the percentage of allowances that are auctioned as part of its global warming cap-and-trade program,
with
the revenue from those auctions used to protect consumers and
businesses and to maximize economic benefits of a transition to a clean
energy economy. WCI partners should have the flexibility to auction up
to 100 percent of allowances and should commit to doing so.
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