Senate Hearing On Climate Law Allowance & Revenue Distribution

Aug 4: The Senate Finance Committee, Chaired by Senator Max Baucus (D‐MT) held a hearing on Allowance and Revenue Distribution Under Climate Change Legislation. Witnesses testifying at the hearing included representatives from the: Government Accountability Office (GAO); Resources for the Future (RFF); American Enterprise Institute (AEI) for Public Policy Research; and Environmental Defense Fund. Chairman Baucus and Ranking Member Chuck Grassley (R-IA) delivered opening statements.

Chairman Baucus explained that most major climate change bills place a limit -- or “cap” -- on carbon dioxide. Companies subject to the cap must buy permits -- often called “allowances” -- to emit greenhouse gases. One key issue in such a system is: How much of these allowances should the government sell at auction? And how much should the government give away for free?

He said, "Economists expect that these allowances will have a value, like cash. Thus, many argue that the government should not just give these allowances away. Many argue that the government should auction them, and return the proceeds to consumers. Others argue that the government should allocate a portion of the allowances to regulated companies. Doing so would soften the effects of putting a price on carbon." Under the House-passed, H.R. 2454 (ACES), at the outset, the government would freely allocate about 85 percent of the emission allowances.

Baucus indicates that, "Allowances will have significant value. In 2012, the first year of the program in the House‐passed bill, the Congressional Budget Office [CBO] puts their value at about $60 billion. For the period of 2010 to 2019, they amount to more than $870 billion." Baucus cites the CBO which says, “[T]he creation of allowances by the government should be recorded as revenues. That logic does not hinge on whether the government sells or, instead, gives away the allowances. Allowances would have significant value even if given away because the recipients could sell them or, in the case of a covered entity, use them to avoid incurring the cost of compliance.”

Baucus said that there are a number of ways to use allowance revenues to mitigate the cost of climate legislation on consumers and businesses. He cited for example, that "Congress could use the money from auctioning allowances to cut taxes: by cutting marginal rates, by cutting capital gains rates, by cutting payroll taxes. Or we could do all of the above. . . Congress could compensate consumers through rebates or fixed payments per‐capita. . . We could also devote allowance proceeds to helping low‐income Americans. We could expand the Earned Income Tax Credit. . . The House bill provided solid relief to low‐income Americans through these means. The Senate should match it, or build on it. Still another approach would be to dedicate a share of revenues to investment in energy efficiency."

Ranking Member Grassley said, "The President supports 100 percent auction of allowances." He cited, Treasury Secretary Geithner's testimony before the House Budget Committee earlier this year when he said, “This program should include a
100 percent auction of emissions allowances -- ensuring that the biggest polluters don't profit on the basis of past pollution…” He also cited Dr. Peter Orszag, OMB Director who said, “…if you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States.”

Grassley said, "the allowance value. . . is in effect a national energy tax on all Americans -- one that will exacerbate the negative impact of other taxes on economic growth and jobs. This means that above all, we have a responsibility to mitigate, as much as possible, those painful effects on the American people."

GAO testified that, "The method for allocating allowances in a cap-and-trade program can have significant economic implications for the government, regulated entities, and households. Most importantly, a cap-and-trade system would create a market for a valuable new commodity: emissions allowances."

GAO indicated "A cap-and-trade program would increase the cost of burning fossil fuels and other activities that generate emissions and potentially raise costs for consumers. A key decision is the extent to which the government offsets these costs. For example, the government could sell the allowances and then return the revenues to covered entities or households. The government could also give away some or all of the allowances. According to the Congressional Budget Office, the value of the allowances could total $300 billion annually by 2020. Today’s testimony provides preliminary results of ongoing work assessing the potential effects of (1) allowance allocation methods, and (2) options for distributing program revenues or the economic value of allowances."

RFF testified that, "A simple per-household rebate of allowance revenue raised by the government through auction, coupled with a more moderate allocation to local distribution companies, can achieve distributional and regional goals at less cost and with greater administrative simplicity and predictability." AEI said, "Auctioning the allowances can address both the efficiency and distributional concerns, if the auction proceeds are properly used. Marginal tax rates can be reduced and compensation can be provided to vulnerable consumers."

EDF testified that, "The principles are straightforward: Protect consumers. Preserve and strengthen American competitiveness. And invest in the transition to a new, growing clean-energy economy. . . My conclusion is that the House bill strikes a sound balance, with the appropriate emphasis on the individual American family. Indeed, what is commonly overlooked is the extent to which HR 2454 channels allowance value to households . fully 43% of the total value over the life of the program."

Access a webcast of the hearing (click here). Access the hearing website for links to opening statement and all testimony (click here).