WRI Brief Assessment of Allowance Distribution under H.R. 2454, the American Clean Energy and Security Act (Waxman-Markey)

John Larsen & Robert Heilmayr
June 25, 2009

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H.R. 2454, the American Clean Energy and Security Act (herein referred to as the ACESA) distributes emission allowances to various purposes. This brief assessment is intended to clarify how allowances are distributed, who receives allowance value and for what purpose that allowance value may be used.

There are two primary ways that ACES distributes allowances into the U.S. economy. First, allowances may be auctioned with the proceeds distributed to fund various purposes according to instructions included in the legislation. Second, allowances may be distributed for free to public and private entities based on various formulas and with differing levels of restrictions on their use by these entities. Since the allowance value does not change under either auction or allocation, the method used to distribute allowances matters far less than who receives allowances and how they may be used.

Based on the legislative language and intent, WRI analyzed where allowance value flows under the ACESA: The various recipients and uses of allowances are grouped into the following six categories:

• Auction with proceeds to the public. For example, low-income consumer assistance.
• Auction with proceeds to agencies for public benefit. For example deficit reduction.
• Free allocation to agencies for public benefit. For example, state programs for energy efficiency.
• Free allocation to regulated entities to benefit energy consumers. For example, allocations to local distribution companies for ratepayer benefit.
• Free allocation to regulated entities for technology deployment. For example, payments for carbon capture and storage of CO2.
• Free allocation to regulated entities with no restrictions. For example, allowances to trade exposed industries.

Charts 1 and 2 present how allowances are distributed under the ACESA to these categories on an annual and cumulative basis respectively.

The following key findings are apparent:

• The amount of allowance value that does not go to some public purpose but instead goes free to regulated entities starts at just over 8 percent, increases to 23 percent in 2014 and then declines to about 21 percent through 2025. It decreases steadily to zero thereafter unless the President adjusts the distribution formula.
• On a cumulative basis, regulated entities receive up to 19 percent of total allowance value from 2012 through 2025 and 12 percent from 2012 through 2050.
• The amount of allowance value directed to consumers or for other public benefit totals 76 percent of the cumulative allowance pool from 2012 through 2025 and 83 percent from 2012 through 2050. This is value that is not directly distributed to regulated entities in any way.
• The amount going to energy consumers for rate payer benefit tops out at just under 40 percent of the annual allowance pool in most years through 2025.
• As rate payer benefits phase out, the amount of value distributed directly to citizens increases. Low income energy consumers receive 15 percent of the allowance pool in all years of the program. In addition, starting in 2025, the climate change dividend to all U. S. citizens grows from zero to as much as 55 percent of the allowance pool on an annual basis.