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Distributing Allowance Value II: 80% for Consumers and Public Purposes

Dan Lashof

Posted May 29, 2009

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Rob Stavins of Harvard has posted a very useful analysis of the way allowance value is distributed in the Waxman-Markey American Clean Energy and Security Act reported by the Energy and Commerce Committee last week. Rob adds theoretical rigor and an important quantitative summary to my previous post on the subject. His analysis shows that, contrary to widely held perceptions, ACES distributes the vast majority of allowances for purposes that are clearly in the public interest. His key conclusion is:

...the totals become 79.9% for consumers and public purposes versus 20.1% for private industry, or approximately 80% versus 20% - the opposite of the "80% free allowance corporate give-away" featured in many press and blogosphere accounts.  Moreover, because some of the allocations to private industry are - for better or for worse - conditional on recipients undertaking specific costly investments, such as investments in carbon capture and storage, part of the 20% free allocation to private industry should not be viewed as a windfall.

I don't agree with all of Rob's comments, but his bottom line conclusion is spot on and crucial. Far too many members of the press and even some well-meaning environmental advocates have adopted the highly misleading narrative that the Waxman-Markey bill "gives away" 85% of the allowances to industry based on a simplistic reading of the fact that only 15% of the allowances are explicitly auctioned at the beginning of the program. As Stavins puts it:

...we should be honest that the legislation, for all its flaws, is by no means the "massive corporate give-away" that it has been labeled.  On the contrary, 80% of the value of allowances accrue to consumers and public purposes, and some 20% accrue to covered, private industry.  This split is roughly consistent with the recommendations of independent economic research.

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