Largest utilities agree on 40% allowances in cap-and-trade bill

The electric industry should receive 40 percent of the initial allowances for greenhouse gas emissions under any climate change legislation, a group of the nation's largest utilities said today.

The allocations are a part of an unprecedented "unified industry position" from the Edison Electric Institute -- a trade association for investor-owned utilities -- on what should be included in a cap-and-trade bill.

Until now, utilities that mainly relied on coal-fired generation could not agree with utilities with more nuclear generation on whether a climate bill should have an "auction" of allowances or an "allocation" of allowances. Nuclear utilities argued that an auction would reward companies that had already taken the steps -- and spent money -- to reduce emissions. Coal utilities said allocating the allowances would allow low-carbon emission technology to develop and would mitigate an extreme run-up in electricity prices.

"These new points of agreement take our industry's engagement on the climate issue to the next level," EEI President Tom Kuhn said. The agreement is a milestone for the institute, which agreed in 2007 that there should be a federal mandatory cap on carbon emissions and that a portfolio of low-carbon emission technologies should be pursued.

The new EEI position outlines a "50-50-50" proposal for distribution of the sector's allowances: Merchant coal generation would receive allowances equal to 50 percent of their base-year emissions, with the balance of allowances distributed to local distribution companies based on half of their base-year emissions and half of their retail sales.


Kuhn said distributing allowances at the level of local distribution companies would be "quicker, cheaper and more efficient" in mitigating the costs of carbon for electric customers. EEI Chairman David Ratcliffe added that state regulators would have oversight of the allowances at the local distribution level and that a similar approach in the cap-and-trade legislation for sulfur and nitrogen oxide emissions has worked well.

Rep. Henry Waxman (D-Calif.), chairman of the House Energy and Commerce Committee, and other policymakers have championed redistributing revenue from a full auction of allowances to help mitigate the costs to the ratepayers.

Technology and price volatility

Along with the 40 percent allocation, EEI's board of directors also declared that the allowances should gradually make the transition to a full auction, the long-term target should be an 80 percent reduction of carbon emissions below current levels and a "price collar" should be set to place a price floor and ceiling on the cost of allocations.

"In order to try to mitigate near-term cost increases to our customers, it would be very desirable to allocate emissions on a declining basis in order to allow us to research and deploy technology," Ratcliffe said. The agreement suggests near-term targets should be aligned with achievements in energy efficiency, renewable energy and, to some extent, new nuclear generation, and medium-term targets should be set in the 10- to 20-year time frame and align with carbon capture and storage and new nuclear capabilities.

EEI's proposal for a "price collar" aims to satisfy both industry and environmental goals. Bill Fang, the organization's deputy general counsel and climate director, said the collar would provide the carbon-emission price stability needed to keep electricity costs at a reasonable level -- similar to a safety-valve concept -- but it would also keep a "visible" carbon price for offsets, a concern for environmentalists.

"The main advantages of a price collar would be to help eliminate price volatility so as to not have incredible swings in prices," Fang said. "People would know in five years it is X dollars and Y dollars," for the ceiling and floor prices, he said.

A price collar would also guarantee revenue for the government, which could use the revenue to fund research, development and deployment of low-carbon emission technology, Fang said.

EEI said the framework focuses on a cap-and-trade scheme but "also remains open to a tax-based or hybrid approach," which would start with a carbon tax and transition into an auction.

Other points of agreement among the utilities: There should be a single comprehensive federal climate policy, not overlapping regulatory regimes or state policies, and allowances should be transferred from the transportation sector to the electricity sector as more electric vehicles -- and therefore more demand and emissions from power plants -- hit the road.

U.S. Climate Action Partnership

A coalition of environmentalists and industry is set to lay out its own proposals for the climate change legislation tomorrow, coinciding with a hearing in the House Energy and Commerce Committee.

The U.S. Climate Action Partnership proposal will include a goal of reducing emissions by 42 percent below 2005 levels by 2030, according to Bloomberg News. The plan will also include a starting floor price for carbon allocations at $10 per ton and create a "reserve of credits" that would stem from offset programs such as preserving tropical forests, the report said.

Some of the companies in the partnership, such as Duke Energy, are also EEI members. But Kuhn said all of those members are "on board" with EEI's position.

Click here to view the EEI climate change agreement.



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