Why "100% auction" matters

Congress is likely to consider federal climate legislation this year to address global warming. Likely, it will be in the form of a “cap and trade” system. We are joining many other scientists and organizations in calling for strong targets in reducing our global warming pollution, specifically 25% below 1990 levels by 2020 and at least 80% by 2050. In addition to those targets, we are also calling for 100% auction of pollution credits (aka carbon credits) that are created under such a system.

What has become obvious recently, is that the “cap” on carbon emissions is becoming more and more accepted by people and groups that just a few years ago opposed climate legislation altogether. Where the fight is shaping up now is over what sort of “trade” system will be established. We support selling or auctioning all of these credits and then directing the revenue generated to working families. Big polluters, such as energy companies, want these credits in the form of free “give-aways” that they can then sell for a profit.

Under a cap and trade system, it is the cap that first creates the value of the item to be traded (carbon pollution, in this case). The underlying concept is that if something is not limited by a cap, it has no value (because it is unlimited). That is why before we do anything else, we first need to put a cap on carbon pollution, and then we can set up a trading system for the resulting pollution (or carbon credits).

Here is why the 100% auctioning of those credits is so critically important. Under this system, pollution would be a commodity, something valuable that could be bought and sold. If we give these credits away to big energy companies for free, companies that are already turning a healthy profit, they could (and would) turn right around and sell them to the highest bidder. This give away to the big polluters would divert millions away from the working families that need help the most.

From Grist Mill:

A cap-and-trade system with no auctions -- call it "cap-and-giveaway" (PDF) -- amounts to a highly regressive tax. Poor and working class families spend a greater portion of their income on energy and will be hardest hit when energy providers raise prices.

The regressivity(sic) can be reduced and even eliminated if the feds auction the permits and use the revenue wisely. One way to do so is to straight up buy people off. (A proposal called "cap-and-dividend" would simply divide up the auction revenue equally among every citizen, along the lines of Alaska's oil fund.) Another way is to reduce other regressive taxes (like the payroll tax). There are other options as well.

In response to this, the energy companies have put up a slick sounding argument against 100% auction. However, their logic is a bit faulty.

You might argue, as the coal industry does, that if permits are given away to utilities, they will pass the profits along to consumers in the form of lower prices. You might claim, in that sense, that giving away permits is more progressive. You would, however, be wrong. The fact is that utilities are going to raise energy prices regardless.

There is evidence to support this assertion. England has already set up a cap and trade system that didn’t have 100% auction of carbon credits. And the utilities raised their rates!

This isn't a theoretical concern -- the experiment has already been run, in the European carbon trading system, and sure enough corporations profited and prices rose anyway. To repeat: Under any system that puts a price on carbon, energy bills are going to go up. The difference is that in a system with auctions, gov't will have the resources to cushion the blow to the most vulnerable. That is as simple and urgent a question of economic justice as you're likely to find.

The sad fact of the matter is that energy prices will likely go up regardless of the path we choose (New nuclear and coal plants are quite expensive as well). However, the resulting higher energy prices don’t have to have a disproportionate impact on lower and middle-income families. If we take the revenue created from a cap and trade system and direct them to those families, they end up with a near wash. If we instead give the energy companies a break and give away those carbon credits, they will raise energy prices anyway and the resultant rate hike would hit us where it hurts the most- the pockets of the millions of Americans earning less than $250,000 a year.

There you have it, our attempt to put this complex issue in a more digestible format. Hopefully you have found this helpful and we encourage you to call your representatives and remind them that 100% auctioning of carbon credits is perhaps the most important provision of a climate change bill- and therefore the most necessary.