Allowance Allocation Options Under the Clean Power Plan

Released by the Environmental Protection Agency (EPA) in August 2015, the Clean Power Plan (CPP) sets state-level emissions goals to regulate carbon dioxide emissions from existing power plants beginning in 2022. Under the CPP, each state has the opportunity to choose the form of its emissions goal (rate-based vs. mass-based) and how the goal will be met. For states choosing a mass-based approach, the method used to distribute emission allowances will impact how emissions goals are accomplished and who will bear the cost of the program.

Key Details

  • State policy priorities should be considered when deciding on the type of emissions goal and how allowances will be distributed under the CPP. Cost of service markets require different solutions than competitive markets. Likewise, policy decisions mitigating retail rate increases will require different solutions than policies providing asset compensation to utilities. Policy decisions can either be supported by how emissions allowances are distributed (e.g., allocation vs. auction) or the unintended consequences and outcomes resulting from a distribution method can undermine those policies.
  • Transparency and simplicity are important factors in developing a carbon market that is cost efficient and trusted. A simple, transparent system is easier for utilities to understand and implement efficiently. Added complexities within the system, while sometimes necessary, add cost and encourage perceptions and questions pertaining to the system’s integrity.
  • By covering both existing and new emission sources, the new source complement mass-based goal provides a solution for assuring that emissions reductions from existing sources do not lead to increases in emissions from new sources while also allowing new entrants into the market.
  • Distributing emission allowances can be achieved through either allocation or an auction, with both methods having incentives and disincentives:
    • Allocating allowances may help mitigate retail rate increases but politicizes the process by picking winners and losers, whether in reality or perception. Additionally, a market that is susceptible to windfall profits will be created as utilities attempt to maximize the rising value of allowances obtained at no cost.
    • Auctioning allowances may cause costs to be passed on to customers but creates a simple, transparent system. The auction proceeds can be used to help mitigate retail rate increases, invest in clean power technology, and other policy initiatives.

Implications

Past environmental regulatory programs and initiatives, such as RGGI and the nationwide Acid Rain Program, have proven that cap and trade programs are successful in reducing emissions. However, the policy decisions made to implement these programs will determine if unintended consequences and outcomes from resulting generation decisions will detract from those benefits. A simple, transparent system that considers all generation sources will be less susceptible to these unintended consequences and unfair outcomes which, in turn, benefits utilities, customers, and policy makers.

More Information

Bipartisan Policy Center: Understanding Allowance Allocation Options Under the Clean Power Plan

This report is part of the Fossil Minute series. To view all featured Minutes, please click here.

Contributing Author: Brian Ruswinkle

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