Next week, the Western Climate Initiative will release a proposal outlining the program’s cap and trade design.* In the proposal, we should expect to learn what share of carbon permits will be auctioned (and will therefore generate public revenue), and what share will be given away for free to emitters.
Auctioning is important—extremely important—because, among other virtues, it is the best way to promote fairness for people with moderate incomes. We’ve had lots to say about auctioning in the past, and we’ll have lots to say about it in the future. In the meantime, for comparison purposes, I thought it might be helpful to share the auctioning percentages from the cap and trade program in the Northeast, called RGGI. Here goes:
Connecticut……………..91%
Maine……………………….100%
Maryland…………………..90%
Massachusetts…………99%
New Hampshire………100%**
New Jersey………………100%**
New York………………….100%
Rhode Island……………100%
Vermont……………………100%
RGGI sets a good standard, one that WCI should strive hard to match or exceed.
Unfortunately, early indications from WCI are somewhat worrisome. In past communications, policymakers have said that they intend to have states auction a minimum of between 25% and 75%, with states allowed to auction more if they see fit. But because it is important not to disadvantage businesses in participating states, a low auction percentage in one state will tend to exert a gravitational pull toward the lowest common denominator. So the best auctioning policy would set a high bar across all the WCI states.
Admittedly, RGGI differs from WCI in a couple of important respects. For one thing, the “scope” of WCI will be bigger than RGGI, which covers only electricity generators. In WCI, by contrast, we can expect to deal with a much broader array of carbon sources, including big industrial plants, waste and landfill emissions, the natural gas used in homes and businesses, and—the big enchilada—probably transportation fuels. Also, there are substantial differences between the electricity sectors in the West and the Northeast. Generally speaking, Western utilities have certain built-in features that protect ratepayers.
Despite these differences, it is important for WCI to auction a very high percentage of the permits—and starting in the first round of the program. Not only is auctioning the best policy on substantive grounds, but it accomplishes two additional things: 1) it sets a high bar for other cap and trade programs such as the Midwestern accord (which is developing now) and future federal action; and 2) it will help WCI mesh better—“link” in the parlance—with programs like RGGI.
* Next week’s draft is basically a next-to-final draft; the final version is scheduled for release just after Labor Day.
** New Hampshire and New Jersey have some special caveats attached to their auctioning percentages. A full explanation can be found by following the links from here.
