When President Obama released his budget, he included a “cap-and-refund” proposal that strictly limits greenhouse gas (GHG) emissions, and would auction emissions permits to large companies. The price of fossil-fuel based energy will increase. However, Obama’s plan also includes giving refunds to taxpayers which will come from the auctions.
Seventy percent of state regulators surveyed by Deloitte in March and April believe electricity costs will go up next year. Eighty percent believe Obama’s proposed cap and trade system will increase electricity costs in their state. Over half (53.3 percent) believe the public would pay as much as five percent in increased rates to reduce GHG emissions. Only 16.7 percent believe the public would accept a 10 percent rate increase, and 23.3 percent believe the public would not support any rate increase.
“Regulators seem to believe that the rate-paying public supports a cleaner energy direction,” says Branko Terzic, energy and resources regulatory policy leader for Deloitte and a former commissioner with the Federal Energy Regulatory Commission.
“Consumers understand that some increase in electric rates tied to cleaner energy may be inevitable,” Terzic notes.
Moody reported in March that energy prices would rise 15 to 30 percent if a cap and trade system that sells carbon credits for $20 per metric is implemented.
Senator Maria Cantwell (D-WA), the Senate Energy and Natural Resources Committee’s energy subcommittee chair, is not sure about the cap and trade program favored by Obama.
“I have serious concerns about how a cap-and-trade program might allow Wall Street to distort a carbon market for its own profits,” Cantwell said. “We are looking at ways that would allow consumers to get something back.”
During an interview in March on CNBC, Warren Buffett in March expressed his concerns about a cap and trade program. “In the utility business, it’s going to be borne by customers. And it’s a tax like anything else,” he said.
Environmental groups have also expressed concern about an emissions trading program. A U.S. carbon trading market could create the same sort of problems that subprime mortgages did, according to a recent report, Subprime Carbon. The Friends of the Earth expressed concern that a carbon market could create “shoddy carbon offset credits.”from “shoddy carbon offset credits,” according to the report.
The majority of the cap and trade bills do not include adequate carbon market regulations, according to the FOE report. The lack of adequate regulations would create a “potentially huge regulatory gap.”
Obama’s popularity might be diminished if an inadequate cap and trade program was created. A recent Zogby poll said 57 percent of voters opposed the administration’s cap and trade proposal. Only 30 percent of voters polled supported the proposal.
Cap and trade programs are “designed to impact a wide range of businesses by creating a market driver for GHG reductions,” according to the World Resources Institute. The impact of a cap and trade program on a company depends on three factors:
1. The company’s energy demand
2. The company’s sensitivity to high energy prices
3. The company’s ability to either minimize or avoid increasing costs
The WRI believes that companies that minimize or avoid exposure to higher fossil fuel energy costs will have a “competitive advantage” in a cap and trade program.
An alternative approach
On April 1, Rep. Chris Van Hollen (D-MD) introduced the Cap and Dividend Act of 2009. If passed, the Act would auction 100 percent of carbon permits and the returns would go to consumers in the form of monthly dividends.
“The strength of cap and dividend lies in its simplicity and durability. All permits are sold at auction, and all proceeds are given back to the American people. As the price of energy rises, the monthly dividends will keep American consumers whole,” Van Hollen said.
Two years ago a publication called Carbon Capping: A Citizen’s Guide presented ideas for creating a carbon capping system in the U.S. The author, Peter Barnes bluntly stated that the price of “burning carbon” will go up under any carbon capping system. However, with a cap-and-dividend system the returns from auctioning carbon permits will go to citizens which will offset the higher energy costs.