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Thursday, February 26, 2009

President Obama & CO2 Allowance Auction Program

AAEA supports a cap-and-trade program for carbon dioxide (CO2) and we solve the environmental justice 'hot spots' issue through our Environmental Justice Allowance Reserve reocmmendation. AAEA has also formulated an Elderly Allowance Reserve. AAEA believes the CO2 cap-and-trade program should be modeled on the successful Clean Air Act Acid Rain Program.

In the Acid Rain Program Allowances were allocated for each year beginning in 1995. Phase I included certain electricity generating units. EPA allocated allowances at an emission rate of 2.5 pounds of SO2/mmBtu (million British thermal units) of heat input, multiplied by the unit's baseline mmBtu (the average fossil fuel consumed from 1985 through 1987). In Phase II, which began in the year 2000, EPA expanded the group of affected sources to include virtually all units over 25 MW in generating capacity. EPA allocated allowances to each unit at an emission rate of 1.2 pounds of SO2/mmBtu of heat input, multiplied by the unit's baseline. Beginning in 2010, the Act places a cap at 8.95 million on the number of allowances issued to units each year. This effectively caps emissions at 8.95 million tons annually and ensures that the mandated emissions reductions are maintained over time. (EPA)

To supply the auctions with allowances, EPA set aside an Auction Allowance Reserve of approximately 2.8 percent of the total annual allowances allocated to all units. During Phase I, when the allocated allowances totaled 5.7 million allowances annually, 150,000 allowances were withheld every year for auctions. During Phase II, when allowance allocations total 8.95 million allowances annually, 250,000 allowances were withheld annually for auctions.

For the first 13 years, the auctions were conducted for EPA by the Chicago Board of Trade (CBOT). CBOT was not compensated by EPA for its services nor allowed to charge fees. Beginning with the fourteenth annual auction in March 2006, CBOT chose to stop administering the auctions for EPA. This means EPA now handles all aspects of the auctions. (EPA)

AAEA believes President Obama should pattern his cap-and-trade program after the Acid Rain Program. President Obama currently wants to auction the initial allocation of allowances and use the proceeds to fund renewable energy projects and provide additional payments to low-income families to help them pay for any increase in utility bills. Proceeds from the auction would come in to the federal government and then would be redistributed as described above. We beleive this recommendation is too complex and will also be politically bludgeoned at a 'carbon tax.' All stakeholders agree the Acid Rain Program was a complete success. The CO2 cap-and-trade program could be equally successful if it is modeled after the Acid Rain Program.

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