The Waxman-Markey "windfalls" myth

In social conversations about climate legislation, one objection that often comes up to the Waxman-Markey bill that passed the House is that, contrary to Obama's campaign promise to auction 100% of the permits, 85% are "given away" in Waxman-Markey, representing a "windfall" to those companies that receive then. This is a perception issue, not a substance issue. As I showed before, ~80% of the free permits will be effectively rebated to consumers, and most of the balance going to clean tech, energy efficiency, international purposes (e.g. avoiding deforestation) and adaptation.

In a recent conversation, a good question came up - what about the 5% of the permits which are allocated to merchant power generators? Won't that constitute a windfall, as they are not required to pass on savings like a regulated utility?

My answer at the time was that merchant generators will have to use the permits for power they end up generating (except for renewable power, but they should receive cash value for renewable power they generate), so the only windfall would be if they do not generate enough to require their 5% allowance allocation and the rest can be sold on the open market.

Here is a related post on Climate Progress by two electricity market experts on why W-M doesn't create windfall profits for utilities. However, I didn't see any mention of the merchant (unregulated) generators in the post, so I'm not sure whether they are meant to be included in the argument, or were omitted. If the latter, and the authors are hiding behind "the bulk of free allowances", I'd like to hear their thoughts on whether the merchant generators could in fact capture a windfall from the current allowance allocation structure.

My provisional conclusion is that the upper bound on profit windfalls is quite low, but I'm not yet completely convinced that merchant generators can't benefit at all.

No comments:

Post a Comment