With the U.S. economy currently in a free fall, some utility industry leaders and elected officials argue that carbon cap legislation should be put on hold while the country recovers financially. However, President Barack Obama has a different game plan.
"We will start with a federal cap and trade system. We’ll establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020, and reduce them a further 80 percent by 2050," Obama said on November 18.
During his campaign, Obama emphasized that his proposed cap-and-trade policy would require all pollution credits to be auctioned, and companies would have to buy all of the allowances they need through government auctions.
| Under the Edison Electric Institute plan, allowances would be allocated for free in the early years. |
Two Approaches to Allowances
The cap-and-trade approach advocated by Obama builds on U.S. experience with the acid rain provisions of the 1990 Clean Air Act Amendments, which imposed SO 2 emissions cuts on many electric power plants.
A conventional cap-and-trade program establishes an economy-wide or sectoral cap on emissions (in terms of tons per year or other compliance period) and allocates or auctions tradable allowances (the right to emit a ton of greenhouse gases, such as CO 2) to large emitters, such as electric power plants.
Allowance allocation has long been one of the most divisive issues in the utility industry. Generators, especially heavy emitters, frequently take the position that they need free allowances in order to finance the carbon capture and storage technology they will have to utilize if they are to continue using coal under a greenhouse gas (GHG) emission cap. They also maintain that they are most in need of allowances to help offset their larger cleanup costs and thereby shield their rate payers from large rate increases. In contrast, generators that have less carbon-intensive power plants often argue that free allowances would unfairly compensate their competitors that produce more CO 2 emissions.
For example, the Senate bill (S. 2191), sponsored by Sens. Joseph Leiberman (I-Conn.) and John Warner (R-Va.), was criticized by FPL Group Chairman and CEO Lewis Hays in 2007 for rewarding "the country’s biggest emitters of CO 2 with billions of dollars of free allowances they don’t need."
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