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February 2010 NewsAnalysis
Coastal cash-in
Cap-and-trade plan bilks the Midwest
 by Dave Hoopman
Last March, a National Rural Electric Cooperative Association analysis of cap-and-trade legislation showed it would make electricity more expensive to produce, and thus more expensive for consumers. No surprise there: The purpose of cap-and-trade legislation is to force changes in people’s behavior by raising the price of power.
But there was one surprise: Not all states would be treated equally under the law. The NRECA analysis showed the Midwest, Plains, and Southern states — where electric cooperatives abound — would bear a bigger share of the expense than the East and West Coasts. This, NRECA said, is because Southern and heartland electricity producers use coal as their primary generation fuel and will need more emission allowances to continue serving their customers.
NRECA labeled the proposal a huge transfer of wealth from the Midwest to the coasts. That was the voice of a trade association representing the interests of cooperative businesses and their member-owners, but fast-forward eight months and we now have the federal government, specifically the Environmental Protection Agency, saying the very same thing.
What is it?
Cap-and-trade legislation is one of the most expensive and least-noticed ideas considered by Congress in a very long time. An October poll by the Pew Research Center for People and the Press revealed that only 23 percent of respondents recognized the term, a stunningly small number given that cap-and-trade will affect every American, without exception, every time they switch on a light or buy a product of any kind.
Readers of this publication have had more opportunity than most to become familiar with the concept, but with that 23-percent figure in mind, here it is again: Legislation passed by the House of Representatives and pending before the U.S. Senate would impose a “cap,” or limit, on the carbon dioxide U.S. electricity producers could emit in any year. The cap would be lowered over time. By 2020, emissions must be 20 percent below 2005 levels. By 2050, they must be 83 percent below 2005 levels.
Congress would create allowances to emit, with an allowance defined generally as one ton of carbon dioxide. Electricity producers with more allowances than emissions could sell, or “trade,” surplus allowances to those unable to reduce emissions below their cap.
At first, government would dole out most allowances for free, to minimize immediate consumer impact. But free allowances would phase out over several years and eventually all would have to be purchased. That’s what President Obama was describing Jan. 17, 2008, when he told the editorial board of the San Francisco Chronicle, “Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket.”
Who pays, who collects?
In March, before the House approved cap-and-trade, the NRECA contended that electric cooperative members would typically see a steeper increase in their bills than the average consumer, largely because utilities on the densely populated coasts rely more on nuclear plants and hydropower and have fewer CO2 emissions requiring federal allowances.
In October this was independently confirmed by an EPA analysis showing coal-dependent Midwest, Great Plains, and Southern states would bear the heaviest costs of cap-and-trade while East and West Coast states would get the most federal help managing the increased costs of energy use.
Glenn English, CEO of the NRECA, said the document confirmed what his organization had been saying for months. An October story in The Washington Times quoted English saying the allocation of allowances in the bill that passed the House of Representatives would create “a big windfall” for utility investors in coastal states.
The proposed allowances for Midwest states like Indiana fail to cover their emissions. Meanwhile two states — California and New York — receive more allowances than needed.
California is the home state of the primary author of the House bill, Rep. Henry Waxman, and of primary Senate author Barbara Boxer. The Golden State would receive allowances for 99 million tons of CO2 to cover an estimated 87 million tons of emissions. New York would receive allowances for 58 million tons to cover an estimated 57 million tons of emissions.
All other states receive allocations smaller than their annual emissions. Indiana, with estimated emissions of 75 million tons, would be allocated 56 million tons of emissions allowances.
Massachusetts, home to second House author Ed Markey and second Senate author John Kerry, would be allowed 23 million tons against 24 million tons of emissions.
Windfall worry
NRECA and others have warned that the bill would hand out unneeded allowances that power providers who can’t cover all their emissions would be forced to buy from utilities in more fortunate circumstances.
The EPA analysis points out that the bill seeks to prohibit any utility from receiving allowances in excess of those “necessary to offset any increased electricity costs” to its ratepayers. Preventing these windfalls, though, the document adds, would be very difficult to implement because it would require a great deal of speculation and estimates by the EPA on a wide range of factors.
Individual utilities will have their own angles. Chicago-based Exelon, for instance, owns a large fleet of nuclear plants, which emit no CO2. If it can corral a large number of allowances it could sell them at great profit to other utilities with a large fleet of coal-fired plants.
Why coal?
A question seldom raised in discussions of climate legislation is why heartland utilities opted for coal-fired generation in the first place. The answer is found in the same place as the current momentum to penalize the use of coal: the federal government.
In the 1970s, the government terminated reprocessing of spent nuclear power-plant fuel. At the same time, its policies strongly discouraged use of natural gas for electricity generation. Then came the Three Mile Island incident and nuclear plant construction halted nationwide. Utilities needing to meet increased demand turned to the one remaining source, coal, that could provide dependable power all day, every day, and had the advantage of relatively low prices and centuries’ worth of reserves inside the continental United States.
If today’s federal policy goals make that choice look like a mistake, it was yesterday’s federal policy goals that made one alternative prohibitively expensive and the other simply impossible.
Meanwhile, the computer models that are the basis for predictions of human-induced global warming say the proposed cap-and-trade emission cuts would prevent warming to the tune of nine one-hundredths of one degree, Fahrenheit, by 2050.
Dave Hoopman is director of electric regulatory affairs for the Cooperative Network of Wisconsin and Minnesota. This article, revised for Indiana, is reprinted from the December 2009 issue of Wisconsin Energy Cooperative News.
Written By: eceditor
Date Posted: 1/26/2010
Number of Views: 147
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