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New Report Lays Out Potential Implications of Global Warming Carbon Allowance Proposals on Consumers and Power Companies

Reports Details Rising CO2 Emissions from 100 Largest U.S. Power Companies; Company-by-Company Exposure to Proposed Greenhouse Gas Limits Before

A new report released today shows that carbon allocation scenarios under Congressional legislative proposals to limit global warming pollution will have dramatically different financial impacts – with billions of dollars at stake – on power companies and consumers.
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May 01, 2008

A new report released today shows that carbon allocation scenarios under Congressional legislative proposals to limit global warming pollution will have dramatically different financial impacts – with billions of dollars at stake – on power companies and consumers.

The report evaluates CO2 pollution data from the nation's 100 largest electric power companies, providing a first-of-its-kind analysis of the projected financial implications consumers and power companies would see from different carbon allowance scenarios in two existing Senate bills: the Lieberman-Warner Climate Security Act and the Bingaman-Specter Low Carbon Economy Act. The electric power sector accounts for about 40 percent of the nation's CO2 emissions. The report was released by the Ceres investor coalition, the Natural Resources Defense Council and two power companies, PG&E and PSEG.

The report shows that the carbon allowance approach under the Lieberman-Warner bill could provide potentially greater consumer benefits – worth billions of dollars a year – because more "allowances," or permits, to emit CO2 from power plants would be sold through auction and given for public purpose, as opposed to power generators getting the allowances for free. Allowances that are auctioned can raise money for energy efficiency programs, clean energy technologies and consumer benefit programs, such as assistance for low-income ratepayers and electricity bill rebates.

Under both Senate proposals, some free allowances would be allocated to power companies based on their historic CO2 emissions. The Lieberman-Warner bill proposes to distribute 1.21 billion tons of free CO2 allowances to power plant operators in 2012, about 45 percent of 2006 electric power CO2 emissions. The bill would also allocate 573 million tons of allowances to regulated electric distribution companies, which could then auction them off to companies regulated by the program to raise money for consumer programs. The Low Carbon Economy Act provides a larger allocation of free allowances – 2.12 billion tons of CO2, or about 80 percent of the power companies' 2006 emissions –to electric power producers in 2012. (The report lists the quantity of free allowances that each of the 100 largest power companies would receive under both legislative proposals, the only two bills that have specific allocation methodologies.)

"Billions of dollars in allowances are at stake under the proposals to cap and reduce global warming pollution," said Dan Lashof, science director at the NRDC Climate Center. "The value of pollution allowances should benefit consumers and smart programs that deliver real pollution reductions, not polluters."

The report does not attempt to predict actual allowances prices, but it does use an allowance price – $10 per ton of CO2 – for illustrative purposes that can then be modified for different carbon-cost pricing forecasts. The report estimates that, using a $10 per ton allowance price and assuming a total allowance pool equivalent to the Lieberman-Warner Act in 2012, the total annual value of free allowances allocated to the 100 largest electric power producers would be worth nearly $10.4 billion. The report estimates that if the same $10 per ton figure was applied to the Low-Carbon Economy Act scenario in 2012, the total annual value of allowances for the 100 power producers would be nearly $18.3 billion, including $6.2 billion to the nation's 10 largest investor-owned utilities.

"One of the purposes of the report is to shed more light on the potential value of the allowances provided under different legislative approaches," said Eric Svenson, vice president of environmental health an safety at PSEG. "We hope this will inform the discussion about auctioning and distributing allowances in the power sector."

The report also outlines how the allowance approach taken in the Lieberman-Warner bill could offset electricity rate increases through targeted rebates and incentives. By distributing allowances to local electric distribution companies, the bill would provide a direct benefit to households and businesses in the form of rebates or energy efficiency incentives – helping offset the added cost of a national climate policy. The report shows that an average household in Indiana could completely offset the costs resulting from a national cap-and-trade program through a combination of rebates, funded by the sale of allowances, and investments in energy efficiency. (See report for specific Indiana case study.)

The report found that overall CO2 emissions from the nation’s electric power sector rose by 29 percent from 1990 to 2006. Sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions dropped 40 percent and 46 percent, respectively.  The disparity is primarily due to CO2 emissions not being regulated and pollution limits being in place for SO2 and NOx under the Clean Air Act.

"Emissions of all these pollutants are important to investors because there are financial risks associated with them," said Mindy S. Lubber, president of Ceres and director of the Investor Network on Climate Risk. "CO2 emissions are an especially big investor concern because emerging policies to limit emissions will make power plants substantially more expensive to operate, requiring large CO2-emitting power companies to reduce their emissions or pay for them.  This report provides essential data to help investment analysts estimate company-specific financial risks."

Many power companies, especially those generating most of their electricity by burning coal, favor free allowances as a way to directly reduce their compliance costs.  But the report warns against relying on such an approach, citing Europe’s recent cap-and-trade problems stemming from too many free allowances to power companies.

"Research indicates that an over-allocation of free allowances to electricity generators can lead to excessive profits for companies, while providing limited benefits in terms of reducing electricity price impacts for consumers and funding energy efficiency and other programs that reduce overall greenhouse gas emissions," the report concludes.  "The European Union's Emission Trading Scheme experienced such problems because the program's pilot phase was overly generous in allocating free allowances to electric generating companies.  Europe's program is now being redesigned with a larger reliance on the auctioning of allowances."

"The continued growth in greenhouse gas emissions from the utility sector reinforces the need for timely and effective climate change legislation," said Steven Kline, vice president of corporate environmental and federal affairs for PG&E. "Effective policy must provide clear direction for all sectors of the economy, encourage the development and deployment of the most efficient and lowest-emitting technologies, and provide direct benefits to consumers."

About Ceres
Ceres is a leading coalition of investors, environmental groups and other public interest organizations working with US companies to address sustainability challenges such as climate change. Ceres also directs the Investor Network on Climate Risk, a network of 60 institutional investors with collective assets totaling $5 trillion focused on the business impacts of climate change.

About NRDC
The Natural Resources Defense Council is a national, nonprofit organization of scientists, lawyers and environmental specialists dedicated to protecting public health and the environment. Founded in 1970, NRDC has 1.2 million members and online activists, served from offices in New York, Washington, Chicago, Los Angeles, San Francisco and Beijing.

About PG&E
PG&E Corporation is a Fortune 200 energy-based holding company, headquartered in San Francisco. With assets valued at $36 billion, its operations include electric and gas distribution, natural gas and electric transmission, and electric generation. It is the parent company of Pacific Gas and Electric Company, California’s largest investor-owned utility. PG&E serves more than 15 million Californians throughout a 70,000 square-mile service area in northern and central California.

About PSEG
Public Service Enterprise Group (PSEG) is a diversified energy company with annual revenues of more than $12 billion, and three principal subsidiaries: PSEG Power, PSEG Energy Holdings, and Public Service Electric and Gas Company (PSE&G). PSEG Power is one of the largest independent power producers in the U.S. PSE&G, New Jersey’s largest regulated gas and electric delivery utility, serves nearly three-quarters of the state’s population.

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