Administrative Delay in Implementing a Cap-and-Trade Program: A Compelling Reason to Auction All Allowances

Cap-and-trade legislation making its way through Congress has become enormously complex, embodying a host of arcane political deals governing the distribution of the vast majority of emissions allowances being given away for free, with crucial details being left to EPA. This complexity threatens to hinder the effort to address climate disruption (see my article Capping Carbon). It would lead to long delays and weak implementation, just like other laws delegating a lot of controversial and litigable decisions to administrative agencies. Delays and weakness could prove disastrous in the climate disruption context, because greenhouse gas emissions have already warmed the planet and gases emitted while implementation flounders can create irreversible and potentially catastrophic ecological problems. Auctioning of 100% of the allowances would make the program run smoothly.

The Regional Greenhouse Gas Initiative—a cap-and-trade program that regulates utility emissions in the northeastern states— has relied on auctioning nearly 100% of the allowances. As a result, the long administrative delays typical of environmental programs have simply not arisen in this program. One Congressional bill, the Cap and Dividend Act of 2009, H.R. 1862, likewise relies on auctioning 100% of the allowances, but it has not gained political traction, at least not yet. But growing strife over political allocation decisions (see E&E Daily, subs. required) may make members of Congress realize that enactment of a simpler alternative based on auctions is better.

The cap-and-trade program for acid rain ran smoothly without auctioning only because Congress made all of the major design decisions itself, even including a table in the legislation allocating allowances to each phase one utility unit, thus leaving EPA with relatively few decisions to make in inevitably contentious rulemaking proceedings. Unfortunately, absent a decision to focus cap-and-trade on upstream providers of fossil fuels, duplicating this degree of specificity is not possible in a comprehensive cap-and-trade bill. The Waxman-Markey bill, for example, contemplates some 270 actions by agencies to implement the bill, some of which are essential to the cap-and-trade program’s operation. (See Michael Gerrard's database, accessible via his site, listing required agency actions under Waxman-Markey).

To be sure, the leading bills (Waxman-Markey, as well as previous bills such as Warner-Lieberman) contemplate Congressional decisions on a number of important matters. Most feature a Congressional decision about the total aggregate cap and an allocation of allowances to various sectors. Even these sectoral allocative decisions, however, do not tell operators of particular facilities within an industry how much reduction to make through making reductions at their own facilities or purchase of allowances. Accordingly, these bills require numerous rulemaking procedures to allocate allowances to individual facilities. These fine-grained decisions establish the individual caps that actually motivate reductions. The criteria governing these decisions create numerous litigable issues and require controversial data-intensive rulemaking by administrative agencies.

Some of this complexity arises from the need to have EPA implement or create fair and equitable formulas to distribute allowances. The Waxman-Markey bill also contains provisions to make sure that allowance giveaways somehow produce public benefits. While this is an easy result to achieve in an auction, achieving it in the context of giveaways produces an enormously complex set of rules, dependent on yet more detailed bureaucratic procedures at both federal and state agencies. Hence, the decision to give away allowances creates risk of a bureaucratic nightmare.

This nightmare will harm regulated firms as well as the environment. For firms, this rulemaking will create a prisoner’s dilemma. Unless each firm devotes resources to trying to maximize its allowance allocations in the rulemaking proceedings, it risks losing out to its competitors. But as long as the aggregate cap is fixed, every firm that succeeds in this game has a competitor who loses. So, this lobbying and litigation cannot be productive for the industry as a whole. Indeed, allowance giveaways will create uncertainty that can complicate rationale planning. Auctioning would avoid substantial uncertainty stemming from complex rulemaking exercises.

As I write this, U.S. firms and individuals continue to release carbon into the atmosphere free from any cap, thereby creating irreversible warming and creating a risk of us crossing tipping points that could trigger much more climate disruption than the models predict. After all of this delay, it is imperative that a bill produce carbon reductions quickly and reliably. Therefore, we should think of auctioning as not merely a nice reform improving distributional equity, but as an essential element to avoid potentially catastrophic delays in implementing enacted legislation.