Output-Based Allowance Allocation
“The Carbon Leakage Prevention Act”
HR 7146 (Inslee-Doyle)
January 8, 2009
James Bradbury, PhD
Legislative Assistant
Rep. Jay Inslee (WA-1st)
james.bradbury@mail.house.gov
202-225-6311
Overview
The U.S. must address global climate change --
All domestic and foreign industries should contribute
Background
Fundamental Policy Questions
1. Why allocate allowances to industry?
2. Emissions vs. Output allocation
3. Which industries should be eligible?
4. How should compensation be phased out?
Conclusions
Consensus Cap-and-Trade
Policy Objectives
Achieve environmental goals at minimum
economic costs
Maximize carbon market liquidity
want broad coverage under the cap because cost
effective mitigation options are widespread
A policy framework that garners broad and
lasting political support
Carbon Leakage & Competitiveness
Critical policy issue of environmental,
economic and political significance
June letter from 10 Senate Democrats
opposing Lieberman-Warner
Energy and Commerce Committee
White Paper and hearing
Climate policy will not advance until this
issue is addressed
Issue #1: Why Allowance Allocation?
Two distinct reasons - Two different policies
1) Protect shareholders from stock losses
Studies find <15% of total allowance value
2) Prevent carbon leakage
For trade-exposed emissions intensive industry
Iron and Steel, Aluminum, Cement, etc.
Studies unclear on how much is needed for each
Examples:
EU ETS phase III; phased out by 2020
Lieberman-Warner; phased out by 2031
Issue #2: Emissions vs. Output
On what basis should allowances be allocated
to industry?
Past Emissions
Rewards least efficient plants
Inconsistent with overall policy goals
Output of Production
Rewards most efficient plants
Updates with changing market conditions
Spurs investments in efficiency upgrades and innovation
Rewards domestic production
HR 7146 - Direct Costs
For onsite combustion or process emissions
Sector
average emissions_
Unit of Output
Facili