First, read Deborah Solomon's story "CBO Study Casts Doubt On CO2 Caps" at the WSJ Online.
One money quote (I love using that cliche when talking about money):
The office plans to say that there is a strong case for treating the permits, when first created, as federal revenue raised. If the permits are given to companies free of charge, that should be treated as spending, it will argue.Then save this link. I love the CBO. Not because we come to the same conclusion* (we did) but rather, because, in all of government, they seem to have the clearest thinkers (and thus, writers).
No cash would actually enter or leave the government's coffers in such a case, but the analysis bolsters the assertion that giving away permits amounts to a subsidy for polluters -- in effect, that there is a cost to taxpayers. The office says that the subsidy theoretically could be worth $50 billion or more a year, based on the value that such permits might have when traded on an open market.
From the statement of Peter Orzag, Director:
...Under a cap-and-trade program, a key decision for policymakers is whether to sell emission allowances or to give them away. The value of those allowances would probably be substantial: Under the range of cap-and-trade policies now being considered by the Congress, the annual value of emission allowances would be roughly $50 billion to $300 billion by 2020 (measured in 2006 dollars). More-stringent caps would result in higher total allowance values.
...By establishing a cap-and-trade program, policymakers would create a new commodity: the right to emit CO2. The emission allowances—each of which would represent the right to emit, say, one ton of CO2—would have substantial value. Based on a review of the existing literature and the range of CO2 policies now being debated, CBO estimates that the value of those allowances could total between $50 billion and $300 billion
annually (in 2006 dollars) by 2020.
Conversely, giving all or most of the allowances to energy producers to offset the potential losses of investors in those industries—as was done in the cap-and-trade program for sulfur dioxide emissions—would exacerbate the regressivity of the price increases.
...On average, the value of the CO2 allowances that producers would receive would more than compensate them for any decline in profits caused by a drop in the demand for energy and energy-intensive goods and services that cause emissions. As a result, the companies that received allowances could experience “windfall” profits, with the government regaining only part of that windfall through corporate income taxes.
...For example, one study suggested that if emissions were reduced by 23 percent and all of the allowances were distributed for free to producers in the oil, natural gas, and coal sectors, stock values would double for oil andgas producers and increase more than sevenfold for coal producers...
HT: the WSJ's Energy Roundup
*"Think about it a little more and you will agree with me because you're smart and I'm right."
-Charlie Munger, Vice-Chairman, Berkshire Hathaway