Obama waters down carbon auctioning plan

President Barack Obama last week gave the first indication that he is willing to water down some aspects of his plans for carbon cap-and-trade scheme in an attempt to get the legislation passed as swiftly as possible.

The president had said on the campaign trail that his proposals for a cap-and-trade scheme designed to cut emissions to 1990 levels by 2020 would see carbon intensive firms have to buy the carbon allowances they require at auction.

He argued that such an approach would avoid the pitfalls experienced by the European emissions trading scheme, which initially distributed 100 per cent of carbon allowances for free, resulting in multimillion Euro windfalls for some of the union's most carbon intensive firms.

But in a signal that the administration is now rethinking 100 per cent auctioning, Obama told a business roundtable last week that some sectors could yet be allocated free emission allowances.

"If it's so onerous that people can't meet it, then it defeats the purpose and politically we can't get it done anyway, so we're going to have to find a structure that arrives at that right balance," Obama said of plans to auction 100 per cent of allowances.

Any free allocation would be welcomed by states reliant on carbon intensive industries, such as coal, oil and cement manufacture, and is likely to be interpreted as a gambit to secure support for the cap-and-trade scheme at a time when some business leaders fear it could pose extra costs on the struggling US economy.

However, Obama also hinted that free allocations would be kept to a minimum, arguing that widespread distribution of free credits would make it harder for the scheme to achieve its goal of cutting carbon emissions.

"If you're giving away carbon permits for free, then basically you're not really pricing the thing and it doesn't work, or people can game the system in so many ways that it's not creating the incentive structures we're looking for, " he said.

Experts warned that any move towards free permits could have a knock on effect on Obama's plans for greater levels of investment in clean technology. The administration has budgeted that the cap-and-trade scheme will generate $646 billion from allowance auctions between 2012 and 2019, a large chunk of which has been earmarked for clean tech projects.

Divya Reddy, a Washington-based energy analyst at the Eurasia Group, told news agency Reuters that the $646bn figure would have to be cut if the scheme moved towards some free allocation, as the original projection was " based on the premise that 100 percent of these [carbon allowances] would be auctioned".

However, the White House insisted that the budget remained accurate, while a number of experts said that the original $646bn estimate was based on conservative assumptions about the price of carbon in the scheme.

Peter Fusaro, chairman at New York-based consultancy Global Change Associates, told Reuters that Obama had little choice but to provide some form of free allocations if he wanted to get the bill passed, arguing that without a compromise deal many states would be unlikely to support the proposals. "Big coal is very strong and there's going to be some kind of accommodation," he said.