White House: full steam ahead for carbon credit auction plan

The White House could compromise on controversial budgetary plans for a proposed carbon cap-and-trade system based on 100 per cent auctioning of pollution permits, according to reports.

The concept of a 100 per cent auction - in which all of the carbon credits issued in a federal cap-and-trade scheme are paid for - has been on the Obama administration's agenda since it took office, and contrasts with the credit allocation model favoured by the EU's European Trading Scheme (ETS), in which a proportion of credits are given away for free to utilities.

Environmentalists claim that free allocation undermines the success of the scheme and provides carbon intensive industries with a windfall when they sell on unused credits. However, some business groups argue that auctioning all the credits within the scheme will effectively create a carbon tax - a financial burden they insist many firms will be unable to bear.

The White House stated its preference for a 100 per cent auction scheme in February, and ostensibly seems determined to stick to its guns as it prepares its 2010 budget.

"We're not going to provide the full details of what will be released on Monday, but I will say that you should anticipate no changes in our climate proposal," said Office of Management and Budget director Peter Orszag in a conference call yesterday, responding to a question about whether the government would stick to 100 per cent auction proposals.

However, The Wall Street Journal received an email from White House spokesman Ben LaBolt on Tuesday, implying that the president might be prepared to compromise. "Members of Congress are looking at a variety of policy options to help us make that transition, and the administration will be flexible during the policy-making process as long as those larger goals of a clean-energy economy, green job creation and cutting oil imports are met," he said.

The White House had previously indicated that it might be prepared to compromise on the 100 per cent auction policy.

The issue is particularly timely, given the recent introduction of draft legislation by Henry Waxman and Edward Markey, calling for a cap-and-trade scheme.

Emilie Mazzacurati, North American manager for carbon market research at carbon market analyst Point Carbon, said that she was seeing mixed messages over the allocation vs auction argument. The president is thought to be pro-auction, she said, whereas utilities are unsurprisingly hoping for a scheme that favours free allocation. She predicted that the final decision will depend on the outcome of the Waxman/Markey bill.

"The bill doesn't say anything about allocation, and they're negotiating right now about how and what will be allocated," she said. "The bill already includes a provision that industry should get some allowances covered, so we know that some won't be auctioned, but it's a pretty small percentage."

The president's position is also bolstered by experiences with other trading schemes. The Regional Greenhouse Gas Initiative (RGGI), a multi-state carbon trading scheme in the north-east of the US, required states to auction a minimum of 25 per cent of their credits. However, the states involved have leaned toward greater levels of auctioning, and they all exceeded their required auction quotas, according to spokeswoman Emilee Pierce.

"It's much more transparent when you have an auction, because everyone can see the price of the credit as it is passed into the market," she said, also citing fairness as a critical factor. Giving credits to utilities for free lets them sell those credits on the secondary market if the cap allows, creating potential windfall profits, she pointed out.

The EU ETS allocation-based scheme has also faced consistent criticism after reports suggested that it would hand windfall profits to energy polluters by allocating unneeded credits that they could then sell.

"There is also the fact that the RGGI states use the auction proceeds for consumer benefit programmes," added Pierce, a practice that undermines the argument that auctioning would place an unbearable burden on businesses.

The potential for auction revenue from carbon credits is particularly important given the White House's attempts to shave money from the US deficit and fund new clean tech investments. An earlier version of the budget, released in February, projected that a nationwide cap-and-trade scheme would raise $646bn (£430bn) between 2012 and 2019.