Entergy and the Environment

Cap and Trade: A Market-Based Best Path Forward

Much has been said in Congress about how the world should begin to reduce carbon dioxide emissions. One of the most popular and controversial proposals is the notion of a cap-and-trade policy. But, what exactly is cap and trade? Why do many believe it holds the key to lower CO2 emissions?

Although there are numerous approaches to climate policy, most of them look to establish a price signal for greenhouse gas emissions to help businesses make rational investment decisions. 

In a cap-and-trade program, the government would set an overall cap on CO2 emissions and create allowances for companies to emit up to the level of the cap. If a company cuts its emissions and has excess allowances, it could sell the excess allowances to other companies that exceeded the national emissions cap. Proponents of this market-based approach, with a transparent price signal, believe it will provide the most cost-effective solution to reducing CO2 emissions.

By capping emissions, policymakers will create a new commodity in emission allowances. The value of allowances in the economywide climate change legislation over the next 40 years could range from $10 trillion to $15 trillion.

Cap and trade is complicated by a number of competing political interests and objectives, including three key allocation decisions:

• Should allowances be sold or should they be allocated at no cost?

• If allowances are sold through government auction, how should the proceeds be used?

• If allowances are allocated at no cost, to whom should they be allocated?

Entergy supports a cap-and-trade approach with 100 percent auctioning of the allowance, and with a ceiling price for allowances set by Congress through 2020. A ceiling price provides some certainty about the impact on the economy.

Whatever the price signal, experts say that signal must “thread the needle,” meaning that it must be seen as politically sustainable and high enough to effect change, but not so high that it cripples the economy.

Protection for low- and middle-income families

In addition to setting a national price cap, Entergy has taken the position that the government should auction the allowances credits and recycle the revenues back to the consumer. Chairman and Chief Executive Officer Wayne Leonard advocates a cap-and-rebate approach, in which the government auctions the emission allowances to make polluters pay, then gives the proceeds to low- and middle-income families as well as to industries (i.e., metals, minerals, and pulp and paper companies) that take the hardest hit from CO2 regulation. Any no-cost allowances for the electric sector should be allocated for the benefit of customers, not generators.

The bigger picture

A cap-and-trade plan would provide both an impetus for utilities to seek cleaner generation technologies and a revenue stream for investment in clean generation research and development. Capping carbon dioxide and putting a price on it will create an incentive for entrepreneurs to develop new technologies and spur the innovation necessary to help the rest of the world reduce their emissions.

Fast-growing, developing countries such as China and India are developing new coal plants at an increasing rate. It’s critical that the United States comprehends the magnitude of this fact, and focuses all of its efforts into a technology that can be exported. CO2 generating units will only continue to grow in number.