Waxman-Markey Math: What are the numbers and what might they mean?

A marked-up version of the American Clean Energy and Security Act of 2009 initially released in April 2009 and revised in mid-May (a/k/a the Waxman-Markey draft bill) passed out of the House Committee on Energy and Commerce on May 21, 2009.

The revised draft bill is 932 pages and covers a broad range of big-picture energy issues, including energy efficiency, renewable energy, and a federal cap-and-trade program to reduce greenhouse gas emissions.

In this short comment, we focus on the cap-and-trade part of the Waxman-Markey bill. In particular, we consider the numbers in the current draft to see what they are, as a starting point for thinking more deeply later about what they might mean for capital, carbon, energy, and related markets.

We consider the minimum carbon prices in the Waxman-Markey bill, and we use them to estimate the minimum value of freely-allocated allowances in the aggregate and to individual industry sectors. We give particular attention to the electric power sector, estimating the minimum value of its free allocations and the minimum cost of purchasing the additional allowances it will need to cover its likely emissions.

The ultimate impacts of a Waxman-Markey style cap-and-trade program depend on many factors beyond the numbers in the draft bill, so we do not project them here. However, the numbers indicate one of the most critical factors will be the collective public and political will for the US to see-through such a program once the costs kick in. Without that will, forecasting carbon impacts based on economic and market fundamentals may generate the wrong projections, and the credibility of the entire program may be at risk.

To read the full article, click here. For the graphs and tables, click here.