Proponents of cap-and-trade want to put market forces to work in the U.S., the world’s biggest per capita greenhouse gas emitter, against global climate change. Cap-and-trade was, on a smaller scale, instrumental in controlling acid rain and it has (arguably) begun to slow emissions growth in the EU.

The enormous size and complexity of a national cap-and-trade plan leaves many cynical, expecting such a system to make the rich richer, the poor poorer and the air no cleaner. A major financial group, an environmental group and 2 utilities undertook a study of the details, wherein the devil might be expected to be found.

Dan Lashof, science director, NRDC Climate Center: “Billions of dollars in allowances are at stake under the proposals to cap and reduce global warming pollution…The value of pollution allowances should benefit consumers and smart programs that deliver real pollution reductions, not polluters.”

The report uses a hypothetical allowance price of $10/ton of CO2. It concludes that the total annual value of free allowances allocated to the 100 largest electric power producers under Lieberman-Warner in 2012 would be nearly $10.4 billion. Under Bingaman-Specter, more allowances are given for free. The total annual value would be nearly $18.3 billion, including $6.2 billion to the nation’s 10 largest investor-owned utilities.

Under either plan, power companies get a huge windfall of free credits. The plans are so designed to allow the power producers to keep the lights on for the country.

The difference in the amount of auctioned credits, though, is the key. Obviously, power companies – especially those burning a lot of coal – favor more free allowances. The report warns against that, describing the EU’s problems in 2005 with its cap-and-trade system from having provided too many free allowances to power companies.

The report: “Research indicates that an over-allocation of free allowances to electricity generators can lead to excessive profits for companies, while providing limited benefits in terms of reducing electricity price impacts for consumers and funding energy efficiency and other programs that reduce overall greenhouse gas emissions…The European Union’s Emission Trading Scheme experienced such problems because the program’s pilot phase was overly generous in allocating free allowances to electric generating companies. Europe’s program is now being redesigned with a larger reliance on the auctioning of allowances.”

The report shows that an average household in Indiana could, under a properly designed system, completely offset cost burdens from a national cap-and-trade program through rebates funded by the sale of allowances and through investments in energy efficiency.