Another Go At Climate Consensus in the United States Senate
The much anticipated energy and climate bill from Senators Graham (R-SC), Kerry (D-MA) and Lieberman (I-CT) appears close to a public unveiling. So far there is an 8-page outline of the legislation that was reportedly provided to captains of industry such as the US Chamber of Commerce in a recent closed-door meeting, but this document has not as of yet been made public. A bill should be released to the public within days. There are a wide variety of issues that will make or break this bill in terms of achieving enough votes to pass the Senate. Here are 3 key issues to watch while assessing political feasibility:
1. A Cap Here, A Tax There
All reports indicate that the bill will take a sector-by-sector approach to the energy and climate challenge. The sector approach is a departure from the House bill passed last year that set an economy-wide cap on emissions. Electric utilities and the manufacturing sectors will undoubtedly still fall under some revised version carbon emissions limits. The political challenge will be ensuring that the emission caps are indeed hard caps while providing ample incentives to ensure industry buy-in. Other sectors will face different strategies to reduce emissions. Recognizing complaints from oil & gas constituents with a cap and trade approach, a carbon tax on transportation fuels is the likely alternative for this greenhouse gas intensive sector. A key political challenge will be finding the right approach for setting the price of such a tax based on factors including price of carbon in other sectors and carbon content of fuel. It is safe to say that a sector approach may bring on more votes. However, the corresponding environmental integrity of the US approach to reducing carbon emissions will be under close watch.
2. Avoiding Fears of “The Big Short”
The cap and trade approach found in the Waxman-Markey bill allowed for limited but generally unfettered trading of carbon allowances and offsets in the capital markets. Given the current economic crisis precipitated in large part by unregulated Wall Street derivatives trading, there is angst in the Senate with unwieldy carbon markets. At the same time, the flexible carbon market approach would allow regulated entities an efficient cost-containment strategy. It will be a challenge to thread this needle in a manner that meets both concerns and maintains environmental integrity. It is anticipated that limited carbon market trading will be part of the bill but that elements of the “cap and dividend” model put forward by Senators Cantwell (D-WA) and Collins (R-ME) will also be incorporated. Under “cap and dividend,” only regulated entities (not Wall Street traders or speculators) are allowed to participate in the auctioning of allowances, and a certain percentage of the auction revenue goes directly to consumers in the form or rebates.
3. Clean Energy: Eye of the Beholder
There will be separate sections/titles in the bill that advance an energy security agenda for the United States. These sections will include coal, renewable energy, nuclear energy, offshore and onshore oil & gas drilling, agriculture and oil refining. Some of the real tough political challenges will fall into this part of the bill. Vastly increasing offshore oil drilling may bring on board some Senators, but will certainly alienate others with environmental constituents. Likewise setting renewable energy targets might set the United States on a lower carbon path, but if the bill avoids adequate complementary incentives for natural gas, nuclear and carbon capture & storage, it will undoubtedly face regional opposition from Southeast and the Midwest Senators. As an example, Senator Graham has floated a “Clean Energy Standard” in place of a national “Renewable Energy Standard,” but it remains to be seen where the trio of Senators land on this issue.
Don't Yank the Tariff Provisions from the House Climate Change Bill
President Obama deserves a share of the credit for the historic vote by the House June 26 to pass the first climate change bill. The bill is far from perfect, but it is an important step in the right direction. In comments following the House vote, however, President Obama took a step in the wrong direction. In urging the Senate to swiftly pass their counterpart to the House bill, President Obama raised questions about a provision that would impose a tariff on the import of goods from countries where the cost of such good benefits from weaker climate change laws:
"At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there….I think we're going to have to do a careful analysis to determine whether the prospects of tariffs are necessary, given all the other stuff that was done and had been negotiated on behalf of energy-intensive industries."
Removing the tariff provision from the bill would give its opponents a strong argument for its defeat. Opponents argue that by imposing what they classify as an exorbitant energy tax on products such as steel, cement and chemicals the climate bill would simply force manufacturers to shift production to foreign countries with more favorable energy costs, resulting in no net reduction of greenhouse gas emissions AND loss of jobs in the US.
This is a potent argument which, if left unanswered, could doom the bill in the Senate. Although President Obama suggested that there may be better alternatives to the "protectionist" provision in the House bill he did not elaborate on them. One alternative that has received some favorable press is the so-called "sectoral approach" in which certain energy-intensive industries seek to reach agreement on a global standard for GHG emissions from facilities in the sector.
Although the sectoral approach is arguably sound in principle, the fear is that in practice the affected sectors would be able to push through weak standards which undermine the battle against global warming. It is almost like begging the fox to guard the henhouse. Another alternative would allow the United States to scrap its cap-and-trade system if China and India do not adopt similar programs. This avoids the fox/henhouse problem, but creates a bigger one: in effect, it cedes to foreign countries the decision of whether WE should combat climate change. The House approach avoids both problems, and should be followed in the Senate.
Why the House is Off on Offsets
So the House of Representatives won’t go carbon neutral, after all. Its decision could portend poor treatment for carbon offsets in the upcoming debate over climate change legislation.
The House’s decision came after its leadership dropped an essential part of the plan to purchase carbon offsets. The House reportedly paid $89,000 for offsets from the Chicago Climate Exchange to cover its 2007/2008 emissions. (Most of those emissions come from steam heat generated by the ancient coal-burning Capitol Power Plant that inspired a protest Monday, hailed the largest act of civil disobedience against coal.)
The House’s decision appears to be rooted in a misunderstanding of offsets. Leaders are uncomfortable with them, according to the Post, because "the money was funneled to [offset projects] that had been completed before the House paid a cent." The Post continues: "Experts said those issues make it hard to say that the House's money had caused the environmental benefits the chamber paid for." Rep. Dan Lungren (R-CA) is quoted as saying, "Maybe they're admitting that what we did [in purchasing offsets] was actually nothing."
This reveals a fundamental misunderstanding of offsets and how they work.
The conceptual advance of the offset is that it commodifies an emissions reduction.
It entices the entity reducing emissions with the prospect of creating a commodity that will be worth more than the cost of actually reducing the emissions. As a result, you have a lot of people investing in emissions reductions projects and “banking” the offsets they create. Why? Because they believe the price of that reduction will be worth more in the future than it is today. Or they may sell it to someone else who wants to hold it.
That, in a nutshell, is the "trade" part of cap-and-trade works, and it is the mechanism that allows the profit motive to drive carbon reductions.
The House appears to be struggling with this basic logic and that should worry offset advocates in the coming debate over climate change legislation.
Congress in 2008
Federal climate change legislation may be on the way. The Senate has targeted a vote in June, and the House by the end of the year, although a bill both chambers can agree upon is unlikely until 2009, if then. It would be a great mistake, however, to view 2008 as a lost year on the climate front. The fundamental elements of Senate and House bills will be debated and accessible to all who probe beneath the surface. The fundamental regulatory structure and economic impact of climate legislation will have been thrashed over thoroughly by the end of the year. To interested stakeholders, the time to weigh in is now. [summary]
While the candidates count delegates, key Senators and Members count votes and try to predict how far toward climate legislation the Congress will progress this year. The short answer: final legislation is not likely this year, although both chambers may come very close. Because the Senate has targeted a vote in June, and the House by the end of the year, it would be a great mistake to view 2008 as a lost year on the climate front, however. To get to these votes, or even to try to get legislation in shape for a vote, means that the fundamental elements of the Senate and House bills will be debated and visible to all who probe beneath the surface. Passage is quite likely in 2009, but the fundamental regulatory structure and economic impact of climate legislation will have been thrashed over thoroughly. The Congress in 2009 will not by any means be writing on a clean slate. To interested stakeholders, the time to weigh in is now – if not already past.
In the Senate, Senator Lieberman optimistically reports that he believes a vote would be veto-proof at sixty votes if the June vote occurs after the Lieberman-Warner bill reaches the Senate floor soon after the Memorial Day recess. But approval may falter if the many amendments Senators are likely to seek come into play. To reach the 60-vote total, the co-sponsors may have to agree to amendments that, while attracting support from fence-sitting senators, may cause others thought safely on board to fall off the fence. Thus, for the US Senate to approve a strong bill this year, the managers will have to walk a fine line from here on out.
Does Senator John McCain support the bill? His support for decisive action on climate is well-documented. But his desire and determination for a role for nuclear power in addressing the climate challenge may place a serious obstacle in the path of approval, because many "climate senators," including the Chair of the Committee on Environment and Public Works that has favorably reported out the Lieberman-Warner bill, Barbara Boxer of California, have expressed opposition to inclusion of incentives for nuclear power. When other ticklish issues are added to the long list of amendment-prone provisions, the prospects for passage this session look decidedly less optimistic.
In the House, Speaker Nancy Pelosi (D-CA) and special climate committee chair Edward Markey (D-MA) were not joking when on April Fools Day they expressed their determination to have climate legislation pass the House by the end of the year. But they have complicated their own task by stressing the importance of including India and China in climate solutions. Strictly speaking, there is no role for addressing these two nations' large GHG emissions totals in domestic US climate legislation; Pelosi and Markey are hoping that India and China will be addressed either through the Kyoto agreement process or through the time-tried pathway of bilateral agreements. But bringing up India and China, the twin Achilles' Heels of climate action, the two members appeared to be drawing attention to their critics' strongest reason for avoiding unilateral US action until the largest global emitters are brought into some sort of accord on joint action.
The issues to be addressed in a domestic climate law are truly daunting, and suggest that next calendar year, after the presidential election, is a more likely time to expect climate legislation for the US. Even then, the challenge cannot be overstated. The issues include negotiating out provisions to cover caps and baselines fairly and effectively, with key decisions to be made about how each plant, company, sector, and state will be expected to comply, not to mention vital assumptions going into a domestic framework regarding the limits to be placed on GHG emissions for the nation and the planet. Baselines need to be set, and the effects of mergers, acquisitions, and corporate reorganizations taken fairly into account. These issues exist even before taking up the much-discussed topic of the role trading/banking/offsets will play, especially vis-a-vis Clean Air Act-California AB 32-style performance standards. One of the very largest and most contentious areas will cover congressional decisions – no doubt after fierce lobbying – of the impact of legislation on different economic sectors (transportation, chemicals, manufacturing, not to mention electrical utilities and fuels production and consumption). In this connection, legislation can be made (or derailed) by proposed provisions regarding phase-in, byes and safety valves, and cost-spreading.
Allocating emissions allowances is about as controversial as the new legislation can possibly become, with major debate about the grandfathering existing sources, whether to auction all or just some of the rights to emit, and allowance retirement. After both creating enormous value in the form of legislative permission to emit GHGs, and auctioning or allocating the newly-minted rights to emit, already it is clear that a large federal direct and indirect subsidy program will be launched, that may favor green technology and conservation and disfavor existing unaltered high-GHG emitting technologies. Early action credits will certainly receive attention, but to what extent and in what form? This has yet to be fully resolved, nor has the point at which allowance purchase may finally be set to occur: upstream/downstream, at the point of energy use or the point of carbon release.
