Wednesday, July 14, 2010

Cap and Trade Legislation

One of my regular readers recently suggested I write a post on this subject. Initially I resisted because it's rather complicated, not widely understood, and, more importantly, most likely not one that most readers are currently very interested in. However, after some research and reflection, I decided to go ahead because I value the reader's input and it's an issue that can ultimately have a very significant impact on our overall economy and our quality of life. What's it all about, why is it important, and where does it stand? To start off, "cap and trade" has to do with concerns about climate change and global warming, but it's also connected to our energy sources and desire for more energy independence.

"Cap and trade," also known as emissions trading, is a flexible environmental regulation mechanism that sets an overall mandatory limit on allowable emissions of one or more undesirable pollutants (greenhouse gases), but allows companies which can more easily reduce emissions to sell credits to other companies for which such reduction would be more difficult. For example, the U. S. government, working through the Environmental Protection Agency (EPA), might set a national limit on emissions of selected pollutants, such as carbon dioxide, for a particular year or years and then allocate a portion of that total limit to major utilities (especially coal-fired power plants), refineries and other manufacturing companies which historically were deemed to have been responsible for the bulk of the emissions in this country.

Utilities and these manufacturing companies would become incented to reduce emissions each year to reduce their costs and potentially add revenue by selling (trading) unused parts of their cap to other companies who may have temporary or more permanent difficulties in staying within the emission cap established for them. These buying companies would become incented to work harder at reducing their emissions, since it would presumably reduce their costs and perhaps ultimately an opportunity to earn more revenue if they came in the position over time of having room within their caps. The private sector is incented to lower costs and become more efficient, while the public and our ecosystem benefits from a lower level of pollutants in the air we breathe and water we drink. Sounds sensible, right?

Cap and trade was first tried on a significant scale twenty years ago under the first Bush administration as a way to address the problem of airborne sulfur dioxide pollution - known widely as acid rain - from coal-burning power plants in the eastern United States. A limit was imposed on emissions from the power plants, and utilities were allowed to buy and sell permits to comply. It's generally considered one of the most effective environmental initiatives we've had, and both environmentalists and our industrial sector have in recent years supported the idea of cap and trade as a centerpiece of government initiatives to address global warming and the growth of our oil imports. Less than a year ago, cap and trade seemed to be the policy of choice for dealing with the issue of climate change.

Environmental groups and their foes in industry joined hands to support the approach. President Obama praised the concept in his first federal budget and the House of Representatives' climate and energy bill passed last June was largely built around it. However, in recent months it seems cap and trade as an economy-wide government measure is currently virtually dead! What's happened?

The answer appears to be partisan Washington politics energized by our weak economy, very low public opinion polls for Congress and President Obama, upcoming mid-term elections, concern with higher front-end costs for industry compliance and U. S. competitiveness, and the general complexity of how cap and trade would work and its net benefits. Another factor was likely the impact of lawsuits filed by a handful of utilities in North Carolina in 2008 where the U. S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had over-stepped its authority in expanding cap and trade markets and that parts of new rules conflicted with existing Clean Air Act regulations.

Despite these concerns, Senate Majority Leader Harry Reid is still trying to put together a comprehensive climate and energy bill to introduce to the Senate during the week of July 26th, less than two weeks away. Reid's current draft apparently has four parts: an oil spill response in the wake of the BP disaster in the Gulf which will likely increase the financial liability of oil companies in the event of another spill; clean energy job creation and consumer savings; reducing oil consumption and increasing energy independence; and reducing pollution among utilities, presumably with some type of a more limited cap and trade component. When questioned about the latter two days ago, Reid declined to elaborate. However, one can assume it will be a cap and trade compromise approach that environmentalists will modestly applaud and that utilities will generally be able to live with.

Ther expectation is that Reid's bill would set a cap on annual emissions over the period 2012 to 2050 and would require the regulated companies to hold allowances to emit the pollutants or greenhouse gases. After allowances are initially distributed, companies would be free to buy and sell parts of their cap to others who are interested in buying them. Electric utilities are expected to be required to meet 20% of their electricity demand through renewable energy sources by 2020, sources such as solar, wind, geothermal or hydroelectric. There's also an expectation that the bill would provide subsidies for new clean energy technologies and energy efficiency. To an unknown extent there will probably also be some protection for consumers on energy price increases.

Until one has an opportunity to read the entire final bill, or at least an executive summary, it's impractical and difficult for interested parties to conclude specifically how they feel about the legislation and its prospects for approval in Congress. Certainly there's a chance, due to its expected complexity, controversial language and lobbying pressures, that voting in the House and Senate on a final bill that has a reasonable chance of approval will be postponed until next year. But it's fairly certain that Obama and congressional Democrats will push hard for approval before November to enhance prospects for their candidates in the mid-term elections.

In evaluating the final bill, I think the focus should primarily be on anticipated impacts of the following important factors: clean energy job creation, national energy independence, air quality, national debt and federal budget, U. S. unemployment rate, energy costs for U. S. consumers, and the competitiveness of our major industries. Obviously there are many other relevant factors that should be taken into account, such as the scientifically determined impact on climate change and what other major developed and developing economies are doing or expected to do on this subject. One can assume that, like with the health care and financial overhaul bills, most of the Democrats will vote for approval for obvious reasons and most of the Republicans will disapprove for various reasons, some very legitimate and some not. Again, support of the Independents will likely be key to success.


wondarwie said...

The United States needs to get its feet going on greenhouse gas emissions and one way to do this is to reenergize Cap and Trade Legislation. Then we need to develop a strategy to encourage the rest of the world to follow our lead.

"Fear" e-mails have been bouncing around the internet concerning the Cap and Trade Legislation and I am glad it is finally being discussed by someone without a pressing political agenda.

The House version passed last year, but it looks like the Senate version is buried in quicksand. It apparently cannot muster the votes from the Senate and now they are trying to scale it down to a utility only proposal, which looks to be the only path for limiting greenhouse gas emissions this year in the U.S.

There is a risk in this approach, in that American energy-intensive industries would face increased production costs when they are forced to pay for more expensive electricity. Certainly their competitors overseas won't face that problem and that could mean a loss of market share for American businesses and a loss of jobs for our country.

So what do we do? Even those who claim we don't have a greenhouse gas emission problem (cyclic weather argument) would have to admit that somehow, sometime we need to draw a line on these emissions. Not just a U.S. line, but an international line.

The Energy Information Administration (EIA) reported a few months ago that global carbon CO2 emissions from fossil fuel sources will reach 42 billion tons by 2035. Most of that will come from China and India, which are still categorized as developing countries by the United Nations. These 150-plus nations create half of the world's CO2 emissions, but somehow the United Nations overlooked that when they produced the Kyota Protocol to reduce these emissions. They exempted developing countries because their agenda is aimed at ending poverty and not reducing greenhouse gases. America never signed this accord and we have suffered fallout from this decision ever since.

Cap and Trade legislation is a good start for the utility industry in our country, but we need to encourage the world to reduce these emissions as well. And I have a plan.

My solution will not be popular, but it is probably the only way we are going to get the world moving in the right direction. We need to tie U.S. foreign aid payments to data on greenhouse gas emissions. We give away $25 billion a year in foreign aid. It isn’t a whole lot of muscle, but it is a shove in the right direction. Another path is to reduce our military presence in countries according to data on these emissions. We have military bases in about 40 countries. If they want a free military force in their country they will have to reduce their emissions. If not, well hey, we have a $664 billion defense budget that could use a few less bases overseas. A third way is to create import tariffs on countries that produce unacceptable reductions in these emissions. We can exempt Least Developed Countries, which number around 50, but the rest have to make visible efforts to reduce these emissions.

A key to this plan is measuring input, as opposed to output, to measure a nations's emissions. In this mathematical model, we study the tons of fossil fuel used and extrapolate the CO2. We do that with every product produced to get a ballpark estimate of emissions.

This can work. Anybody have a better solution?

Viking Views said...

I agree with your concerns and have some reactions to your proposed plan. It seems to me that part of a good action plan must still include a concerted effort to get much more scientific and political consensus in the U. S. on the seriousness of the danger posed by rising greenhouse gas emissions and the urgency called for.

According to EIA statistics from 2008, China had the largest emissions volume with 6.5 billion metric tons out of the world total of 30.4. China's total almost doubled from 2003! The U. S. was second with 5.8 billion metric tons, Russia was third with 1.7, India was fourth with 1.5, followed by Japan and Germany. China is definitely the big one, and, based on all the new coal-fired power plants they're building and fast increasing volume of new cars and trucks on the road, China will no doubt be responsible for more than 25% of all emissions within just a few more years and possibly as much as 40% by 2035. My guess is that the U. S. will continue in second place, with India moving up to third and Russia down to fourth within the next few years.

Gaining China's meaningful participation in cutting emissions must therefore be a top priority. The foreign aid and military bases presence angles don't probably apply to China, although I think it's possible to get some cooperation by negotiating a deal involving reducing our presence in South Korea and Japan. However, tariffs on the huge volume of imports from China as an inducement, though provocative, would certainly get their attention. Commitments by the U. S. and China to a longer-term program of verifiable and very significant emission reeductions would go a long way to get most of the other larger economies to make similar relative commitments.

While we need to look seriously at cutting back our military presence abroad, and secondly even our foreign aid, for basic economic reasons, I'm not sure it's needed, or would have that much of an impact, to gain cooperation on reducing emissions.