April 1st, 2009 by Jess

Yesterday, in one of the biggest movements on the issue this year, Representatives Waxman (D-CA) and Markey (D-MA) released a discussion draft of their climate change bill, currently known as the American Clean Energy and Security Act of 2009.  The full text of the bill is available on the Committee of Energy and Commerce webpage.

I must disclaim by saying I did not (and probably will not) read the full text of the bill.  It is over 600 pages long, I am preparing for a cross-country move, and I have a day job.  It’s just not likely to happen.  That being said, here is a brief overview of my thoughts on the bill.

Things We Like:

• Aggressive emissions reductions targets – more aggressive, in fact, than President Obama’s.  20% from 2005 levels by 2020 and 83% by 2050
• Smart grid for electricity.  A smart grid would lay the groundwork for so many important developments, including electric cars and increased utility of residential renewable energy sources.
• Green jobs and worker
• It’s a draft bill!  It’s movement!  We’re thrilled!

Things We Don’t Like:

• This bill leaves many questions unanswered.  How will allowances be distributed?  How will revenue generated from the sale of carbon permits be used?
• Free permits to carbon-intensive industries.  While I understand that steps must be taken to cushion carbon-intensive industries from the cost impact of climate change, I don’t know that this is the way.  However, it will make the bill more politically salable, which is important.
• $10 billion for carbon capture and storage.  Wouldn’t it be better if we just produced renewable energy?  I worry that pouring money into CCS technology might encourage the construction of new coal power plants, especially in developing countries.  I think this is a step in the wrong direction.  Again, politics at work here.
• Performance standards for new coal fired power plants.  Can we please not build any more of these?

Things To Note:

• Offsets – this bill provides for them.  There are limits on how many companies may use as well as a scientific advisory board to monitor offset quality.
• Unlimited banking and limited borrowing allowed.
• All regions of the country would be required to source 25% of energy from renewable sources by 2025.
• The United States Climate Action Partnership (USCAP) has called the bill a “strong starting point” for dealing with emissions.

The Waxman-Markey bill is only a discussion draft, and clearly there is much to be done in the way of negotiating specific details, especially in the area of allowance distribution.  But it is a good start.  More to follow later on the individual sections of the bill.

American Clean Energy and Security Act, cap and trade, climate change, Waxman-Markey bill

April 1st, 2009 by Jess

One of the concerns with implementing a cap and trade system is leakage.  This concept of leakage – that both jobs and emissions might shift from countries with emission reduction policies – is an important thing to address in crafting policy that will be both politically saleable and environmentally useful.  The worst case scenario fear is that a policy that places a cost on emitting will harm the economy while doing nothing to protect the environment.

The whole point of cap and trade legislation is limiting emissions.  In order to do so, Congress is discussing implementing policy that may generate significant additional expense for U.S. industries, especially carbon-intensive industries or those identified as “trade-sensitive.”  If producers pass the costs on to consumers, cap and trade policy could translate into higher priced goods, which may not be competitive in the global market, as countries with no emissions reduction policy will be able to produce goods more cheaply.

If this occurs, U.S. products will become less competitive in the global market.  This is where the issue of leakage comes into play.  People will stop buying American-made products, instead buying cheaper goods from other countries.  The resulting contraction of U.S. industry will result in loss of American jobs.  The expansion of industry in countries without emissions reduction programs will result in increased emissions in those countries.  Negative economic impact with zero environmental benefits.  Everyone loses.

Complicated stuff.  Any time you get international trade involved, things get complicated.  Just look at Doha.

On March 18^th, members the Committee on Energy and Commerce Subcommittee on Energy and the Environment met to hear from experts on the issue of leakage, and to discuss how U.S. cap and trade policy might be designed to maximize environmental benefit while minimizing negative economic impact.

As might be imagined, this hearing was similar to the last climate change hearing in that it was very technical.  However, this hearing included deep discussion about specific policy options.  The witnesses and committee members discussed types of allocation – auction versus allowances, either free or with a set price.  There was also significant discussion of border equalization measures which, if the U.S. adopts domestic legislation this year, will be an important piece of the negotiations in Copenhagen.

The panel represented the full spectrum of views on this issue.  Some felt it would be best to go to Copenhagen with a domestic climate policy in place, which would give us credibility as an international leader on this issue, as well as provide more carrots and sticks for the negotiations.  A counterargument was raised that any policy incorporating a border tax would only serve to anger the international community, developing countries in particular, and make reaching an agreement in Copenhagen more difficult.  Several witnesses felt that the issue of climate change needs to be addressed at the international level first, and the U.S. should not go into Copenhagen with domestic policy in place.  And one holdout, Dr. Margot Thorning of the American Council for Capital Formation, feels that the cost-benefit analysis of climate change policy does not justify any domestic policy at this point.  Simply put, it is too expensive with too little environmental benefit in the absence of action from China and India.

(An aside – China and India are the primary concerns in a discussion of developing countries and climate change.  Projections show that even if developed countries adopt aggressive emissions reduction policies, if China and India do not follow suit and continue at their current rate of development, total emissions will continue to rise.  Buy-in from China and India is absolutely necessary if we are to solve this issue at a global level.)

While many agreed on the issues at hand, very little consensus emerged regarding the answers.  An international agreement is absolutely necessary.  A cap on carbon, most likely implemented sectorally, is the most effective way to address this issue.  We must avoid a trade war over carbon.

But how?  Are border adjustments one more tool in our arsenal or will they cause insurmountable strife?  Is domestic legislation a virtual prerequisite for the formation of a meaningful international agreement in Copenhagen?  Will Dr. Thorning ever smile?

I believe that last is a no.  As to the rest, we will have to wait and see.

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