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Kerry-Lieberman OK or Not OK

On May 12th, US Senators John Kerry (D-Massachusetts) and Joe Lieberman (I-Connecticut) revealed the details of a new Bill which they intend to pass in the United States Senate, the American Power Act.


Kerry-Lieberman - OK or Not OK  

Michael Lewis - Sunday, May 16, 2010

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Kerry-Lieberman: OK? or Not OK?
May 16, 2010 © Enerhope.com
On May 12th, US Senators John Kerry (D-Massachusetts) and Joe Lieberman (I-Connecticut) revealed the details of a new Bill which they intend to pass in the United States Senate, the American Power Act.

If approved by the Senate, the Bill would complete Congressional approval of the USA greenhouse gas cap-and-trade system promised by the Obama team during the 2008 presidential election campaign. This US Senate Bill would complement the earlier Waxman-Markey Bill which was passed by the US House of Representatives in June, 2009. (See previous Enerhope Forum article, “Whither USA?”) If passed, the cap-and-trade system would be signed by the President, and would become law.

The text of the Bill (in its present form, marked “Discussion Draft”) and other documents are available from Senator Kerry’s web site, http://kerry.senate.gov/americanpoweract/intro.cfm According to the press release, the purpose of the Bill is to create , ”comprehensive energy and climate change legislation that will create jobs, strengthen America’s energy independence, safeguard our (USA) national security, and restore our (USA) global economic leadership for decades to come.

” Thus, the Bill is much more than the establishment of a greenhouse gas cap-and-trade system. The Bill includes incentives for nuclear power, offshore oil and gas, carbon capture and storage, promotion of renewable energy and energy efficiency, electric vehicles, natural gas vehicles, the highway trust fund, and clean energy research and development. All of these other causes, as necessary as they may or may not be, are joined to cap-and-trade in this Bill, and the fate of cap-and-trade depends on the popularity within the Senate of these other causes, especially offshore oil and gas, which is suddenly under attack because of the alarming news from the Deepwater Horizon oil spill disaster.

Enerhope’s analysis will attempt to put aside these other causes, and will concentrate on examining the cap-and-trade aspects of the Kerry-Lieberman Bill.
Let’s examine the cap-and-trade system proposed by Kerry-Lieberman, mindful of the simple Enerhope system described in this web site.

Here are the intentions of the Bill, with Enerhope’s comments:
Scope The cap-and-trade system will place all fossil fuel electricity generators under the cap, for their direct emissions into the atmosphere, starting in 2012.

In 2016, the number of capped facilities will be increased. Every stationary source emitting more than 25,000 tonnes per year of CO2e, directly into the atmosphere, including the already-capped fossil fuel electricity generators, will be placed under the cap. Each natural gas distribution company selling enough natural gas to emit 25,000 tonnes per year of CO2 through combustion by uncapped facilities will also be placed under the cap.

 The “threshold” of 25,000 tonnes/year is so small that many thousands of medium-sized enterprises with no knowledge of emissions reporting, trading or reductions would be required to report their emissions and retire allowances and offsets at the end of the year. Supervising this massive number of capped facilities would place a huge administrative burden on the US Government.

A 2009 USEPA report showed that a threshold of100,000 tonnes/year would capture 53% of all USA emissions under the cap, and would cap 6,269 facilities. Lowering the threshold to 25,000 tonnes/year would increase the number of facilities under the cap by 62%, but would increase the total emissions under the cap by only 2%.

Here is the URL of the USEPA Report mentioned above:
Each supplier of refined petroleum products will be required to purchase, each year, from the US Government, Allowances, equal to the total tonnage of the greenhouse gases emitted by combustion of the products that the supplier has sold during the year. The price per Allowance will be determined by the Government, based on the recent average paid by electric utilities in Allowance purchases. At the end of each year, each supplier of petroleum products must “hold” Allowances equal to the total greenhouse gas emissions from combustion of products that the supplier has sold during the year. Suppliers of petroleum products may not trade Allowances.

This requirement, imposed on suppliers of petroleum products, is a carbon tax, which should not be entangled in the cap-and-trade system. This is a tax on indirect emissions by customers of petroleum companies.

Cap-and-trade succeeds in regulating direct emissions by large, direct emitters. Cap-and-trade does not succeed in reducing indirect emissions.

Capping fuel distributors for their indirect emissions, i.e. for emissions by their customers, is a serious mistake. Motorists who buy and consume gasoline from service stations would not be under any regulatory obligation to reduce their greenhouse gas emissions. Instead, the motorists would see a price increase between 4% and 8% in the price of gasoline, varying with the week-by-week price of allowances. The motorists would resent this price increase but would not reduce their emissions.

Similarly, capping natural gas distributors for indirect emissions by their customers will not result in emission reductions. Residential customers will see increases between 4% and 9% in the price of natural gas, not a big enough increase in price to cause any emission reductions.

Historical data (New York Times, May 2, 2010) shows us that between 1990 and 2007, the average USA price of gasoline (adjusted for inflation), climbed from $1.87/US gallon (1990) to $2.95/US gallon (2007) (a 58% increase, 1990-2007) but the changes in the price of gasoline had no effect on total greenhouse gas emissions from gasoline combustion, which climbed steadily from 966 Mt CO2e (1990) to 1187 Mt CO2e (2007).

(The gasoline emissions data is from the following USEIA site:)
If consumers of petroleum products do not reduce their consumption, the Allowances purchased by petroleum product suppliers will devour more and more of the total Allowance pool, as the total issued Allowances decrease from 4722 Mt (2013) to 1043 Mt (2050).

Allowance Allocation
 A total of 4722 Mt of Allowances will be allocated in 2013, including a small Cost Containment Reserve. Petroleum product suppliers will be required to purchase allowances equal to the greenhouse gas emissions from combustion of the products that they sell. Based on 2008 data, this sector will purchase 2436 Mt of Allowances, leaving approximately 2000 Allowances for the electricity sector.

In 2013, Electricity Generators will be free-allocated the remaining (in 2013, approximately 2000 Mt of) Allowances, based on a formula of 75% of available allowances based on previous greenhouse gas emissions, 25% based on previous electrical energy delivered.
What is an Electricity Generator? The Discussion Draft currently available from the website lacks a definition of “electricity generator.” Perhaps the Bill intends to reward hydro-electric generators with free Allowances. Perhaps the Bill intends to allocate to fossil-fuel electricity generators only. Let’s assume that “electricity generator” means “fossil fuel electricity generator.”

In 2013, USA fossil fuel electricity generators can look forward to being allocated approximately 1500 Mt of Allowances, based on their total previous emissions, and approximately 500 Mt, based on their previous total generated energy.
In 2007, USA fossil-fuel electricity generators generated a total of 3004 TWh of electrical energy, and emitted 2409 Mt of greenhouse gases. If 2013, the sector will be required to make major reductions in its greenhouse gas emissions, or purchase large numbers of Offsets for retirement.

“Starting in 2013, electric power utilities would have to obtain pollution permits, initially provided for free by the government and then changing to full auctions by 2030, according to Senate aides.” (Reuters, May 13th, http://www.reuters.com/article/idUSN1219978020100513?type=marketsNews )
The Discussion Draft does not mention how many % of the total Allowances will be auctioned in any particular year.

Starting in 2016, large industrial sites (direct emissions) and natural gas distributors (indirect emissions) will be added under the cap, as previously explained. The total Allowances available for allocation will be increased to 5524 Mt.

In 2008, greenhouse gas emissions from all three 2016-capped groups (industry, petroleum suppliers, natural gas suppliers) totaled about 6700 Mt, of which 3827 Mt were emitted as direct emissions by industrial facilities, and the remainder as indirect emissions by the customers of petroleum and natural gas suppliers. Clearly, in 2016, these three groups will be under considerable pressure to reduce emissions, or to buy large numbers of Offsets. The brunt of these reductions will fall on the large industrial facilities, unless petroleum and natural gas customers can be persuaded by other programs and policies to make major reductions in their consumption of these products.

The Discussion Draft includes a year-by-year schedule of how many percent of the total Allowances, year-by-year, will be distributed for free to each of a list of 10 recipient groups, the biggest being Electricity and Natural Gas Consumers.
The mechanism for allocating these Allowances to these groups and then translating the value of these Allowances to rebates for individual consumers is not explained. The relationship between the Allowance auction and the free allocation of Allowances to these groups is not explained.

The complex free allocation/auction scheme described in the Bill would burden the capped facilities (and their customers) with the cost of subsidizing 10 different recipient groups, as well as the auction price on top of the cost of emission reductions. Cap-and-trade is a fragile program that should not be endangered by extraneous financial burdens or political causes.
Auction of allowances or free allocation to non-capped organizations would create a long, circuitous path for the allowances to be traded by their original owners, through various traders, to the capped facilities. This long, circuitous path would add cost, complexity, and the risk of price speculation to the purchase of allowances by capped facilities.
The best allocation system is free allocation to capped facilities, according to a fair scheme, under a hard cap. Free allocation to capped facilities has the following advantages:
• Minimum cost to customers of the capped facilities: The only cost is the cost of emission reductions. The market for allowances and offsets quickly purchases the lowest cost emission reductions.
• The capped facilities hold most of the allowances in their own accounts until retirement. A few allowances are traded before retirement.
• Wealthy polluters cannot easily buy their way out of their regulatory obligations.
• No taxes, no fees, no subsidies
• No auction-rigging, no hoarding, no scalping • Allocations are visible to the public: “Transparency”
• By controlling the allocation of allowances to capped facilities, the Government can discourage “leakage” of emission activities outside the capped facilities.

The Verdict In its current form, as described in the May 12th Discussion Draft of the American Power Act, the Bill contains some serious flaws in the scope of the proposed cap-and-trade system and in the proposed Allowance allocation process. The author of this analysis wishes the promoters of the US greenhouse gas cap-and-trade system the best of good fortune, but strongly recommends that the promoters redesign the proposed cap-and-trade system.

A simple, clear cap-and-trade system for a specified list of large, direct emitters, with a hard cap, free allocation to capped facilities according to a fair allocation scheme, and a lively offsets system would be the best course for the USA, and could reduce the USA’s greenhouse gas emissions by 12% to 20%.

Other policies and programs can be implemented to reduce greenhouse gas emissions from other sectors not capped under the cap-and-trade system.
The cap-and-trade Bill should not be complicated by other energy, environmental, economic or political causes.

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