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Whither, USA

Is the Obama Administration heading in the right direction with its cap and trade plan?

 

Is the Obama Adminstration heading in the right direction with its cap and trade plan?  

Michael Lewis - Monday, March 29, 2010

Welcome to Enerhope
 

March 29, 2010
Whither USA?
Is the Obama Administration heading in the right direction with its cap and trade plan?
©Enerhope.com   2010

The United States of America is the home of three of the most successful emissions trading systems to date. The Ozone Transport Commission NOx Budget Program (1990-2001) and the NOx State Implementation Plan (2002-present) reduced emissions of oxides of nitrogen from fossil-fuel generation of electricity in the northeastern states by 70% by 2009. The Acid Rain Program reduced sulfur dioxide emissions from fossil fuel generating stations by 5.5 million tonnes per year between 1990 and 2005, a 35% reduction.

These successful emissions trading systems capped the direct emissions of pollutants from a manageable list of specified, large, direct emitters.

The USA was one of the countries that signed the 1998 UN Framework Convention on Climate Change, which recommended the introduction of international greenhouse gas emissions trading as a mechanism for reducing greenhouse gas emissions.

During the 2008 USA presidential election campaign, the Obama team promised to implement an economy‐wide cap‐and‐trade program to reduce greenhouse gas emissions by 80 percent by 2050, if elected. The cap-and-trade system would feature 100% auction of all “pollution credits.” Proceeds of the auction would be used to finance clean energy, energy efficiency, wildlife habitat restoration, and rebates for families and communities.

In promoting the cap-and-trade system through the United States Congress, the Obama administration faces considerable challenges.

In the House of Representatives, Obama’s Democratic Party holds a clear majority. However, some of the Democratic Representatives are “Blue Dog” Democrats from industrial states with heavy consumption or production of fossil fuels. These Blue Dog Democrats refused to vote for a massive cap-and-trade bill without major compromises for the fossil fuel industries in their states.

The House of Representatives approved a greatly modified cap-and-trade on June 26th, 2009, as part of the American Clean Energy and Security Act (The Waxman-Markey Bill). According to the Bill, the USA cap-and-trade system would start in 2012. 85% of the USA’s total greenhouse gas emissions would be “under the cap.” Four and a half billion allowances, each representing one tonne of CO2e, would be allocated in 2012. The US Government would auction only 5% of the total allowances, although this percentage would rise in future years. The other allowances would be allocated for free to a list of 30 different groups of recipients, including electricity and natural gas retailers, coal-fired generators, motor vehicle manufacturers, health promotion, and tax rebates for low-income home owners. A Registry would track the allowances, offsets and accounts.

It is now the turn of the United States Senate to debate the merits of cap-and-trade. The Obama Democrats currently hold a majority of the 100 seats in the US Senate, but not the 60-seat “super majority” needed to prevent an opposition filibuster in debate.  Once again, the “Blue Dog” Democrats are likely to demand concessions for the fossil fuel consuming and producing industries in their home states, before approving a cap-and-trade bill.
Any cap-and-trade bill that might be passed by the US Senate would probably be greatly changed from the Obama team’s 2008 plan.

If the passage of the cap-and-trade bill is frustrated by the US Senate, the President may enact cap-and-trade by regulation. A US Supreme Court decision in 2007 (Massachusetts vs EPA) held that EPA already has statutory power to regulate greenhouse gas emissions under the Clean Air Acts. Acting on the Supreme Court ruling, in March, 2009, EPA cleared the way for a possible regulation by publishing a finding that greenhouse emissions endanger human health by causing climate change. However, implementing a cap-and-trade system by regulation instead of legislation may still be challenged in the US courts, and could be a political liability for the Obama administration.

A storm of US critics has set upon the proposed cap-and-trade system. Many opponents of the proposed cap-and-trade system have voiced their criticism in the US media. Not all of these critics are arch-conservative pundits or Republican political opponents of the Democratic administration. In the face of this barrage of criticism, some of the staunch supporters of cap-and-trade are starting to waver. Some senators are discussing alternatives to the proposed cap-and-trade bill.
Here are some recent media articles:
‘Cap and Trade’ Loses Its Standing as Energy Policy of Choice
New York Times, March 25, 2010
http://www.nytimes.com/2010/03/26/science/earth/26climate.html?src=me&pagewanted=print
White House: "Cap and Trade" is Out
CBS News, March 31, 2010
http://www.cbsnews.com/8301-503544_162-20001508-503544.html
One of the promoters of the cap-and-trade bill in the US Senate, Senator John Kerry of Massachusetts, is quoted as saying, “I don’t know what Cap and Trade means.”
On March 31st, US Interior Secretary Ken Salazar said on CNBC,"I think the term ‘cap-and-trade’ is not in the lexicon anymore.”

Enerhope’s Analysis, and Recommendations
In its present form, especially as distorted by the Waxman-Markey Bill, the Obama cap-and-trade plan is seriously flawed. Here are the major flaws, with advice for improvement:

Scope
The cap is intended to cover 85% of US greenhouse gas emissions.
This cap is much too large. The cap should be limited to large, direct emitters, e.g. coal-fired electricity generators, petroleum refineries, cement kilns. Each of these large, direct emitters emits over 100,000 tonnes per year of greenhouse gas equivalent into the atmosphere. These large, direct emitters are responsible for about 40% - 50% of the USA’s total greenhouse gas emissions.
The US Government should publish a list of the specific sites that will be “under the cap,” well before the beginning of the cap-and-trade system. If there are any disputes over which facilities should be under the cap, these disputes should be settled before the first year of the cap-and-trade system.
The other sectors should not be under the cap. The US Government should use other programs and policies to encourage emission reductions in these other sectors.
The proposed cap-and-trade system places “under the cap” every direct emitter of greenhouse gases over 25,000 tonnes per year of CO2e.
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.
Producers, distributors and importers of petroleum products and natural gas will be under the cap for the emissions by their customers.
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 of about 5% 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. If the government made allowances so scarce that the price of gasoline increased by a large percentage, e.g. 70%, motorists would begin to reduce their fuel consumption, but many vulnerable people would be hurt.

Allowance Allocation
During the 2008 Presidential Election campaign, the Obama team promised a cap-and-trade system with 100% auction of all allowances. Revenue from auction would be used to finance various worthy programs.
The Waxman-Markey Bill changed the allocation system to free allocation of allowances to 30 different recipient groups, including electricity and natural gas retailers, tax rebates for homeowners, coal-fired generators, and motor vehicle research.
The complex free allocation scheme described in the Waxman-Markey Bill would burden the capped facilities (and their customers) with the cost of subsidizing 30 different recipient groups, as well as 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 brokers, 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 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 USA cap-and-trade system should include a mechanism for changing the future caps and the list of capped facilities. Several cap-and-trade systems in other jurisdictions over-allocated allowances in 2009, because 2009 total emissions turned out to be lower than the caps that were set for 2009 several years before.

Offsets
The attempt to place 85% of US greenhouse gas emissions under the cap means that only 15% of emissions would be from facilities that could plan offset projects. This shortage of offsets would prevent the creation of a lively offset market. The absence of a lively offset market would place additional risk on the allowance system. If too many allowances were available, the price of each allowance would sink to a trivial amount. If not enough allowances were available, the capped facilities would not be able to meet their regulatory obligations.
The best solution to this offset dilemma would be to limit the cap to large, direct emitters, which represent 40% - 50% of total US greenhouse gas emissions. The other sectors would be free to create a lively offsets market, which would supplement the allowance market under a rigorous, “hard” cap.
Waxman-Markey authorizes the US Federal Department of Agriculture to create and award offsets for agricultural projects. The responsibility for creating and awarding offsets for any sector should remain with the US EPA, not with another department which does not have environmental protection as its major goal.

Registry
Waxman-Markey authorizes the US Government to create and allocate 4,500,000,000 allowances in 2012, one allowance representing one tonne of CO2e. This number would rise to 5,500,000,000 allowances in 2017. Too many allowances to register and track! Suggestion: Create one allowance for each kilotonne of CO2e. Result: a smaller, manageable number of allowances.

Summary
The proposed USA greenhouse gas cap-and-trade system should be revised. After revision, a well-designed cap-and-trade system could reduce the USA’s total greenhouse gas emissions by about 12%, relative to current totals.
“I believe that good policy is good politics.”
USA President Barack Obama, 2010

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