12.20.04Arthur O'Donnell, The Energy Overseer,

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The National Commission on Energy Policy is certainly not the first group to recommend that the United States implement a "cap and trade" system for reducing greenhouse gas (GHG) emissions that have been implicated in an apparent, if not completely proven, change in the global climate [see The Business Electric, "You're Probably on the Right Track," 12/13/04]. We can argue for years about whether the earth is warming (or cooling) as a result of industrialization or just going through a natural cycle along some geologic timeframe that defies our human understanding. Still, the evidence is mounting that continued reliance on combustion of fossil fuels at an unbridled pace presents both immediate and long-term hazards to health and economic wellbeing here in the U.S. and around the world. Reports from the United Nations' conference on climate change, held this past week in Buenos Aires, called 2004 the fourth warmest year on record, during a 15-year period in which the ten hottest years have occurred. Even disregarding the direst forecasts of future environmental impacts, there is evidence of adverse consequences here and now. According to one U.N. report, climate change caused over $90 billion in economic losses worldwide during the first ten months of this year, and such costs are projected to rise even more in the future.

"We don't need more evidence," said Thomas Loster, director of climate change and natural disaster research for Munich Re, at the conference. "We need to start acting now." It’s been seven years since U.N. members negotiated the Kyoto Protocol, a program of mandatory reductions of carbon dioxide and other greenhouse gases along with an emissions credit trading market. The goal of Kyoto—to cut worldwide emissions of GHG to about 92 percent of 1990 levels by 2012, is variously seen as properly aggressive, draconian, or not nearly enough to stem the tide, depending on who is making the analysis. While 128 countries have adopted the Kyoto accord as policy—including Russia as the “tipping point” ratifier that will allow the program to take effect in February 2005—the U.S. government has completely backed away from support. President George Bush instead espouses voluntary programs and more research spending.

The dichotomy of approaches has led to withering criticism of the Bush administration and Congress by Kyoto ratifiers in Europe and Asia. Meanwhile, the administration reportedly has been trying to gather allies in an effort to prevent future negotiations on a post-Kyoto period agreement that might impose even more strict limits. And the late news from Buenos Aires indicates that Italy may terminate its support for Kyoto limits.

The controversy over Kyoto is just part of the context for the NCEP’s recommendation for a modified “cap and trade” system that begins in 2010, with a goal of reducing the density of target emissions by 2.4 percent per year for a decade. That would slow the increases in GHG emissions from 1.5 percent per year to 0.5 percent annually. After 2020, the program would increase the reductions target to 2.8 percent per year, “effectively halting expected emissions growth,” noted the NCEP’s report. After that, emissions would drop. Ralph Cavanagh, senior attorney for the Natural Resources Defense Council (NRDC) and a member of the Commission, admits that the modest goals will rile many in the environmental community. “It will not satisfy many of my colleagues who want more aggressive timetables for first stabilizing and then reducing emissions,” he told me. “But it is a step in the direction of creating the international markets for reducing emissions reductions that I think almost everybody now acknowledges are needed.”

Is there any chance that the current administration or Congress will buy into any program, however modest, that requires emissions limits? “The administration’s objectives for reducing carbon intensity will not be met by business-as-usual,” Cavanagh said. What the Commission has proposed, “is a cap and trade system that I’m hoping will look to the administration like a reasonable extension of proposals the administration has already made,” he added. To try to gain broad support, the NCEP more frequently refers to the market-based system for reducing sulfur emissions that was enacted under the 1990 Clean Air Act than it raises the Kyoto principles or the European offset market that will begin next year. NCEP also leaves many of the sticky political issues to Congress, Cavanagh noted. “The trading system, as with the sulfur system, is administered by the federal government. The question is who gets allowances initially, obviously, and how many of the allowances that are available initially are in effect sold off by the government to add revenue for the government as opposed to simply given to emitters,” he said. “And we have not tried in detail to propose how to allocate those, that is a classically political question. The Congress will want to resolve it.”

The Commission recommends allocating 95 percent of the allowances to the entities currently responsible for the target emissions, which, according to Cavanagh, will minimize the economic strains that they will face initially. Although applied across the industrial and economic spectrum to all GHG emitters, any mandatory system would have a disproportionate impact on electric generating facilities (notably coal-fired plants), which account for more than 80 percent of domestic carbon releases. The 5 percent of allocations reserved for the government would be sold at an indexed price capped initially at $7/ton. That’s considered a necessary “safety net” that effectively caps the cost of compliance and brings flexibility to the trading system. The expected revenues from government offset sales—about $36 billion over 10 years—would be used to fund research and development of less-polluting technologies, according to the Commission. Contrast this proposal to others that have been made recently. For instance, about two weeks prior to the release of the NCEP report, the environmental group Resources for the Future released its own proposals that called for controlling releases of U.S. greenhouse gases and a trading system, “even in the absence of an international agreement.” The Resources for the Future program, however, also called for a carbon tax—something that is seen as dead in the waters of the Potomac.

Similarly, when the Sustainable Energy Coalition in early October presented its “sustainable energy blueprint” for the country, it proposed a cap & trade system that would mimic Kyoto’s reduction goals over a somewhat longer timeframe ending in 2025. But this plan also called for eliminating all oil and gas imports beginning this year, doubling auto fuel efficiency requirements, and the eventual phasing out of all American nuclear plants—not to mention a proposed 25 percent requirement for renewable energy resources.

That’s not a program that stands much of a chance under current political circumstances. Perception and timing are everything in Washington politics, observed Jack Riggs, executive director of the Aspen Institute’s program on energy, the environment and the economy. Two years ago, Riggs was part of a group that tried to develop and promote a non-partisan energy policy for consideration by Congress. However, the recommendations of the National Energy Policy Initiative group—which included a carbon cap & trade system—went nowhere on Capitol Hill. A large part of the problem was that the Initiative group was headed by Amory Lovins of the Rocky Mountain Institute, someone perceived as an ardent environmental advocate. “I think the weakness of that was that there was a perception that it was kind of from the center to the left,” Riggs said. “I don’t think you had any of the ‘Let’s go drill an ANWR, let’s build more nuclear power plant types’ in the group. I think it came up with good recommendations for the most part, but it had two strikes against it. Some people may not have come who should have been there, and then as a result when the recommendations came out, even though they were fairly balanced, people looked at the list and said ‘This isn’t a balanced group.’ So that was an uphill battle to get those things accepted.”

More recently, the Aspen Institute sponsored a program on balancing the policies and politics of climate change proposals. The resulting report leaned heavily on analysis of mandatory GHG reductions and trading systems very similar to the one in the NCEP plan. According to the final report from Eileen Claussen of the Pew Center on Global Climate Change and Robert Fri, former president of Resources for the Future, “there was broad agreement that the paramount concern for a workable program is political acceptability. Indeed, without political acceptability, the most well-designed, theoretical program will never get off the ground.” The Bottom Line: Whether you think the National Commission on Energy Policy’s recommendation for a cap & trade carbon reduction system appears too extreme or too timid, it was consciously designed as the foundation of an integrated set of recommendations that target the “sweet spot” of political acceptance. “This is no Kyoto,” said Bill Reilly, the former U.S. Environmental Protection Agency head, who co-chaired the NCEP effort. That’s possibly the best argument the Commission can make as it attempts to get a fair hearing in Congress for its recommendations. And there is some indication that the timing may be ripe for consideration of more assertive carbon limits in the U.S.

Democratic Senator Joe Lieberman, who last term co-authored a “Climate Stewardship Act” with Arizona Republican Senator John McCain, claims there is a better chance for a carbon-limit bill now that Russia has ratified Kyoto. Lieberman believes that U.S. companies that operate globally will push for a consistent carbon reduction program. “Some of the large business entities, including power generators, will begin for reasons of business efficiency and predictability to press the administration and Congress to do something about climate change,” Lieberman said. Arthur O’Donnell is Energy Central’s Editorial Director. The Business Electric is found exclusively on Energy Central.

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Reader's Comments

Date	Comment
Rodney Adams 12.20.04	Arthus: I fully understand and agree with the need to reduce all air pollution - not just greenhouse gases, and I believe that some kind of free market trading system is the best way to do so. Where I normally stumble in understanding proposals that groups like NCEP make is that I do not understand why current polluters recieve their credits for free based on their current emissions. It is sort of like telling people that the faster that they drive now, the faster they should be allowed to drive on the highway. The entities that currently pollute our air by burning coal, oil or gas - and I include myself in that category - should pay enough for the priviledge to support a market based approach that would encourage the production of systems that do not pollute. Note that I did not say that it should encourage research and development - there are already several capable choices available that should be produced now. Rod Adams www.atomicinsights.com
Arthur O'Donnell 12.20.04	Rod, It all comes down to political acceptability. The current administration has said it won't accept a policy (like Kyoto) that causes economic "harm" and the Rs view most D proposals as punitive. So any acceptable program has to be seen as non-punitive. No carbon tax duirng the Bush/Cheney watch. I did not explain the allocation method for credits (that's was left up to Congress), but generally you get credits not for how much you produce but how much you REDUCE...and you apply them to expansions or trade them to others.
Len Gould 12.22.04	"Australia Draws Line With United States On Global Warming: Report" http://www.spacedaily.com/news/climate-04zzzzl.html An interesting link here, includes a graph of CO2 levels and some data, though is presented as (politically) more than it actually is. Hard to believe that this sort of info. (CO2/CH4 levels track historic temp., currrent levels higher than any measured in past 400,000 years) can simply be ignored. Rodney: "political acceptability" is the key. It's an artifact of our outdated "representative" (ha ha) democratic systems. Cheers though, soon to go the way of the Record Lables industry.
Rodney Adams 12.26.04	Arthur: I guess it is semantics, but it seems to me that a system that rewards based on how much you REDUCE is, in fact, rewarding you for past sins. A company that currently produces ZERO emissions - perhaps because it is a new company - does not get any credits if it begins producing power without producing emissions unless it buys the credits from a company that already is polluting. At least, that is the way that I understand the way that previous emission trading schemes have worked. When it comes to political acceptability, it is interesting to me that the organizations that get protected are not large voting blocks, but large contributors. The more I experience our current political environment, the more I realize that it is based on dollars, not votes. That is not really the democracy that our founding fathers designed or that I have sworn to protect and defend. Rod Adams
Arthur O'Donnell 12.27.04	Gee, Rod, where have you been living? Can I get a visa?
David Hirst 12.29.04	The beauty of emissions trading is that it maximises the collective welfare of everybody, or, in other words, it is economically efficient - indeed it is optimal so long as the allowances are given away. It ceases to be optimal if they are sold by a government unless the government returns all the proceeds in an optimum way. (Most people consider this unlikely.) But economic theory offers no guidance as to how best to allocate the emissions allowances among participants. So it works (even) if the allowances are given to the worst polluters. Other allocations merely transfer wealth among participants. So it is a political (and deeply unenviable) task. If the primary goal is to achieve the pollution reduction any wealth redistribution is secondary. Moral objections do not help the process, and may prevent the goal. So swallow the political practicalities, and lets see the reductions. Actually, the allowances are usually made on pollution emitted so long ago that allowances were unlikelly to contribute to the thinking of the polluters. This may be why the Kyoto baseline is 1990 .
Peter Balash 1.5.05	Arthur, Nice recap and reporting on the NCEP study. One correction, though. Coal-fired plants account for 80% of Co2 emissions from the electricity generation sector. Electricity contributes roughly a third, while transportation contributes over a quarter, of US Co2 emissions. What the NCEP study implies is that the allocation of carbon permits would only apply to electricity generators. If so, then transportation is let off the hook. However, transportation indirectly contributes to emissions reductions through the NCEP's CAFE proposals. Peter Balash
Sue Tierney 1.12.05	Dear Friends: As a member of the National Commission on Energy Policy, I have enjoyed seeing your thoughtful comments on this important issue. Thanks, Arthur, for beginning the dialogue, and thanks to the rest of you for keeping the conversation going. Sue Tierney
Arthur O'Donnell 1.12.05	Thanks, Sue. By all means keep us informed of the NCEP's efforts to be at the table when a national energy policy is drafted. ao'd

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