Between various consulting projects and a spot of vacation, I've struggled to keep up with the evolution of the Waxman-Markey climate change bill, officially H.R. 2454, the "American Clean Energy and Security Act of 2009". Reading through the bill's 932 pages was out of the question, though I hope to find time for at least a thorough skim once it gets closer to a House vote, perhaps later this summer. But while it contains many important measures, including a proposed national renewable electricity mandate, the core of the bill is its cap & trade provisions, and at the heart of those is its method for distributing emissions allocations and offsets, which I have just reviewed. The House Energy and Commerce Committee moved very far, indeed, from President Obama's ideal of a bill based on auctioning 100% of those allowances. That's probably a good thing, as I noted recently. However, the implications of the committee's choices for allocating those allowances are not so good. They heavily favor the electricity sector, largely at the expense of transportation. This flies in the face of the actual contributions to US greenhouse gas emissions from these sectors, and of their relative degrees of freedom for reducing emissions in the near future.
To understand how this version of cap & trade would work, you need to envision how its three strands would mesh. Total US emissions would be capped at a level that declines each year, beginning at 97% of 2005's emissions in 2012 and shrinking to 83% of 2005 in 2020, 58% in 2030, and a skimpy 17% in 2050. (The feasibility of actually achieving such reductions is a topic for another day.) In each of those years, emitters would have three choices for meeting these restrictions: They could physically reduce their emissions by investing in efficiency, changing their energy sources, or simply consuming or producing less; they could apply emissions permits received from the government or purchased at federal auction or from someone else with permits surplus to their requirements; or they could acquire emissions offsets from forestry and other qualifying activities, domestically or internationally.
Now, because greenhouse gases, once emitted, are entirely fungible, or equivalent in their impact on climate change, you might expect that once the Congress determined the total proportion of permits to allocate (for free) to current emitters, they might be distributed more or less evenly, so that all emitters would be in roughly the same position of needing to cut GHGs or buy extra permits or offsets. Instead, the Committee established an initial allocation to the electric power sector of 44% in 2012, declining gradually to 39% by 2025 and then rapidly phasing out between 2026-30. This allocation comes with the intent that electricity providers pass on the value of these allowances to consumers, presumably canceling out the cost of reductions or purchased permits required to meet the shrinking annual emissions caps. What makes this choice so bizarre is that the electricity sector accounts for the largest single block of US emissions: 41% in the Department of Energy's "flash" estimate of 2008 emissions, which incidentally showed a 2.8% drop in US emissions for the year.
Other stationary emissions sources also get a sizable free allocation, including 9% to natural gas distribution companies for the benefit of consumers, and 1.9% to home heating oil and propane users. Other allowances are assigned to encourage investments in energy efficiency and renewable energy, clean vehicle technology, and carbon capture and sequestration, or to protect trade-sensitive industries and support various causes, leaving an unspecified quantity for deficit reduction between 2012 and 2025. In fact, when you compare the allocations to our actual emissions, the single most exposed sector after permits are handed out is transportation fuels, which despite accounting for 33% of energy-related GHG emissions, are assigned only 2% of the free permits.
Now, I can hear all sorts of compelling justifications for this, ranging from the profitability of the oil industry, the need to encourage consumers to buy more efficient cars, and the promotion of energy security--though the bill appears to make no distinction between domestic petroleum sources that enhance energy security and imports that diminish it. But whatever the rationale, even if it simply boils down to more effective lobbying by utilities and other emitting sectors, the present version of cap & trade legislation would impose the heaviest burden on transportation fuel producers and consumers. Unlike their counterparts in electricity generation and power and natural gas distribution, petroleum producers, refiners and importers will have to pay for essentially all the permits and offsets they will need to meet their emissions targets, and the cost will be passed on to those who use their products. In other words, after you sift through all its complexity, Waxman-Markey's cap & trade system becomes in essence a targeted tax on gasoline, diesel and jet fuel.
The problem is that if the main driver here is climate change, and we really want big emissions reductions as soon as possible, this approach won't deliver that outcome. Utilities have more and better choices for producing low-emission power in the next decade or two, particularly with natural gas becoming cheap and abundant again, than refiners do for reducing the emissions of motor fuels or consumers and businesses for reducing the emissions from a car fleet, the turnover of which has been slowed by the recession and could be further impeded by the new CAFE regulations. In other words, actual emissions reductions look harder--and costlier--to achieve from transportation than from stationary sources, and Waxman-Markey would dole out free permits in a manner 180 degrees out of sync with that reality.
I have supported the idea of establishing a price for GHG emissions through cap and trade since long before I started writing this blog, but I must say I'm dismayed by the distorted version that has emerged from the Energy and Commerce Committee. If all they really wanted to do was tax petroleum products more heavily--and there are solid arguments in favor of that--then they could have done so without creating anything like the impenetrable bureaucratic intricacy that this bill would bequeath us. Unfortunately, Congressional action on emissions has become entangled by the overlapping but hardly congruent imperatives of energy security and climate change and the innate desire to shield consumers (voters) from anything that looks like a direct tax. What are the chances the Senate will strip out much of the bill's complexity and favoritism and deliver a simpler, cleaner (in all senses) piece of legislation?