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Cut out the carbon middleman

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The opposition by the Republicans to the idea of carbon trading is a bit baffling, given that it is a classic Wall Street-driven solution for dealing with a serious problem.

Sure, carbon trading, which is the centerpiece of the Obama administration-backed American Clean Energy and Security Act, would carry a cost for consumers and companies that emit too much in greenhouse gases. But the economic impact of the bill’s so-called cap-and-trade scheme would be modest — costing the average household $175 a year in added expenses, according to the Congressional Budget Office.

What’s actually more baffling is President Obama’s infatuation with this trading scheme, which will benefit the global environment, but will also fatten the wallets of Wall Street traders. A simple tax on polluters and carbon producers would get the job done without the kind of wealth transfer to the gilded class that Republicans generally support.

It’s easy to see why Wall Street, which has been waiting for carbon trading to ignite in the United States, favors the measure.

WashPost poll exposes cap-and-trade divisions

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This story from today’s Washington Post is one of those where the headline could have been “Cap and trade plan divides voters” as easily as “Limits on emissions have wide support”.  Public opinion on climate change action is very sensitive to how the plan (and the consequences) are framed. 
 
There is fairly widespread approval for the government to take some action to limit greenhouse gas emissions — but only if the resulting rise in energy costs stays low.  If it involves sharper rises in the cost of energy, support begins to erode rapidly. 
 
It is one reason that proponents of climate-change action have settled on a very gradualist approach — one which deliberately defers and obscures costs — as the best way to get a cap-and-trade based system through Congress.

“Three-quarters of Americans think the federal government should regulate the release into the atmosphere of greenhouse gases from power plants, cars and factories to reduce global warming, according to a new Washington Post-ABC News poll, with substantial majority support from Democrats, Republicans and independents.

from John Kemp:

Log-rolling in the Waxman emissions bill (HR 2454)

The climate change bill is a spectacular example of log-rolling and special interest lobbying by the firms on K-Street. 
 
The attached chartbook is a first attempt to analyse the impact of the cap and trade programme set out in the American Clean Energy and Security Act 2009 (HR 2454) as approved by the Energy and Commerce Committee of the House of Representatives last week. 
 
http://graphics.thomsonreuters.com/ce-insight/EMISSIONS-BILL-HR2454.pdf
 
The bill is very complex and almost unreadable in its current form (a cynic might suggest the complexity is a deliberate attempt to obscure the bill's impact in as a strategy to get it through Congress). 
 
It does not help that the bill is largely drafted as an amendment to the Clean Air Act (CAA).  The cap-and-trade programme would be enacted as a new Title VII to the CAA. 
 
The programme is set out as Sections 311-321 of the American Clean Energy and Security Act 2009.  But if it is passed into law, it will be referred to as Sections 701-793 of the Clean Air Act.  The result is that all the parts of the bill have two (alternative) numbers.  Be warned! 
 
Shorn of the detail, though, the bill is fairly straightforward. 
 
It sets out a list of "covered industries" that would be required to buy emissions allowances to cover their annual emission of greenhouse gases (mostly electricity producers, natural gas suppliers and industries that are intensive users of fossil-fuel derived energy). 
 
It also establishes an annual number of allowances that will be issued (each permit grants the right to emit one metric tonne or carbon dioxide or equivalent).  The number of allowances issued gradually tapers down to ensure emissions are reduced to 97% of their 2005 level by 2012, 83% by 2020, 58% by 2030 and just 17% by 2050. 
 
Allowances can be traded, banked and borrowed in a free market. 
 
But the interesting aspect of the bill lies in the INITIAL allocation of allowances (see Charts 3-6 in the attachment). 
 
The government could have allocated allowances in proportion to the volume of carbon dioxide emitted by different industries and firms in the baseline period (2005-2010) and then gradually reduced the allocations pro rata.  That would have been the "neutral" approach. 
 
Instead the bill opts for a discretionary allocation of emissions allowances that reflects a complex mix of environmental objectives and the need to secure support from coal-producing and heavy industrial states. 
 
By divorcing the initial allocation from emissions in the baseline period, the bill has in effect created a new form of "currency" and an alternative "carbon budget" that can be used to reward particular industries by granting them valuable emissions rights that can be used to support business activity or sold for conventional dollars. 
 
The largest part of this "currency" is being used to shield electricity, gas and heating oil consumers from the impact of rising emissions prices until well beyond 2020 (see sub-sections (a) to (c) in Charts 3-6). 
 
A small fraction is being used to offset the impact of higher emissions and energy prices on industries that are especially energy intensive and open to international trade (see sub-section (e) ). 
 
Some of the permits are being auctioned (sub-section (d) ). 
 
But large quantities will be used to further a range of "clean energy objectives" -- in effect granting valuable, saleable rights to companies promoting new technologies such as carbon sequestration and storage, energy efficiency and renewables, and clean vehicle technologies (sub-sections (g)-(l) ).  These technologies will receive as much as 10 percent of the initial permit allocation over the next decade.

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