Emissions bill overhauled to secure votes

March 3, 2010

WEATHER/

– John Kemp is a Reuters columnist. The views expressed are his own –

Prominent U.S. senators are set to substantially re-write climate legislation in a bid to secure the 60 votes needed for passage before Congress is engulfed by the mid-term election campaign.

According to well-sourced media reports that emerged at the weekend from conversations with aides engaged in the process:

(1) The single economy-wide cap-and-trade programme proposed by the American Clean Energy and Security Act (HR 2454) could be ditched in favour of sector-specific programmes for utilities, transportation and manufacturing. Utilities would be covered by an allowance trading system. Motor fuels would be subject to something like a tax. Energy-intensive manufacturers would eventually be covered by a trading programme but with a delayed start date.

(2) Free allocations of allowances to power and gas utilities to cushion the impact on household bills could be abandoned in favour of full auctioning, with revenues rebated directly to households. Proposals could resemble the cap and refund system advocated by Senators Maria Cantwell (D, Washington) and Susan Collins (R, Maine) (S 2877). They would also be consistent with the rebate approach recommended by California’s Economic and Allocation Advisory Committee (EAAC) for the state’s own cap and trade scheme.

The modifications would substantially re-write the main climate bill (S 1733) sponsored by Senator John Kerry (D, Massachusetts) which has been endorsed by the administration and received cautious support from Senators Joseph Lieberman (I, Connecticut) and Lindsey Graham (R, South Carolina).

They will be subject to frantic lobbying, especially from power and gas producers, and could yet be altered. But they retain the essential features of cap and trade (a declining cap on emissions, and allowance trading), while modifying incidental ones (such as the distribution of allowance values, and whether the system covers all sectors or just the largest emitters) to improve the bill’s viability.

THE ART OF THE POSSIBLE

The modified bill is likely to be embraced by the White House and Democratic leaders in Congress who are chastened by a string of election defeats and anxious to move on to more popular issues.

If Congress is ever going to enact emissions legislation and send it to the president, the modified version of S 1733 is the last, best opportunity. It represents a compromise.

It will incense utilities and trading desks of banks on Wall Street. And it will not satisfy market purists and maximalists within the environmental movement.

But it is now the only bill on offer. Senator Graham has reportedly said “cap and trade is dead“.

If there are still not enough votes, there is no prospect a “better” bill will be approved in the next Congress — which will almost certainly see diminished Democratic majorities in both chambers, and be riven by partisanship as the two major parties gear up for the presidential election battle in 2012.

If they want a bill at all, environmental groups and power producers will have to swallow their doubts and embrace a modified version.

It would at least commit the country to meaningful emissions reductions, provide the certainty energy companies need to plan future investment, and possibly unlock binding commitments from other countries.

BILL’S SEVERABLE ELEMENTS

Proponents of cap and trade schemes argue that they are an integrated package.

Each element is an essential part of the whole that cannot be changed without sacrificing the programme’s efficiency and integrity. In fact cap and trade programmes consist of several separate elements that are severable and give policymakers a menu of choices:

(1) Emissions can be regulated through a single economy-wide system (applying to all sources) or a series of different programmes (applying to one or more sectors).

(2) Programmes may rely exclusively on market-based mechanisms or a combination of market-based price incentives, taxes and mandatory controls.

(3) Allowance prices may be free to vary without restriction, or subject to caps and floors to limit the degree of volatility.

(4) Allowances can be auctioned with the proceeds given to households or used to reduce other taxes, or allocated to utilities and other emitters (which is conceptually the same as selling the permits and then handing the revenues back to emitters).

BUYING SUPPORT, NOT ENOUGH

The main climate bills were carefully crafted to maximise support among legislators and cement an alliance between environment campaigners, utility companies and Wall Street.

Campaigners got a hard cap to guarantee a specified volume of reductions would be achieved. Utilities were protected by free allocations. Wall Street got the unfettered right to participate in a giant new market.

In fact the current proposals stick closely to the “Points of Agreement” published in January 2009 by the Edison Electric Institute (EEI), which lobbies on behalf of shareholder-owned power companies.

Meanwhile votes were purchased from selected legislators by giving free allocations to selected industries (which is the same as handing out large chunks of revenue).

Offsets were permitted to keep the rise in energy prices to a politically acceptable level. In the end, though, the package has not attracted sufficient backing from Democrats in industrial and coal-producing states, or Republicans, to meet the Senate’s 60-vote threshold.

The modified bill retains the cap while changing other elements to broaden its support. The most controversial changes are the decision to restrict cap and trade to a single sector initially (power generation) and hand allowance values back to households rather than utility companies. Neither is fatal to the scheme’s integrity.

CAP AND REFUND IS SUPERIOR

Any cap and trade programme is likely to be regressive. To be effective, it must raise the price of energy and energy-intensive items, which will hit households in the lower half the income distribution harder: they spend less on energy, because they drive and fly less, and live in smaller homes, but it represents a larger proportion of their income.

It would also reduce demand for energy and energy-intensive industries. While losses to shareholders would be diffused (because most investors hold diversified portfolios) the impact on employees in affected industries and their communities would be much more concentrated.

How allowance values are allocated makes a crucial difference to whether this regressive aspect is offset or not. Under a lump-sum rebate programme, low-income households could actually be better off. The size of the rebate would be larger than the average increase in their spending on energy and energy-intensive goods. The cost of emissions reductions would fall mostly on high income earners.

In contrast, giving allowances to energy producers would make cap and trade even more regressive. In a letter to Senator Jeff Bingaman dated July 2007, Peter Orszag, then-director of the Congressional Budget Office and now President Barack Obama’s head of the powerful Office of Management and Budget wrote:

“On average the value of the CO2 allowances that producers would receive would more than compensate them for any decline in profits … As a result, the companies that received allowances could experience “windfall” profits. Because those profits would not depend on how much a company produced, however, they would be unlikely to prevent declines in production and resulting job losses …[t]hose profits would accrue to shareholders, who are primarily from higher-income households, and would more than offset those households’ increased spending on energy and energy-intensive goods and services”.

No wonder EEI supports free allocations. But refunds might be a way to build more political support because they recycle revenues in a visible way that gives ordinary households some sense they are being “compensated” for increasing energy prices.

Meanwhile a utility-sector only programme would postpone the political problem of how to manage the disruption to manufacturers and keep high volatility in emissions prices away from the hyper-sensitive driving sector. It might be theoretically messy, but the political logic is compelling and it is now the only way forward.

Image shows a couple walking the grounds of the U.S. Capitol Building as snow falls in Washington, January 30, 2010. REUTERS/Jason Reed

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This had little or no chance of passing before the fraud from East Anglia, the IPCC, and other sources came to light. With us still in a recession, and with public support flailing, it is highly unlikely any of this will pass in the short term. Obama’s window of opportunity has closed.

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