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

President Barack Obama read the last rites for national cap and trade in 2010 on Feb. 2, while senior Democrats in the House of Representatives prepared to put a stake through its heart to ensure the Environmental Protection Agency does not try to resurrect it unilaterally without congressional approval.

Obama finally bowed to the inevitable and admitted cap and trade might need to be separated from a more popular green jobs bill in the Senate, a shift that would effectively end prospects for cap and trade in 2010.

In a question-and-answer session the president commented: “The only thing I would say about it is this: We may be able to separate these things out. And it’s possible that’s where the Senate ends up.”

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

The Republican Party’s stunning special election victory in deep-blue Massachusetts has killed any lingering prospect of passing cap-and-trade legislation in 2010, and with it international negotiations to produce a binding climate accord before the end of the year.

With no chance of U.S. action in the short term, emerging markets such as China and India are under no pressure to accept mandatory emissions reduction targets. If climate legislation is eventually revived in the United States, in 2011 or beyond, it may come back in the form of a carbon tax rather than a permit trading program.

TO RETREAT OR REINFORCE? Perhaps the most important decision any general has to make is when to stand and fight, and when to beat a retreat in order to fight another day. The Massachusetts special election to fill the Senate seat left open by the death of Edward Kennedy confronts President Barack Obama with a similar strategic choice.

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

LONDON – Yesterday’s announcement by Senator Byron Dorgan (Democrat, North Dakota) that he would not seek a fourth term in November, coupled with today’s expected announcement by Senator Chris Dodd (Democrat, Connecticut) that he won’t seek a sixth term, will remove two veterans, once secure legislators from the Democratic caucus. It highlights the mounting problems confronting congressional Democrats facing voters in November’s midterms amid high unemployment, a relatively unpopular agenda led by the administration, and concerns about the party’s capture by special interests.

Dodd’s retirement is not surprising, given his plummeting poll numbers and criticism for being too close to the banking and insurance industries he regulates as chairman of the Senate Banking Committee but which have been major campaign contributors.

Despite trying to reinvent himself as a populist in recent months, the legislation he has worked on has sometimes appeared to show too much favouritism for the industry. He has also run into criticism for receiving VIP mortgages in 2003 from Angelo Mozilo’s failed Countrywide Financial.

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

How much are U.S. households prepared to pay to avert the threat of climate change? According to the latest polling data published by the Washington Post, the answer is not very much, probably not much more than $25 per month or $300 per year.

Most respondents (65 percent) believe the federal government should regulate greenhouse gases from sources like power plants, cars and factories, including those who believe this strongly (50 percent) or somewhat (15 percent). Only a minority think the government should not regulate them (29 percent).

While the margin favoring regulation has narrowed since the middle of the year (when it was 75 percent to 22 percent), probably in response to a vigorous opposition campaign, there is still a clear majority in favor of taking some action on climate change.

– John Kemp is a Reuters columnist. The views expressed are his own — Households in the United States and the United Kingdom are about to experience a revolution in the way they pay for electricity.Over the next decade, almost all homes will be fitted with “smart meters” recording the time as well as the quantity of electricity used. Most customers will face some form of dynamic pricing that relates the price they pay for each kilowatt hour (kWh) to the actual cost of generating it.Smart meters and dynamic pricing are critical to using the generation and transmission system more efficiently while accommodating a growing share of renewables (wind, solar) on the grid without sacrificing reliability.VARIABLE DEMAND Power cannot be stored, and the amount demanded by customers (”load”) is highly variable, so system operators hold large amounts of generating capacity in reserve to cope with demand peaks or outages when generating units become unavailable.Many generating units must be built and maintained even though they may only be used for a few hundred hours each year. The greater the variability in load the more idle capacity has to be maintained. In general, usage is higher during the day than at night, and higher in summer than winter, owing to increased airconditioning demand.The problem will get worse over the next decade as the share of generation from renewables such as wind and solar, which cannot be scheduled in advance, increases. Even more back-up capacity will need to be held in reserve in case renewable power is not available at peak times. CAISO LOAD CURVE The attached chart shows total demand across the power grid run by California’s Independent System Operator (CAISO) over the last twelve months. It covers about three quarters of consumption across the state.While “average” load is around 27,000 MW, load rises sharply during daytime hours in the summer when airconditioning demand is highest.On almost all hours throughout the year (more than 98 percent) load is less than 40,000 MW. But on a very small number of hours (less than 2 percent) load increases substantially, sometimes as high as 45,000 MW. Enormous amounts of capacity must be kept in reserve to meet the peak demand experienced for less than 180 hours a year.Even the distribution’s tail understates the amount of capacity kept in reserve, since the system is designed to operate with a safety margin, ensuring peak demand can be met even if one or more large power plants becomes unavailable due to scheduled maintenance or a fault.The safety margin is set so the system will be unable to meet peak hourly demand no more than nine times a century. If peak demand is 45,000 MW, the system needs to carry a substantial cushion of spare capacity above this level.The safety margin is normally set to at least 10 percent. So CAISO needs to maintain access to more than 50,000 MW of capacity (45,000 MW peak load plus 10 percent), even though the system “typically” needs to meet only about half that power demand. AVOIDED CAPACITY If CAISO could reduce demand on just the 2 percent of peak hours each year, it could avoid up to 5,000 MW of load and the need to maintain more than 5,000 MW of idle capacity.The load curve’s steep tail explains why demand response strategies designedto curb power use at peak periods have become one of the highest priorities for governments and system engineers on both sides of the Atlantic.At the moment, demand response is largely restricted to industrial power customers, especially those with large heating and cooling loads, many of whom are on interruptible contracts allowing the system operator to order them to shed load for a period from 30 minutes to several hours at peak times, in exchange for rebates or a lower tariff.In future, officials hope households can be brought within the demand management system by fitting them with smart meters that will vary prices significantly at peak times and/or allow the utility to reduce non-sensitive loads such as refrigerators and airconditioners when the system is stretched.SMART METERS Under existing plans, most residential customers in California will be fitted with smart meters by 2013. Britain’s Department of Energy and Climate Change has announced plans to have all households fitted with smart meters by 2020.Smart meters will record consumption in five-second or hourly intervals, and be capable of transmitting the data back to a central control and billing centre. Each meter will have a display unit showing both usage and current prices.Meters will be capable of communicating with programmable thermostats and other household electronic devices. In theory, control devices could be instructed to turn up airconditioning systems by a degree or two or shut down non-essential loads when prices hit a critical level. DYNAMIC PRICES Once meters have been rolled out, households will be shifted from fixed-rate tariffs to variable ones. Current systems allow customers to “opt-in” to variable pricing but there is likely to be less choice in future.The simplest time-of-use (TOU) tariffs would establish a relatively simple system varying prices by time of day, day of week, and perhaps season of the year. Prices would be fixed in advance. The intention is to encourage households to “load shift”, moving as much consumption as possible from peak daytime periods to the night-time when there is plenty of spare capacity available.TOU tariffs have already been implemented for many industrial and residential customers. But smart meters would enable much more radical reform.In the most ambitious system, customers would face real-time prices (RTP) linking the price they pay directly to hourly prices in the wholesale power market.In an intermediate system, critical peak pricing (CPP), customers would pay very high prices for a small number of peak hours each year — perhaps no more than three hours a day for a maximum of ten days each year. These critical periods would be announced a day or so in advance. The rest of the time, customers would be on a standard TOU tariff.The aim of both RTP and CPP systems is to provide customers with a strong incentive to cut all avoidable demand during the few hours when the system is most stretched. REDUCED BILLS? While customers would face high prices at peak periods under all three systems, overall bills could be lower if generating capacity can be used more efficiently and the need to maintain so much idle capacity in reserve is reduced.Much would depend on how savings are distributed between customers and shareholders. But the potential is enormous.Peak load across the United States is currently 810 gigawatts (GW) and forecast to grow by an average 1.7 percent a year to 950 GW in 2019. But in a report for the U.S. Department of Energy, the Brattle Group estimated 2019 peak demand could be lowered by between 82 GW and 188 GW through the wider deployment of demand response linked to smart metering and dynamic prices.If demand response technologies were deployed in almost all homes across the United States, coupled with a strong dynamic pricing system, almost all forecast peak demand growth in the next ten years could be avoided.Such an ambitious demand response program would avoid the need for a huge amount of new generation and transmission infrastructure, while making it easier to accommodate variable sources such as wind and solar by matching them with increased variability in demand.Full demand response is unlikely to be achieved (or be cost-effective). Policy will instead blend demand response with more investment in renewables and construction of additional gas-fired generation and transmission capacity to provide back up.

– John Kemp is a Reuters columnist. The views expressed are his own –Energy efficiency will have to make the single most-important contribution if policymakers are serious about limiting greenhouse gas emissions and dampening growing demand for fossil fuels.Energy efficiency will not remove the need to invest in large volumes of wind, solar and nuclear generation, or in technology for carbon capture and storage, but it does form the third leg of the triad.In the United States, nowhere have efficiency initiatives been given higher prominence and become as deeply entrenched in the public policy process as in the state of California. In response to a series of power crises, the state has adopted some of the toughest standards anywhere in the world.The 1974 Warren-Alquist Act, signed by then-governor Ronald Reagan, created the State Energy Resources Conservation and Development Commission, now renamed the California Energy Commission (CEC), with a mandate to develop minimum efficiency requirements for new construction and appliances.Efficiency improvements have been enforced through a strict standard-setting process.Title 24 of the state code of regulations prescribes detailed requirements for all new buildings and major redevelopments in the state. Title 20 establishes standards for appliances sold to in-state customers, including heating and cooling systems, lighting units and refrigerators. Both have been repeatedly tightened to require higher levels of efficiency.The objective is to limit the need to build new generation and transmission capacity by cutting electricity consumption in heating and lighting applications.Measuring the amount of generation and greenhouse emissions avoided this way is difficult since it involves a counterfactual — comparing the amount of energy actually used and the amount that would have been needed in the absence of conservation measures — which can never be known for certain.But by any yardstick, the amount of generating capacity and greenhouse gas emissions avoided by these “negawatts” has been substantial.THE ART OF ENERGY EFFICIENCYPrior to 1974, California’s installed generating capacity was 30 Gigawatts (GW) and growing 6 percent per year, with more than half the annual increase required to supply new homes and buildings.California Energy Commissioner Art Rosenfeld, one of the godfathers of the efficiency movement, claims Title 24 building standards cut energy use per square foot for heating and cooling in new buildings by 50 percent in the ten years between 1975 and 1985. A decade later savings had avoided the need to build 2.5 GW of new generation.Rosenfeld claims even larger success for standards to improve domestic refrigerators. Progressively tighter state and federal regulations for new appliances, as well as improvements in technology, have cut annual energy consumption from an average of 1800 kilowatt hours (KWh) in 1974 to 450 kWh in 2001.Consumption has been cut even as the typical refrigerator’s volume has grown 10 percent from 18 cubic feet to 20, making a compound efficiency gain of 5 percent per year.Rosenfeld estimates the amount of energy saved, in California and now nationwide as standards have been adopted at federal level, is equivalent to around 50 GW of generating capacity (see the diagram on page 48 of Rosenfeld’s famous paper on “The Art of Energy Efficiency”.CPUC ADOPTS AMBITIOUS TARGETThe drive to reduce power consumption has accelerated following the state’s devastating power crisis in 2000-2001.”Energy efficiency is the first priority in California’s loading order for energy resources” (ahead of solar, wind, nuclear or fossil fuels) according to the California Public Utilities Commission (CPUC), which regulates electricity rates charged by investor-owned utilities (IOUs) in the state.CPUC has now included energy efficiency objectives in its IOU rate-setting process. Utilities receive an increase in the rate charged per kilowatt hour in return for meeting certain load-reduction targets.CPUC has adopted targets that would cut peak generation about 450-500 MW per year between 2006 and 2013. Assuming they are met, California’s four IOUs would avoid the need for around 4 GW of generating capacity by the end of 2013 (roughly four large nuclear or coal-fired plants)For comparison, the Western Interconnection, of which California is the largest component, has around 178 GW of generating capacity at present, so the avoided capacity would be equivalent to around 2 percent of all generating capacity on the western power grid.CASH FOR CLUNKERS, REDUXCalifornia’s approach is now being adopted by the Obama administration (Energy Secretary Steven Chu is a self-described “energy efficiency nut”).The administration has already run a cash-for-clunkers programme to provide a boost for automakers while giving customers an incentive to retire older, less efficient vehicles in favour of modern cars that achieve higher mileage per gallon.But the American Recovery and Reinvestment Act also provides $296 million of funding for State Energy Efficiency Appliance Rebate Programs (SEEARP) — a cash-for-clunkers system to replace aging clothes washers, refrigerators and room air conditioners with more energy efficient versions.California’s share is $35 million, and the state proposes to make rebates available for purchases made during a one-month period from March 17 and ending on April 22, 2010. Rebates will be offered for 125,000 washing machines, 150,000 refrigerators and 100,000 air conditioners.”COMFORTABLE CONSERVATION”Rosenfeld has calculated that the amount of energy used to produce a dollar of GDP fell by a factor of 4.5 between 1845 and 1998, after adjusting for inflation, a compound annual improvement of 1 percent, driven by market forces.But the average concealed substantial variations. Conservation rose to as much as 4 percent per year following the first oil shock, until real oil prices fell in the late 1980s and through the 1990s, slowing the pace of improvement.If the rate could be raised to 2 percent per year — double the long-term average but just half the rate achieved after the first oil shock — energy consumption per unit of output could be cut by two-thirds in just over 50 years.”Comfortable conservation” (getting the same quality of heat, light and output for a fraction of the energy by reducing waste) is now the central objective for the coterie of physicists advising the White House, and is likely to be one of the central policy themes over the remaining years of the Obama administration.Such gains are perfectly feasible. U.S. motor manufacturers achieved even larger improvements in engine efficiency in the early 1980s, though the gains were used to build larger and more powerful vehicles rather than reduce fuel consumption.The real prize, however, is in the emerging markets, where most appliances and buildings still operate at just a fraction of the efficiency of their advanced-country counterparts, and where the scope for efficiency gains is huge.In effect, the only way to continue raising living standards, especially in developing countries, while limiting emissions is to take the success achieved in California refrigerators and replicate it across all the other energy-consuming sectors on a worldwide scale.

LONDON, Nov 19 (Reuters) – Donald Kohn, the influential vice-chairman of the Federal Reserve, has rejected calls for the central bank to incorporate asset and commodity price movements into its monetary strategy.

Kohn’s view represents only one strand of thinking with the Federal Reserve System. There is no consensus and the presidents of at least some of the regional Fed banks may take a different view.

But his views represent the view of the Fed establishment, especially at the Board of Governors in Washington. The headquarters establishment looks set to oppose any reformulation of policy that would see the Fed take account of commodity and equity prices explicitly.

If their views prevail, the Fed will continue to ignore the run up equity values and soaring oil prices. It will not start to remove excess liquidity from the system, let alone raise interest rates, until there are clear signs of self-sustaining recovery on Main Street and some reduction in the output gap.

- John Kemp is a Reuters columnist. The views expressed are his own –As hopes for reaching a binding agreement to cut greenhouse gas emissions at the Copenhagen summit die, climate negotiators could learn useful lessons on how to structure the negotiations from the multiple rounds of trade talks within the GATT/WTO framework.Climate negotiations are about limiting carbon dioxide emissions, but the negotiators are also hammering out a complex economic instrument that will define the distribution of production, energy use and income in the next few decades. It is the agreement’s profound economic effects that are making it so hard to reach a final deal.While the stalled negotiations on the Doha Round might make it seem likely an unlikely role model, the GATT/WTO process has successfully created a legal framework for liberalising world trade through eight successive rounds of increasingly complex negotiations, as well as a dispute settlement system accepted by all major countries.In the process, negotiators have already had to resolve many of the difficult issues bedevilling attempts to reach an emissions deal:* How to obtain treaty commitments from a huge range of countries at different stages of economic development.* How to handle negotiations with the United States, given the peculiar nature of that country’s constitutional arrangements.* How to ensure countries live up to their commitments and resolve subsequent disputes about treaty implementation.Climate negotiators could usefully apply many of these lessons to their own agreement. As Copenhagen falters, they may need to rethink the “road map” for talks to improve the chance of bringing them to a successful conclusion.FRAMEWORK AND DETAILED SCHEDULESThe 1947 General Agreement on Tariff and Trade (GATT) established a legal framework and general principles for trade liberalisation. But detailed tariff reductions as well as commitments on subsidies, dumping and technical barriers were left to a later series of trade rounds. These commitments were then turned into schedules of concessions for each member country and incorporated by reference into the central treaty.Negotiations started with a series of limited tariff reductions that were gradually made more ambitious. Part IV of the GATT, added in 1966, guaranteed developing countries “special and differential treatment” to encourage them to become involved in the tariff-reduction process and make their own binding commitments.For each round, political leaders set broad objectives at the outset, but the detailed exchange of “concessions” was handled by lower-level officials in a Trade Negotiations Committee (TNC).Something similar is needed for the climate talks. President Barack Obama has already backed a “two-step” process. Political leaders would aim for an “operational agreement” at next month’s summit while leaving a legally binding agreement until 2010 or later. [ID:nSP280582] The aim is to ensure agreement on the big issues is not held hostage to myriad disputes over the details.It might make sense to separate an agreement on the broad framework (including establishment and review of targets, trading emissions allowances, technology transfer, funding, and dispute settlement) from the details (including specific reduction targets and how much developed countries pay their developing counterparts to help mitigate the costs of technology upgrades).It might also make sense to agree fairly easy reductions in the first round, then hold further negotiations in coming years to make targets more ambitious, using salami-slicing tactics rather than a big-bang approach. This would also allow developing countries to adopt modest emissions cuts in round one, with the aim of toughening them further in subsequent talks.But for a two-step process to work, political leaders must give clear instructions to lower-level officials responsible for detailed negotiations (including clear scope for eventual concessions). If not agreement will become bogged down over relatively small differences in percentage reductions, as the Doha Round has become stalled over farm subsidies and tariff cuts for developing countries.THE PROBLEM OF SENATE RATIFICATIONTrade negotiators are already used to the idea that an agreement is subject to a “double lock.” Deals require approval at international level and by the U.S. Congress (either by a two-thirds majority in the U.S. Senate if the deal is presented as a treaty, or a simple majority in both houses if the deal is presented as ordinary legislation).The existence of this double lock confers an advantage on the United States since other countries have to negotiate twice — once with the administration and then again with Congress. Having given one set of concessions to the president’s officials to secure a deal, other countries may have to make even more concessions to get the deal approved by U.S. legislators.To encourage countries to make meaningful concessions without fear the final deal will be re-opened, U.S. presidents have often been required to obtain “fast-track” negotiating authority binding Congress to a straight up-or-down vote within a set time on the results of a trade round.Negotiations are usually structured as a “single undertaking” in which every commitment or concession is part of a whole and indivisible package and cannot be agreed separately: “nothing is agreed until everything is agreed.”In terms of sequencing, trade negotiators have usually sought to reach an international agreement first and then presented the deal for congressional approval.Until now, the climate negotiations have been using the opposite approach. The Obama administration has sought to obtain an ambitious climate bill including cap-and-trade from Congress (HR 2454, S 1733) and then use this to persuade developing countries such as China to offer significant emissions reductions at the international level.But experience with trade negotiations suggests that an international deal precedes U.S. action, and does not come after it. It is unlikely Congress will agree to stringent targets without some assurance other countries will follow suit, including large future emitters such as China and India. So the international track may need to move first, or at least in parallel.The Obama administration needs to harvest a number of provisional commitments from its international partners to have any hope of getting a climate bill through the Senate. If it is structured as a single undertaking, the various parties would offer tentative commitments. Once a deal is done, it would be taken back to the Senate to be incorporated into U.S. law.The only question is whether the president would need to obtain some sort of fast-track authority. This is probably not necessary as long as the president’s Democratic Party controls both houses of Congress with comfortable majorities.But it does set a deadline for a deal. Negotiators would need to reach agreement by next summer, well ahead of the 2010 mid-term elections, unless the Democratic Party appears on course to retain comfortable majorities, in which case negotiations could take longer and still reach a successful conclusion.DISPUTES, NULLIFICATION, IMPAIRMENTU.S. lawmakers are already suspicious that other countries will not adopt meaningful targets or will cheat on those they do agree. So any climate deal will need a mechanism for settling disputes. If not, countries are likely to retaliate unilaterally against partners they believe are not living up to their commitments, which could unravel the whole system.From the beginning, GATT Article XXIII allowed a country to request formal consultations with another treaty member if it believed expected benefits under the agreement were being “nullified or impaired,” and this has been worked up into an increasingly formal and effective dispute settlement system.If emission targets and aid packages are structured as part of a mutual exchange of concessions among treaty signatories, so one country’s targets are conditioned on other countries meeting their own, the climate treaty will need a similar dispute mechanism.Rather than attempt to create one from scratch, it would probably be better to use the WTO system as a template and modify it to take account of the climate accord’s unique characteristics.