Under pressure from the Obama administration, the House Energy and Commerce Committee has put forward its proposal to reduce greenhouse gas emissions in the US. The plan calls for the creation of a cap-and-trade market, as the mechanism to begin reducing the United States’ greenhouse gas emissions. While the US currently produces roughly 20% of the world’s annual emissions, the new bill won’t see US emissions drop below 2005 levels until 2026. James Handley from the Carbon Tax Center believes not only that cap-and-trade is a flawed system in general, but that the current plan has been made even worse by way of concessions to the energy companies, big coal in particular. The result is a bill, according to Handley, that is left unlikely to achieve needed emission cuts, likely to create serious financial instability, and incapable of protecting the most vulnerable from its intended hike in energy prices.
Story Transcript
US to crack down on emissions?
Producer: Jesse Freeston
JESSE FREESTON, TRNN (VOICEOVER): As reports of vanishing multi-year ice in the Arctic return to the news, the US Congress is in the midst of constructing its attempt at a comprehensive environmental policy. At the center of the debate is how to best reduce greenhouse gas emissions. Approaches have broken down into three basic categories: cap-and-trade emission credits markets, carbon taxes, and straight-up regulation of carbon pollution. And while experts and advocates outside the walls of Congress have been calling for varieties of all three, President Obama and leading members of the Democratic Party have put strict limits on the debate inside Congress.
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Courtesy: C-SPAN
May 13, 2009
BARACK OBAMA, US PRESIDENT: And I once again call on Congress to send me legislation that places a market-based cap on carbon pollution, which will then drive, incent, the kind of innovation and dynamic, new clean-energy economy that can create jobs and new businesses all across America. So this is—.
FREESTON: The result is the Waxman-Markey bill, a 900-plus page proposal that includes the creation of a cap-and-trade emissions credit market.
JAMES HANDLEY, CARBON TAX CENTER: The idea is to—instead of having a regulatory approach where you would tell each emitter, say each power plant or each factory or each automobile, how much to reduce, and specify even—some regulations would specify the technology—is to create some flexibility about how to do that, and set overall limits, and let the players in the system choose how to make the reductions most efficiently. So that’s the basic idea of cap-and-trade. One of the problems with that is it creates volatility. Cap-and-trade is what they call a quantity-based mechanism, as opposed to a price mechanism. You can set either the quantity of emissions or the price of emissions, but since one variable depends on the other, you can’t set both. So you set the quantity of emissions, and under cap-and-trade, the price fluctuates. And what we’ve seen in cap-and-trade systems elsewhere—they have one for SO2 emissions in the United States, and the European Union has started a cap-and-trade system—there are some pretty wild price swings in emission allowance prices.
FREESTON: Proponents of cap-and-trade claim it will give rise to technological innovation. Handley claims that the wild price behavior discourages investment and gives rise to another kind of innovation—speculative finance.
HANDLEY: It creates a secondary market where people are setting up derivatives. If you’re a coal-fired power plant and you don’t want to worry about the price swings in emission allowance prices, you can buy a hedging instrument, a derivative, that’ll say, we’re going to flatten out the price, basically. If it goes up, we’re going to pay you the difference in price on some particular day in the future. So it’s a way to basically buy an insurance policy. But what that means is there’s another side of that transaction and there’s a whole secondary market that mirrors the real market in carbon allowances. And if you kind of think about what’s happened with the mortgage-backed securities in the last year, that was an example of a primary market which also had a secondary market that was actually in some ways larger, in terms of the capital involved, and unregulated, the derivatives market, that—in some ways it becomes the tail wagging the dog. The derivatives market drives the price of the of the primary market, and so you get extreme fluctuations and speculative bubbles. What the House Ways and Means Committee has been considering is skipping the whole trading aspect and just, predictably, setting a price, which people call a carbon tax, a carbon price. It’s a way to gradually increase the costs of emissions, which has the same effect of cap-and-trade, of creating an incentive for reductions and an incentive for investment in alternative energy and in green energy, and an incentive for making investments in efficiency.
FREESTON: Any attempt to put a cost on carbon, either through cap-and-trade or through a carbon tax, will increase the cost of energy. But who is going to bear the brunt of that cost increase?
HANDLEY: And it’s particularly a problem for low-income households, because they spend more of their income on energy than people at the high end. And the total amount is much more at the high end: the rich people fly more; they live in bigger houses; they drive less efficient and bigger automobiles. But as a percentage of income, the low-income people are hurt more.
FREESTON: Handley argues that the revenue created by a carbon tax can be used in various ways, such as dividends to the poor, to compensate for its ill effects. Cap-and-trade could also create a revenue stream by auctioning off the carbon emission allowances to the emitters, a strategy that Obama stressed during his campaign.
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Courtesy: ABC
January 5, 2008
OBAMA: I think a cap-and-trade system makes more sense. That’s why I proposed it, because you can be very specific in terms of how we’re going to reduce the greenhouse gases by a particular level. Now, what you have to do is you have to combine it with a 100 percent auction. In other words, every little bit of pollution that is sent up into the atmosphere, that polluter is getting charged for it. Not only does that ensure that they don’t game the system, but you’re also generating billions of dollars that can be invested in solar and wind and biodiesel. Under a cap-and-trade, there will be a cost. Plants are going to have to retrofit their equipment, and that’s going to cost money, and they will pass it on to consumers. We have an obligation to use some of the money that we generate to shield low-income and fixed-income individuals from higher electricity prices prices.
FREESTON: Conversely, the Waxman-Markey bill would see only 15 percent of the allowances auctioned off and 85 percent of them given away for free.
HANDLEY: There was a hearing a couple of weeks ago when they were introducing the bill, and Congressman Joe Barton asked the panelists one by one—who were industry folks, you know, utilities and energy companies that were supporters of the cap-and-trade provision—he said, if you don’t include in the bill, if we change the bill to eliminate free allowances, would you support this cap-and-trade proposal? And one by one the answer was no, no, no, no, no, no, no. So they’re supporting it because they expect to get a piece of this allowance pie, and as you saw, 85 percent are being divvied up.
FREESTON: But what about emissions? Can cap-and-trade make a significant reduction? NASA’s James Hansen, co-discover of global warming and a proponent of emission reductions since the early ’80s, has stated his desire for the bill to fail, stating that any strategy that does not efficiently move the US away from dependence on coal is already a failure.
HANDLEY: If you look at CO2 emissions per unit of energy, coal is the biggest, petroleum is in the middle, natural gas is the lowest. And in terms of our total emissions, the spread is even wider. So, yes, coal has to be the target. And, well, a gradually increasing carbon tax is a way to do that, to efficiently phase out coal. Wind power is now available for roughly 15 percent more than coal is. Well if you had a carbon tax that added 5 percent a year to the price of coal electricity, in three years wind is cheaper than coal. And if you do that trajectory now—and investors know that’s where it’s going in three years or five years or whatever your time horizon is—the investment capital that would have gone into coal isn’t going there. So that’s the kind of a price signal that you need economy-wide to start making the shift away from coal. The Energy and Commerce Committee is probably the most coal-friendly committee on Capitol Hill. And the coal interests, for example, got these huge amounts of free allowances that mean the real phaseout of coal is postponed, if it happens at all out of this bill.
FREESTON: The Environmental Protection Agency, who recently declared carbon dioxide a danger to public health and welfare, has joined Obama in putting their support behind the cap-and-trade initiative.
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Courtesy: C-SPAN
May 12, 2009
LISA JACKSON, ADMINISTRATOR, ENVIRONMENTAL PROTECTION AGENCY: I have said over and over, as has the president, that we do understand that there are costs to the economy of addressing global warming emissions, and that the best way to address them is through a gradual move to a market-based program like cap-and-trade.
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FREESTON: Should the Waxman-Markey bill work as its supporters claim, annual CO2 emissions in the US wouldn’t fall below 2005 labels until 2026, 17 years from now. This is a far cry from the 20 percent reduction by 2020 being called for by the UN’s climate change panel. This shortfall is due in large part to a practice known as carbon offsetting. Come back for Part 2 to find out the dirt on carbon offsets.
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