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A Good Start, but Not Good Enough

SOURCE: AP/C.J. Gunther

The Brayton Point Power Station in Somerset, Massachussetts—one of the plants participating in the nation's first cap-and-trade greenhouse gas auction on Thursday, Sept. 25, 2008 as part of the 10-state RGGI consortium.

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House Energy and Commerce Committee Chairmen John Dingell (D-MI) and Subcommittee on Energy and Air Quality Chairman Rick Boucher (D-VA) unveiled their long-awaited draft of climate change legislation early last month.

The two representatives have been circling climate change warily over the past two years, holding hearings, meeting with stakeholders, and issuing detailed white papers on the topic while several other House members introduced climate bills and the Senate brought the Lieberman-Warner Climate Security Act to the floor. The conventional wisdom was that Dingell and Boucher—longtime allies of the auto and coal industries—were uncomfortable with the far-reaching economic implications of climate legislation and wanted to proceed with caution.

Yet with the clock running out on this congressional session, Dingell and Boucher have produced a thoughtful and serious effort to grapple with the complexities of creating a cap-and-trade system. One impetus for the draft bill is undoubtedly political. Dingell and Boucher believe that global warming will be on the front burner in the new Congress and they want to lead the debate in 2009. But the bill also sends the message that climate change is an urgent threat that must be addressed. As Dingell and Boucher say in their memo to the full Energy and Commerce Committee, “politically, scientifically, legally and morally, the question has been settled: regulation of greenhouse gases in the U.S. is coming.”

The draft bill has a number of strengths for which Dingell and Boucher deserve credit. It is economy-wide, covering 87 percent of U.S. greenhouse gas emissions. It sets a long-term target of reducing emissions by 80 percent of 2005 levels by 2050 that corresponds with prevailing scientific consensus. It contains strong energy efficiency programs. It uses the allowance allocation process both to stimulate low-carbon energy technologies and provide consumers relief from high energy prices. It provides for strict oversight of the carbon markets to prevent manipulation and assure transparency. And it creates a “strategic reserve” of allowances that would be auctioned if allowance prices are too high, but avoids a “safety valve” that would suspend the emission cap if allowance prices exceed a predetermined level.

Despite these positive features, two aspects of the bill—the absence of allowance auctioning in the cap-and-trade program and weak emission reduction targets for 2020—raise serious concerns and should not be the starting point for legislative action in the new Congress.

In a departure from nearly all recent climate bills, Dingell and Boucher would not auction allowances to power plants and other covered emitters before 2026, when an auction would be triggered in the absence of congressional reauthorization. Instead, they propose four allocation mechanisms, three of which would make large distributions of free allowances to industry. During the first phase of the European Trading System, this approach resulted in substantial windfalls to emitters—a mistake that the European Union is now moving to correct. A robust auction process would not only prevent windfalls, but assure a sufficient revenue stream to support investments in efficiency, advanced technology, adaptation, and financial relief to consumers.

Even more troubling is that the draft bill calls for reducing emissions from covered sources by only 6 percent below 2005 levels by 2020. This is significantly less than nearly all other recent bills and California’s AB 32, which require a 20 percent reduction by 2020. It is also well below the 15 to 20 percent 2020 target supported by 152 House members in an October 2 letter to Speaker Nancy Pelosi.

Since emissions would presumably continue to increase in sectors outside the cap-and-trade program, overall reductions in U.S. emissions would actually be smaller than the 6 percent target. As a result, U.S. emissions in 2020 would remain well above 1990 levels, probably by 600 million to 700 million metric tons of CO2 equivalent, or nearly 15 percent. Thus, 23 years after the Kyoto Protocol, the United States would still not be within striking distance of the protocol’s 1990 emissions baseline, let alone the further average reduction of 8 percent required of developed countries by 2012. E.U. countries are, in contrast, generally on track to meet their 2012 Kyoto targets and the European Commission is considering a 2020 reduction goal of 20 percent below 1990 levels, which could be increased to 30 percent if a new international agreement is negotiated.

With the United States reducing emissions by only 6 percent from 2005 levels, we would lag dramatically behind other developed countries. This would be seen around the world as a sign that we lack the political will to tackle climate change. As a result, it would undermine the incentives for significant commitments by China and other developing countries who are watching closely to see whether the United States shows real leadership before softening their opposition to climate mitigation measures.

To be fair, while 2020 reductions would be modest, Dingell and Boucher are proposing that, by 2030, emissions from covered sources would be reduced by 44 percent of 2005 levels. If achieved, this cut would be very dramatic. But is it really credible to expect that, after declining only slightly over the next 12 years, U.S. emissions would drop over six times more quickly in the following decade?

According to some reports, the premise behind the Dingell-Boucher approach is that carbon capture and storage, or CCS, will not become viable at coal-fired power plants until 2025, but then will be deployed widely, enabling sharp emission reductions by 2030 that could not be achieved earlier. As Ken Berlin and I have previously argued, CCS is a promising technology and we should do everything we can to bring it to fruition. Dingell and Boucher have proposed to support CCS by establishing a CCS-based emission performance standard for new coal plants built after 2009 that would take effect in 2026, and then by issuing bonus allowances to owners of up to 60 gigawatts of CCS-equipped coal plants.

This combination of carrots and sticks is a step in the right direction, but the drivers for CCS deployment could be strengthened: For example, an emission performance standard for new coal plants would likely be feasible before 2020. Yet even with a more aggressive push for CCS deployment, it is doubtful that it could be implemented on the massive scale required by 2030. Emissions would need to be reduced by an additional 38 percent in the space of 10 years—or by nearly 2.4 billion metric tons—to meet the Dingell-Boucher 2030 target. If one assumes that CCS will account for half of this reduction, over 650 existing 500-megawatt coal plants, and all new coal plants, would need to be equipped with CCS. (It is projected that 100 GW of new coal-powered electricity will be added by 2030. The average 500 MW coal plant emits around 3 million metric tons of CO2 per year and would capture around 2.7 million tons at an 85 percent capture rate). In other words, CCS would have to be deployed for 74.5 percent of the country’s existing coal plant fleet, which now has a capacity of 336 gigawatts of electricity. Near-universal CCS retrofitting of the U.S. coal plant fleet is a desirable long-term outcome, but the odds of it happening in under 10 years are not high.

While deployment of CCS at new and existing coal plants is essential, it is only one of many paths to reducing emissions. Efficiency programs in commercial and residential buildings and factories, increased production of cellulosic ethanol, switching from coal to natural gas as a power generation fuel, and increased reliance on renewable power are all proven emission reduction strategies. Dingell and Boucher consider these strategies important, but they apparently do not believe that they can achieve significant emission reductions by 2020.

Many studies in fact show the contrary. For example, a comparative analysis by the Environmental Defense Fund of a wide range of studies modeling the economic impacts of the Climate Security Act (S. 3036) shows that a 20 percent emissions reduction by 2020 would have negligible effects on GDP, employment, consumer purchasing power, and energy prices. Similarly, a landmark study by the management consulting firm McKinsey and Company indicates that, using tested approaches and high-potential emerging technologies, the United States can achieve sizable emission reductions at a reasonable cost, with strategies like energy efficiency yielding productivity improvements and opportunities for innovation that actually create economic value.

To the extent that covered sectors cannot directly reduce emissions cost-effectively by 2020, the purchase of “offsets”—emission reductions from other parts of the economy or outside the United States—can provide a low-cost means of meeting compliance obligations.  Offsets are controversial, and strong safeguards must be in place to assure that the underlying emission reductions are real, verifiable, and additional. S. 3036, for example, would require EPA review and approval of all offsets but, assuming they pass muster, allow covered sources to satisfy 15 percent of their allowance requirements from domestic offsets and another 15 percent from international offsets. This compliance option would be fully available in the initial years of S. 3036’s cap-and-trade program. The Dingell-Boucher bill, however, takes a different approach. Offsets would be limited in the initial phases of the program—accounting for no more than 5 percent of the compliance obligation for the first five years and then gradually increasing as the cap becomes more stringent.

This approach seems counterintuitive. Offsets should be more, not less, important in the early years of a cap-and-trade program when new technologies are still maturing, investments in efficiency are still ramping up, and new reduction tools are still being tested. As the price of carbon increases and new technologies penetrate the economy, the flexibility provided by offsets should be less valuable to emitters, although offsets may still play a useful role. If Dingell and Boucher followed S. 3036 and allowed offsets to account for 30 percent of compliance obligations instead of just 5 percent starting in 2012, emitters would have a greater range of options and could presumably achieve deeper reductions at lower costs.

Dingell and Boucher are concerned that an abrupt transition to a cap-and-trade program will be disruptive and costly. But 2020 is 12 years from now, states such as California are already making substantial strides on efficiency and renewables, and the tools for reducing emissions cost-effectively are already in place.

A bigger danger than short-term economic disruption is the risk that an overly modest emission target will encourage business-as-usual thinking, with utilities, energy suppliers, and manufacturers delaying investment in emission reduction strategies because there is no real pressure to make them. This will work to the United States’ detriment, because we will lose an opportunity to gain a competitive edge in low-carbon technologies that can support economic growth and job creation.

If we are serious about reducing emissions by 80 percent by 2050, postponing the heavy lifting until 2030 sends precisely the wrong signal. Unless we are prepared to roll up our sleeves and create a low-carbon economy now, the job will be that much tougher when deep reduction targets loom two decades from now and the time to save the planet is running out.

The many positive aspects of the Dingell-Boucher draft bill deserve careful consideration in the new Congress. But a better starting point would be H.R. 6186, the Investing in Climate Action and Protection Act introduced by Rep. Ed Markey (D-MA), which sets a strong but realistic timetable for reducing emissions, auctions all allowances, protects families from higher energy costs using auction revenues, and uses carrots and sticks to achieve CCS deployment before 2020.

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