U.S. Still Searching for Way Forward on Greenhouse Gases

Stephen DeAngelis

June 24, 2009

Recently, the United States and China have been in negotiations about to move forward in an effort to reduce greenhous gas emissions [“China and U.S. Seek a Truce on Greenhouse Gases,” by John M. Broder and Jonathan Ansfield, New York Times, 7 June 2009]. Broder and Ansfield report:

“For months the United States and China, by far the world’s two biggest emitters of greenhouse gases, have been warily circling each other in hopes of breaking a long impasse on global warming policy. They are, as President Obama’s chief climate negotiator puts it, ‘the two gorillas in the room,’ and if they do not reach some sort of truce, there is no chance of forging a meaningful international treaty in Copenhagen later this year to restrict emissions. … Both sides are demanding mutually assured reductions of emissions that are, in the current jargon, ‘measurable, verifiable and reportable.’ In the background hover threats of great retaliation in the form of tariffs or other trade barriers if one nation does not agree to ceilings on emissions. … Many take the simple fact that the two nations, jointly responsible for more than 40 percent of the world’s greenhouse gas emissions, are even talking seriously to each other about the issue as a propitious sign after years of mutual distrust. But there is cause for profound skepticism as well. The Chinese continue to resist mandatory ceilings on their emissions and are making financial and environmental demands on the United States that are political roadblocks. The United States, despite optimistic words from the White House and Congress, has yet to enact any binding targets on greenhouse gas emissions. The energy bill now before Congress proposes emissions targets that are far short of what China and other nations say they expect of the United States. Compounding the difficulty is the fact that both countries are struggling economically and the Chinese and American publics appear far more interested in jobs than in tackling environmental problems, a task that would necessarily be costly. … Yet the clock is ticking. Only six months remain before the opening of United Nations-sponsored talks in Copenhagen to produce a climate change treaty to replace the 1997 Kyoto Protocol. Without the full participation of the United States and China, most negotiators believe that any agreement is doomed to fail. Congress and two American presidents refused to accept the Kyoto accord, which expires in 2012, because it imposed no pollution limits on China or other developing countries. The American refusal to ratify the treaty and the lack of participation by China and other developing nations have left the pact all but toothless.”

In order to make emissions more ‘measurable, verifiable and reportable,’ lawmakers in the United States are seriously considering enacting legislation that dictates caps, trades and offsets on carbon emissions [“Caps, Trades and Offsets: Can Climate Plan Work?” by David A. Fahrenthold, Washington Post, 26 May 2009]. Fahrenthold reports:

“It sounds like alchemy, an act of bureaucratic magic. Under the climate-change bill just approved by a House committee, the U.S. government would literally make a commodity — as tradable as a Pontiac or a pork belly — out of thin air. The bill would require polluters to obtain ‘allowances’ — permits allowing them to emit a given amount of a greenhouse gas such as carbon dioxide or methane. Today, these gases are invisible, free and floating all around us. This bill would put a price on them. That would accomplish an economist’s version of a triple back flip. It would divide a problem of the global commons into pieces and make those who use gas or electricity pay for their share of the emissions that result. … The proposal would also create official carbon ‘offsets’ — in some cases, a government-certified hypothetical calculation of an amount of gases that would have been emitted but were not. Those, too, could be bought by polluters.”

Although there is a lot of support for a cap and trade market, there are also a lot of pitfalls to such a system according analysts interviewed by Fahrenthold. The biggest pitfall is the fact that the market is being created by the government which means that the rules under which it will operate will be subject to tremendous political pressures by special interests.

“To satisfy Democrats from states with coal mines or heavy industry that would be hit hard, committee leaders dropped their target for emissions reductions by 2020, from 20 percent to 17 percent. And they agreed that, instead of all credits being sold to the highest bidder, 85 percent would be given away. This had the effect of simultaneously outraging both Greenpeace — ‘If you give all the pollution credits away, it doesn’t actually serve the market principle of making carbon have a cost,’ spokesman Michael Crocker said — and House Republicans. The bill’s complexity led one Republican to cite the adage that a camel is a horse designed by a congressional committee. It may prove to be an elephant before long: The rest of the House and the Senate are waiting for their crack at it.”

Despite the horse-trading that will go on, most environmental groups favor a cap-and-trade system:

“Many environmental groups say they support the bill, because it still creates a ‘cap-and-trade’ system. This requires polluters to amass credits equal to their emissions and then allows them — and others, including Wall Street trading firms — to sell them on an open market if they cut their emissions, giving them a surplus of credits. ‘We have decided we’re going to regulate the commons, which is the sky, or the air,’ said Liz Martin Perera of the liberal-leaning Union of Concerned Scientists. And this is the best way, she said: ‘It is able to harness the power of the market, to find the cheapest reductions first. If it’s going to be cheaper for me to reduce [emissions] than you, then I’m just going to go ahead and reduce and sell you my permit.’ The United States already has a working cap-and-trade system, used since 1995 to cut back the gases blamed for acid rain. The Environmental Protection Agency says the trading system has reduced the overall cost of cutting acid-rain-causing pollutants to one-third of what was projected. But comparing the two problems is like comparing a horn section and an orchestra. Acid-rain pollutants can be sucked out of a smokestack by adding ‘scrubbers.’ But nothing like that is commercially available for carbon dioxide — polluters might have to replace the coal they burn with a different fuel, or replace the coal-burning plants with solar ‘farms’ and windmills.”

It’s because new ideas need to be created to make the cap-and-trade system work that the Democrats believe the emissions bill will create jobs. Another group that is eager to see a cap-and-trade system implemented is banks [“How Banks Will Pounce on Carbon Trading,” by Mark Scott, BusinessWeek, 8 June 2009 print issue].

“While U.S. policymakers continue to squabble over the details of the ‘cap-and-trade’ proposal, big banks are gearing up for what they see as a new profit center. ‘U.S. carbon trading is coming,’ says Louis Redshaw, head of environmental markets at Barclays’ investment bank. ‘You have to be in it to win it.’ The industry is calling on its experience in Europe, where regulators set limits on emissions in 2005 and the carbon market now tops $79 billion. With no such rules in the U.S., carbon trading is limited to a number of regional exchanges in which participation is often voluntary. Last year trading stateside amounted to less than $400 million. But that’s about to change. … Analysts figure rules will be in place by 2013, and carbon trading could top $1 trillion a year by 2020, according to research firm New Carbon Finance. At that size, carbon would rival oil as one of the largest commodity markets.”

While the cap-and-trade system is fairly straight forward, the “offsets” portion of the bill isn’t quite so clear. It requires the Environmental Protection Agency to predict how well new buildings and plants will do at eliminating emissions. Fahrenthold reports:

“Instead of buying an allowance to cover their pollution, a factory could buy an offset to negate it. An offset would be a certificate showing that, for example, emissions have been avoided, or taken up by newly planted trees, or captured and pumped underground.”

Carbon capture remains a hot topic and I’ll discuss the current debate in a future post. According to Scott, investment banks want to get in on the offset business as well.

“The carbon credits themselves could be a source of profit for financial firms. That’s why Morgan Stanley, JPMorgan Chase, and Goldman Sachs are buying stakes in so-called offsetting companies. These independent businesses invest in eco-friendly projects, such as reforestation programs in Oregon, that reduce greenhouse gases and produce carbon credits as a result. The credits can be sold to companies looking to mitigate—or offset—their carbon footprint. Prices on the credits could soar once the U.S. imposes emission caps and the carbon market takes off. Says Seb Walhain, the global head of energy and commodities at Holland’s Fortis Bank Nederland: ‘Carbon soon will become part of the regular business for banks.’ Some investment banks are doling out advice to companies preparing for restrictions in the U.S. Citigroup, for example, is working with utilities and oil refiners, which want to know whether carbon caps will hurt their bottom lines.

It’s the giveaway of offset credits that has created most of the stir around the propoosed legislation [“Cap and trade, with handouts and loopholes,” The Economist, 23 May 2009 print issue].

“Giving away permits creates several problems. First, it generates no money, thereby royally messing up Mr Obama’s budget. Second, it means that the permits go not to those who value them most (as in an auction) but to those whom the government favours. Under [ the Henry] Waxman-[Edward] Markey [bill], electricity-distributors would get the largest share, with the rest divided between energy-intensive manufacturers, carmakers, natural-gas distributors, states with renewable-energy programmes and so on. Oil firms, with only 2% of the permits, feel hard done by. But most polluters, having just been promised hundreds of billions of dollars’ worth of permits for nothing, are elated. So it is not just the owners of ski resorts and businesses with negligible carbon footprints that are queuing up to praise the bill. Duke Energy, a power generator with lots of coal-fired plants, is also enthusiastic. … Another problem with Waxman-Markey is its complexity. At 932 pages, it is half as long again as an already-bloated previous draught. It includes a dizzying array of handouts, mandates and technical standards for everything from hot-food-holding cabinets to portable spas. It allows for a huge increase in ‘offsets’—where a polluter pays someone else to stop polluting instead of curbing his own emissions. These are open to abuse, as Europe’s experience shows. There is little to stop foreign factories from starting to pollute just so that someone will pay them to stop.”

The Economist complains, “Ideally, politicians who want to save the planet would be honest with voters about how much this will cost. But America’s leaders do not seem to think Americans are ready for straight talk about energy.” The whole point of passing legislation controlling greenhouse emissions is to place a price on carbon. Such a scheme will undoubtedly raise costs of producing everything from cars to electricity, but environmental benefits are deemed by most to be worth the cost. Many of the beneficial effects of changing how we measure and pay for carbon use won’t be immediately apparent. In the long run, however, new industries (and new opportunities) are likely to emerge. Because such industries are likely to be innovative, they are likely to create good jobs that benefit the economy as well as the environment. Obviously, the way ahead remains challenging, but doing something appears to be better than doing nothing. The U.S. House of Representatives has scheduled a vote on the legislation for this Friday [“Vote Set on House Climate Bill,” by Steven Mufson, Washington Post, 24 June 2009].