CAP&TRADE, CAP AND DIVIDEND, PROS, CONS, OTHER OPTIONS

Lawmakers forge alternative to cap-and-trade proposal
Les Blumenthal, April 19, 2009 (Kansas City Star)

SUMMARY
The greenhouse gas emissions (GhGs) reduction regime proposed in energy and climate change legislation currently being considered in the House of Representatives and the Senate includes a plan to institute a cap&trade system. Senator Maria Cantwell (D-Wash), Chair of the Energy Subcommittee of the Senate Energy and Natural Resources Committee, is one of those raising questions about cap&trade and suggesting alternate plans.

Senator Cantwell is concerned that cap&trade is vulnerable to abuses by market manipulators like the Wall Street players who took advantage of loopholes in derivatives trading and helped bring about the current financial crisis.

Cantwell’s sense of potential abuses cap&trade could be vulnerable to stems from substantive experience. She was involved in convicting Enron for electricity market manipulations and she worked against commodity price manipulations by oil and gas traders that drove prices to record highs. She fears emissions trading market regulators could be as ineffective as the Federal Energy Regulatory Commission (FERC) was against Enron and the Commodities Futures Trading Commission (CFTC) was against the oil and gas commodities hustlers.

There is also speculation that an emissions market is dangerous in that it could develop “bubbles” and lead to crashes like those that resulted from the tech market bubble of the late 1990s and from the recent housing market bubble.

The Environmental Defense Fund argues that a cap&trade system can be effectively regulated. Markets presently trade international emissions allowances and voluntary U.S. emissions credits without significant incidents.

From NationalWildlife via YouTube.

Senator Cantwell prefers an alternative emissions reduction scheme called cap and dividend.

Both cap&trade and cap and dividend begin with a cap on emissions that is firm and gets tighter going forward. Both require big emitters to buy allowances at auction and from the federal government. Both would return some of the auction revenues to utility customers as reimbursement for rate increases and disburse the balance of the auction-generated revenues for the building of New Energy and Energy Efficiency infrastructure.

The House Energy Subcommittee of the House Energy and Commerce Committee has been holding hearings on energy and climate change legislation proposed by Subcommittee Chair Ed Markey (D-Mass) and Committee Chair Henry Waxman (D-Calif) that includes a cap&trade proposal.

Cap÷nd was proposed by Congressman Chris Van Hollen (D-Md), Chair of the Democratic Congressional Campaign Committee.

Jim McDermott (D-Wash) and Lloyd Doggett (D-Texas) have also proposed cap&trade alteratives. Other Democrats contend a “carbon tax” is the simplest, most straightforward method of cutting GhGs.

The European Union (EU) has operated an emissions reduction market since 2005.

Some fear “subprime carbon” and “junk carbon” in an emissions trading market.

Cantwell says her opposition to cap&trade does not entirely block energy and climate legislation. She suggests it could emerge from Congress in stages. First pieces could be (1) a national Renewable Electricity Standard (RES) requiring U.S. utilities to obtain a specific portion of their power from New Energy sources by specific years and (2) a national Energy Efficiency Resource Standard (EERS) requiring U.S. utilities to reduce consumption a specific percent by specific years.

From PeterBarnesTV via YouTube.

COMMENTARY
Cap&trade is the proposal of the Obama administration as well as writers of the House and Senate legislation. The market-based system for GhG reductions has also won approval from many environmental organizations and leaders in the business community.

U.S. conservatives have ignorantly attacked the market-based cap&trade concept. Instead of making an effort to understand it, they have labeled it as as the biggest government giveaway in U.S. history, the biggest, most complicated tax in U.S. history, corporate welfare, Wall Street welfare and just plain welfare.

Carefully nurtured since 2005 by the EU, its Emissions Trading Scheme (ETS) puts a limit (cap) on the emissions allowed to power companies, utilities and industries. Allowances to emit (European Union Allowances, EUAs) are auctioned to them. A market (the ETS) facilitates the sale of the EUAs by companies that can do business below their capped emissions and the purchase of EUAs to companies that exceed their caps. Investors can also speculate in the ETS market.

The ETS had untenable fluctuations in price during its earliest phase because the market’s organizers failed to auction a large enough portion of the allowances and the supply of free allowances subjected the market to instability when profit-taking companies dumped allowances.

Pieces of an energy policy 1. [Renewable Portfolio Standard (RPS) is the same as Renewable Electricity Standard (RES) and Renewable Energy Standard (RES)]. (click to enlarge)

After the ETS stabilized in its later phase, the financial crisis caused a drop in demand for power and commodities. Companies once again found themselves with excess allowances and dumped them, once again causing a sharp drop in the market.

ETS stumbles offer learning opportunities for the federal government as it undertakes the building of a U.S. emissions trading market. One of the first issues to be worked out is the auction of allowances. The Obama administration advocates auctioning 100% of the allowances but is willing to compromise if such a compromise facilitates the formation of consensus behind emissions reductions.

As Wall Street has demonstrated, no market is safe from fluctuations and abuses and no regulatory regime is impervious to being outsmarted. These facts do not constitute an argument against markets but an argument in favor of well-designed, well-regulated, well-policed markets.

Although a cap&trade system does drive power prices up, the auction of allowances also generates revenues that are returned to utility ratepayers in the form of tax cuts and other benefits to offset their expenses. The result is a shift for the cost of GhGs to the major emitters.

One of the major appeals of cap and dividend is that it returns the revenues more directly to consumers. Its weakness is that it lacks a market mechanism by which winners and losers among New Energy and Energy Efficiency technologies could emerge and leaves the decision to central planners.

Pieces of an energy policy 2. (click to enlarge)

The appeal of a straight tax is its apparent simplicity. In actuality, administering a tax is no simpler than administering revenues from an allowance auction. The more serious criticism of a tax is that it offers no hard cap on emissions.

Al Gore has warned that the U.S. presently is heavily invested in “subprime carbon” because of its dependence on GhG-generating fossil fuels.

The Environmental Defense Fund favors cap&trade because it maximizes the use of revenues derived from auctioning emissions for the building of New Energy and Energy Efficiency infrastructure.

QUOTES
- Senator Maria Cantwell (D-Wash), chair, energy subcommittee/ Senate Energy and Natural Resources Committee: "I have serious concerns about how a cap-and-trade program might allow Wall Street to distort a carbon market for its own profits…We are looking at ways that would allow consumers to get something back…"
Cantwell, on her doubts about a U.S. emissions trading market: "We all know the problems with these derivative markets…"

From tpmtv via YouTube.

- Friends of the Earth: "Today speculators do the majority of carbon trading, and they will continue to dominate as carbon trading markets grow…Carbon-trading firms have strongly advocated self-regulation as a way to govern this market, and most cap-and-trade bills implicitly reflect this mode of governances…"
- Steve Cochran, national climate campaign director, Environmental Defense Fund: "We need to make sure market manipulation doesn't occur and that any scofflaws out there are punished…"
- Cantwell, on rolling out energy and climate change legislation in stages: "We are doing the softball stuff…My philosophy is get what you can, keep the ball moving, and holding it up for one mega-thing can be a mistake."