THE VOICES IN THE CAP&TRADE DEBATE

The Voices in the Cap&Trade Debate
Herman K. Trabish, February 1, 2010 (original reporting exclusive to NewEnergyNews)

Who would have expected a belly laugh to end the recent VerdeXchange panel discussion on emissions trading? When an Asian man in the audience demanded to know why the U.S. was not prepared to move as quickly and efficiently to a global emissions trading system as China, a wag in the audience beat the panel to the answer. “They don’t have Republicans,” he called out.

In fact, the debate right now over a U.S. emissions trading system is not a Democrat-Republican debate but a 3-part disharmony between voices speaking for business interests, populist interests and cynical interests. Two of the three sides of the issue were well represented on the VerdeXchange panel. The third, however, loomed over the discussion like a specter.

The business community was represented by panel moderator Marc Stuart, a founder and Director with major emissions trader EcoSecurities, by Josh Margolis, Co-CEO at venerable emissions trading giant Cantor CO2e, and by Gary Gero, the President of the Climate Action Reserve offset registry.

The peoples’ interests were strongly represented by Peter Barnes, author of Climate Solutions, A Citizen’s Guide and Who Owns The Sky?.

The cynical interests, whose oversimplified or idealistic understanding of greenhouse gas emissions-trading prevent the world and the nation from reaching agreement on a way forward, merely loomed. With business and the people split over how best to answer the cynicism and implement measures to cap and cut back on GhGs, the worst effects of global climate change become ever more unavoidable.

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Any cap&trade system implemented legislatively would be similar to the one used to control acid rain in the U.S. in the 1990s and to the one effectively being used to control greenhouse gas emissions (GhGs), despite pioneering difficulties, in the EU. It would put a hard cap on industrial scale emitters and create a market where they could buy extra allowances to emit (if that was the only way they could keep doing business) and sell excess allowances (if they used efficiencies and New Energies to do business with fewer emissions).

Companies that successfully shift to low-spew practices profit. Protections would be built into the legislated system, in the form of an apportioning of free and auctioned allowances, to protect industries that cannot do business without spew. There would also be protections for consumers, in the form of rebated auction revenues.

A small portion of offsets would likely be included in a cap&trade system that allow companies to pay for greenhouse gas emissions (GhG) cuts in emerging economies rather than make cuts in their own operations because GhGs are, after all, a universal and not a local problem.

The basic wisdom of cap&trade is that it gives business interests the opportunity to control their own destinies in the shift to an emissions-constrained economy.

EcoSecurities’ Marc Stuart began the discussion by reminding everybody there are three levels of emissions-regulating activities. At the international level, emissions controls are stymied by the failure of the community of nations to get a potent agreement at the December Copenhagen meeting. At the national level, emissions controls are stymied by the deadlock in the Senate. At the local level, several states and groups of states are making impressive but inadequate progress.

The panelists agreed that for the time being the local level is where the action is but none was without hope for higher-level movement.

Gero and Margolis agreed the Senate’s gridlock, made worse by the Massachusetts election, nevertheless opens the door to finding some kind of measure that can get bipartisan support.

CantorCO2e CEO Josh Margolis explained why he believes Senate action remains a real possibility. First he referred to EPA Director Lisa Jackson’s newly declared power to regulate GhGs through the legal weight of the Clean Air Act (CAA) and the Supreme Court’s 2007 ruling that GhGs were indeed a threat to human health and therefore subject to the CAA. Margolis then said Senators may very well realize they prefer a cap&trade bill with an allocation of emissions allowances to “looking Lisa Jackson in the eye” and challenging her to use a command-and-control EPA regulation system.

Stuart asked the panel to discussion the viability of auctioning emissions allowances as part of a cap&trade system.

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Margolis was quick to reply, saying that for the sake of his kids and grandkids he sincerely hoped the system has firm caps that take the nation to where science says it needs to be...But, he cautioned, the system needs to be structured so that meeting its requirements doesn’t drive businesses to go in search of places where there are no GhG controls.

This gave Barnes the opportunity to explain the case for the people, otherwise known as cap and dividend.

Having been in Washington, D.C., at the time of the Massachusdetts election, Barnes said, he saw first hand what a shock it was to the Senate’s Democratic majority. He noted senior California Senator Diane Feinstein’s observation that “…a large cap&trade bill is dead for now…”

But, Barnes said, “…the significant word is large. What spooks senators about [the proposed version of cap&trade] is the size and complexity and that it is inexplicable to the general public so it inspires fear, like the health bill. To replicate the same thing with carbon policy has people reacting…”

But that doesn’t mean, Barnes said, there is no politically viable way forward because “…there is a way to put a price on carbon that can be simple, transparent and bipartisan, and that is the Cantwell-Collins so-called cap and dividend bill that is starting to get traction now in the wake of this shift…”

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Cap and dividend “…would put the price signal on carbon that we need that would be clear, transparent and durable. And the durable part is important, because the other problem with cap&trade is it has been characterized as tax, it is a tax…”

Cap and dividend, as presently structured in the Senate bill proposed by Senator Maria Cantwell (D-Wash) and Senator Susan Collins (R-Maine), Barnes said, starts with an auction and an increase in the price of energy that will be passed to consumers but “…75% of revenue is recycled…” so consumers “…pay here and get money back over here…If consumers use less carbon-based energy, they’re actually going to come out ahead. The majority of people will come out ahead, so that has political legs…The worst thing would be to have a carbon tax that was so unpopular that five years down the road the political winds change and it’s repealed or weakened. The nice thing about cap and dividend is it builds in long term support because as high as the carbon price goes, dividends rise with the price.”

Moderator Stuart asked what price the various proposals would put on GhGs. Margolis answered that GhGs are trading in New England’s Regional Greenhouse Gas Initiative (RGGI) at an ineffective $2 per ton and said that RGGI and similar initiatives will eventually be an “…uninteresting part of the process…” He then asked Barnes to estimate what price cap and dividend would put on emissions in 2015.

A price collar, or ceiling price, will keep the initial cost low, Barnes said. The minimum price starts in 2012 at $7 per ton, “…which ain’t much…” The ceiling price in 2012 is $21 per ton. “In following years those prices rise at 6% per year plus inflation so eventually they’ll get to something significant…” Barnes concluded.

“What I’m concerned about,” Margolis replied, “…is a program that says to each and every industry that’s currently operating… ‘You’ve just invested in a refinery or a plant, you’ve got your permits and everything’s fine' and then the government says…'you can’t operate this facility until you buy enough emissions allowances in order to operate not just one year but 30 years out…' You can’t get loans. If you’re going to build a billion dollar power plant, you can’t just operate for a single year."

With a cap&trade system, he went on, “…you can turn what looks like a waste stream into a profit stream. So you say if I invest and make a reduction that is required by law, I can actually make money by doing what I’m supposed to do...The dividend process gives money to consumers,” he concluded, “but the consumers need jobs and the jobs will disappear if in fact you have to buy 30 years worth of allowances before you get going…”

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Moderator Stuart then shifted the subject to offsets which, he said, were initially included in emissions trading to provide price stability. “Is there a backlash against offsets at all levels politically?” he asked Gero.

Gero used the question to pick up on what Margolis was saying about cap and dividend, observing “…you do need to protect consumers against price spikes but I don’t think necessarily that dividend is the right approach…

“In a properly designed cap&trade system,” he went on, “you could use revenues from the auction to drive efficiency reductions and those reductions are going to show up as a net to the consumer in their use of electricity or any other energy resources…We’re cycling that money into policy solutions rather than into the consumers’ pockets where you may not know that it's going to drive the kind of actions that you want to drive…

“I do think that offsets have a bad name,” he added. “Some to that is due to the complexity…But I can’t say that at a political level that everyone is absolutely opposed to offsets. There is a large roll for sectors of the economy that don’t lend themselves well to regulation or to direct reductions…[like] agriculture and forestry and if you want to have a comprehensive economy wide system that reduces emissions in a real way and a stable way over time, I think you need to include all sectors of the economy…These are places where [agriculture and forestry] see a real opportunity to support a cap&trade bill…

“I do agree,” he concluded, “that coming off the health care bill there isn’t a lot of appetite for complexity. We all want it as simple as possible. These are difficult systems to build but sometimes difficult systems are necessary to tackle large problems. I think at the end of the day offsets are going have to be part of the system…”

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Margolis jumped in here. “I think offsets in general have a good name,” he said. “…There are bad offsets and there are good offsets. The ones we should be focused on…are offsets that meet certain quality criteria…

“Let’s also think about this,” he added. “Two-thirds of emissions are going to come from developing countries by the 2020. Two-thirds. If we shut down all the sources of emissions in the developed countries, we still wouldn’t shut down enough sources to prevent catastrophic climate change. So we need a system to incentivize people to go after those offsets that are low hanging fruit, the reductions that you can get for a fraction of the cost of paying somebody in San Francisco or in Los Angeles…[If they] are good offsets, then they should be allowed into the program.”

“I do think there is a backlash against offsets,” Barnes objected. “…Certainly there is a difference in quality among the offsets…but I think the fundamental point about all offsets…is not that the offset itself is bad but…that somebody is continuing to pollute in exchange for buying an offset. So you have that generic problem which one could argue is kind of a fundamental flaw…”

Barnes then went back to answer Margolis earlier point about auctions. “…Nobody would have to buy 30 years in advance under the Cantwell-Collins structure…[Upstream permits] would be auctioned quarterly…and fuel companies would buy them as they need them. It would just be a small additional cost when sold that would be passed on when sold and wouldn’t in any way burden the fuel supplying company.

The other point I would make is that the auction process doesn’t eliminate these kinds of ag and forestry projects that you are developing and that we all agree are really important…75% of the auction revenues would go back to consumers and 25% would be put into a fund to be used for projects in the ag and forestry and similar industries…”

click thru for the NewEnergyNews assessment of cap&trade and this book's objections to it

Stuart framed the concluding exchange with an introduction that summarized the debate.

“…I like to think emissions performance is an asset,” he explained, “something that companies should be trying to create on their balance sheet. I’m not sure that using a little less coal because coal costs a little more is necessarily incentivizing those…

"What we saw over the last 6-7 years, particularly in London, is asset classes emerge in financial markets. Billions were raised around funds to produce emission reductions, to a lesser extent venture capital into technology, into carbon trading companies…Looking where we are right now, and there is uncertainty in where we are politically, from each of you, where would you be putting money right now if you were looking for ways of benefiting from a low carbon economy, whatever the policy emerges may be?"

“The key thing we all agree on,” Barnes replied, “is the need to have a carbon price and where we disagree is some of the details of how to do that so…I think what I would call real investments, venture capital investments, investments in meeting the state renewable energy standards, these are things that are solid. They’re not gonna fluctuate wildly, so that’s where I would put my money. I’d be nervous about putting money in carbon securities at this point because the future does seem somewhat uncertain.”

Margolis went next. “I’m going to focus on emissions reductions that are facility specific, that have a story behind them, that when I run them up [key regulators’] flagpole, [they say] ‘those look pretty good.’ And that means I need to have a pretty good understanding of what [the key regulators] want…I think we have a pretty good understanding of some of the criteria that are necessary…

"So I think there are places we can go to get some pretty good certainty but once everything is certain, prices are going to go from $2 to $200. When we go from 8 billion tons, which is where we’re gonna be in 2050 with business as usual, to 1 billion tons [with necessary cuts] you will see costly carbon in a relatively short time because that’s what the scientists say we need to get to from 8 billion to 1 billion.”

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Except for the closing laugh, Gero got the last word.

“I want to focus on a kind of longer term goal,” he said,“because we all know that the whole point of this kind of system, these complex mechanisms, is to get us to the fundamental transformation of the energy economy, from a fossil fuel based economy that we have today to a clean energy economy. We’re not going to get to 80% reductions by 2050 in any other way…[So] I would make long term bets on clean energy technology.

But…trying to put some bookends on this conversation…there is skepticism in the general public and among policy makers [about] financial markets. We all know that financial markets are manipulable and we know they’ve been manipulated…Any system that is complex is subject to potential manipulation…I would venture to guess that if a cap&trade bill moves, it’s going to move with very very strong market oversight regulation provisions because that is the fundamental skepticism about cap&trade.”

So there it is again, looming like a specter. A mechanism complex enough to meet the complex challenge of global climate change can either be simplified or vigorously regulated but how does it answer cynical charges that it is a rigged system or a Big Government tax?

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The smart betting right now is that it won’t have the political support to answer the cynics this year. But, as CantorCO2e’s Margolis told NewEnergyNews, it won’t be over until Senate Majority Leader Harry Reid (D-Nev) says it is. All Reid has to do is get some kind of agreement from business, the people and the cynics. Too bad somebody didn’t say that. It would have gotten another big laugh.

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