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| 2/19/2010 9:36:00 AM | Email this article • Print this article | Cap-and-trade legislation falters, but the goals don't
Each side in global warming debate claims economic benefits
News Analysis
As with the rest of his legislative agenda, President Barack Obama's effort to establish a U.S. carbon cap-and-trade system is stuttering and stalling in Congress, though that doesn't mean the push to radically reduce fossil fuel emissions is faltering along with the legislation.
Cap-and-trade is, in this case, a fossil fuel emissions trading process where total emissions are limited, or capped. Permits are allocated to companies up to the cap, and a market allows those participants who don't exhaust their quota to sell the excess permits to firms needing to buy additional permits.
After the Obama administration's version of cap-and-trade legislation passed the U.S. House of Representatives this past June, it looked as if there was no stopping it, or health care reform, or any other piece of the Obama agenda.
In fact, though, the wheels came off cap-and-trade long before the Massachusetts Senate election derailed health care reform. It was in trouble in the Senate from the get-go.
For one thing, the bill was immense.
"It's a complicated piece of legislation," John Piotrowski, an engineer with Packaging Corporation of America, said at a recent Oneida County meeting of the Wisconsin Towns Association.
Piotrowski was delivering a presentation he has prepared on the legislation (from his personal perspective, not that of PCA).
"It is arguably one of the most comprehensive pieces of legislation ever considered," he said. "There are more than 400 separate regulations attached to the bill and 1,100 mandates. It will affect every business and every household in the United States."
What the bill says and does
Specifically, the bill aims to reduce carbon dioxide emissions by replacing fossil fuels with renewable energy resources such as biomass, solar and wind. Hydroelectric and nuclear power do not count.
The system would be made up of so-called allowances, with one allowance permitting an emission of one ton of carbon dioxide.
Each company would be capped according to a base-line year of 2005. The cap would then be reduced in subsequent years.
"Once the cap is established and then it diminishes, we can either cut our fossil fuel consumption or purchase other allowances from businesses that have successfully reduced their emissions and have extra," Piotrowski said. "Theoretically, as the cap diminishes, an allowance becomes more valuable."
Using 2005 as the baseline, the goal of the bill, authored by Rep. Henry Waxman (D-Calif.) and Edward J. Markey (D-Mass.), is to reduce carbon dioxide emissions by 3 percent by 2012; by 17 percent by 2020; by 42 percent by 2030; and by 83 percent by 2050.
While figures are easy to bandy about, Piotrowski asks, what do those percentages mean in terms of the real world and the real economy?
"Reducing fossil fuel emissions by 17 percent by 2020 puts us back to the 1998 economy in terms of fossil fuel emissions," he said. "The 2050 goals would put us back to 1910."
In other words, he says, the economy would be using the same amount of fossil fuel to power energy in 2050 as it did in 1910.
"For the average household, that might power a single refrigerator," he said.
Piotrowski said utilities and manufacturers with more than 25,000 tons of emissions per year would be the most dramatically affected.
What it means overall
In Piotrowski's view, cap-and-trade would lead both to higher residential and business energy costs and to massive layoffs, and in fact he says it has already done so in Europe.
"If I were to move my house to Europe, I would pay about three times more for energy consumption as here," he said.
Others say it also leads to profiteering, while not actually reducing emissions.
A year ago, in February 2009, a Washington Post editorial called the European experience with cap-and-trade Exhibit A on how not to approach fossil-fuel reductions.
"Emissions targets were set too high," the editorial stated. "Too many pollution allowances were given away to industry. The value of a carbon credit plummeted. Companies made windfall profits by charging customers more for energy while selling allowances they didn't need. And the Europeans have not had much success reducing greenhouse gas emissions."
In testimony before Congress last year, Ben Lieberman, a senior policy analyst with the conservative Heritage Foundation, said the impacts would be similar in the United States, all with limited environmental effect.
"Our analysis of that bill estimates higher energy and other costs for a household of four averaging nearly $3,000 annually and overall lost gross domestic product of $393 billion annually and $9.4 trillion cumulatively by 2035," Lieberman said. "We also estimate over a million lost jobs. And even assuming it works to reduce emissions, Waxman-Markey has been estimated by climate scientist Chip Knappenberger to reduce the earth's future temperature by no more than 0.2 degree C by 2100."
In his presentation, Piotrowski said the European experience ratified the reality of lost jobs, while companies profit from the layoffs.
"Most companies have a jingle and typically it says something like our most valued asset is our people," he said. "But in the world of cap and trade, the value of people has to be measured against the value of your allocation."
All of which means it can be more profitable to reduce both the work force and emissions by reducing production then selling the resulting excess allowances.
Last year, for example, Corus, Europe's second-largest steel producer, closed a British steelmaking plant, eliminating 1,600 jobs. Corus blamed lower steel demand because of the global recession, which caused a consortium to back out of long-term contracts.
There's no doubt the recession lowered the demand for steel. The question is, did cap-and-trade exacerbate the economic consequences?
To wit, a growing surplus of carbon credits naturally accompanied the falling market demand. According to the Wall Street Journal, in 2008, Corus already had the second largest surplus of EU carbon allowances, coming in with 7.5 million.
By closing the plant, the Journal opined, the company generated even more credits because it produced six million fewer tons of carbon dioxide. That's six million more credits the company could sell.
At $50 a credit - the value has been hovering at about $20 a credit, but the European Union is seeking to boost it to $50, and companies can horde the credits - the company would net an additional $300 million a year, not including the wage-and-benefit savings it gained through layoffs.
In this view, The Wall Street Journal expounded, the company was being paid handsomely to throw its employees out of work.
Even worse for Wisconsin?
In the United States, the way the legislation is written could cause certain states big problems - and Wisconsin is one of them.
For example, Wisconsin would be capped at 71 percent of its 2005 baseline, Piotrowski said, while California would get allowances for 114 percent of its baseline.
So why the generosity for California?
Well, for one thing, Waxman hails from California.
Besides that, Piotrowski said, the upper Midwest is being penalized because, as a region, it relies heavily on coal-generated power, more so than some other regions. The Midwest is more than 60 percent dependent on coal, in fact, while California uses less than 10 percent.
"The reason the Upper Midwest uses coal is that it is a relatively cheap way to generate power," Piotrowski said. "If we are forced to use renewable resources, the costs will go up. The economics drive it that way; the physics drive it that way. So Wisconsin would pay for both the historical insult and the remedy for climate change."
For industry, Piotrowski said, the concerns are many.
"We're not planning to move out of the country, but if the costs are prohibitive, one simply can't do business any more and you're obligated to find a place where you can survive and thrive, wherever that may be," he said.
A Heritage Foundation study agreed with Piotrowski's analysis, saying cap-and-trade would reduce gross state product by $8.95 billion by 2035.
And as the economy adjusts to shrinking gross domestic product and rising energy prices, employment would take a hit in Wisconsin, too, the study stated.
"Beginning in 2012, job losses will be 33,472 higher than without a cap-and-trade bill in place," the report stated. "And the number of jobs lost will only go up, increasing to 67,434 by 2035."
Proponents of cap-and-trade
Cap-and-trade does have its proponents outside the halls of Congress, including environmentalists, President Barack Obama, and Wisconsin Gov. Jim Doyle.
They see the impacts much differently.
For one thing, according to Dr. Bill Chameides, it's classically market-based, providing incentives to compete to discover the best ways to cut emissions.
"In a cap-and-trade system, the government plays a small role, and leaves the main decisions to the private sector," Chameides wrote in 2007 while serving as the chief scientist at Environmental Defense. "It does not tell industries and companies what to do or how to meet their allocations. Each company is free to make those choices. It can reduce its own emissions or pay someone else to lower them. Businesses can profit by coming in below their cap and selling their extra carbon credits to others. Even farmers can profit by enhancing carbon storage in soils and trees and selling the extra carbon credits."
Unlike a tax, he wrote, it encourages innovation by creating incentives and rewarding those who lower emissions at the least cost.
Richard L. Revesz, dean of New York University School of Law, and Michael A. Livermore, the executive director of the Institute for Policy Integrity, say cap-and-trade levels the playing field by forcing fossil-fuel prices to reflect their true cost.
That, they wrote last March, will spur a wave of clean-energy investment, including research and development in new technologies, new factories to produce solar panels and wind turbines, and energy-efficiency retrofits of commercial and residential real estate.
"That means jobs, and lots of them," Revesz and Livermore wrote in Business Week. "While some businesses that rely on dirty energy will be hurt, many others will thrive in the clean-energy economy."
Obama's cap-and-trade is different from other plans because the carbon permits are not given to companies but are auctioned to them, they wrote. Either way, Revesz and Livermore conceded, the cost is passed on to consumers through higher electric bills, but the Obama plan recoups the cost with the auction rather than allowing the companies to pocket the pass-along.
Obama's plan then refunds the money to consumers through a tax credit.
"If all, or nearly all, of the revenue from an auction is directly refunded, most Americans will receive more from the refund than they pay in increased energy prices," they wrote.
In addition, Waxman says, jobs created in the green-energy field cannot by their very nature be moved to foreign countries.
"This legislation will create millions of clean energy jobs, put America on the path to energy independence, and cut global warming pollution," he said. "We will create jobs by the millions, save money by the billions, and unleash energy investment by the trillions."
What's more, the group Environmental Defense Fund asserts, history is on the side of cap-and-trade because it has already worked, both in the United States and abroad.
"Cap and trade was designed, tested and proven here in the United States, as a program within the 1990 Clean Air Act Amendments," the group states on its website. "The success of this program led The Economist magazine to crown it 'probably the greatest green success story of the past decade (July 6, 2002).'"
In the beginning, the group observed, the expected market price for sulfur dioxide allowances was in the range of $650-$850 (in 2000 dollars) but the actual market turned out to be between $100 and $200 for most of the program.
"In the 1990s, the U.S. acid rain cap and trade program achieved 100 percent compliance in reducing sulfur dioxide emissions," the group concluded. "In fact, power plants took advantage of the allowance banking provision to reduce (sulfur dioxide) emissions 22 percent (7.3 million tons) below mandated levels for the first phase of the program."
On the eve of the legislation, the group continued, the EPA estimated the program would cost $6 billion annually once it was fully implemented, but the Office of Management and Budget later estimated actual costs to be $1.1 billion to $1.8 billion - just 20 to 30 percent of the forecasts.
And compliance was achieved without doomsday economic consequences.
Sustainable or not
Still, sulfur dioxide emissions did not compare with the magnitude of carbon dioxide emissions.
And even if the comparison was apt, beyond the economic impacts, another question looms: Even if cap-and-trade worked as its proponents say it would, are its goals scientifically feasible?
As Piotrowski points out, energy demands dictate that, as carbon-based energy declines, renewable resource-based energy must replace it. In the cap-and-trade scheme, that does not include hydroelectric power or nuclear power.
To put that in perspective, consider that as of 2006, fossil fuels generated 86 percent of the world's power, according to the U.S. Energy Information Administration.
By contrast, solar, wind and biomass provided a much smaller bandwidth of energy production - less than 7 percent, including hydroelectric power.
So can these nascent technologies and industries grow fast enough to meet the requirements of the legislation?
Piotrowski says no.
"As fossil fuel emissions go down over time, we have to replace and amplify this little band of energy," he said. "Is it realistic? Well, I'm a science guy. When it comes to physics and politics, physics will win because the physics can't be altered, no matter what your politics are."
Dick Armey, the former U.S. House Majority leader and later chairman of FreedomWorks, made the same point in a 2005 letter to U.S. Senators.
"Most analysts agree that renewable technologies, such as solar and wind power, are not sufficiently developed to provide a viable alternative to current energy sources," he wrote, citing the EIA's conclusion that solar technology was still in the early stages of development, with relatively high costs and uncertain performance, while wind resources were often far from electricity customers.
Then, too, if the wind wasn't blowing, the resources might not be available during peak daily or seasonal loads.
That analysis hasn't changed much since 2005. In 2008, as Josie Garthwaite observed in Salon, the EIA estimated that renewable sources would provide only 12.5 percent of total U.S. electricity generation in 2030, up from 8.4 percent in 2007. It also forecast renewable fuel consumption growth at only 3.3 percent for 2009.
In fact, in its 2007 Annual Energy Outlook, the EIA forecasts that fossil fuels will continue to provide roughly 86 percent of U.S. primary energy supply in 2030.
Political support
In general, the politics of cap-and-trade break down along party lines, with Democrats supporting the legislation and Republicans opposed.
Passage last summer in the U.S. House came on a narrow 219-212 margin; eight Republicans broke ranks to provide the difference.
In Wisconsin, all Democrats supported cap-and-trade: Tammy Baldwin; Ron Kind; Gwen Moore; Dave Obey; and Steve Kagen.
All Republicans opposed it: Paul Ryan; Jim Sensenbrenner; and Tom Petri.
Ryan has been vocal on the issue, calling it an economy killer.
"At a time when jobs are increasingly scarce across southern Wisconsin, Congress passed legislation explicitly designed to shrink our economy and increase energy costs on all Americans," Ryan said. "Wisconsin is one of the nation's top manufacturing states. Wisconsin entrepreneurs, small businesses, and workers shouldn't need permission from the federal government to produce, grow, and create jobs, yet that is exactly the paternalistic message sent by Congress today."
Ryan said the measure included a 300-page amendment that effectively regulated the national energy sector, or 8 percent of the U.S. economy.
"This bill is the biggest federal power grab of the American economy this year and that's quite a statement," he said.
Ryan echoed Piotrowski's and the Heritage Foundation's analysis that Wisconsin would be disproportionately hurt.
"As the legislation's authors and chief advocate reside far from the Midwest, the cap-and-trade legislation wasn't primarily concerned with cold-weather, manufacturing states that get most of their energy from coal," he said. "Families in southern Wisconsin don't have the luxury of turning off the heat in the winter."
Even worse, he said, the bill would actually undermine environmental protection.
"By making manufacturing more expensive here in America, this bill would send our manufacturing jobs overseas to our competitors like India and China," Ryan said. "For every ton of emissions we reduce, India and China will produce several tons more. Under this bill, we will send our competitors American jobs while they are negating the minimal environmental gains made here at home."
Kagen sees it in an entirely different light, saying the legislation would create higher wage jobs and support industries across Wisconsin.
"This bill will encourage private sector investments in clean energy to create new jobs in northeast Wisconsin while supporting the industries that have been part of our way of life," Kagen said. "We are taking the necessary steps to reduce our dependence on foreign oil and build a better future for our children and grandchildren."
Kagen also said the bill would ensure that Wisconsin's family farms are rewarded for their efforts to operate self-sustaining farms, while expanding the market for biofuels and renewable energy by reclassifying all trees as agricultural products and all tree byproducts as renewable energy sources.
He said farmers and forest owners would benefit as well from the creation of a market-based carbon offset program run by the U.S. Department of Agriculture.
"We have kept the EPA off our farms," Kagen said.
But one Democratic senator has not yet embraced the bill, at least as of late last year: Russ Feingold
"I'm not signing onto any bill that rips off Wisconsin," Feingold said in September.
He also stood at arms length from the bill during a Northwoods visit last August.
"You know, the other countries won't play ball," he said of his attempts to get the international community to work together on global warming. "Maybe we should impose tariffs. We should put some pressure on them. They cannot be given a free pass, and we cannot do cap-and-trade alone."
Richard Moore can be reached at rmmoore1@verizon.net.
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Reader Comments
Posted: Friday, March 12, 2010
Article comment by:
butch
This bill would be fine except after all is said and done it will be twisted and bastardized so it wont have any benefit for any body. Remember GATT AND A FEW OTHERS?
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