Heard on the Street - The Latest About The Kerry-Lieberman (not Graham) Energy Bill

Posted on May 10, 2010 by Reed Rubinstein

Here's the latest rumors about the contents of the Kerry-Lieberman Senate Energy Bill.  It used to be the Kerry-Graham-Lieberman Senate Energy Bill, but Sen. Graham has bailed out.  It is not clear whether this information is accurate, but here it is, for what its worth.  This is being sold as a "transformational" law.  The drafters don't want to do much - just fundamentally remake the entire US economy.

1. This is a cap and trade bill covering the entire economy. When Sen. Graham said "cap and trade is dead," he meant the term, not the program.  In any event, the caps are phased in by sector. First utilities, then transportation, then manufacturing. There is a "five year plan" (honestly) for the caps. There will be a "price collar" pegged to CPI. Secondary and derivative carbon trading will take place regulated by the CFTC. There will be international and domestic agricultural offsets. The government will take about 20% off the top from the allowance fund to cover its increased energy costs and for deficit reduction. However, the drafters were very vague about how the money will be handled, who will actually sell the allowances, whether a new agency is required, what the revenue projections are, etc. Apparently, the Environmental Defense Fund is doing the economic modeling for the bill

 

 

2. There will be a gasoline tax, though its not called that. Refiners get some breaks in the form of free allowances.  There will be very extensive and expensive building and home efficiency requirements - this means commercial real estate owners and developers are facing increased costs and regulatory requirements. There will be more money for solar/wind development. There will be a "robust" nuclear title, with reforms in permitting, insurance, siting requirements, etc. to speed deployment. There will be provisions for continued use of coal provided there is carbon capture and sequestration (CCS) technology available. No viable CCS, no coal. The bill contains no liability relief or siting assistance for CCS operations, further complicating deployment. There may be siting assistance for new transmission lines, but nothing else. Off shore drilling is still in, but may be out by the time the draft is made available to the public (supposedly next week). Nothing for natural gas - the drafters said that the bill will drive people away from coal, and encourage the use of natural gas trucks, so their market is made without more.

3. There will be "rebates" to consumers to cover higher utility bills. However, these will be in the forms of tax credits and/or grants to community organizations, not necessarily in the form of checks. Only the "vulnerable populations" will qualify for direct cash rebates.   Also, some of the allowance revenue will be "recycled" in the form of funding for the highway trust fund, grants for solar arrays or wind farms, battery research, etc. No real analysis of job losses or economic impact has been done.

4. The drafters tacitly admitted that the bill, if enacted, will not have any material impact on the increase in worldwide CO2 levels. They said that they hope China and India will agree to reduce CO2 emissions based on our example. The trade provisions in the bill are still under discussion.

5. There is not so much preemption. EPA cannot call CO2 a hazardous air pollutant, or set a NAAQS for GHGs, and state CO2 registries and exchanges are out of business. That's it. EPA may continue to regulate mobile sources (cars and trucks). Tort suits go forward. Claims under ESA, CWA, NEPA, state laws, etc. all in play. Also, the bill leaves the door open for EPA to step back in and re-regulate GHGs if worldwide levels exceed an as of yet undefined benchmark.

6. The bill will be about 1500 pages long. It will incorporate provisions of three other energy bills now kicking around the Senate. If passed, there may be a conference to reconcile with Waxman-Markey. Alternatively, they'll use reconciliation ala health care. The primary difference between this bill and Waxman-Markey seems to be more effort has been made to buy off coal state Democrats and to strengthen nuclear power development to reduce Republican opposition.   Substantively though, the bills are very similar.

No matter what anyone says, it seems that the primary purpose of the bill is to "transform the US economy." It will be pitched as a jobs bill and an energy security bill for political reasons, however, there are no data/studies supporting these claims. 

The bill is very much a work in process, but the basic outlines are unlikely to change in any material way.
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Casas on Cap and Trade Part II

Posted on April 7, 2010 by Reed Rubinstein

From Greg Casas, GT Houston.

As the Senate turns to an energy/cap and trade/tax bill to reduce GHG emissions, the pundits are turning to the question of whether cap and trade (a) will be enacted and/or (b) reduce GHGs. The Huffington Post’s Robert Stavins links the demise of cap and trade to the failing economy, to an endemic lack of faith in markets, and to the fact that cap and trade was the leading proposal to limit and reduce greenhouse gas emissions. In other words, cap and trade has been attacked by Republicans and coal-state Democrats because it was supported by the everyone else. 

The problem with this is that not “everyone else” supports cap and trade. For example, Annie Leonard launches a hyperbolic attack on cap and trade (e.g. cap and "giveaway" was designed by Enron alumni and Goldman Sachs, and is akin to the pyramid scheme of Bernie Madoff), and misinformation about how markets actually work .    According to Leonard, cap and trade is bad, can never work and will be abused by big business to make money and continue to pollute. 

Leonard is not entirely wrong. Improper cap and trade programs accomplish nothing. However, Leonard substitutes invective for analysis. Her solution is to slap carbon fees on “polluters” – neglecting to mention that these “fees” will be paid by consumers – and then sending the money overseas to pay our "ecological debt." Her approach calls for severe regulation, which even she admits will be "painful," to reduce emissions.

A recent MIT report, offhandedly and wrongly cited by Leonard, demonstrates the fallacy of her approach by concluding proper cap and trade systems can reduce GHGs without significant economic impact.  MIT assumes free allocations of allowances might be necessary at the outset, but that allowances will be auctioned as the system matures. Further, allowances must be created based upon realistic expectations for manufacturing and energy production. Overestimating the need will result in no incentive to reduce emissions, or worse, the misuse of unused allowances, as in Hungary. Underestimating need, on the other hand, will result in skyrocketing prices and in fact tank the economy as critics warn. 

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Reading The Budgetary Tea Leaves.

Posted on February 12, 2010 by Reed Rubinstein

The FY2011 Budget is out.  The numbers provide useful indications of key Obama Administration environmental and energy policies.   Highlights include an aggressive EPA rule-making agenda to control GHGs and more money for DOE 's renewable energy research but huge cuts in DOE's fossil fuel programs.

To begin with, the term "cap and trade", which was prominently featured in the FY2010 Budget (see for example page 21) is missing entirely from the FY2011 Budget.   The new and apparently improved euphemism for mandatory GHG emission controls is "comprehensive market-based policy that will reduce greenhouse gas emissions."  While the Administration has apparently jettisoned "cap and trade" as a political liability, it remains committed to regulating GHG emissions and has requested significant funding for EPA to do so through command and control regulations. The Administration allocates "$56 million– including $43 million in new funding – for the EPA and states to address climate change effectively through regulatory initiatives to control greenhouse gas emissions."   The budget is $25 million for states to regulate GHG emissions under the New Source Review and Title V operating permits programs, $7 million for New Source Performance Standards (NSPS) to regulate GHG emissions from major stationary sources, $6 million to implement the 2010 auto emissions rule and to develop regulations for large mobile sources, and $5 million to develop guidance regarding the best available practices and technologies to control GHG emissions through command and control permits.   My suggestion here that key Administration policymakers viewed GHG legislation as a mere side-show and were instead committed to administrative rule-makings seems to have been on the mark. 

Other key EPA funding requests include $3 billion for water infrastructure projects and millions more for enforcement.  Notably, EPA's Budget anticipates re-institution of the long-dead Superfund tax.

DOE's Budget emphasizes scientific research.   $5.1 billion is allocated for the Office of Science and $300 million for ARPA-E.    An additional $5 billion is promised for the successful 48C tax credit program as well as $36 billion in loan authority for nuclear power plants and $545 million for carbon capture technology.  DOE seeks $302 million for solar, $220 million for biofuels and biomass R&D, $325 million for "advanced vehicle technologies" and $231 million for "energy efficient building technologies."   

Fossil fuels take a beating.  DOE proposes a 43% cut in funding for the U.S. Strategic Petroleum Reserve, no money at all for clean coal, and a 12.8% cut in funding for fossil fuel research and development. 

What then do we learn from the FY2011 EPA/DOE Budget?  Well, first and foremost, it is terribly unwise to underestimate the Obama Administration's ideological commitment to "climate change" regulation through restrictions on fossil fuel use and development, and stakeholders need to plan and act accordingly.   Administrative rules, not legislation, appears to be the preferred mode of control and Federal agencies are moving very aggressively to implement the GHG control agenda. 

It is gratifying to see DOE devoting serious money to "hard science" R&D, enlarging its successful loan guarantee and tax credit programs, and taking the first steps toward a serious domestic nuclear power effort.  Still, the evisceration of its relatively small yet critical fossil fuel programs, including the Strategic Petroleum Reserve, is very troubling.  As the President pointed out, domestic energy security requires a robust domestic fossil fuel industry.  However, the FY2011 Budget suggests energy security is a lesser value, for  the Administration has targeted existing tax breaks and incentives for domestic oil and coal exploration for termination, apparently because of its single-minded GHG agenda and without regard for domestic energy security or economic efficiency.  This is a problem at many levels, reflecting, in the words of one Brookings Institution expert, a "profound ignorance of our petroleum industry."
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