"Cap-and-Dividend:" A Realistic "Replacement" for Cap-and-Trade?

In contrast to one year ago, few people in the U.S. now believe that the U.S. Congress will be able to agree anytime soon on a greenhouse gas emissions-limiting bill that focuses on cap-and-trade.

Last summer, with the passage in the U.S. House of Representatives of the Waxman-Markey Energy bill there was some expectation that the Congress might be able to cobble together something. However, in the wake of the Obama Administration's inability to push through a health care bill, no one is holding their breath now in anticipation of a cap-and-trade measure.

Despite the palpable disappointment of many "greens," a cap-and-trade approach -- similar to what the European Union has agreed on -- may be a nonstarter. What might replace it, however, is a measure that has been characterized as "cap-and-dividend." Introduced in December 2009 by United States Senators Maria Cantwell, Washington state Democrat, and Susan Collins, Maine Republican, the cap-and-dividend measure has begun to attract a growing amount of attention.

The cap-and-dividend concept works in this manner:

• In 2012 the president will set an initial target amount of carbon from fossil fuels that can be emitted without disrupting the economy. The cap will gradually decline.
• Revenue generated by "carbon permits" comes from producers and importers of coal, natural gas, and oil. In other words, a power plant that burns coal does not buy carbon permits; they are paid for by the mining company that mined the coal. Using this approach, the "upstream" point of regulation means that only 2,000 to 3,000 fossil fuel producers and importers will face any new compliance obligations.
• Carbon price permits will be determined by a bidding process among fossil fuel companies participating in monthly auctions. Only entities with a compliance obligation are eligible to participate -- no Wall Street traders or speculators will be allowed in.
• Seventy-five percent of revenues will be returned to consumers (as a "dividend") directly each month on an equal per capita basis to offset energy cost increases. Average annual refunds for a family of four are estimated to be about $1,000. According to Senator Cantwell, "Sending auction revenues directly to consumers means 80 percent of the American public will incur no net costs and the lowest income population will receive net positive benefits."
• Twenty-give percent of revenues will go into the Clean Energy Reinvestment Trust Fund to pay for additional greenhouse gas emissions reductions, low-carbon energy investment, climate change adaptation, and related regional economic adjustment projects.

Publications ranging from The Economist to The Denver Post have written positively about the concept. For example, The Economist ("A Refreshing Dose of Honesty," Feb. 4, 2010) wrote that the bill "is refreshingly simple. At a mere 40 pages, it is one thirty-sixth as long as the monstrous House bill (known as 'Waxman-Markey' after its co-sponsors), which would regulate everything from televisions to 'bottle-type water dispensers' and is completely incomprehensible to a layman." Similarly, The Denver Post editorialized ("Fresh Start on Carbon Battle," Feb. 16, 2010), "[T]he structure of the system would encourage conservation and give Americans a big incentive to burn cleaner fuel...We very much like that it would avoid the creation of a vast energy-trading market such as the one envisioned in the Waxman-Markey bill."

Will the bill succeed? Good question and one not readily answered at this early stage. But nevertheless, a few observations:

• Wall Street bankers are not going to like the measure since it cuts them out "of the action" associated with permit trading.
• Fossil fuel companies are not likely to support it either for obvious reasons.
• The current simplicity of the measure means that all of the back room deals that were cut in putting the Waxman-Markey bill together will be gone, thus disappointing many Representatives who had worked hard to battle for their districts' interests (real and perceived).
• Some sectors of the economy won't like it either since they have been granted hugely favorable treatment in the House bill.

On the other hand, in Washington's current partisan stalemate the fact that a Democrat and a Republican senator have signed on to the bill is worthy of mention, but this in and of itself probably doesn't mean a great deal right now.

There are many difficult legislative issues on the 2010 political agenda -- jobs, financial sector regulation, health care -- so don't expect too much time devoted to cap-and-dividend. Only time will tell whether it is a game changer or merely another legislative idea destined to hit the scrap heap of other "good ideas" that came to naught. But it is a concept that all of us should keep in mind.

Click here to see the bill as originally introduced, and click here to see an in-depth overview of the measure.

Don C. Smith

Sheila Hollis, Leading Washington, D.C. Energy Attorney and DU Law Alum, Talks About U.S. Climate Legislation

Sheila Hollis, chair of the Washington, D.C. office of Duane Morris and graduate of the DU College of Law, was interviewed earlier this week about the status of climate legislation in the U.S. Congress.

The interview, "Duane Morris' Sheila Hollis Previews Difficult Climb to 60 in the Senate," was part of E&E TV's continuing coverage of major environmental and energy issues.  The program features experts, such as Ms. Hollis, talking about the most important issues before Congress.

Ms. Hollis has received multiple awards including recently being named as one of the 50 Key Women in Energy worldwide.   She was also a finalist for Lifetime Achievement in Energy in Platt's Global Energy Awards, an honor made even more noteworthy since she is the first attorney in private practice to be nominated for the award. In 2001-2002 Ms. Hollis chaired the Section of Environment, Energy and Resources of the American Bar Association.  In 2007 she was recognized by the college of law as an outstanding graduate.

Anyone -- lawyers, law students, graduate students, engineers, accountants, industry leaders, etc. -- interested in climate legislation should watch this video.  Ms. Hollis' observations about, among other things, the distribution of allowances made in the Waxman-Markey energy bill, which passed the House several weeks ago, as well as the "tariffs issue" that has arisen are extremely useful. 

As I have said before, there is no substitute for learning from the experts.  Sheila Hollis is definitely one of the best in the energy law field.

The European Union should "put an ambitious set of proposals on the table" at the UN climate change meeting in Copenhagen in December, a highly respected EU think tank said last week.

The Centre for European Reform (CER) said bluntly that if the EU does not take the lead in Copenhagen, "the negotiations could end in a stand-off."

While the U.S. largely limps along (the passage by the U.S. House of the Waxman-Markey bill represents some movement, but the details in the bill include a mind boggling array of handouts) in the climate change policy debate, it is interesting to see how European thought leaders -- including the CER -- view the issue:

"The EU has led the world in its response to climate change. And although the election of Barack Obama to the White House means more constructive U.S. engagement, there are few signs that Washington is prepared to take the lead. As a result, the onus to bridge the differences between rich and poor countries will rest with Europe. In an ideal scenario, the EU will put an ambitious set of proposals on the table; other developed countries will follow suit, showing that they are prepared to shoulder prime responsibility for saving the world's climate; and the developing world will then get on board."

However, the CER cautioned that in order for the EU to be credible at Copenhagen it needs to strengthen its own policies:

"The EU is relying on carbon pricing to encourage investment in green technologies. But carbon prices under the EU's emissions trading scheme are nowhere near high enough to provide business with the necessary incentive to make such investments. Unless companies start investing in new technologies now, Europe will not be able to bring about a permanent reduction in emissions. Bleak economic prospects (which means less output and few emissions) mean that prices are set to remain weak over the medium term -- unless action is taken to boost them. The [Swedish presidency of the EU] should recommend tightening the emissions caps or introducing price floors for carbon permits."

Finally the Wall Street Journal Editorial Page Weighs In: Waxman-Markey Bill Does "Almost Nothing to Reduce Carbon Emissions"

It took a week, but the venerable Wall Street Journal editorial page has now weighed in on the Waxman-Markey energy bill.

Since the Journal editorial page has never seemed to think that carbon emissions are harmful, I figured the second sentence in the editorial -- which says, "The 1,200-page wonder manages the supreme feat of being both hugely expensive while doing almost nothing to reduce carbon emissions" -- indicated that they were not entirely opposed to the measure, but a further read confirms that is not the case.  

The Journal editorial page, which is as predictable as the sun coming up in the east, holds forth as follows:

President Obama is calling the climate bill that the House passed last week an "extraordinary" achievement, and so it is. The 1,200-page wonder manages the supreme feat of being both hugely expensive while doing almost nothing to reduce carbon emissions.

The Washington press corps is playing the bill's 219-212 passage as a political triumph, even though one of five Democrats voted against it. The real story is what Speaker Nancy Pelosi, House baron Henry Waxman and the President himself had to concede to secure even that eyelash margin among the House's liberal majority. Not even Tom DeLay would have imagined the extravaganza of log-rolling, vote-buying, outright corporate bribes, side deals, subsidies and policy loopholes. Every green goal, even taken on its own terms, was watered down or given up for the sake of political rents.

Begin with the supposed point of the exercise -- i.e., creating an artificial scarcity of carbon in the name of climate change. The House trimmed Mr. Obama's favored 25% reduction by 2020 to 17% in order to win over Democrats leery of imposing a huge upfront tax on their constituents; then they raised the reduction to 83% in the out-years to placate the greens. Even that 17% is not binding, since it would be largely reached with so-called offsets, through which some businesses subsidize others to make emissions reductions that probably would have happened anyway.

Even if the law works as intended, over the next decade or two real U.S. greenhouse emissions might be reduced by 2% compared to business as usual. However, consumers would still face higher prices for electric power, transportation and most goods and services as this inefficient and indirect tax flowed down the energy chain.

The sound bite is that this policy would only cost households "a postage stamp a day." But that's true only as long as the program doesn't really cut emissions. The goal here is to tell voters they'll pay nothing in order to get the cap-and-tax bureaucracy in place -- even though the whole idea is to raise prices to change American behavior. At the same time -- wink, wink -- Democrats tell the greens they can tighten the emissions vise gradually over time.

Meanwhile, Congress had to bribe every business or interest that could afford a competent lobbyist. Carbon permits are valuable, yet the House says only 28% of the allowances would be auctioned off; the rest would be given away. In March, White House budget director Peter Orszag told Congress that "If you didn't auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States."

Naturally, Democrats did exactly that. To avoid windfall profits, they then chose to control prices, asking state regulators to require utilities to use the free permits to insulate ratepayers from price increases. (This also obviates the anticarbon incentives, but never mind.) Auctions would reduce political favoritism and interference, as well as provide revenue to cut taxes to offset higher energy costs. But auctions don't buy votes.

Then there was the peace treaty signed with Agriculture Chairman Colin Peterson, which banned the EPA from studying the carbon produced by corn ethanol and transferred farm emissions to the Ag Department, which mainly exists to defend farm subsidies. Not to mention the 310-page trade amendment that was introduced at 3:09 a.m. When Congress voted on the bill later that day, the House clerk didn't even have an official copy.

The revisions were demanded by coal-dependent Rust Belt Democrats to require tariffs on goods from countries that don't also reduce their emissions. Democrats were thus admitting that the critics are right that this new energy tax would send U.S. jobs overseas. But instead of voting no, their price for voting yes is to impose another tax on imports from China and India, among others. So a Smoot-Hawley green tariff is now official Democratic policy.

Mr. Obama's lobbyists first acquiesced to this tariff change to get the bill passed. Afterwards the President said he disliked "sending any protectionist signals" amid a world recession, but he refused to say whether this protectionism was enough to veto the bill. Then in a Saturday victory lap, he talked about green jobs and a new clean energy economy, but he made no reference to cap and trade -- no doubt because he knows that energy taxes are unpopular and that the bill faces an even tougher slog in the Senate.

Mr. Obama wants something tangible to take to the U.N. climate confab in Denmark in December, but the more important issue is what this exercise says about his approach to governance. The President seems to believe that the Carter and Clinton Presidencies failed by fighting too much with Democrats in Congress. So his solution is to abdicate his agenda to Congress -- first the stimulus, now cap and trade, and soon health care. We wish he had told us he was running to be Prime Minister.

A footnote to this blog: it is probably not wise to reprint an editorial in full, but in this case it was hard to know what to delete.  The Journal's editorial board labored many hours over this piece, and it seemed rather a shame to leave anything out.  

And one more thing: the "Washington press corps" that the editorial refers to in rather disparaging fashion -- isn't the Journal part of that press corps?  Last time I check, the Journal had a very good set of reporters in Washington, led by the extremely able Gerald Seib.  Does this mean that the Journal's Washington staff is also a mere cypher for the carbon-gone-wild Democrats?

Indian Environment Minister Criticizes U.S. "Carbon Tariff" Plan

Jairam Ramesh, India's environment minister, yesterday said his government rejected the inclusion of a "carbon tariff" in the Waxman-Markey energy bill.

A last minute provision added to the bill allows the U.S. to impose tariffs on goods entering the country from other countries that have not enacted carbon emissions reduction legislation.

Mr. Ramesh described the provision as "pernicious" adding, "We reject the use of climate as a non-tariff barrier," the Financial Times reported ("India Attacks US Carbon Tariff Plan," July 1, 2009). He also said, "We categorically reject any attempt to introduce climate change as an issue at the [World Trade Organization]."

Climate change negotiations between developed and developing countries are almost certain to be difficult in the run-up to the U.N. climate change meeting in Copenhagen in December. India's government is particularly sensitive to the desire by developed countries to limit the growth of carbon emissions, viewing it as a means of actually stalling Indian economic growth.

"India has not polluted. We are bearing the brunt of global climate change caused by the developed countries and we are being asked to curb emissions. I find this ludicrous," Mr. Ramesh said.

A footnote to the U.S. carbon tariff provision: when French President Nicholas Zarkozy suggested that the EU should adopt a similar measure for goods coming into the EU from countries not addressing climate change, the bellyaching in Washington could be heard all the way to the Elysee Palace in Paris. Apparently, what's good for the goose (in this case the U.S.) is not always good for the gander.

Financial Times' Characterization of Waxman-Markey: "Cap-and-Trade Mess"

Sometimes it is useful to look outside of one's "neighborhood" to see how an issue is playing somewhere else. This helps provide context for what may otherwise be only an "inside analysis" of a particular problem or issue.

An editorial in Monday's Financial Times, which is published in London, provides a welcome "outside" look at the recently passed Waxman-Markey energy bill. Despite the hoots and hollers by the bill's U.S. supporters, the view from the other side of the Atlantic -- and the only place, incidentally, that has a major emissions trading scheme -- raises some thought provoking observations:

"Cap-and-Trade Mess"

"The US House of Representatives has passed a bill to limit greenhouse gases. The White House lobbied hard for it: “A bold and necessary step,” said Barack Obama. Many hailed its passage as a triumph. In fact there is little to celebrate.

"Recall that cap-and-trade was expected only recently to pass in the House without difficulty. It scraped through by 219 votes to 212, with 44 Democrats voting against. Opposition to cap-and-trade in the Senate is stronger, so the chances of this bill or anything like it becoming law look slim.

"To make matters worse, the bill makes political compromises that undermine its effectiveness. Even so it passed by just seven votes. What this says about the prospects of a more forceful measure – one that dares to confront consumers with significantly higher energy costs – is discouraging.

"To curb climate change, the world needs to cut carbon emissions. It needs US leadership on the issue too. But this bill is not the way. A bewildering combination of cap-and-trade, mandates, new regulation, and every kind of open and disguised subsidy, it is too complicated, too prone to subversion and in many ways downright self-defeating.

"To soften its impact, the House first adopted undemanding targets for emissions. Debate made them milder still. Instead of auctioning emissions permits, the bill would give nearly all of them away, so the measure does little to raise needed revenue. Permits will be handed to electricity producers on condition that the windfall be passed to consumers, many of whom would see their electricity bills fall as a result.

"Learning nothing from Europe’s experience, the bill relies heavily on offsets, which let companies pay someone else to plant trees or cut emissions, so they do not have to. The still-unsolved problem is policing the system to ensure the offsets are real. The bill gives oversight of domestic offsets in farming to the Department of Agriculture – good news for farmers seeking a new trough of subsidy. To defend US competitiveness, it proposes subsidies for exporters and penalties on importers. In principle, cap-and-trade does require border adjustments, but the bill is careless and creates a gateway for protectionism.

"In short, it is a mess. The key to a better plan is understanding that you cannot cut carbon without making carbon-based fuels more expensive – an obvious point, you would think. But it is one that US policymakers still cannot face."

Doesn't exactly seem like a vote of confidence, does it.

In Historic Vote Waxman-Markey Energy Bill Passes U.S. House

In an historic vote, the U.S. House of Representatives late this afternoon passed the Waxman-Markey energy bill, the first piece of legislation ever approved by one house of Congress that would put a price on carbon dioxide emissions.

In a 219-212 vote, the measure passed and is now on its way to the U.S. Senate. Click here for a final vote tally.

The measure, co-sponsored by Congressmen Henry Waxman, California Democrat, and Edward Markey, Massachusetts Democrat, had been the focal point for the House Democratic leadership for weeks. In the end, despite the leadership's best efforts 44 Democrats voted against the bill. On the other hand, eight Republicans voted for it.

A few highlighted comments from interested stakeholders:

"In approving the Waxman-Markey climate bill, the House has chosen to ignore the legislation's harmful effects on American consumers, businesses and the economy. At a time when America is trying to recover from a serious recession, the House has approved legislation that would cost energy users billions of dollars and add new stress to the economy...We are hopeful that the Senate will produce a bill that does not harm the economy and includes a more balanced approach to transportation fuels and gas." Jack Gerard, president of the American Petroleum Institute

"The American Clean Energy and Security Act is the most important environmental and energy legislation in our nation's history. Today's vote is a huge achievement for the country and the climate...The bill that emerged from the House has the fundamental structure we need to significantly reduce carbon pollution while growing the economy. It puts a strong cap on emissions and reorients our energy market to make low-carbon power the goal. It ensures that utility rates will stay affordable and a competitive playing field for U.S. companies." Fred Krupp, president of the Environmental Defense Fund

"The [U.S. Chamber of Commerce] hopes, at some point, that Congress will find a way to balance the need for a strong U.S. economy while still addressing global climate change. Unfortunately, Congress has fallen short with this bill." William Kovacs,senior vice president of environment, technology and regulatory affairs for the U.S. Chamber

"With today's historic vote, Congress has taken the first step toward unleashing a true clean energy revolution...This bill sets the stage for the dawn of the clean energy future. While imperfect, it sets forth a set of goals America must achieve-- and exceed. Its most important achievement is setting the United States on a path to reduce carbon emissions some 80 percent by 2050." Statement by the Sierra Club

Waxman-Markey Energy Bill Heading for House Floor and Historic Vote

The U.S. House of Representatives is expected to debate the Waxman-Markey energy bill on the floor of the House as soon as Friday. A vote on the bill would be an historic first for a federal government that has generally -- until this year -- taken an ambivalent if not hostile view of climate change legislation.

The bill moves to the House floor with the support of Congressman Collin Peterson, Minnesota Democrat and chair of the House Agriculture Committee, who had fought his corner (i.e., protecting farm interests) right up to Tuesday afternoon. One concession that Mr. Peterson won from bill co-sponsor Congressman Henry Waxman is that the U.S. Agriculture Department rather than the U.S. EPA will manage the farm-related aspects of the bill. There will also be more emissions credits freely given to electric co-operatives, another major sticking point for Mr. Peterson.

Mr. Peterson may bring along as many as 50 moderate Democrats in support of the bill, and thus his support has been viewed as critical to the bill's passage. The final wording of the bill will come in the form of a manager's amendment that will be presented on the floor at the time the bill is taken up for debate.

As all of this was unfolding, the battle for winning passage hit full speed today. President Barack Obama said Tuesday afternoon, "This week the House of Representatives is moving ahead on historic legislation that will transform the way we produce and use energy in America...We all know why this is so important. The nation that leads in the creation of a clean energy economy will be the nation that leads the 21st century's global economy. That's what the legislation seeks to achieve. It's a bill that will open the door to a better future for this nation and that's why I urge members of Congress to come together and pass it." Similarly, and of no surprise, the National Association of Clean Air Agencies, urged the House to pass the bill.

Nearly two dozen U.S. electric utilities and companies published an ad yesterday in the Washington Post calling for passage of the measure. "We support this legislation because certainty and clear rules of the road enable us to plan, build, innovate, and expanded our businesses," the group, which includes Duke Energy, eBay, Nike, NRG Energy, and Starbucks, said.

On the other hand, the American Petroleum Institute said the measure would "drive up the cost of gasoline and other petroleum fuels for consumers and businesses." Senator James Inhoffe, Oklahoma Republican, also voiced opposition saying "Waxman-Markey is a massive energy tax on American families that will destroy millions of jobs and make America's businesses and entrepreneurs less competitive in a global marketplace."

Alongside the push and pull of the legislative process came two reports on what a cap-and-trade bill in the form of Waxman-Markey might mean for American households. The non-partisan Congressional Budget Office reported that the cost in the year 2020 (but expressed in 2010 dollars) would be about $175 a year. An EPA study said the cost would be in the range of $80-$111 annually.

The bill, which now weighs in at 1,024 pages, could be voted on by Friday evening.

Paco, my loyal research assistant, asks what I think is a very legitimate question: "Can we assume that no one in the House will have actually read through the entire bill by the time it's voted on? And in any case, does this make any difference?" My reaction: "Where you have been Paco? Since when was it necessary for congressmen and women to have actually read through and understood completely a measure before they voted on it?"

Oh the beauties of the American legislative process.

Congressional Budget Office Says Waxman-Markey Legislation Would Generate About $850 Billion Over 10 Years

The Congressional Budget Office Cost Estimate for the Waxman-Markey legislation predicts that revenue generated by auctions of carbon emissions credits will be $846 billion from 2010-2019.

By fiscal year, the projections (in billions) are:

2010: .9

2011: 39.1

2012: 59.1

2013: 63.5

2014: 90.6

2015: 104

2016: 112.3

2017: 117.6

2018: 126.1

2019: 132.3

All but about $24 billion of the revenue will be used to pay for programs proposed in the legislation.

Waxman-Markey Energy Legislation Report Released

The U.S. House Energy and Commerce Committee has released the committee report on the comprehensive energy legislation -- also known as the Waxman-Markey bill -- that was approved last month.

The report includes the bill as amended, a section-by-section explanation, and all committee votes on the measure.

Meanwhile, yesterday the committee heard testimony on issues related to emission allowances. Thomas Ferrell, president of Dominion Resources, told the committee that the Edison Electric Institute -- an investor-owned electric utility trade organization -- supports a provision giving local electric distribution companies 30 percent of the allowances for free, E&E News PM reported ("Waxman Releases Committee Report of Cap-and-Trade, Energy Bill," June 9, 2009). On the other hand, David Sokol, chair of MidAmerican Energy Holdings, asked the committee to delete the free emissions allowances.

Revised Summary of American Energy and Security Act (H.R. 2454) Released by House Energy Committee

On May 21, 2009, the U.S. House Energy and Commerce Committee reported out of committee the American Energy and Security Act (H.R. 2454), which is also known as the Waxman-Markey bill.

A revised bill summary is now available.

Meanwhile, word from Capitol Hill is that Speaker Nancy Pelosi, California Democrat, wants the bill debated on the floor of the House before the July 4th recess. Stay tuned.