"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

Smithsonian Magazine Reports on the Political History of the Cap-and-Trade Concept in the U.S.

If you are not yet familiar with the cap-and-trade concept, then maybe it is time to brush up on it.

First introduced into U.S. legislation in 1990 by President George H.W. Bush, the cap-and-trade began its role in U.S. environmental law to address problems with acid rain. But the concept of cap-and-trade goes back much farther than that.

The July issue of the Smithsonian Magazine includes "The Political History of Cap and Trade," which provides a brief but useful overview of cap-and-trade, why the first Bush administration adopted it as part of its agenda, and how it works.

Despite being skeptical if not out right antagonistic to the concept of cap-and-trade, the European Union -- with urging from the Clinton administration -- decided that it would form the backbone of the EU's efforts to address climate change. Of course after the U.S. persuaded the Europeans to adopt cap-and-trade what did the U.S. do but effectively absent itself from any constructive role in the climate change debate.

In any case, knowing about the fundamental aspects of cap-and-trade is likely to grow increasingly more important as time goes on. This article will help provide a context in which to come to a better understanding of it.

Cap-and-Trade: A Step Towards "Environmental Progress" or Simply a Giant "Bubble Machine" That Will Enrich Wall Street?

There are many (but certainly not everyone) in the environmental and utilities communities who think that the cap-and-trade concept is a reasonable approach to reducing greenhouse gas emissions. But a recent story in The Rolling Stone ("The Great American Bubble Machine," July 9-23, 2009) makes the argument that the cap-and-trade concept being discussed in Washington is effectively "a new commodities bubble" that will enrich a handful of traders.

Of particular interest is the discussion of "Bubble No. 6: Global Warming". Matt Taibbi, the newspaper's politics reporter, contends cap-and-trade "will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the [financial] bailout: It allows the bank to seize taxpayer money before it's even collected. [Mr. Taibbi's italics]"

Mr. Taibbi explains:

"The feature of [the cap-and-trade] plan that has special appeal to speculators [such as the investment banks] is that the 'cap' on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time."

And here is some more troubling information about one of the leading corporate cap-and-trade supporters, investment giant Goldman Sachs:

• President Obama received $981,000 in presidential campaign contributions from Goldman employees.
• In the last election, Goldman employees gave nearly $4.5 million to the Democratic Party and its candidates (do you think this had anything to do with the fact that in the run-up to the November 2008 election it looked like the Democrats would continue their control of the House and would likely take control of the Senate? Surely not...).
• Last year, Goldman spent more than $3 million to lobby on issues related to climate.
• The Chicago Climate Exchange, which presumably will be right in the middle of emissions trading, is owned in part by Goldman.
• The Obama Administration is filled with Goldman alumni, not all that bad perhaps from Goldman's standpoint but what about the larger public?

Of course it would be nice to conclude that Goldman and its employees' actions are purely those of interested citizens and a benevolent company. But, after what all of us have seen in the last year, that's about as hard to swallow as a fresh $8 hot dog (to say nothing of a two-day old one) at Mile High Stadium in Denver. I do not care how many $10 beers one tips to wash it down. You still cannot rid yourself of the awful taste, and the knowledge that you actually ate the vile thing. (I know about this...I tried it several years ago.)

In the article, Mr. Taibbi takes Goldman Sachs to task (a better word is "excoriates") for a whole list of bubbles including the Internet and mortgage bubbles before moving on to cap-and-trade.

In response, Lucas van Praag, a spokesman for Goldman, told FelixSalman.com that, "Taibbi's article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance was there to support the theories? We reject the assertion that we are inflators of bubbles and profiteers of busts, and we are painfully conscious of the importance of being a force for good." (And making astronomical amounts of money, too, it might be observed -- check out Goldman's profits for the last quarter).

What to make of this? I suppose that any time a market is created -- which is effectively what cap-and-trade will do -- there are opportunities for the quick and clever to make money. No one I know disagrees that making money is what makes the world go round (this is the lesson the Chinese seem to be preaching to the Americans and Europeans in particular). But why is Goldman so interested in this particular issue? Are they simply doing it for the good of the planet?

As a long suffering fan of the Kansas City Chiefs pro football firm (cannot really call it a "team" anymore since these outfits are businesses, not sports "teams" as they once were), I want to believe that the Chiefs will win the Super Bowl next January. I want to believe that they have assembled a team that all Chiefs' fans can be proud of. But I also know that just as surely as the sun comes up in the east and goes down in the west, the Chiefs are about as likely to make the Super Bowl as I am of being President Obama's second nominee (when a position opens) for the U.S. Supreme Court.

The point is that we can all dream magical thoughts, but reality often pokes its ugly head into the dream. All of this has set me to wondering about exactly how the cap-and-trade is going to be implemented (if it's passed) and who will be among the big beneficiaries. For some reason, I can't get Goldman out of my mind...

Big Four Accounting Firms Prepare for Cap-and-Trade; Will U.S. Legal Practitioners be Ready?

If there was ever any doubt about the legal and consulting opportunities associated with a cap-and-trade system in the U.S. those doubts can likely be put to rest -- the Big Four accounting and auditing firms are rapidly gearing up for some type of U.S. greenhouse gas emissions regulatory system.

About 10 days ago, I posted a piece "Accounting and Sustainability" that pointed out how accounting firms have been quite aggressive in seeking out new market niches.  A story in ClimateWire ("Accounting: The Big Four Will be Among the Big Winners if U.S. Adopts Climate Law," July 6, 2009) predicts that accountants are poised to benefit in a huge way if the U.S. limits greenhouse gas emissions.

According to Jan Babiak, who directs Ernst & Young's sustainability and climate change practice, "I don't think it's understood universally by our clients or by the profession.  What we all know is that at some point this is going to be absolutely transformational."

Similarly, Deloitte's Eric Hespenheide, a leader in its sustainability practice, says, "We're clearly leveraging our experience in Europe [which has limited greenhouse gas emissions since 2005] ...to build out and anticipate as best we can what impacts [a cap on greenhouse gas emissions] will have on U.S. businesses."

It is difficult to predict for sure what the cap-and-trade landscape (if any) will look like in the U.S. in a few years or what the business landscape will look like for that matter.  However, what does seem probable is that those who are well prepared to deal -- from a multitude of perspectives -- with these issues will clearly have a first mover's advantage over firms and individuals who don't.  In a partial response to this, the graduate program will introduce a second renewable energy course in Spring 2010 and we are considering other new offerings as well.

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

Higher and More Stable U.S. Energy Prices Will Result in Long-Term Benefits, According to New Harvard Study

A price on U.S. greenhouse gas emissions must be established – either through a cap-and-trade system or a carbon tax – as part of the country’s overall energy policy, according to the Belfer Center for Science and International Affairs at Harvard University.

This recommendation is part of a policy brief, “Acting in Time on Energy Policy,” just published by the John F. Kennedy School of Government at Harvard. The report “outlines priorities for U.S. energy policy at the dawn of the Obama administration, and recommends specific steps that the U.S. government should take to address the numerous energy-related challenges facing the United States.”

According to the report, "Higher and stable energy prices would help achieve all the policy objectives in the longer term – improved oil security, lower greenhouse gas emissions, more efficient operation of the electricity system, more incentives for private sector innovation in energy technologies, and more incentives for consumers to purchase cleaner and more energy efficient products.”

As part of addressing the greenhouse gas emissions issue, there must be a long-term goal for global emissions reductions, the report said.

Other key findings and recommendations:

The U.S. should subsidize the building of 10 to 20 commercial-scale projects involving carbon capture and storage. Longer term, carbon capture and storage should be adopted at all large fossil fuel-based stationary power plants.

Legislation should be enacted to set a “variable tax” when oil reaches a certain price. For example, a tax could be established that sets an oil “floor price” of $90 per barrel. When oil has a market price of $80 per barrel, a $10 tax would increase the cost to $90 per barrel. Once the price hit $90 a barrel, the tax would be suspended. In effect, the tax would eliminate the possibility of huge downward trending oil prices.

Additional investment is required for energy infrastructure projects.

New Book Examines European Union's Climate Change Policies

The European Union's leadership role in addressing climate change is explored in a new book written by David Buchan, a senior fellow at the Oxford Institute for Energy Studies and a former Financial Times energy editor.

"Energy and Climate Change: Europe at the Crossroads," is particularly timely as the United States begins to seriously consider for the first time whether to address climate change.  The EU has been seriously (although not always entirely successfully) working on this issue for a decade, and in 2005 established the world's first cap-and-trade system for carbon dioxide emissions.  The EU has committed to reducing its carbon emissions by 20 percent based on 1990 levels by 2020, as well as increasing the percentage of renewable energy to 20 percent by 2020.

This morning's Financial Times includes a book review ("EU's Global Warming Policy Blazes a Trail," May 28, 2009) that is highly favorable to Mr. Buchan's book.  Among other things, the book review says:

"His book will be indispensable for anyone who wants to understand the progress the [European energy] industry has made in the past decade, and where it is likely to go in the next.  The framing narrative is the story of how the European Union's politicians and officials tried to forge collective approaches to meet three often conflicting challenges: competitiveness, energy security, and climate change."

I have not yet read the book (although I've just ordered it).  However, one thing is for sure: The global leader in addressing climate change is in Brussels, where the EU is primarily located.   Washington, D.C., has not even merited a mention until the last few months.

Consequently, if one wants to stay current on action (and not just talk), the key is to know what the EU is doing.  As far as the U.S. goes...well one would just as well (until recently) pick up People Magazine and read about the lives of the rich and famous. This is about as "hot" as the news has typically gotten in the U.S.    

America's Cap-and Trade Legislation: A "Dour" View From Across the Pond

At least one major European-based publication -- The Economist magazine, which is published in London -- has poured a huge bucket of cold water on the Waxman-Markey "American Clean Energy and Security Act of 2009."

Despite the self-congratulatory pronouncements of the last few days among some members of America's politically green class, this week's Economist includes an editorial entitled "Climate Change and Congress: Weak Medicine," which comments on the failings (in its view) of this legislation.

(Now I hasten to say that something may be better than nothing in this case, and to be sure the U.S. has been missing in action for most of this decade in regards to the climate debate.  But on the other hand, many Americans have a curious way of looking at "reality" that only another American -- but hardly anyone else in the world -- could appreciate.)

Here is the Economist's assessment of three reasons why the legislation is too weak:

"First, it envisages America cutting carbon dioxide emissions by 17 percent below 2005 levels by 2020...Europe, by contrast, is aiming to cut its emissions by 20 percent below 1990 levels by 2020...

"Second, the purpose of a cap-and-trade system is to introduce a carbon price.  But the bill sets a ceiling of $28 per ton on the price of carbon -- too low to change behavior enough.

"Third, under a cap-and-trade system, the government issues permits to pollute.  The Administration had wanted 100 percent of permits to be auctioned, but the bill would hand most of them out free...When that happened in Europe, power-generation companies passed the cost of buying permits on to consumers and pocketed the value of the ones they had been given free.  In order to avoid such an outcome, the bill specifies that the value of free permits must be passed on to consumers.  But if consumers are protected from price increases, they will have no incentive to cut back on carbon consumption -- which is one of the goals of the scheme."

In contrast, The Economist suggests that America should dump this legislation and enact a carbon tax:  "Sceptics will howl about the initial cost, but it will be transparent and far, far cheaper than the impact of serious climate change."  

The Economist has been wrong on a million fronts before and it will be again.  But this editorial should provoke at least some consideration in the U.S. about whether the current cap-and-trade bill is the way to go.

Of course, the other point that makes this assessment even "richer" is that it comes from a European-based publication.  That will provide plenty of cover for those in the U.S. who are prone to rail on about how "the Europeans" (writ large) are always trying to tell "the infants" in "the colonies" how to do things.  No parent and child relationship is ever easy to understand, and this one isn't either.

New Version of "American Clean Energy and Security Act of 2009" Introduced; Markup Session Begins Today

The real battle over the "American Clean Energy and Security Act of 2009" started today as the House Committee on Energy and Commerce began its "markup" on the bill.

This new version of the legislation -- which would institute a cap-and-trade system for greenhouse gas emissions -- replaces the "draft bill" that Reps. Henry Waxman, California Democrat, and Edward Markey, Massachusetts Democrat, introduced on March 31.

However, no sooner had the new bill been introduced last Friday than an amendment in the nature of a substitute bill was introduced.

The bill -- certain to be one of the most contentious environmental/energy bills handled by Congress in years -- will be considered by the House committee this week and next. Chairman Waxman's goal is to report the bill out of committee by the end of next week.

As the markup session began this afternoon, Chairman Waxman said, "I am very proud of the work this committee has done in developing this legislation. Energy legislation is by its nature contentious. It can inflame regional differences. But over the last several weeks, we have been able to bridge these differences and build a remarkable coalition behind the legislation."

Well, I guess we'll wait and see. One thing is for sure -- the bill is now replete with all sorts of free (for the time being) emissions allowances.

Word in Washington is that the measure will receive no Republican votes in committee. Does a nearly straight party-line vote (although some Democrats are likely to join the Republicans in voting against the bill) represent "a remarkable coalition?" Maybe in Washington, D.C., but not in the real world. On the other hand, the bill was never likely to receive much Republican support in any case.

Swedish Report Says U.S. Has Reached "Critical Political Tipping Point" Regarding Climate Politics

The Obama Administration has "already begun to demonstrate its seriousness about climate change through actions being taken within U.S. borders," according to a new report commissioned by the Swedish government.

The report, "Sea Change: U.S. Climate Policy Prospects Under the Obama Administration, written by the Stockholm Environment Institute (SEI), was prepared in the run-up to Sweden's July 1-December 31 presidency of the European Union.  In this role, Sweden will speak on behalf of the EU at the Copenhagen U.N. climate conference in December.  Based on Sweden's historical performance in the EU presidency, the U.S., and the rest of the world, should expect a well-focused and effectively-argued case being made on behalf of the EU.

The report notes the "dramatic shift" in U.S. climate politics in terms of the executive branch and points out that additional changes are taking place at regional, state, and local levels.  "In short, the conditions for adopting and implementing forceful measures for addressing climate change look far better than at any time previously."

While describing this as "good news," the report goes on to caution, "Nevertheless, some of the important circumstances that condition the development of U.S. climate politics remain stubbornly fixed.  Numerous domestic structural, institutional, and political hurdles remain in place.  These make it unlikely that the most comprehensive measures now being pursued, such as an economy-wide cap-and-trade system, will have been adopted by both House and Senate and signed by the president prior to the [December talks]."

Despite the report's careful analysis of the American political situation, it seems to have missed one key point: the role that money plays in American politics.  Regardless of the merits of the underlying case for cap-and-trade, the fact is that the big industrial interests will be in the shadows currying favor and support.  

Consequently, will the U.S. join the Europeans in the tough fight ahead in terms of climate change?  Time (and unfortunately probably money) will tell.

Obama Willing to Compromise on GHG Auctioning?

Despite initially supporting a cap-and-trade program requiring a 100% auction of greenhouse gas emissions credits, there are indications that the White House might be willing to support legislation calling for less than full auctioning of credits.

Ben LaBolt, a spokesman for President Obama, has told The Wall Street Journal ("White House Flexibility Signaled on Climate Bill," April 9, 2009) that Mr. Obama's "preferred approach was 100% auction to create incentives for companies to reduce their greenhouse gas emissions.  Members of Congress are looking at a variety of policy options to help us make that transition, and the administration will be flexible during the policy-making process" as long as the administration's goals of creating a "clean-energy" economy are met.  

Members of Congress from coal-producing states as well as states that rely heavily on coal-fired power plants have voiced concern that a 100% auctioning scheme would provoke huge home-state opposition.  

The matter of how emissions credits should be handled is a tricky one.  The EU has been mightily burned by disputes involving its initial decision to give away emissions credits as part of the EU Emissions Trading Scheme.  In response, the EU has significantly tightened up the distribution of free emissions credits (although this remains a particularly difficult political issue with regard to the central and eastern European countries such as Poland).

U.S. Cap and Trade Will Need 60 Votes in the Senate

Last week, in a move that received relatively little attention, the U.S. Senate approved a measure effectively requiring that 60 votes will be needed to pass any American cap-and-trade legislation.

The Republican-sponsored measure, which passed by a 67-31 vote, provides that the cap-and-trade legislation will not receive so-called "reconciliation protection." Legislation that receives such protection is not subject to the vagaries of the Senate's filibuster procedure in which 60 votes are needed to move legislation forward.

As reported in the Financial Times ("Senate Rules Out Fast-Track Action to Push Through Climate Change Laws," April 3, 2009), "While not binding, the [measure], which drew support from more than 20 Democratic senators, showed the Obama administration had little chance of forcing through climate change measures as part of the budget. It also underscored the difficulty that Mr. Obama will face winning support for his proposed cap-and-trade system even outside the budget process, raising the possibility of the U.S. arriving empty-handed at the next round of United Nations talks on climate change in Copenhagen in December."

That scream you just heard (or thought you heard) was from the Berlaymont in Brussels, home of the "very pro" cap-and-trade European Commission.