There’s going to be a lot of talk about cap-and-trade next week as the Warner-Lieberman Climate Security Act (S.3036) opens for discussion on the floor of the United States Senate. If don’t already know the basics then the following information can help you to understand what it’s all about.
The purpose of the Act is stated within as follows:
(1) to establish the core of a Federal program that will reduce United States greenhouse gas emissions substantially enough between 2007 and 2050 to avert the catastrophic impacts of global climate change; and
(2) to accomplish that purpose while preserving robust growth in the United States economy, creating new jobs, and avoiding the imposition of hardship on United States citizens.
In short, the bill aims to reduce harmful emissions between 2012 and 2050 without destroying the U.S. economy.
The purpose will be achieved by creating caps on emissions from certain ‘covered’ facilities. For the most part the caps will apply to any coal, natural gas or oil fired power plant. The caps will also apply to companies that operate large vehicle fleets.
The caps will be acknowledged via emissions allowances that will be doled out to a variety of parties. Companies that own ‘covered’ facilities will have the right to emit greenhouse gases up to the limit of their allowances. If a company exceeds their limit they can buy allowances from other parties or pay heavy penalties for exceeding the cap.
Emissions allowances are tradeable and bankable. Allowance holders can sell them to just about anyone they like. Allowance holders can also bank unused allowances for use in future years.
Companies who emit greenhouse gases will initially be allocated enough allowances to cover their emissions but as years go by they will be issued fewer allowances.
Companies that own fossil fuel powered electric generation facilities will be subject to caps and thus receive allowances. The vehicle fleet clause will likely affect companies like UPS, Federal Express and large over the road trucking companies as well.
Because emissions allowances are tradeable, it is likely that emissions traders will buy and sell allowances as well. These traders will likely consist of established commodity trading houses as well as emissions trading start-ups that arise as a result of this legislation.
State governments, Electric and Natural Gas load serving entities (LSEs) will receive allowances as well. These parties are directed to sell the allowances and use the money for a variety of purposes. The most popular revenue spending requirements are aimed at mitigating impacts on low-income energy consumers and promoting energy efficiency.
New Government Entities
This bill creates the Climate Change Credit Corporation. The CCCC will administer the cap-and-trade program. They will be responsible for doling out emissions allowances and allocating revenue to a wide variety to companies and programs.
The Carbon Market Efficiency Board is also established. The CMEB will be responsible for assessing the economic impact of the program as well as maintaining the market for emissions allowances.
New Government Programs
The Federal Greenhouse Gas Registry will be created to track emissions of greenhouse gases. Entities that emit greenhouse gases will be required to submit data to this registry. The Domestic Offset Program will be responsible chiefly for distributing allowances to companies that produce verifiable, permanent reductions in greenhouse gas emissions. This will allow organizations to meet some of their emissions requirements by purchasing offset allowances which they can then submit to meet cap requirements. The Deficit Reduction Fund will be created to bank allowances that are not otherwise allocated. This fund increases yearly as fewer allowances are distributed.
The Program For Tribal Communities will deliver assistance to tribal communities affected by climate change. The Climate Change Worker Training Program will be established to create jobs in fields related to renewable energy. A Science Advisory Board will be established.
The International Climate Change Adaptation and National Security Program will be established. This program will be responsible for the submission of annual reports to the President and other government agencies
A number of funds are created by this bill including: The Energy Assistance Fund, The Climate Change Worker Training Fund,The Adaptation Fund, The Climate Change and National Security Fund, The Bureau of Land Management Emergency Firefighting Fund, The Forest Service Emergency Firefighting Fund, The Climate Security Act Management Fund and The Energy Independence Acceleration Fund.
How It All Works
Creation of emissions allowances effectively puts a price on greenhouse gas emissions. Emitters will then have to pay for their emissions starting with nothing at first and then more in the future as they are allocated fewer and fewer allowances. As such, emitting greenhouse gases will get more and more expensive. This will create incentives for emitters to invest in low carbon and carbon free technologies that will ultimately help in reducing all greenhouse gas emissions in the United States.
Meanwhile the federal government will be collecting revenues via the auctioning of allocated allowances and the sale of allowances that the government allocates to themselves. The resulting revenue is used to monetize the programs, funds and agencies mentioned in the paragraph above. Ostensibly these programs, funds and agencies will serve to accelerate the development of low-carbon and carbon free technologies as well as mitigating the impact of these changes on low-income consumers of energy.
The Projected Effects
The Energy Information Administration has written an extensive impact assessment of S.3036 which I recently reviewed. The short answers are these. The emission of GHG will be significantly reduced during the time period of this bill. Most of this reduction will be due to changes in the electric power sector. It is likely that Natural Gas will become an increasingly dominant fuel source for electric generation. Coal consumption is greatly reduced. Energy prices and this energy bills for consumers will be greatly increased. The impact of increased energy prices will affect the overall economy by reducing purchasing power and lowering demand for goods and services. Industrial activity is significantly effected by the changes. Significant revenue (between $300 and $800 Billion) is generated by Federal and State Governments auction and sale of emissions allowances.
The actual effects of S.3036 depend on a lot of factors. The ability of the U.S. to develop and deploy nuclear and carbon capture and sequestration (CCS) technologies is a very important one. If the U.S. is not able to develop these technologies then the increased reliance on natural gas will be pronounced. This would likely lead to significantly higher natural gas prices which would cause a greater negative impact on the overall economy.
The Road Ahead
This is a wide ranging and controversial piece of legislation. S.3036 essentially changes the landscape with respect to the economics of energy production and consumption for the next forty years. The Act also greatly increases the size and funding of the U.S. government as a result of the agencies, programs and funds contained in the Act.
Some will see this as an onerous increase in the power and responsibility of the government. While others will view S.3036 as landmark legislation that will change the planet for the better. Some see S.3036 as a vehicle for massive wealth redistribution. While others will call it a necessary sacrifice during a time of dire need for reductions in emissions. As such, expect intense debate and discussion that will likely end up passing the issue to the next Presidential administration.
It is also worth noting that the Warner-Lieberman legislation is not the only game in town. Recently Representative Edward Markey from Massachusetts announced a bill with stricter emissions requirements than S.3036. Perhaps the two pieces of legislation will give rise to a third bill that blends provisions included in each of them.