Hill Heat

From CQ Green Sheets: Senate Environment Presses Ahead on Federal, State Climate Action

Summary: Lieberman & Warner are working on carbon cap-and-trade legislation. Their staff is working hard right now to get the legislation written before the August recess, but they might not make that target. The witnesses at this hearing give a hint as to what the legislation will look like.

Witnesses

• Timothy Profeta, Director, Nicholas Institute for Environmental Policy Solutions, Duke University, former Lieberman staffer and the principal author of the 2003 Lieberman-McCain cap-and-trade legislation
• Blythe S. Masters, Managing Director, JP Morgan Securities, Inc., supporter of carbon trading
• Robert Baugh, Executive Director, Industrial Union Council, AFL-CIO, supports Bingman-like (S 1766) elements like “safety valve” emission cost caps and money for carbon sequestration
• Garth Edward, Trading Manager, Shell International Trading and Shipping Company, supporter of carbon trading
• Margo Thorning Ph.D., Senior Vice President and Chief Economist, American Council for Capital Formation, believes cap-and-trade evil and the European experience a failure

2:33 PM Lieberman Our staffs have been reaching out to all stakeholders. Two questions people ask are 1) what do we do if there’s an economic emergency? 2) This is a global problem. Yes, let’s say that America is going to take a leadership role, but unless China and India also do so, our hard work will have little overall effect. So how do we deal with that?

This morning Warner introduced an emergency off-ramp provision they hope to be included in any cap-and-trade legislation. I think it has the flexibility to deal with a genuine economic crisis.

Earlier this month Bingaman and Specter introduced a bill with interesting and thoughtful provisions. The most interesting addresses the second question.

There was a report published by the EPA today, an economic analysis of the Lieberman-McCain bill. I congratulate the EPA on a first-rate piece of work.

2:41 PM Warner This is an extraordinary challenge.

2:43 PM Lieberman There’s no chance of victory unless you lay a beachhead.

2:43 PM Boxer I am so pleased at the leadership you’re both showing. You’re on a great mission. I want to thank the private sector for being so far out ahead of us on many ways. We’re going to go to Greenland if we don’t have to be here this weekend. I hope that type of a trip is going to put more wind behind our sails. I understand Sen. Warner is working on an innovative program for borrowing emissions permits. Stern indicated the cost of failing to act greatly outweighs the cost of action. We hope you will look at Sanders-Boxer. Certainly the borrowing of emissions permits. We can allow facilities to bank their emissions. In terms of international emissions we need to make sure other countries do their part.

All in all I couldn’t be more pleased with the progress we’re making. I stand ready to work with everyone as the chair.

2:49 Inhofe This is our 16th hearing on global warming. I’m pleased that you’re having this hearing. This is the first in which we’re dealing with substantive issues. It seems clear to me that cap-and-trade doesn’t work, that Kyoto is a beacon of what not to do. I just don’t think it has been working. The body has now passed two resolutions on global warming: Byrd-Hagel said we would not want to ratify any treaty that would inflict serious economic damage on our country. Not one of the bills will avoid this; maybe the one you’re working on. According to the MIT study, the Sanders-Boxer bill would cost hundreds of dollars for a family of four, similarly with the Lieberman-McCain bill. Half a trillion dollars by 2030, using lowball assumptions. It does nothing to encourage reductions from the number one emitter, China. Even the Bingaman bill would export millions of jobs, mostly to China. It’s bad enough we have job flight to China, now we’d be exporting jobs and emitting more over there.

I’ve said if we’re going to do this, let’s be honest about it and have a carbon tax. I don’t want a tax, but given the choice I would take the more honest approach.

Even if there is a man-made problem, shouldn’t any approach do something about China?

2:56 Sanders It is also important to understand what happens if we do not go forward aggressively. The WHO tells us today already 1 million people have died. The CIA are now examining the implications of drought and hunger. I am optimistic we do know how to address this crisis. I think we can create millions of high-paying jobs. If we move forward in terms of energy efficiency we can reduce house energy costs by 40%. Right now in terms of job creation. More often than not we are importing our photovoltaics even though we developed the technology.

I cannot support a safety valve. It is a white flag.

3:00 Craig If this is a beachhead, I am here to stop the landmines.

3:01 Warner The chairman and I have decided to forge this partnership. We’re going to put out a study document instead of a bill before we leave for August, so that we may receive the benefit of your comments.’

Lieberman Yes, essentially a draft proposal, give people a chance to say what they like and do not like. And then we’ll offer a bill to the subcommittee as quickly as possible in September.

Boxer Thank you for your timetable. Assuming we do make this timeframe, our plan would be to look at all of the economy-wide proposals when we get back and look to you as the base of documents, I’m trusting to get the best of the ideas from the previous proposals.

3:04 Lieberman This is a global problem and we want to come up with a national response.

3:06 Profeta The issues you seek to address today are the ones the Senate set as sticking points: cost containment and international competitiveness.

The problem of global warming is intertwined with every action in our life. Fortunately several members in the committee have committed to action. Cap-and-trade system is the best cost containment. Any proposal should maintain the environmental integrity of the program. It should maximize the use of market-based mechanisms, and be long term. Our proposal involves a board with the power to modify emissions allowances to adjust the economic impact. This proposal does not claim to know the unknowable, what the price of carbon will need to be. This plan cleanly addresses the uncertainty.

We still need to ensure comparable action by trading partners. We talked with major corporations and trade disparity came screaming out at us. Our efforts focused on article 20 of the GATT. In general, first the US engages in a good faith effort, applied evenhandedly to domestic and foreign products. Our assessment of the Bingaman-Specter language is that it is consistent with our effort.

3:16 Masters We established a group to help our clients reduce carbon emissions. J.P. Morgan is an international company. We recognize global warming represents grave risks to the international economy. Congress is studying whether to start a cap-and-trade framework. J.P. Morgan supports such a framework. GHG emissions (“carbon”) must have a price. There are precedents for this. It’s my understanding, Sen. Warner, you played a major role in the acid rain cap-and-trade system, which worked and below cost.

The US is understandably tooking to contain compliance costs. Having said that, there are multiple approaches to cost containment. Prices will tend to be lower the more supply there is. The easiest way to expand emissions supply is to increase carbon offsets. I don’t have a precise recommendation but there is an ideal balance. One of the mistakes of the Kyoto Protocol is to prohibit the preservation of tropical forests.

Price controls will prevent Europe and other carbon markets from linking to the US cap-and-trade system. Neither the acid rain nor the European system use price controls. Despite not having price controls in place, neither producers nor consumers in the European system have suffered.

3:28 Baugh On behalf of the 10 million members of the AFL-CIO I thank you. Climate change is a major problem. Our energy task force has been informed by science and economic reality. We endorsed Bingaman-Specter. One: it made a significant statement about the environment. It has a timetable that balances environment with economy. It ensures a modest effect on prices. One of its most important aspects is its commitment to technology investment. The point of the allowances is to ensure a positive change.

3:42 Edward Shell was the first business to transact in these systems. Shell believes a cap-and-trade system is ideally suited for energy production. It is not ideally suited for transportation. I’ll talk about what cap-and-trade allows us to do.

An emissions market drives the most efficient way to reduce emissions. It does function as a cost containment mechanism by itself. The wider the pool of reduction opportunities, the less exposed the overall market is to short term impacts. Other ways to constrain costs are through offsets. Shell believes carbon sequestration will be a major future offset. Clearly there must be robust rules. Regulators, investors, and the public have a vested interest that these rules are rock-solid. The US will help its industry by making sure its system interlocks with international credit markets.

The EU has not allowed unlimited access to international credits, but the access has reduced volatility and costs. Shell believes allowances should be granted free at the beginning of any program. Auctions require upfront costs from the companies that need to spend on changes. Shell does not support price caps because they sacrifice the environmental goal at the heart of the program. A price cap compromises the emissions cap. In effect, you can have a guaranteed emissions level or a guaranteed price level, but not both. A price cap makes cap-and-trade like a tax. With the price cap, the incentive to invest in new technology is also capped.

3:51 PM Thorning Listening to the testimony of the earlier witnesses we must focus on the most cost-effective ways to achieve the goals. I’d like raise three issues: 1) energy security of supply, 2) environmental protection 3) reduction of global energy poverty. She’s giving the same testimony she did two weeks ago.

4:09 PM Lieberman Based on the international experience, how has the EU dealt with the problem? Are there “emergency off ramps”, “safety valves”?

Edward There is no safety valve per se. There is access to international markets. There is access to more supply, rather than an interventionist price cap.

Masters There was a trial run to be used for adjustments. What was terrific is that we can learn from that experience here. There was an instance of a significant price adjustment in 2006.

4:13 Warner I was a lawyer once. As we move forward what do we do to make sure these markets are not fraudulent?

Masters In arguing against a “safety valve” we are not arguing these markets should not be regulated. There is significant risk of cheating. The best way to achieve an orderly market is to ensure there are oversight mechanisms, in particular a body that establishes standards that can be independently verified. There are two markets today: compliance markets and voluntary markets. There have been some instances of fraud in voluntary carbon markets that don’t have the same standards the compliance markets do. It’s important that there is regulation, transparency, standards, and standards that are uniformly supplied.

Warner We’re looking at our federal reserve system as a model. By the way I’m guilty of the “off ramp”. Our state has a lot of mountains.

Edward These markets are not significantly different from other markets. We understand registry systems, validation of emissions, tax treatment. Basically, emissions markets will be audited the same way as financial markets.

Warner The status of CCS. Can we expedite it to build a bridge to get to another level of technology?

Profeta It’s one of the elements of a longer term strategy. The EU analysis is that there is no way that the US, with its supplies of coal, can manage the transition without CCS. A price cap would not get us to invest enough into this sector.

4:30 Profeta Its desire is to stimulate engagement with these countries, where we have liquidity across the markets.

4:31 Inhofe I walked in at a time I have not heard discussed before. You cannot tell people who are struggling to have enough to eat to reduce their emissions. China is the beneficiary of efforts we have here. I’m surprised at the AFL-CIO’s position here. You’ve endorsed the Bingaman bill that unilaterally caps our emissions here.

Baugh We agree China is not going to listen to us unless they have a reason to listen to us.