When laws are passed in the United States they are usually subject to so many compromises that it is not uncommon for the original intention of the legislation to be lost.
This appears to be the case with the new version of the American Clean Energy and Security Act, issued on 15th May 2009. This bill sets emissions reduction targets for 2020 at 4-7% below 1990 levels by 2020 – considerably less than the 15-20% targets set by other jurisdictions, including the EU. While the 2050 target is substantial – an 83% reduction on 1990 levels – setting long-term targets which are demanding is easier than setting short term targets that will require immediate sacrifice and significant change.
The Bill also creates a cap and trade regime in which some 85% of the emissions permits are given away and only 15% of these permits are auctioned. Companies that secure permits through either allocation or purchase may then trade them for profit. Obama had seen 100% of these permits being auctioned and had planned to use the resultant $650 billion over ten years to pay for a tax credit aimed to offset the higher energy costs that will result from cap and trade and reduce the number of people moving into energy poverty. These tax credits – an essential part of the low carbon economy – will have to be funded by other means, probably through deficit funding.
The problem with giving away so many permits, as has been found in the European Trading Scheme, is that the price for carbon traded in the market is set unrealistically low. By auctioning the permits, the scheme begins with a realistic market value for a tonne of Carbon – thought to be $50 or more. By giving so many permits away, the price fluctuates in a price range below that which requires firm to change their carbon emitting behaviour.
Also included in the Bill is permission for firms to buy offsets - project based reductions – but these are limited to 2,000 million metric tons CO2 equivalent per year or 30% per cent of U.S emission reduction, split evenly between domestic and international offsets. Domestic offsets do not include Green Buildings offsets. There are provisions for emissions reductions from reduced deforestation through what are known as “allowance set-asides”.
The Bill will likely achieve several things. Congress could finally pass a bill focused on climate change and head into the December world summit on climate change in Copenhagen with something to work from. Second, it will significantly increase energy and supply chain costs, only partly offset by tax credits and other social security payments. Third, it will create a new bureaucracy – regulating carbon emissions – and a new financial services business – carbon credit trading. Finally, it will do little to cut emissions.
Europe has had a cap and trade system for sometime – since 2006 in fact. Despite this, emissions from industries required to cap and trade have continued to rise. They rose 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007. A major reason for this, the analysts suggests, was governments alloating too many trading permits to polluters when the market was created – a mistake that the Obama administration is about to repeat. In Europe, over allocation of “free” permits led to a near-market failure after the value of the permits fell by half. This also called into question the validity of the cap and trade system.
Offsets were also allowed by the European system, as will be permitted under the Bill now before the US congress. Many were attracted by the UN sanctioned offsets, but serious doubts have been cast on their effectiveness. Most of the funds are allocated to third world countries for forestry and other projects intended to capture carbon, but some of the funds have been siphoned off into other activities and the impact of the projects in terms of carbon storage is minimal. The chief concern is that this “buying of carbon penances” does nothing to change emissions behaviour in the company buying these offsets.
Cap and trade is a way of avoiding the real issue: the need to tax carbon if the intention is to change human and organizational behaviour. This is why many “green” organizations and researchers oppose cap and trade – they don’t see it as leading to the substantial emissions reductions they see as needed to “save the planet”. A flat tax on carbon - $50 a tonne or more - would force industries to change their behaviour and spur the development of new technologies for transport, buildings and energy production. If each individual person, as well as the companies or organizations they worked for, had to pay for the carbon they emitted, then a low carbon economy would emerge, these campaigners suggest. What is more, emissions would go down quickly as the costs of emitting would be quickly obvious to all.
Take an example. A business executive living with a husband and two children in California who has to travel as part of their employment is likely to account for at least 7 – 9 tones of carbon each year. At $50/tonne they would pay a tax of $350 to $450 year plus additional costs for heating, natural gas, gasoline and other energy sources. They would also pay more for all goods, since transportation costs for goods would also increase. We can estimate the impact at around $1,500 a year on an individual. On a small transport company with twenty trucks, they may also have to pass on to consumers around $35,000 a year in carbon taxes. Such sums would get people’s attention. Cap and trade, however, is like derivatives, I doubt whether anyone can really explain what these are as they walk around Safeway or Next – its hidden and away from view.
As the US sees no short term emissions reductions from its cap and trade, it will start to want to sell more permits and create a real market. It will face fierce opposition from industry, especially the transportation and energy sectors. It will also face a backlash from tax payers who will have seen higher costs without any social or environmental benefit. What the American Clean Energy and Security Act will do is delay the real debate about emissions and the environment until the next Obama administration, when the environment will likely be a more urgent issue for some.