It’s Getting Hot In Here

The Lieberman-Warner Climate Security Act is up for a vote on the Senate floor next week — the most progress any major climate legislation has ever made in Congress. So would the bill actually reduce U.S. emissions? Not significantly — at least not until 2030, and perhaps longer. That’s the conclusion of an increasing number of energy experts and commentators, including the World Resources Institute and Joe Romm at the Center for American Progress. I performed an independent analysis (available here) and came to a similar conclusion. The problem? In an effort to contain costs and avoid increased energy prices, the Climate Security Act (CSA) allows firms to delay action into the future and purchase low-cost allowances.

Cost Containment #1: Delay till the end

According to the bill, over 6 billion emission allowances would be taken from allowances allocated for 2030-2050 — around 11 percent of the total for 2030-2050 — and these would be auctioned between 2012 and 2027 in order to contain costs. How might this impact U.S. emissions?

If all cost-containment allowances are purchased, it would delay progress toward the U.S. emissions reduction target by around ten percent until 2028. At that point, the U.S. would have 22 years to reduce its total emissions by 70%. As a result, the U.S. would have to reduce its emissions every year by 135 million tons — nearly 25% more than the 110 million tons it would have theoretically reduced each year between 2012 and 2027. In other words, starting in 2030, our efforts would suddenly have to get 25% better.

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And while the absolute annual emissions reduction would stay constant, by the late 2040s the U.S. would have to reduce its annual emissions by 11% from year to year. That’s in part because the bill requires the “removal” of emissions allowances taken from 2030-2050 (to supply 2012-2027) to be lower at the beginning of that period and higher at the end. When you do the math, you find that the rate of U.S. emissions reductions would have to more than triple between 2028 and 2050 — from a rate of around 3% in 2028 to a rate between 9 and 11% per year in the last three years.

Many energy experts predict that the final emissions reduction efforts will be the most difficult, since low-hanging fruit such as efficiency will gone. If this is the case, it is likely that the economic impact of such a rapid rate of decrease in emissions would produce a political backlash from consumers, industry, and politicians.

Cost Containment #2: Set a low auction price

Would the CSA result in a high price on carbon? One way to tell is to look at the price at which allowances will be auctioned. Two types of auctions will take place, one for regular allowances, another for future allowances (as described above). The bill indicates that regular allowances will be auctioned at a price floor of $10 and will increase by 5 percent annually (in addition to the rate of inflation). At this rate, the price floor for a regular allowance auction will reach about $21 by 2027 (in 2012 dollars). What about the future allowances? Their auction price floor is $22 in 2012 to increase at 5 percent annually as well, which means their price would pass $40 in 2024. Yet in Europe, we’ve seen that even at a permit price of approximately $38, coal is still economical. Could this mean we won’t see any substantial reductions until 2030?

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Cost Containment #3: Buy cheap offsets

The CSA would allow 30% of total U.S. emissions reductions to come from offsets, including domestic and international. Carbon offsets have become increasingly controversial as studies have shown them to be largely ineffective. A recent study by two energy experts at Stanford concluded:

Offset caps as envisioned in the Lieberman-Warner draft legislation, for example, do little to fix the underlying problem of poor quality emission offsets because the cap will simply fill first with the lowest quality offsets and with offsets laundered through other trading systems such as the European scheme…

We suggest that this enthusiasm [for offsets] is misplaced because any offset market of sufficient scale to provide substantial cost-control for a cap and- trade program will involve substantial issuance of credits that do not represent real emissions reductions.

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The impact of offsets is unclear, so it is difficult to know what impact this would have on total U.S. emissions. However, if much of the criticism of offsets is correct, it is very likely that actual emissions reductions would only be a fraction of what ends up on paper.

What does it all mean?

Not surprisingly, few analysts have much faith that the CSA, in its present form, will do much to reduce U.S. emissions significantly over the next two decades. Then again, few analysts expect the CSA to pass out of the U.S. Senate, much less be signed into law. But beyond the fate of the current proposal, the evolution of the CSA demonstrates several dynamics that will probably determine the fate of any climate legislation likely to draw serious consideration by the next Congress and the next President.

1. Targets are meaningless: Emissions reduction targets and timetables in proposals to address global warming are largely meaningless. The CSA purports to cut U.S. carbon emissions by 70 percent below 2005 levels by 2050. But no serious analysis of the bill suggests that it will actually do so. The various cost containment mechanisms described above effectively limit the actual emissions reductions well below what the targets and timetables that headline the legislation would ostensibly accomplish. While targets can be useful as goals or a statement of policy intent, we should be under no illusions that those targets will actually be achieved when the details of cost containment mechanisms, offsets, and international trading mechanisms will determine what, if any reductions will be achieved.

Advocates of the current approach will argue that this is simply a problem of closing the loopholes and eliminating the cost-containment mechanisms, which brings us to the second critical dynamic.

2. The Gordian Knot: The Gordian Knot of climate and energy policy that we described almost a year ago is alive and well in the U.S. Congress. For those unfamiliar with the concept, we described a dynamic, already well documented problem in Europe, wherein political leaders tasked with establishing or implementing policies to reduce carbon emissions would not be capable of overcoming public resistance to policies designed, explicitly or implicitly, to significantly increase energy prices.

Cost-containment mechanisms included in the CSA legislation are not the result of drafting errors or provisions slipped into the legislation in the dead of night by energy lobbyists, they are provisions necessary for any climate legislation to be seriously considered by the Congress. Virtually every proposal in the Senate includes explicit or implicit cost containment provisions. Any proposal moving to the Senate floor or beyond will probably need to make its cost containment provisions explicit.

This dynamic has defined virtually all policies around the world to establish carbon emissions reductions and has resulted in little progress in reducing actual emissions where policies have been established non-withstanding the ostensible emissions reduction goals of those policies. All approaches to reducing carbon emissions that depend upon making dirty energy more expensive, be they cap and trade, cap and auction, cap and dividend, or simple carbon taxes, will run up against this dynamic.

The solution may simply require building political power sufficient to overcome public opposition to raising energy prices, but it is sobering to note that the Gordian Knot dynamic continues to dominate the political dynamics of climate change after close to twenty years and many hundreds of millions of dollars spent to build sufficient political support to establish significant limits on carbon emissions and two years after public opinion about the urgency of addressing global warming supposedly tipped.

3. Regulation is Expensive: Cost containment proposals raise the question of how much low carbon technologies really cost. If, as many environmental leaders assert, cutting carbon emissions deeply will not cost as much as it now appears, and if low carbon energy technologies will soon be cost competitive with conventional energy sources, then environmental leaders should not object to cost containment provisions in legislation like the CSA. Modest carbon prices such as those allowed by the CSA proposal should be sufficient to drive the transformation to clean energy technologies, and environmental organizations should not be opposing the cost containment provisions and cranking out analysis of the bill suggesting that it will have little impact on carbon emissions.

But of course that is not what is happening. Environmental leaders are attacking the cost control mechanisms and asserting that the legislation would do little to reduce emissions. These actions speak louder than all the rhetoric of recent years about solar, wind, and other alternatives being cost competitive with current energy sources. The reality is that alternative energy technologies, in real deployed terms, remain vastly more expensive than conventional energy sources. This is the reason why environmental organizations oppose cost containment and why even environmental supporters of the legislation see it as an incremental step that will need to be amended (namely removing cost containment) in order to achieve deep reductions in U.S. carbon emissions.  And it’s why we must focus on reducing the price of clean energy through massive and strategic investments in clean energy technology, rather than focus on making dirty energy expensive.