As Climate Bill Passes Tough Committee, Why Am I So Worried?

Late Thursday night, the House Energy and Commerce Committee voted 33-25 to pass landmark legislation that promises to address our nation’s urgent energy challenges and help avert potentially catastrophic climate change.  The legislation, known as the American Clean Energy and Security Act (or ACES), also presents an unprecedented opportunity to renew our economy and position the United States at the forefront of a burgeoning global market for clean and affordable energy technology.

Momentum is now behind a serious effort to address climate change, and that is cause for celebration.  The bill’s champion’s – notably Henry Waxman, Ed Markey and Jay Inslee and their dogged staff – deserve praise for bringing the bill through some pretty hostile territory in the Energy and Commerce Committee, and for their tireless efforts during the marathon sessions of the past week.

However, knowing how much is at stake, we must also take a close look at whether or not the bill lives up to its promises.  

I’ve spent most of this week digging deep into the 1,000-page ACES bill to pull back the layers of complicated mechanisms it contains and to shine the spotlight on the numerous concessions to dirty industries made as the bill moved towards approval in the Energy Committee, and here’s what I’ve found…  

The bill contains many provisions that will do a measurable good.  Unfortunately, the cap and trade portion of the bill – considered by many to be the guts of the legislation – leaves me very worried that unless major changes are made as the bill moves forward, the cap and trade provisions will be ineffective at either driving urgently needed emissions reductions or securing a clean, prosperous energy economy.  

There are three key reasons to be worried, very worried...

First, instead of reducing their own emissions, the bill allows power plants, oil refiners, and other polluters regulated under the bill's cap and trade program to “offset” up to two billion tons of emissions each year by paying for certified emissions reductions projects overseas or in sectors of the U.S. economy that do not fall under the emissions cap.  Two billion tons is a massive quantity, equal to more than a quarter of all U.S. emissions, and the extensive use of these offsets would allow emissions in “capped” sectors to continue emitting global warming pollution at levels well above the reductions supposedly driven by the emissions cap.  

I published detailed analysis this week that reveals that, if fully utilized, the offset provisions in the ACES bill would allow total U.S. greenhouse gas emissions to continue to grow at a business as usual rate for the next two decades.  Emissions in supposedly “capped” sectors of the economy – power plants, heavy industry, oil refiners, and natural gas distributors – could continue to rise to up to 9% above business as usual levels by 2030.  

In short: the extensive offset provisions (one might say “loopholes”) in ACES could render the bill’s “cap” on emissions effectively non-binding.  So long as affordable offsets are available, there will be no pressure on U.S. firms or consumers to change their behavior or investments or move towards cleaner energy sources for up to two decades.

Second, largely because of the extensive use of offsets, the cap and trade system will set a very modest price on global warming pollution.  According to analysis by the U.S. Environmental Protection Agency (first analysis here, and update here), the permits to emit greenhouse gases under the ACES cap and trade system will remain between $12 and $20 per ton through 2020, far lower than necessary to drive major transformation of the U.S. energy economy.  

Furthermore, if prices for pollution permits spike in any given year, rising by more than 60% from previous years’ average prices, a flood of additional permits will be auctioned from a “strategic reserve pool,” ensuring prices remain low while allowing emissions to exceed the “cap” for the year.  The reserve pool will be refilled with additional international forestry offsets, again substituting overseas emissions reductions for the transformation of the U.S. energy system the bill is supposed to drive.

Advocates of the ACES bill claim it puts a cap on U.S. greenhouse gas emissions that will steadily decline over time, providing certainty that U.S. emissions will fall to mandated levels.  This supposed firm limit on greenhouse gas emissions is the central purpose of cap and trade proposals.

Unfortunately, these first two factors combine to form a worrisome conclusion: the emissions “cap” is a cap in name only.  In fact, these two factors mean that rather than providing certainty that emissions will fall, the ACES cap and trade program will only drive emissions reductions if a number of contingencies prove true.  

Emissions will only be required to fall in the supposedly “capped” sectors of the U.S. economy:


That’s a lot of ifs and not a lot of the emissions reduction certainty we’ve been promised.  

In short, the objectives of the bill will only be realized if a steady supply of affordable opportunities to reduce emissions in the U.S. exists.  One might assume, then, that the bill would therefore include numerous provisions to subsidize clean energy, invest in energy efficiency, or dramatically expand energy R&D to ensure a steady supply of low-cost clean energy technologies can emerge from the lab into the marketplace.  You’d be wrong.

That brings me to the third issue of major concern: the bill invests far to little in making clean energy cheap and directly driving the transition to a clean energy economy.

The pollution permits under the cap and trade program will be worth roughly $1 trillion in value between 2012 and 2025.  That’s a lot of potential revenue that could be invested to support the birth of a clean, prosperous energy economy.  Instead, according to analysis my colleague Teryn Norris and I completed, a meager 12 percent of the value of pollution permits will be invested in clean energy and energy efficiency.  The vast bulk of the money, nearly five times the amount invested in clean energy, will be used to blunt the impact of increased energy prices on heavy industry, oil refiners, polluting utilities, and end-use energy consumers.

With a carbon dioxide price of between $10 to $15 per ton, which analysts predict the carbon dioxide price would be in first decade of the program, the ACES bill would allocate just $6 billion to $9 billion annually for clean energy technology, defined broadly, and just $500-$750 million for R&D — just one-twentieth to one-thirtieth of the $15 billion in new energy R&D investments repeatedly called for by President Obama.  In contrast, the bill would allocate $28-42 billion annually for fossil fuel-reliant energy companies, oil refiners, and heavy industries.

So what is to be done?

Let’s be clear: to be effective, this legislation must drive a dramatic transformation of the U.S. energy system, spur the development and deployment of clean, efficient energy technologies and rapidly move us away from dirty fuels like coal and oil.  To drive this transition and jump-start a new energy economy we must, quite simply, “make clean energy the profitable kind of energy,” as President Obama has said.  That is, the gap in price between our traditional sources of energy and new, clean energy sources, like wind, solar power and biofuels, must be closed.  

We must not forget, there are two ways to close that price gap.  We can make conventional, dirtier energy sources more expensive.  Or we can make new, clean energy sources more affordable.   I worry that as currently drafted, this bill will fail to effectively utilize either option, and therefore prove unable to reduce emissions or truly build a new clean energy economy.  

It’s unlikely that as the bill moves forward, efforts to raise the price of dirty energy any higher than the modest amount the bill already allows will succeed.  That’s why we must not forget the other option at our disposal: making clean energy cheaper.  

In the short term, public investments and incentives can close the price gap just as well as carbon prices, spurring the deployment of wind, solar, biomass and other clean energy technologies and harnessing the economies of scale that drive down their real costs.  In the longer-term, investing in research and development can give birth to a whole new generation of low-cost clean energy technologies.  Together, these critical public investments can make clean energy cheap and profitable.

As this bill moves forward, it must include significantly larger investments to make clean energy cheap.  As climate advocates and clean energy champions try to close the offsets loophole and strengthen other aspects of the bill, we must also focus our attention on securing far greater investments to directly drive the transition to a clean energy economy and ensure a steady supply of low-cost emissions reductions are available.  Increased investment in clean energy is likely the greatest opportunity to significantly improve the effectiveness of this legislation.  If we let this opportunity slip between our fingers, the ACES cap and trade program will be set up for failure, and that’s simply a scenario we cannot afford.