The American Gas Association (AGA) believes that reasonable and responsible federal action to reduce greenhouse gas emissions is warranted and we look forward to working with Congress on the Waxman-Markey draft bill as a starting point for developing legislation to address this critical national issue.

With 202 utility members that deliver natural gas to more than 171 million Americans, we view natural gas as part of the solution to the climate change issue because it has the smallest carbon footprint of all fossil fuels, and when used directly in America’s homes and businesses it is highly efficient. In fact, more direct use of natural gas can increase energy efficiency, reduce greenhouse gas emissions and save consumers money—all important national goals.

Legislative efforts to reduce greenhouse gas emissions should also focus on all sectors of the economy, but with the flexibility to consider the most effective approach for each particular sector. For example, America’s residential natural gas customers are leaders in combating climate change. In fact, the number of residential households using natural gas has increased from 38 million in 1970 to about 65 million today — an increase of more than 70 percent — yet aggregate residential consumption over that time has remained essentially flat and so have greenhouse gas emissions from natural gas households.

As a result, with respect to the natural gas residential and small commercial sectors, we ask that Congress allow programmatic measures, such as the adoption of conservation and efficiency programs, tighter building codes and standards, and higher-efficiency appliance standards. They are far more likely to lead to continued emissions reductions than a cap-and-trade program.

We also endorse the “carbon footprint labeling” provisions in the Waxman-Markey bill, which would include carbon footprint information in the existing Federal Trade Commission EnergyGuide labeling program for home appliances. As significant reductions in carbon emissions becomes a top national priority, better educating consumers about how much carbon their home appliances may emit will help them make better informed purchasing decisions, which, in turn, will further our national energy efficiency and environmental goals.

However, one area of the Waxman-Markey discussion draft bill that we are concerned about is the provision to establish an “energy efficiency resource standard” (EERS) for both electric utilities and natural gas utilities. While the goal is a laudable one, the mechanism is flawed. Natural gas utilities can, and do, take many steps to improve efficiency and reduce consumption. But utilities cannot force customers to lower their thermostats or install more efficient equipment. Therefore, we are concerned that natural gas utilities would be penalized should their customers’ actions fail to reach the EERS mandates. We are also concerned that an improperly structured EERS would steer customers away from the one primary fuel choice that produces the fewest emissions—natural gas.

AGA and its members hope that Congress will be mindful of these important issues as it crafts climate change legislation. We look forward to working with Congress as it continues to formulate policies for achieving the nation’s carbon-regulation goals.

Energy and Commerce chairman Waxman and subcommittee chair Markey introduced a discussion draft rather than a finished bill to spur just the sort of healthy debate that is now taking place. It’s high time we had a vigorous national debate about energy and climate policy.

Does the Waxman-Markey draft need a complete overhaul? Absolutely not. We need to move forward with this important and historic legislation. Discussion is good, but so is action. Members must engage on this bill because the world is waiting for the U.S.—the nation with one of the highest rates of greenhouse gas emissions per person—to lead the way out of the carbon trap.

The bipartisan, side-by-side testimony of former vice president Al Gore and former chair of the Armed Services Committee John Warner reflects the broad coalition that supports taking the steps needed to stop dumping carbon pollution into the atmosphere and start leading the world toward a sustainable clean energy future. There are powerful special interests with huge investments in the status quo, and they are busy trying to stonewall comprehensive climate and energy legislation. But if we allow them to keep our attention focused in the rear-view mirror we will fail to anticipate the energy curves ahead

We do believe there are some fairly simple things that can be done to strengthen the Waxman-Markey proposal. Among them is adding a provision to assure that some of the revenues from a cap-and-trade system are dedicated to safeguarding our natural resources and helping them survive the inevitable impacts of a changing climate. We urge Reps. Waxman and Markey to devote 5 percent of the total allowance value under the bill to this purpose, so that our land can continue to provide services like clean water and clean air and viable wildlife habitat and biodiversity that are the basis of all public health.

The Waxman-Markey draft bill has a solid foundation. It takes a comprehensive approach to climate and energy policy. Combining energy efficiency, renewable electricity and transportation policies with a cap is the most cost-effective way to achieve emissions reductions.

Last week, I had the privilege of sharing with the House Energy and Commerce Committee the results of a recent UCS analysis called “Climate 2030: A National Blueprint for a Clean Energy Economy.” Our Blueprint, which is based on a modified version of the Department of Energy’s National Energy Modeling System, analyzed a suite of climate, energy and transportation policies that would allow the United States to meet an emissions-reduction cap of 56 percent below 2005 levels by 2030.

It found that in 2020, households would realize an average of $300 in net annual savings. By 2030, annual household net savings would grow to $900, including $580 on transportation (fuel, vehicle and driving) costs and $320 on electricity, natural gas and heating oil, after investing in home efficiency improvements. In 2030, Businesses collectively would realize net annual energy bill savings of $130 billion.

Our analysis indicates that one thing that should not be changed in the Waxman-Markey draft bill is its inclusion of renewable electricity, energy efficiency and low carbon fuel standards, since these policies would greatly increase its economic benefits.

It’s also crucial that the legislation set sufficient emissions reduction targets to avoid the worst consequences of climate change. Right now, the bill requires economywide emissions reductions of 20 percent by 2020 and 83 percent by 2050. It also requires 5 percent of allowances or revenue raised from auctioning allowances to be used to protect tropical forests. That’s important, because a UCS analysis (pdf) found that those revenues would allow the United States to achieve an additional 10 percent emissions reduction in 2020 through avoided deforestation and forest degradation. Together, these emissions reduction requirements would set us on the right path. Congress should not weaken them.

One piece of the proposed legislation that has yet to be worked out is how to distribute emissions allowances. We believe should all be auctioned. Auctioning is the most effective way for the market to set a price on allowances. The revenue raised then should be used to invest in energy efficiency, renewable electricity and measures that would help consumers, workers and low-income families make the switch to cleaner energy and save money.

Finally, one piece of the proposed bill should be changed. The final language should reduce the amount of offsets the draft allows. As it is currently written, the bill would allow polluters to avoid cutting their own emissions by purchasing as much as 2 billion metric tons of offsets. Half would come from domestic sources and half from international sources. While offsets can be used to ensure that businesses that are not otherwise regulated – such as those in the agriculture and forest sectors – have an incentive to reduce emissions, such a high number of offsets would allow polluters in capped sectors (industry, utilities, etc.) to avoid reducing their emissions for a long time. In turn, that would delay the deployment of energy efficiency and renewable electricity technology we need here at home to curb global warming and generate jobs. It also would eat into the savings consumers and businesses would see from deploying clean technology.

This post is in response to Jim Rogers' March 9 posting and Chuck Gray’s March 11 posting:

The Waxman/Markey bill, while the subject of criticism from the left and right, takes many essential steps towards combating climate change, most importantly by including a cap-and-trade system to limit greenhouse gas emissions.

However, the draft bill left open two of the most important questions: how to allocate pollution permits and what to do with whatever revenue is collected from auctions. Unfortunately, on each of these issues, there is not much maneuvering room.

For both political and policy reasons, lower and middle class Americans must be protected from the price increases that will come from putting a price on carbon. It is important to move quickly to decrease our greenhouse gas emissions, but it is unfair to pass the tab to those least able to afford it.

Luckily there is an easy way to avoid doing this. Pollution credits should not be allocated to existing emitters for free; instead they should be auctioned and the revenue should be returned to American citizens.

The argument that polluters need free credits to protect their rate-payers from price increases is false. The value of the free credits is unlikely to be passed on to consumers. A good analogy for the “permit-give-away effect” was posted on The Vine at The New Republic:

A ticket scalper is going to charge the same amount—the going black-market price—whether he's selling a ticket that he found on the ground or a ticket that he bought. He's just going to turn more of a profit if he found it on the ground.

More credits given away means less money for Americans who will be paying higher prices for electricity—it’s a double whammy for low and middle income earners. In a time of economic downturn, this is not a fair equation. Energy companies do not need a bailout and they certainly don't warrant the windfall profits they would see from free pollution credits.

For these reasons, although the Waxman/Markey bill takes many important steps, in order to protect American consumers, Congress should look to the cap-and-dividend bill (HR 1862) offered by Congressman Chris Van Hollen.

In a recent letter to Van Hollen, a group of economists praised the bill for “mitigating global warming, without placing undue burdens on low and middle income citizens.”

While the Waxman/Markey bill is being debated, many issues will be up for grabs in the political process. Forcing low-income Americans to make a big, unnecessary sacrifice should not be on the table. Providing for an auction and refund is the best way to make sure that a cap-and-trade program is fair, and ultimately takes the wind out of the opposition’s sails by showing the American public that they can be green and prosperous at the same time.

How comprehensive energy and climate legislation deals with renewable energy, cap-and-trade, and building efficiency issues will largely determine if the U.S. forest products industry and its nearly one million workers will remain competitive in the world marketplace.

Renewable Energy

Despite the carbon-neutral, renewable nature of the power our industry generates in abundance—28.5 million megawatt hours annually—the draft legislation’s restrictive definition of biomass would likely disqualify our power from the Renewable Electricity Standard (RES), and prevent our mills from obtaining renewable energy credits for it. This would put them at a disadvantage with utilities and new renewable energy generation companies when competing for wood biomass—our raw material—since power producers could receive credits for the power they generate from the very same fuel.

The definition also would make large swaths of public forests ineligible as a feedstock for renewable energy credits and, as discussed below, prevent its recognition under a cap and trade program. This would eliminate the bioenergy market as a tool for removing the dead trees and underbrush which is a significant fire threat and barrier to the health of public forests and surrounding communities.

The renewable biomass definition should be revised to expand the eligible range of feed stocks. It also should incorporate sustainable forest management principles into the definition, and a study and waiver provision, to allow a waiver of RES requirements for utilities in whole or in part or provide relief through reduced alternative compliance payments, if certain conditions are met.

Cap and Trade

Aside from barring our power and biomass from public lands from qualifying for RECs, the definition of biomass in the bill also is inconsistent with the Intergovernmental Panel on Climate Change, the EPA, and other internationally recognized climate policy groups, who have concluded that the combustion of biomass causes no net addition of carbon dioxide (CO2 ) to the atmosphere. As a result, the emissions of CO2 associated with the combustion of biomass under these organization’s definitions are not included in greenhouse gas emissions totals in climate change programs, including the European Union Emissions Trading System (EU ETS). The narrow definition of renewable biomass in the proposal would require regulated entities using biomass fuel to remit allowances for its CO2 emissions when combusted.

AF&PA believes that competitiveness and international leakage concerns largely can and should be avoided by distributing without charge or auction a sufficient number of allowances to all facilities under the cap. If Congress ultimately proceeds with a program designed to collect revenues from covered sources, AF&PA supports distributing an adequate allocation of emission allowances for affected energy intensive industries, such as the forest product industry, based on a facility’s historical emissions.

Also, we are concerned about the cap and trade program’s lack of recognition in the proposal for domestic forestry activities that sequester and store carbon. U.S. forests and forest products currently store enough carbon each year to offset approximately 10 percent of all U.S. CO2 emissions, and EPA estimates that the amount of carbon stored annually in forest products in the U.S. is equivalent to removing more than 100 million tons of CO2 from the atmosphere every year. It is important that policymakers create incentives for maintaining these forest sequestration and storage levels, and afforestation, reforestation, and forest management should be included in legislation as eligible offset project types.

Furthermore, to help reduce carbon dioxide emissions, the bill should encourage and reward new and existing use of combined heat and power (CHP) processes. CHP is the simultaneous generation of both heat and steam from the same fuel, and is about twice as efficient as standard electricity generating technology, resulting in decreased carbon dioxide emissions.

Energy Efficiency
AF&PA and its members endorse, and are committed to, reducing the environmental impact of new buildings, however, the codes and standards utilized, and the benchmarks used for measuring improved energy performance, must not unfairly discriminate against materials or assemblies used in construction as they do now. These biases create marketplace distortions that provide no improvement to building energy performance, and often result in less energy efficient buildings. DOE must take affirmative steps to revise and ensure that energy codes and referenced standards demand equal performance from all buildings, regardless of the materials from which they are constructed.

The Waxman-Markey draft bill sets up an economy-wide cap-and-trade system to reduce greenhouse gas emissions, and it represents a good-faith effort to address a number of complicated issues. However, as with many legislative starting points, the bill will need some substantial changes before it can become equitable, politically sustainable, and cost-effective public policy. It also does not provide a resolution to the key allowance allocation issue. My areas of concern are not limited to three, but my top three concerns, which I group into outcome categories are (1) elimination of the renewable energy standard (RES) as unnecessary and inequitable under a cap-and-trade system, as well as more tailored performance standards in general; (2) consumer mitigation and industrial competitiveness enhancements through free allocation of allowances, at least for a transition period; and (3) more effective allowance price cost containment mechanisms (allowance reserves, offsets, rate of cap declination).

As I noted in my testimony on the bill last week, I believe the RES should be eliminated from the Bill. I am concerned that, as drafted, it will be both cost-ineffective and inequitable for ratepayers in the Southeast and Midwest where cost-effective renewable resources are limited.

My first concern is that an RES conflicts with the market-based cap-and-trade system that accompanies it and the cap’s underlying least cost principle. Renewables are simply one option to decarbonize power fleets and reduce carbon. They may or may not be the most cost-effective option for doing that, however, and the price signal sent by the cap is supposed to decide that issue. Since the RES is a performance-based standard that must be complied with regardless of cost, it undermines the cap’s basic least cost approach. In effect, the RES is a bet that renewables, and not some other alternative, will be the most cost-effective solution for carbon reductions under the cap, all the way up to the full amount of the RES. Most troubling to me is that there appear to be no economic studies that a 25% RES by 2025 will provide more cost-effective carbon reductions than the cap program itself. Hence, I refer to the RES as a bet.

My second concern is that ratepayers in resource-poor states, where the wind does not blow as hard and the sun does not shine as brightly, will be assessed significant costs to comply with the RES for which they will receive no benefit. Instead, the monies will flow to the benefit of the ratepayers in resource-rich states, and either subsidize those ratepayers’ RES compliance cost or those ratepayers’ fleet decarbonization efforts and associated carbon cap costs.

To illustrate this, I use an example where I am a utility owner in a resource-poor state where renewables tend to cost more than in resource-rich states. I would have three choices under the legislative proposal.

First, I can build above-market (by that I mean higher cost renewable power than the prevailing REC price) renewables facilities in-state that will ensure green jobs and investment capital provided by ratepayers remain in-state, and that will provide some benefit toward carbon compliance in-state. But the costs for compliance with the RES will be higher than if other alternatives are adopted. However, since I also get a carbon benefit if I build my own renewables facility (which might be worth $7 MWh or more), I need to subtract that cost savings from my renewables cost, and those economics will likely make me build some, and perhaps many, above market renewables facilities. That result makes sense to me and my ratepayers, because it is the lowest cost solution to the dual compliance obligations of the carbon cap and the RES, but it makes no sense as a national policy. The result will be, nationally, more above market renewables facilities in the Southeast and Midwest, and fewer economic renewables facilities in resource-rich states. And, of course, since renewables will be part of compliance with the carbon cap, and the overall costs of renewables is higher than it need be because above market facilities are built, the cost of compliance with the cap nationally will be higher than it would be without the RES.

My second choice is to purchase Renewable Energy Credits (RECs) to fund construction of a renewables facility in another state with better renewable resources. If I do that, my ratepayers’ compliance costs with the RES will be lower, but I will have to go back to them for more money to fund investments in carbon reductions for my system, since I have received no carbon benefit from the renewable power facility funded by my ratepayers’ REC dollars. In addition, I will have funded creation of green jobs in the resource-rich state, but not my own, and I will have funded fleet decarbonization efforts in the resource-rich state through construction of a renewable facility, but not my own. As a consequence, I have subsidized the carbon compliance costs of the ratepayers in the resource-rich state, who will not see rate increases to fund the carbon reductions my renewable power facility has made for them.

My third choice is to make an alternative compliance payment. This option would also allow my ratepayers to comply with the RES at a lower cost, but again they see no carbon reduction benefits for the payments, and I will have to go back to them for additional monies to fund my own carbon reduction efforts. In addition, the monies I spend making alternative compliance payments are returned to the resource-rich states that complied with the RES, and presumably refunded to the ratepayers. Thus, my alternative compliance payments subsidize the RES compliance costs of citizens in resource-rich states, but my ratepayers see no benefit.

As a former PUC commissioner, I do not like any of these choices. None make any economic sense to my ratepayers, and they do nothing to address climate change, since the cap already requires carbon reductions independent of the RES. Frankly, I am baffled as to why I would have to make a choice between three such poor options. No one has told me that renewables up to the full amount of the RES are the most cost-effective way to reduce carbon. And no one has told me that the U.S. renewables industry cannot sustain itself based on the price signal the cap will send, the existing plethora of state RES requirements, and the other financial incentives available to renewables. It seems to me that the primary effect of the RES requirement is to pick winners and losers, and the ratepayers in resource-rich states will be clear winners, while the ratepayers in resource-poor states will be the clear losers.

I do not oppose use of renewables and believe they are an important part of the tool kit to address climate change. They will certainly be employed at scale under any carbon cap up to the point that they are cost-effective compared with alternatives. What I am against is the imposition of a very large federal renewables mandate that effectively advantages ratepayers in resource-rich states and disadvantages ratepayers in resource-poor states for no compelling reason.

In recent weeks, I have been thinking about why Congress is making such a strong push for renewables. One answer I come up with is that since renewables are available now and do reduce carbon, the temptation to require their use must be strong. In that light, mandating an RES has some very strong parallels with the issues confronting Congress when it adopted the Acid Rain requirements as part of the Clean Air Act Amendments of 1990. Then, Congress considered mandating that expensive scrubber technology be installed on much of the U.S. coal fleet. The reasons for this were similar to the reasons we consider mandating renewables. Scrubber technology was the only technology that could provide deep SO2 reductions, and there were no real alternatives, so why not require it. Scrubber technology also might be expensive, but the costs would come down as the technology was deployed at scale, and the industry learned by doing. In the end, Congress boldly decided to establish the now famous SO2 cap-and-trade system, and the market it created went to work. That market then developed ways to burn low sulfur Western coals in units designed to burn only high sulfur Eastern coals. It was not "man on the moon" science, but simply hard work to cost-effectively redesign units to burn coals they were not intended to burn. The result was a savings to utility ratepayers of billions of dollars over what a scrubber performance standard would have required, and full compliance with the cap. Today, it would seem wise for Congress, as it did in 1990, to forgo requiring a known technology (renewables) which might or might not be the most cost-effective way for the power sector to comply with a carbon cap in favor of allowing the market set up by the trading program to see if better results can be produced.

In contrast to the RES, the draft legislation's energy efficiency standard is likely to produce cost-effective reductions. While I again see no need to layer another performance standard over a market-based cap-and-trade system, the EES is likely to reflect what power companies with least cost planning and prudence requirements will do anyway, and hence it has a lower potential to do harm to the market-based orientation of the cap-and-trade program. Indeed, since energy efficiency is almost always cost-effective, and it is generally equally available to all regions of the country, it would seem that allowing energy efficiency to be substituted for renewables up to the full amount of the RES would help address some of my concerns with the RES, if it is not eliminated. I would tweak the EES requirements to make them less cumbersome, and revisit the "additionality" principle, since energy efficiency projects are almost always economical, and other additionality criteria will be difficult to come up with.

Perhaps more important are the implications for the rest of the legislation if the energy efficiency provision is retained. The EES should have the policy effect of eliminating debate over objections to free allowance allocations. With respect to free allocations, a primary objection is that the "price signal" will not be as strong if the cost of the entire allowance baseline is not passed through to end users, as opposed to the only the costs of carbon reductions required under the cap if allowances are given away for free. However, the primary, although not only, reason a strong price signal is desired is so that power consumers (residential, commercial, and industrial) will reduce power consumption, primarily by adopting energy efficiency measures which they are not otherwise inclined to adopt. By instead mandating that power companies seek out and implement energy efficiency measures on a broad scale through the EES, there is far less reason for auctioning allowances simply to send a stronger price signal.

In the end, while I believe the RES should be eliminated and the EES revised somewhat, if I were only to "tweak" these performance standards, I would reduce the RES requirement to 10% by 2025, allow energy efficiency to be substituted for the full amount of the requirement (and not the lesser amount currently provided for in the bill), and I would retain the EES, subject to eliminating or revising the additionality issue, in order to pave the way for free allowance allocations.

Allowance allocations are the second area where I have major concerns. The draft legislation has not fully addressed this critical issue. Appropriate resolution of that issue will be key to passage of an effective bill. If that issue is not properly addressed, and consumer, commercial, and industrial costs are not mitigated through largely free allowance allocations, the legislation will likely become politically unsustainable over the long term.

In general, I believe that allowance allocations for both the power sector and industrial sector will need to be free. The legislation does outline a framework for free allocations to energy intensive industrials that largely, but not fully, mirrors the work of Congressmen Inslee and Doyle, and that approach should be continued. It does not, however, address allocations to the power sector. Presumably, the bill is leaving open the prospect of a large or full auction of allowances that Obama prefers, and some method of returning much, but not all, of that revenue to consumers. In this regard, both the full auction approach and the free allocation approach are trying to address similar objectives in different ways: specifically consumer mitigation. Under an auction and refund approach (cap-and-dividend), consumers are protected from rate shocks through return of revenue to them. Under a free allocation approach, consumers are also protected because rates do not rise to fund the purchase of allowances. However, to me, the free allocation issue is more sustainable because it also protects other power consumers such as commercial entities (including schools, hospitals, libraries, small businesses, and large employers), which are just as prone to rate shocks (and job losses) as are consumers, and it is far less complicated so that the form and specifics of revenue return under an auction does not create unfair winners and losers. In addition, a free allocation also does not divert capital needed by power companies to decarbonize fleets into an auction purchase. As noted above, since the bill contains an aggressive energy efficiency standard, the need for a stronger price signal through higher power costs is lessened since the energy efficiency standard will replicate many of the types of reductions that the price signal would seek to induce.

The area that seems most controversial under a free allocation is whether merchant power plants (power plants that sell to LDCs and others, but are not directly regulated as to rates) should receive any free allowances, or should these just go to LDCs. Since power plants are "energy intensive" industries, and are just as susceptible to "price shocks" as are consumers, the only reasonable solution would be to allocate free allowances to merchant power plants as well. These power plants need time and capital to decarbonize their fleets just as regulated power plants do, and they will have a difficult time doing that if forced instead to come up with large sums of capital simply to cover operating costs that would now include massive allowance purchase obligations. Free allocations to merchant coal plants will also ensure they do not shut down prematurely (i.e., more quickly than their regulated brethren) due to a massive increase in operating costs, and thus will keep fuel diversity intact in the early phases of a new carbon cap, avoiding a costly and premature rush to gas in states with merchant generation. Notably, merchant coal allowances make up a relatively small amount of the total allowances of the electricity sector, only around 16% of all generation in the U.S., and the total allowances they would receive under a free allocation would be a relatively small share. In addition, merchant coal generates electricity only in certain areas of the country. Allocating allowances to them would not by itself result in increased coal generation in all areas of the country and would help avoid rate shocks to those consumers whose electricity comes from coal. Even under a free allocation proposal, merchant generators would only get about half of historic emissions to ease their transition, and since free allocations to the power sector will ultimately be phased out, free allocations will decrease annually to zero over time. On balance then, it would seem appropriate to include merchant plants in a free, transitional allocation to the power sector. It may be possible to replicate the benefits of a free allocation to merchant coal plants by allocating those allowances to the LDCs they sell power to, with the LDCs obligated to surrender those allowances on behalf of merchant coal generation.

I recognize that my former colleagues at NARUC have opposed the allocation of free allowances to merchant coal facilities out of a concern about the possibility of windfall profits being gained by those generators and their shareholders. Having been involved in the development of NARUC's policy favoring the allocation of no cost allowances only to local distribution companies, I understand well the concerns expressed in testimony last week by my friend Rick Morgan on behalf of NARUC. First, it is important to recognize that on the fundamental point of allocation versus auction, NARUC's position in favor of free allocation is consistent with both the Edison Electiric Institute and the Pew Center on Global Climate Change, a fact that should not be lost on Congress or the Administration. In my opinion, there also is consistency between NARUC's position on free allowances to merchant coal and that of EEI – both positions are grounded in legitimate concerns about potential negative consequences for consumers. While NARUC's concern is focused on the avoidance of potential windfall profits, EEI's concern is focused on the very likely negative impact on consumers in terms of both cost and reliability should merchant coal resources be lost in those parts of the country served by organized wholesale markets. In other words, I would suggest that Congress be both careful and thoughtful to make sure that, in an effort to avoid the possibility of windfall profits in what is a relatively small portion of the electricity sector, inadvertent, and potentially significantly greater, harm is not done to consumers in those markets. I have suggested one potential solution at the end of the preceding paragraph and strongly urge all of the interested parties to both acknowledge the legitimacy of the concerns on both sides of the issue and to seek an appropriate solution that, in the end, best protects those consumers for whom merchant coal resources are vital sources of both fuel diversity and reliable service.

I also note that free allowance allocations to the power sector is intended to be transitional and phase out over time. That phase-out period should be long enough to ensure the decarbonization technologies such as carbon capture and storage are available and deployable. As well, as free allocation transitions to an auction, the monies collected by the auction should be returned to the states whose ratepayers generated the revenue, and not diverted to other purposes. We have seen proposals to use carbon auction revenue to reduce the deficit, finance health care reform, or, under Obama's proposal, finance a middle-class tax cut. However laudable these goals might be, they are inherently inequitable since they either fully divert ratepayer money to other uses, or, in the case of the Obama proposal, redistribute that money to consumers and states in ways that bear no relationship to how that money was paid in. My strong preference in this regard is that the money be returned to states (and the ratepayers that provided it) who can use it for consumer rate refunds, energy efficiency, and other carbon reduction efforts in accordance with their unique local needs and opportunities.

The final area that I believe needs adjustment is in the cost containment area. The bill does provide several cost containment provisions such as allowance borrowing, and a strategic allowance reserve, and each of these elements is important and should be strengthened. However, the two primary cost containment measures in the legislation seem inadequate. The most important cost containment measure in this or any carbon legislation is the rate of cap declination. The draft legislation calls for a 20% reduction by 2020. This is even higher than last year's Boxer substitute, and substantially in excess of Obama's goal of a 14% reduction by 2020. The reason the rate at which the cap declines by 2020 is important, and why it is a critical cost containment measure, is that if the cap declines at a level faster than significant carbon reduction technologies can be developed and deployed, costs will increase rapidly and political support for the greenhouse gas reduction effort will wane. In particular, if carbon reduction technologies such as carbon capture and sequestration, and renewable friendly transmission grids and other renewable-related infrastructure upgrades are not timely available, the primary compliance alternative will be a switch to natural gas, which will not only significantly increase power prices, but will also harm U.S. industries that use natural gas as a feedstock. Hence, I would certainly "tweak" this legislation to reduce the rate of cap declination by 2020 to better align it with realistic expectations about technology development and deployment.

The second primary mechanism for cost containment is the use of offsets from uncapped emissions domestically or internationally. While global warming is a "global" issue, and a ton is a ton, Democrats in general have tended to be largely hostile to use of offsets as a cost mitigation alternative without really saying why. The draft legislation has significant, and in my view unnecessary, restrictions on the number of offsets that can be used, punitive discount rates, and international and national offset restrictions and other measures that will serve to limit the ability of offsets to act as an effective cost containment option. So long as offsets follow established and generally agreed upon guidelines for their generation and verification, I find it hard to understand why the legislation would contain such severe restrictions, and I believe an important cost-containment option will not be as effective.

NARUC supports moving forward with legislation to address climate change. That said, from our perspective, the bill must find a way to ensure that consumers are not unduly burdened by the anticipated price increases any cap-and-trade system will undoubtedly bring. Therefore, we urge Congress to support American electricity and gas consumers by acting in three areas:

One: Allocate free allowances within the electricity sector to only Local Distribution Companies (LDCs) during a transitional period. Doing so puts State utility regulators in charge of ensuring that consumers—not utility shareholders—benefit from the value of allocated allowances in the cap-and-trade system. State utility regulators already have mechanisms in place to ensure that this value will be passed through to consumers through rate mitigation, investment in energy efficiency and clean-energy technology, low-income assistance, and other related programs. Also, this prevents unregulated generators from receiving windfall profits.

Two: Include cost-containment measures to prevent rate shock. Reducing carbon emissions will not be cheap. Accordingly, as Congress mandates emission reductions, we urge lawmakers to develop cost-containment measures to address volatility in allowance markets that will ensure energy prices do not become unaffordable. Given the current financial climate, consumers are more pressed than ever, and every economic forecast of climate legislation predicts a significant jump in electricity bills. Although NARUC has not endorsed a specific cost-containment program, something must be done to keep carbon prices in check if the market does not work as envisioned. Effective cost-containment measures will also support increased investment in new technologies by supporting predictability and certainty in the cost of carbon reductions.

Three: Ensure proper and effective oversight of the allowance markets. As we’ve just experienced in national and international financial markets, one of the most important lessons learned is the need for proper and effective oversight of market players. Those of us in the electric utility industry remember all too well the 2000-2001 California energy crisis, when markets were out of control and the federal regulatory bodies struggled to provide discipline to market participants and relief to energy consumers. Markets need well-understood rules enforced through strong and transparent regulatory oversight by independent public officials who are able to understand market behavior and anticipate problems before they happen.

I had the privilege of testifying last week before the House Committee on Energy and Commerce about draft climate legislation developed by Chairmen Waxman and Markey.

I was pleased to be joined by leaders of five major companies who are also members of the U.S. Climate Action Partnership--a coalition of major environmental groups, energy producers and users, and leading members of the manufacturing sector.

The Waxman-Markey discussion draft followed many suggestions offered in the USCAP Blueprint for Legislative Action. All of us agreed that the draft was a strong starting point and emphasized the importance of enacting legislation this year.

But the discussion draft is incomplete and marks the beginning of the legislative process, not the end. I think the legislation could be strengthened in these ways:

1. Provide incentives to states and utilities to invest in all cost-effective energy efficiency opportunities, which are the cheapest, fastest, and cleanest way to reduce carbon emissions.

2. Narrow the scope of the Clean Air Act exemptions, such as the proposed repeal of New Source Review for polluters covered by the Waxman-Markey draft. The current Clean Air Act and a climate law can and should provide complementary approaches to achieving our objectives.

3. Add a floor price for emission allowances to make sure we create adequate incentives for private investment in transformative, low-carbon technologies.

We welcome the draft bill as a solid starting point for developing legislation that can pass the House. We believe that the most important changes to be made are those that will help protect American jobs. Manufacturers and industries that deal with certain commodity products that are both energy-intensive and trade-exposed will be particularly challenged by U.S. climate policy if faced with competition from countries that have not committed to an internationally recognized greenhouse gas emission reduction path.

In such cases, there will be a risk of carbon leakage. The draft bill includes provisions to provide rebates to energy-intensive, trade-exposed sectors that are at risk under a U.S. climate policy. However, it is critical that the number of allowances be adequate to address those sectors that meet the energy intensive, trade exposed criteria.

If Congress does not set aside enough allowances to address the leakage issue, then it will fail to protect critical American manufacturing jobs. Only when there is an internationally level playing field should these allowances be reduced or eliminated.

Other provisions in the draft bill also impact the competitiveness of U.S. manufacturers.

For example, the bill would provide compensatory allowances to companies that use fossil energy as a raw material rather than as a fuel source. Unfortunately, this provision is unworkable in its current form and should be changed to maintain the competitiveness of energy-intensive sectors, such as the U.S. chemical industry.

The bill should also try to avoid excessive fuel switching from coal to natural gas in the power sector. One way to do this would be to establish a trigger price for the strategic reserve of offsets to avoid the so-called “dash to gas,” which could seriously hinder manufacturing companies by dramatically raising the price of natural gas.

By properly addressing these three issues – carbon leakage, compensatory allowances, and fuel switching -- Congress will be able to craft legislation that maintains the competitiveness of U.S. manufacturers as the United States transitions to a low-carbon economy.

Well, it's interesting to see from the comments below how this dance is being played. The over-the-top hysteria is being left to members of Congress, and the likes of Gingrich and Limbaugh, while the carbon emitting lobby and their allies urge more caution, delay, and give-aways to existing carbon emitters.

What happened to the free market principal -- pay for what you get? If carbon producers were treated equally, and each had to obtain a permit for the carbon they introduce into commerce, and the number of permits gradually declined each year, there would be economic efficiency and transparency, and given that the program would begin during a recession in which demand for carbon permits will be, almost certainly, lower than normal, there will be an adequate transition period.

So we ought to tweak Waxman-Markey to make it work more like a real carbon auction, but get on with the job -- a time of depressed demand for carbon fuels is actually the ideal time to phase in an auction and cap.

But it would be useful to know if the business community is going to clearly break with the kind of inflammatory rhetoric we heard in Congress last week -- with Representative John Shimkus of Illinois proclaiming that Waxman-Markey was worse than the attack on the World Trade Center!

First, remove the National RPS and efficiency standards. Leave these to the States. Second, front-end load free allowances to create a less derivatives-dependant carbon market - and manage leakage and transition issues. Something like 60% for the first 5 year period, 30% for the second, and 15% for the third - would still mean about 3/4 auction over the life of the policy. Call this the training wheels that consumers, emitters, and the carbon market need to get rolling on their own. Third, recognize that we won't cut 83% without nuclear - and provide a path to "cookie cutter" versus our historical "bespoke" nuclear power plants.

While Congressmen Waxman and Markey should be applauded for their end goal of reducing greenhouse gas emissions, the legislation they have introduced will result in great pain for the U.S. economy with little results to show for it.

A joint analysis from the American Council on Capital Formation and the National Association of
Manufacturers examined a similar proposal introduced in the previous Congress, which set targets to reduce GHG to 15 percent below 2005 levels by 2020 and to 70 percent below by 2050. The damage includes a rise of 101 to 129 percent for residential electricity, and industrial natural gas price increases up to 244 percent.

The bottom line for working Americans is that they get a double-whammy of higher prices at home and fewer will have jobs to pay those higher costs. The ACCF/NAM study found that reductions in total U.S. employment could reach as much as 1.8 million jobs by 2020 and 4.1 million by 2030. This toxic economic cocktail could decrease GDP by up to 2.7 percent by 2030, a truly staggering figure.

Even sadder is the minimal environmental reward for all of this pain. According to the 2009 Council of Economic Advisers' Report to the President, global concentrations of carbon dioxide will be virtually unaffected by U.S. reductions unless developing countries participate. In short, that means sacrificing U.S. economic growth -- not to mention lots of good jobs -- through unilateral climate change policies would yield little environmental benefit.


U.S. climate policy needs to entice developing countries that simply can’t and won’t sacrifice economic growth for environmental benefit. Unfortunately, this will require an overhaul and a completely different from the current legislation.

To be effective, policies to reduce global carbon dioxide emission growth must include developing nations. Enhancement of technology development and transfer are likely to be more widely accepted by the developing countries that must be brought to the global table on climate solutions.

You can read more about my thoughts on the Waxman-Markey bill in my recent op-ed in Roll Call, posted here.

The Devil is Always in the Details: Potential Consequences Will Not Be Addressed in a Rushed Process

Charles T. Drevna

President, National Petrochemical & Refiners Association

When addressing an issue as complex and controversial as global climate change, failure to adequately investigate and resolve the numerous unknowns before taking action will only result in unintended consequences for American consumers.

The speed of a legislative process should not determine the consequences of a bill, rather the consequences, known or unknown, should dictate the process itself. Since the days of President Clinton, when that White House wisely chose not to submit the Kyoto Protocol to the Senate for ratification, numerous and varied proposals have been put forth by Congress, none of which has adequately addressed increased consumer costs resulting from regulation of greenhouse gases. With the addition of the discussion draft legislation, the American Clean Energy and Security Act of 2009, Congress now has a new proposal to thoroughly and transparently vet before potential passage.

When I testified late Friday before the House Subcommittee on Energy and the Environment, I spoke of linkages: the rearrangement of the links between and among hydrocarbon molecules, and the more consequential links between energy and national economic strength, and between energy and American security. I suggested to subcommittee members that the question before Congress and, ultimately, the entire nation, is whether the current draft of the American Clean Energy and Security Act of 2009, or similar legislation, would forge stronger, more viable links in these vital chains, or would it lead to adverse economic impacts on not just the domestic refining industry, but the nation’s economy? We believe the answer to this question, and others, must be fully investigated, understood, and documented before enactment of any legislation. On climate change, it is not simply a matter of getting it done, but one of getting it right. We have but one opportunity to get it right, and the nation can ill afford anything short of complete understanding.

NPRA addressed four main concerns with the current draft in testifying before the subcommittee:

· Adoption of a low carbon fuel standard (LCFS) is redundant and punitive;

· Compliance timeframes are overly aggressive;

· The refining industry is energy intensive and subject to international competition; and

· Allocation of emission allowances.

First, an LCFS is redundant because transportation fuels would already be covered under the cap and trade program, which is the dominant feature of the discussion draft. Producers of transportation fuels will be forced to pay more for the carbon content of these fuels each year as the cap on carbon emissions decreases over time. There is no justification for this redundancy. An LCFS could also threaten American energy security by significantly decreasing viable and available options, thus limiting, not expanding, the supply menu.

Second, the discussion draft places a disproportionate and early compliance burden on the refining community. Refiners must meet the earliest compliance mandate for fuels in 2013, while other sources would not be phased in until 2014. NPRA believes such time frames look to achieve aggressive reductions before adequate compliance tools become available. Gasoline is carbon by nature, and refiners will have few options to reduce compliance costs other than constricting production. In addition, requisite costs for compliance will be astronomical.

Third, the domestic refining community is incorrectly excluded by definition from qualifying for the rebates provided to other “energy intensive” sectors in Title IV of the discussion draft. In fact, the production processes of the domestic refining industry are extremely energy intensive. Refiners also face intense global competition in the transportation fuels marketplace. As a result, the domestic refining industry should not be excluded from eligibility for rebates under the discussion draft.

To further the point on global competition, the draft legislation fails to ensure international participation. While the Obama Administration is willing to participate in the UN climate talks later this year, China has indicated that it will not participate in any program that places restrictions on its emissions. International participation is a critical issue, as we need to assure that any program we implement will actually create global reductions while also protecting our economic competitiveness. Any legislation enacted must contain provisions to prevent leakages of both jobs and emissions. Without international participation, any carbon control measures taken by the U.S. would have little or no impact on potential climate change.

Lastly, the issue of pass-through speaks directly to the issue of allowance allocations in a cap-and-trade program. Although the discussion draft does not address allowance allocation, NPRA is concerned about this issue and its potential impact. Previous climate change proposals, such as the Lieberman-Warner Climate Security Act, have discriminated against the refining industry with respect to allowance allocations. Such a policy would adversely impact the industry and consumers. Foreign importers are responsible only for their finished product emissions, not the process emissions from refineries abroad. Failing to account for foreign process emissions could automatically provide foreign-based refiners a 10 percent cost advantage over the U.S. refining industry. If emissions allowances are not distributed in an equitable and transparent manner, they will damage the competiveness of U.S. refiners and endanger our domestic supply of gasoline, jet fuel, home heating oil and other petroleum-based products.

Climate change legislation must be fair and effective in achieving its goals. A federal policy to address climate change must be based on cost-effective approaches that maintain the global competitiveness of the entire U.S. economy and treat all sectors and industries equitably. Such policy must enhance our energy security, ensure the strength of our economy, and contain realistic assessments regarding the development of technologies necessary to achieve required emission reductions. We feel that the House Energy & Commerce Committee needs to address the critical issues in the discussion draft before the goals of a finalized legislative approach can be achieved, particularly in the transportation sector. Transportation fuels and the crude oil they are derived from play vital roles in our economy and everyday life.