While a sector-by-sector approach to reducing emissions has the advantage of providing more flexibility for industries with very different capabilities to reduce GHGs, it will inevitability be more complicated, inequitable and subject to fraud than a carbon tax levied the point of fossil fuel production or importation.
In addition, if only utilities are subject to a cap and trade system and required to buy emission permits, the cost of allowances is likely to be higher than if there were more industries involved in trading and thus the impact on energy prices may be larger.

The current discussion over cap-and-trade reminds me of the old saying by Winston Churchill—albeit slightly modified: “Cap-and-trade is the worst form of reducing greenhouse gases--except for all the others.”

Markets are not perfect. They can lead to bubbles. They need to be regulated. Players can cheat. Some people will lose money, while others will make money. Such is the nature of markets.

The trouble is, the alternatives are worse.

If you accept the conclusions of every major scientific body in the US, that greenhouse gases need to be reduced to a certain amount by a certain year, then the simplest method of doing so is to require all major emitters to hold a permit—aka an allowance—for emitting greenhouse gases, and then set the number of allowances to equal, over time, whatever the scientists say is safe. It is really not that complicated.

True, it can take a lot of pages to turn a fairly simple concept into law. Allowances represent value, and members of congress and their constituencies will fight over how to distribute that value. That is democracy. The same thing happens every year in the appropriations process, and every time the tax code is reauthorized—except that taxes and appropriations are generally longer, more complicated, and less transparent. At the very least cap-and-trade is going through the normal legislative process: committee hearings, floor action in each chamber, etc—which is more than can be said for appropriations, which distributes funds primarily through report language, not legislation, and in a manner which has little to do with what is authorized by law, and a lot to do with who sits on the appropriations committee.

Of course, a cap-and-trade bill also needs to establish clear rules for trading and unambiguous regulatory authority, and further needs effective means for keeping costs down. In the end, it is not difficult to end up with a long bill. But that is still better than the alternative.

Cap and dividend, carbon taxes, cap and tax, sectoral approaches, traditional command and control: none of them have the effectiveness of economy-wide cap-and-trade. Taxes just get paid, passed on in increased prices, and forgotten, resulting in increased revenues for the appropriations committee to fight over, but also increased costs to the economy, with no guarantee that people will actually reduce their emissions. Command and control results in the government telling each facility how many greenhouse gases they are allowed to undertake their business - as if the government knew. Can’t operate your plant at that level? Sorry, you are not allowed to buy cheaper credits from the plant next door which is under its limit, because that would be trading and trading is bad. You will have to shut down instead. The remaining approaches generally consist of some combination of the above.

Nevertheless, a sectoral approach is not necessarily a bad first step. Europe started its cap-and-trade program primarily with the power sector, and, despite a few hiccups, it actually accomplished its objectives. The Europeans set a cap, they reduced emissions to below the cap, and they did so in a cost-effective manner—while US emissions grew rapidly. I am hopeful that Kerry, Graham, and Lieberman will produce legislation based on sound market principles, even if only for one sector. But let us not forget that so far, Waxman-Markey’s economy-wide cap-and-trade bill is the only ghg bill to have ever passed either body of Congress.

The Cantwell-Collins approach has only two virtues: it is short, and it proposes to write checks to people to “make them whole.” But the American people will ever trust the government to make them whole with such massive revenues floating through the federal government. In fact, the Cantwell-Collins dividends only aim to make people partially whole – and it does so with such patently unfair regional impacts, that folks in the South and Midwest are going to feel like they got a “pig in a poke.”

A gradual sector by sector approach makes sense. It would allow the market time to adjust. The real problem with Kerry Boxer is how it treats the transportation fuels. By requiring refiners and importers to purchase 100% of the allowances, the bill generates huge windfalls for the federal government – which it then tries to spend wisely on a myriad of worthy causes (Low income consumer protection, Energy R&D, State and local renewable and efficiency programs, etc.). As worthy as those causes are, they are not worth the political pain of auctioning such a penalizing level to the oil industry. However, it is a tough call on how to allocate to fuels providers in a fairer way. It would never work to give large free allocations, due to the fear of refinery “windfalls.” So a new approach is needed.

A novel approach would be to simplify the Kerry-Boxer allocations by making transportation fuels providers responsible for a fair percentage of the emissions embedded in each gallon they sell rather than 100%. This could be done with a “linked fee” or, better yet, a “baseline-and-credit” approach, where they are only issued credits for improvements below the baseline – and are held responsible only for emissions above the baseline. Admittedly, there are precious few things that fuels refiners can do to improve their customers’ use of fuels, so they are likely to generate few “credits.” Still, one of these alternative approaches would have the virtue of equalizing the transportation sector’s share of carbon responsibility and mitigating the hit on their customers.

Beyond this, the free allocations to the power and industrial sectors should be maintained. These provisions provide a great deal of certainty to these sectors, reduce costs to their customers – and engender much needed political support for the bill.

Obviously, if transportation fuels providers are required to purchase fewer allowances, there will be less funds flowing through the federal government for the myriad of special causes specified in the ACES bill. I am in no mood to reward the puerile behavior of API in running advertisements across the country labeling ACES as “cap and tax,” when they have come forward with no promising solutions to the complex allocation problem. But politically, the reality is that the “tax” charges only work when large auctions are at the heart of the bill. If the auctions are removed or mitigated, it reclaims the legitimate moral high ground of a “cap and trade” design where the money stays at work in the private sector, looking for solutions, rather than cycling through the government.

Which brings me to the critical problems of Cantwell Collins: with 100% auctions, no cost containment from offsets, restrictions on market participation that impair its potential efficiency, and a “pig in a poke” for many consumers – the bill is much worse than ACES. If you thought the API attack ads were bad in demonizing the partial auctions in ACES, you can imagine how they’ll attack a 100% auction of Cantwell-Collins.

The American Gas Association (AGA) commends Senators Kerry, Graham, Lieberman, Cantwell, Collins, Bingaman and Murkowski for helping to keep a spotlight on our nation’s energy issues and looking for smart, creative and logical alternatives to address America’s need for a sound energy policy. By recognizing the role that clean, domestic and abundant natural gas can and will play in combating climate change, our legislators can help reach our nation’s energy goals sooner.

AGA urges members of Congress to take a look at the successful track record of America’s natural gas customers. During the past 40 years, while the number of natural gas customers has doubled, actual natural gas use and greenhouse gas emissions have remained essentially flat. This decline in residential gas usage per household is due to better insulated homes, more efficient appliances and conservation/efficiency programs supported by natural gas utilities.

This remarkable success in both reducing natural gas usage on a per-household basis and increasing appliance efficiency should be considered when crafting a national energy strategy. Instead of simply mandating arbitrary prescriptive requirements, a far more effective course of action would be to continue to support these successful approaches and encourage other innovative ways to promote conservation.

We believe that natural gas could, and should, be used as a tool to improve environmental quality and energy efficiency. An approach to reducing emissions that is focused on appliance efficiency standards, building codes, and utility-supported conservation/efficiency programs has a proven track record for residential and commercial natural gas customers. As it looks to the future, Congress should also identify what has worked in the past and encourage more of it.

While I agree the cap-and-dividend approach is a politically viable approach, I am not sure it will be fairer or more effective than the cap-and-trade system envisioned in the House’s American Clean Energy and Security Act.

On paper, the plan sounds fantastic—auctioning off emission allowances and distributing the proceeds to Americans on a per-capita basis could result in significant rebate checks. But logistically, the proposal could be a bureaucratic nightmare and result in a decidedly inequitable redistribution as it ignores the enormous regional variation in carbon emissions across the country, leading to monetary windfalls in some regions and shortfalls in others. Instead, senators should simplify the cap-and-trade legislation it already has by limiting the number of giveaways and handouts and more clearly articulating why consumers would be better off under this scenario.

Here’s why: First, immediately auctioning the emission allowances will dramatically increase utility bills for all consumer classes. Consumers are already cash-strapped—State utility commissions are seeing record utility bill arrearages across the country. Adding carbon-reduction costs to an overburdened customer base without any kind of cushion or protection will only bring higher numbers of default payments, not to mention angry customers. By contrast, allocating emissions at no-cost to regulated utilities for the benefit of their consumers provides an effective and equitable means of protecting those consumers during the lower-carbon transition.

Second, if the allowance proceeds are distributed on a per-capita basis, how will that take into account industrial and commercial customers? Since businesses are the largest electricity consumers, will they get a rebate check too? And what about those who live in apartment buildings, group houses, or arrangements where their utilities are included in their rent? Could a resident who doesn’t pay a utility bill receive the rebate check? Also, what assurances are there that the auction proceeds won’t get diverted to other federal needs, such as balancing the budget? Or that the proceeds will really target the poor and middle class, instead of wealthy taxpayers?

Third, will consumers correlate their rebate check with their higher electricity bills? Or will they use the money for a new high-definition television or another gadget that will increase electricity demand?

These questions need to be answered before Congress moves forward with this approach. There is no doubt that promising voters a big rebate check in return for higher electricity bills is an easier pitch than explaining the complicated cap-and-trade system in the House bill. Unfortunately, the number of giveaways in the ACES bill has made such an approach hard to defend.

But rather than scuttle the House bill entirely, why not just simplify how that legislation treats emission allowances? NARUC is a long-time advocate of a transition period in which emission allowances are allocated to limited groups with a specific purpose—to ensure that consumers are not overly burdened by, and indeed can share in the benefits from, lowering carbon emissions.

At least within the electricity sector, these allowances should only be distributed to regulated Local Distribution Companies on behalf of their consumers. LDCs at all levels of the electricity sector are regulated by State commissions or other entities. These agencies are legally required to treat proceeds from any allowance sales as income that must be shared with their consumers. Under reasonable federal oversight, the Senate should let the States decide how best to distribute the proceeds, either through rebates or investments in various clean energy programs. If Senators are concerned about handouts or giveaways, it should remove the free allocation of allowances to merchant generators, which remains unjustified.

Our members will continue analyzing the cap-and-dividend approach with the hope of finding ways to make it more palatable. We just think that by simplifying the cap-and-trade system, reducing the number of giveaways, and more clearly stating the purpose behind the LDC allocation—i.e., to benefit consumers—Congress will see that it actually has a workable piece of legislation.

In an entry regarding whether carbon should be priced and mandated by the federal government, sector-by-sector, the Alliance of Automobile Manufacturers’ Dave McCurdy writes: “When it comes to determining whether green technologies are successful or not, consumers are in the driver’s seat.” This is true. Consumers, acting in a free market, will be the drivers of innovation and technological advancements, especially as it relates to the most affordable and efficient forms of energy.

At the same time, however, Mr. McCurdy highlights the purported virtues of a host of top-down, Washington energy mandates, that favor otherwise unsustainable and unprofitable “green” industries, and then, somehow, arrives at the conclusion that consumers – not government – is best suited to make such sweeping decisions.

But what have other nations shown us – in real world terms – about mandating and heavily subsidizing “green” energy forms? Well, in Spain, Denmark and Germany, just to name a few, such burdensome and costly experiments have led to higher energy costs, fewer jobs and less competition. Not exactly the model for the United States to follow.

And while everyone one is entitled to their own opinion, no one is entitled to their own facts. Mr. McCurdy claims that a Low Carbon Fuel Standard (LCFS) “will result in significant additional reductions in CO2 emissions.” However, many independent experts – including a top U.S. Energy Dept. advisor – have determined that global greenhouse gas emission would increase under a one-size-fits-all LCFS. An LCFS, of course, aims to ban heavier forms of secure, North American energy reserves from entering the United States.

Some select automobile manufacturers could benefit under this mandate. Unfortunately, the real loser is the American economy, struggling families and small businesses, which rely on Canada’s oil sands to meet nearly 20 percent of our nation’s daily fuel needs. Other winners? OPEC nations, who produce lighter forms of crude, which scores favorably under a convoluted LCFS scheme.

The most important addition that Senators Kerry, Graham, and Lieberman can make to the climate bill is a refund provision similar to the Cantwell-Collins proposal. Without some mechanism to compensate Americans for rising energy prices, middle and lower income families will be stuck with the tab for our transition to cleaner energy, which is both bad policy and bad politics.

As I’ve noted in the answer to a previous panel question, under any carbon pricing plan we will see small price increases on our energy bills as the cost of making electricity goes up. Since those with lower incomes spend a larger percentage of their money on utilities, they are going to bear an outsize portion of the burden. As we begin to climb out of an economic downturn, it certainly does not seem fair for the cost of this policy to be greatest for those least able to afford it.

Beyond a question of fairness, a refund can ensure that consumers will not be burdened by the changes caused by climate legislation, undermining political resistance to the legislation. Compensating working families for price increases has the potential to appease many voters who are not convinced climate change is a priority.

Details of the Kerry-Graham-Lieberman plan have been scarce, but the centerpiece seems to be a sector-specific approach which treats different industries in different ways. Oil would get a tax, electricity a cap, and industry gets a pass for now.

If the new setup has better prospects in the Senate, then it will represent important political progress. Includeing a rebate for consumers should increase the broad political appeal even further. Most importantly, the bill would put a price on at least some greenhouse gas emissions and get us on track to wean us off polluting fuels.

But besides better politics, it is not clear what the benefits are over an economy-wide carbon price. Businesses will not be able to take advantage of the cross-industry efficiencies that come from applying the same rule to everyone—ton for ton, a sector-by-sector approach will cost a little more to contain emissions. Some people will be paying too much to reduce their carbon pollution and others will not be paying enough—if the price on carbon is greater for coal than oil, then electricity generators will be taking more costly measure to control carbon, while lower cost opportunities would go unrealized in the auto industry.

The point of an economy-wide model is for everyone to face the same incentives, which ensures that we get the greatest reductions for the lowest price. In a sector-by-sector approach, money could be wasted like heat coming off an incandescent bulb—useless inefficiency. The greater the price differential, the worse the “heat loss” that will be passed on to consumers. Americans don’t get anything in return for that extra price tag—the cost of reductions is just shifted around and increased overall.

But environmentalists have long learned the lesson of letting the perfect be the enemy of the good. With so much at stake, and so many details unknown, this bill could still shape up to be better than good enough.

Differential carbon pricing would likely prevent manufacturers with relatively high emission-reduction costs from buying surplus permits from utilities with relatively low reduction costs. Thus, compared to an economy-wide cap-and-trade plan, such as that in the Waxman-Markey bill, differential pricing would lead to less efficient (higher priced) emission reductions.

Not that Waxman-Markey is any great shakes when it comes to efficiency. By dictating fuel choices, the bill’s renewable electricity standard (RES) would limit utilities’ flexibility to pursue least-cost emission reduction opportunities. Similarly, by maintaining and indeed strengthening fuel-economy standards, Waxman-Markey would partly dictate, regardless of market data, how the transport and petroleum sectors comply with the cap.

So why are Sens. Kerry (D-MA), Graham (R-SC), and Lieberman (I-CT) exploring this approach? Not for economic or environmental reasons. Apparently, they think differential pricing is new and strange enough to fool the public.

Last week (Mar. 9), Greenwire quoted a statement by Sen. Lieberman that is both funny and revealing. According to Greenwire:

Lieberman also downplayed the use of the term “cap and trade” when it comes to limiting emissions, even though that is generally the plan with their bill. “We don’t use that term anymore,” he said. “We’ll have pollution reduction targets. Remember the Artist Previously Known as Prince?”

According to earlier reports, Kerry, Graham, and Lieberman may propose to combine a utility-sector cap-and-trade program with carbon taxes on transportation fuels. If so, then Kyotoism is truly dead. Electric utilities are gung-ho for cap-and-trade only if it’s economy-wide, so they can sell free emission permits they would get under a bill like Waxman-Markey to other sectors receiving fewer freebies.

More importantly, Waxman-Markey is a non-starter in the Senate because millions of Americans now view cap-and-trade as “cap-and-tax” – a stealth tax on energy. Combining an overt energy tax with scaled down cap-and-trade is hardly the bold alternative and fresh start Graham, Kerry, and Lieberman are promising. Such a plan is even more obviously a tax than Waxman-Markey, so it should be even easier to block!

Kerry, Graham, and Lieberman are trying to shove a great deal more than the camel’s nose under the tent. There’s nothing subtle about taking one step back to take two steps forward. With a little coaching, the public should be able to see that a utility-only cap would be precedent and springboard for an economy-wide cap – and quickly morph into it.

The “Artist Formerly Known as Prince” was still Prince even before he changed his name back to Prince! And an energy tax by any other name smells just as bad.

CLEAR is a far better bill than many believe. Passage of CLEAR would massively mobilize U.S. investment in low carbon technologies. Consider this soundbite in the FT last week about U.S. venture capital: "But VC-backed IPOs, which numbered 270 in 1999 and 264 in 2000, are an endangered species. There were six in 2008 and 12 last year." As John Doerr said at this month's arpa-e summit: "tell your legislator three things - price carbon, price carbon, price carbon". U.S. investment and innovation in clean energy could (at last) be set loose by CLEAR.

In addition to the CLEAR hallmarks of simplicity, transparency, verifiability, and fairness...consider the actual abatement compared to that of other bills (which are super-sized with offsets for cost containment): see this table from Breakthrough Institute comparing CLEAR to other bills. Sure, there might be a few things to add (nuclear, better risk management tools for first sources, more specifics on offset purchases by CERT, etc.) - but CLEAR is the clean sheet of paper Congress needs to make progress on a bill that can be explained to the American public (not to mention actually read by public officials).

In the 14^th century, a Franciscan monk developed what is known as Occam’s Razor -- a principle for solving problems which states “entities must not be multiplied beyond necessity.” In the 20^th century, Albert Einstein validated this maxim with the observation that we should “make everything as simple as possible, but no simpler.”

The Senate and, in particular, Senators Kerry, Graham, and Lieberman clearly do not subscribe to Occam’s Razor or perhaps just don’t understand the virtue of simplicity. Their approach to climate legislation is as arrogant as it is unnecessarily complicated. The notion that Congress understands sectors of the economy well enough to design a differential carbon pricing system to move the economy to a lower level of emissions is another example of the fatal conceit.

A ton of carbon is a ton of carbon regardless of where it originates, so what is the purpose of dealing with emission sources differentially? Applying different carbon prices to different sectors of the economy would only multiply opportunities for discrimination and chances to game the system by both politicians and regulated entities. It’s simply a bad idea.

A system which encourages regulated entities to seek profit by influencing regulations -- instead of from innovation and competition in the market place -- is a system that is inherently unstable. Since a ton of carbon is a ton of carbon, the price of carbon should not be set to discriminate for or against any sector. The Clinton Administration’s BTU tax proposal was built on that kind of approach. And that was a major reason for its failure.

Instead of the complicated and mischievous approach being promoted by the three Senators, a straightforward upstream carbon tax with the revenue raised being offset by a reduction in the payroll tax would be simpler and fairer. This would reduce the cost of labor providing an incentive to hire as well as provide an immediate increase in the take home pay of workers. Providing a tax reduction to workers would address the political concern about not being able to institute a new tax.

Although companies would still try to influence implementing regulations, it would be harder to do under a simple carbon tax because there would be fewer regulations and greater transparency. And an upstream tax at the mine mouth for coal, the refinery gate, or at oil and gas gathering points would limit the number of covered entities that needed to be monitored.

Senators Kerry, Graham, and Lieberman, as well as their colleagues, would do well to heed Einstein’s advice.

In addition to a carbon tax, Congress could change depreciation rules to encourage faster turnover of the capital stock which would accelerate the retirement of older coal fired utilities and installation of more efficient lower emission gas fired power systems. The CAFE standards being implemented already provide for emission reductions in the transportation sector. And a carbon tax would provide a further incentive for higher mileage vehicles.

In reporting the many alternative bills, I note a reluctance to discuss the trajectory for the cap. From a climate perspective, how hard we work is what matters most. The answers to these questions for Waxman-Markey were impressive: The signal that we are serious is embedded in the trajectory of the Waxman-Markey cap, and seriousness is what we need to use this window of attention to convey to ourselves and the rest of the world. Migitation Lite, where we have the right words but the wrong numbers, is not where we should end up after all this effort. I hope the discussion this week can be about how to make each and every one of these plans lead to serious investments in low-carbon technology, because the price signals are credible and the objectives are ambitious.

Energy security and environmental protection have converged at the center of the national political agenda. The Alliance supports an economy-wide approach to reducing greenhouse gas emissions that includes every sector of the economy and all consumers to achieve desired emission reductions at the lowest cost with the least economic disruption.

For motor vehicles, the soon to be final National Program for GHG emissions and Corporate Average Fuel Economy (CAFE) announced last May by President Obama will reduce emissions by at least 30% by 2016. For fuels, policies like RFS 2 and a national Low Carbon Fuel Standard (LCFS) will result in significant additional reductions in CO2 emissions from motor vehicles. Beyond vehicles and fuels, consumers and governments have responsibilities as well – all of which will combine to foster an integrated approach of shared responsibility.

Success in implementing the National Program hinges on consumers and their purchasing decisions. The current national energy policy as it pertains to vehicle fuel economy sends consumers conflicting signals. Automakers are mandated to manufacture more fuel efficient vehicles. At the same time, the government promotes policies supporting inexpensive gasoline, and in doing so undermines demand for more efficient vehicles. This contradiction should be corrected by new public policies that send consumers consistent market signals promoting fuel efficiency and GHG reductions.

Two auto industry specific policies that could greatly reduce GHG emissions in a sector by sector approach are increased gas taxes and vehicle miles traveled (VMT) pricing. Higher gas prices reduce vehicle miles traveled (VMT) and encourage consumer purchases of less CO2 emitting more fuel-efficient autos. Conversely, low fuel costs, coupled with more fuel-efficient autos, mean consumers will drive more, increasing vehicle miles traveled (VMT) or overall transportation demand by consumers. Charging consumers for traveling on certain roads or during peak hours on a per-mile basis could be an effective way to reduce GHG emissions and enhance energy security based on use.

Consumers are the link that takes us beyond simply manufacturing energy-efficient vehicles to actually deploying green autos on our roads. Two top energy-efficient technologies, hybrids and clean diesels, together constitute 3% of U.S. vehicle sales after more than a decade in the marketplace. When it comes to determining whether green technologies are successful or not, consumers are in the driver’s seat. As consumers, we can all make better decisions with the help of better price signals or incentives, along with improved information on technology choices and their implications for fuel savings and CO2 reductions.

Predictable price signals encourage conservation and incentivize businesses and consumers alike to invest in clean energy technologies. A successful CO2 reduction program should be designed to reflect the market price of carbon with the expectation that incremental costs will be passed through.

A single integrated, national policy is the most cost-effective approach to address climate change. The overall policy and program framework must be established at the federal level, and individual states should be discouraged from taking actions that would interfere with or conflict with the balance struck at the federal level.

Looking forward, the transportation sector must be firmly embedded in a comprehensive carbon-reduction effort that engages all sectors of the economy, from agriculture to utilities to households to transport. At the same time, within the transportation sector, we need to maximize CO2 reductions through an integrated approach linking technology, energy, government and consumers.

The best policies are based on performance metrics rather than technology mandates, allowing markets—and markets are simply consumers—to find optimal, least-cost solutions that meet low-carbon goals.

It does not ultimately matter too much if Congress and the EPA start with a sector by sector approach, or a universal approach. Eventually, of course, all major sources of greenhouse pollutants will need to be significantly reduced. But initially, sure, let’s begin with the sources that we know are extremely dirty and injurious – coal burning power plants, cement factories, and other big industrial sources – and move down from there. This is, indeed, basically what EPA Administrator Jackson has proposed to do with the tailoring rule despite her recent (and perhaps illegal) capitulation to Senators Murkowski and Rockefeller on the threshold level to be regulated in 2011. It’s also already how the Clean Air Act basically works, whereby specific new source performance standards are established for different categories of pollution sources.

Yet, to be honest, no one should completely trust Congress (controlled by either party) to objectively and fairly decide which sectors would be regulated and how. Favorites would be played by our elected officials who, thanks to the Supreme Court, can now openly pander every two years to their favorite corporate sponsor. To the contrary, EPA is governed by science-based standards that are enforced by federal courts. Congress is governed, to varying degrees, by brute force or conniving rhetoric. Congress is at its best when it passes straight-forward and facially understandable laws that equitably share burdens and rewards. This is why the Cantwell-Collins approach, warts and all, is certainly superior to the convoluted and loophole ridden House-passed global warming bill. Better yet would be a straight “tax and dividend” approach whereby all sources of greenhouse pollutants are taxed and all taxpayers get the same dollar amount back from the federal government to be made economically whole. Do you hear Congressional Republicans howling yet on that proposal?

Unfortunately, all of this is hot air if the United States does not soon display true leadership and enunciate defensible greenhouse reduction targets that prevent unprecedented harm to humans and the natural world. Let’s start the bidding at 350 CO2-eq ppm.