Editor's Note: This week, Sen. Jeff Bingaman, D-N.M., chairman of the Committee on Energy and Natural Resources and a contributor to this blog, is providing the question.

Last week, the Committee on Energy and Natural Resources held a hearing to examine the increased supply estimates for domestic natural gas from shale formations, and the contribution that those projected supplies could make to our energy security and climate protection objectives. One of the witnesses put forward a proposal to replace the least-efficient coal-fired electricity generators with newly built natural gas plants. He testified that replacing about 8-10 of these old coal plants per year in this manner would account for about 10 percent of the cumulative 2020 domestic emissions reduction contemplated by pending climate bills, and that these reductions would come at a cost equivalent to about $13 per ton of CO2 reduced.

What would be the pluses and minuses of such an initiative? If we greatly expand our use of natural gas in the utility sector, how would that affect the manufacturing sector, which also has a growing need for natural gas? How likely is it that utility fuel will switch to natural gas in any case, independent of the passage of climate legislation or specific initiatives?

-- Jeff Bingaman

AGA’s position with respect to natural gas versus coal for electricity generation is:   we need natural gas and coal for that purpose, just as we need to aggressively develop all of our other energy resources—nuclear, wind, solar and hydro, along with technologies that will maximize the utilization and efficiencies of each fuel.   After all, demand for electricity will continue to grow, so our optimum energy strategy—both from a domestic-security and infrastructure-capability standpoint—is a flexible, diverse and regionally appropriate blend of electricity generation, in which natural gas plays a role, but so does every other fuel source.

Certainly, in a carbon-constrained world, natural gas, which is by far the cleanest and most efficient of the fossil fuels, can make a significant contribution to electricity generation, especially since new natural gas resource estimates indicate we have about 100 years of domestic supply. Thus, replacing the least efficient coal-fired generators with new natural gas plants would be a clear, and cleaner, step forward.

That said, we cannot lose sight of the fact that the most beneficial use of this premier fuel is directly in the home and business, or in other end-use applications such as natural gas vehicles.   Natural gas from the wellhead to the burner tip in homes and businesses loses only about 10 percent of its useable energy. Converting natural gas into electricity to power comparable electric end-use product in the home or business results in the loss of about 65 percent of its useable energy, and results in increased greenhouse gas emissions.   That is why diverting from its direct-use applications the significant volume of natural gas needed to replace the generating capacity of 8-10 coal plants every year is a less than ideal scenario. 

We all understand that natural gas is a key piece to solving the energy and climate change puzzle.  But increased fuel diversity would allow more natural gas to be used directly in the residential and commercial market, where, for more than 40 years, natural gas customers have led the way in increasing energy efficiency, conservation and greenhouse gas reductions.

Replacing the coal plants with natural gas plants is not the best option in the long run.

The dichotomy of coal or natural gas is not that clear. There are technologies to make natural gas out of coal, aka, coal gasification. This would be energy using and will produce effluents. However, the final result, syngas, or synthetic natural gas, burns more efficiently and cleanly than the original coal. In net effluent terms syngas can be more environmentally sound, if it is done right. We also have coal bed methane. There is methane, natural gas, locked into coal beds by water. By taking the water out and filtering it properly, natural gas can be produced. This is an increasing source of natural gas in the US and in many other parts of the world with large coal deposits. 

It is indeed the case that natural gas burns more cleanly than coal given the average technologies we have today. Clean coal technologies are not exactly diffusing at a rapid pace given their costs and other reasons. Some even question whether clean coal technologies fit their name.

Replacing the coal plants with natural gas plants is not the best option in the long run. It may be a small start toward a full phasing in toward a new energy future. Natural gas plants also produce C02, albeit less than coal plants. Less C02 is better than more, but there are better ways of getting to less.

If we are focusing on C02 reductions then nuclear plants might be a better choice, if it were not for the time it takes to get these up and running and the big problem of what to do with the waste. Solve these two problems and nuclear could be on a roll.

Renewable technologies could also be used to replace the coal plants and these renewable technologies have a very small carbon footprint compared to fossil fuels. What I am thinking about, amongst many thousands of other possible ideas on this, is geothermal, concentrated solar power, solar updraft towers of significant size, and, in some areas, tidal power such as can be found in Canada near the Bay of Fundy. (You might want to look at what is happening with the DESERTEC project to get a sense of the potentials here.)

Sure many of these technologies have their problems, but if you calculate in the reasonable environmental, military, diplomatic and other costs of using fossil fuels per KWh produced many of the renewable technologies become quite competitive.

Another option we need to consider that is far more important in the long run than switching from coal to natural gas is improved efficiency in electricity production in fossil fuel plants. Right now we are losing 70 plus percent of the fuel put into many of these plants to heat that dissipates into the air. This holds for coal, natural gas, and oil plants. What is a lot smarter way of reducing the total carbon footprint per usable BTU in these plants is to finally get to the "no brainer" solution: combined heat, cooling and power. Why is it that Denmark and other do this and we do not?

A power plant produces a lot of heat from burning fossil fuels. Most of it is lost at the plant. This heat can be captured for use in municipal or local heating. It could be used for industrial and agricultural processes. It could be used, for example, in greenhouses in cooler times of the year to grow crops. Iceland does this. The heat from these power plants could also be used to produce cooling. How can heat produce cooling? One can do this through the use of absorption chillers that use a liquid that evaporates at low temperatures, such as ammonia, for example.  

Voila, we now have electricity, heat, cooling, industrial processes, agricultural and other processes now using more and more usable energy. Is that not better than just tossing the heat into the air and complaining about the C02, other effluents and energy and national security weaknesses that result from being inefficient when we could be otherwise?

Some of the biggest users of electricity are buildings, including industrial, commercial and residential. If we tightened up those buildings and made them more energy efficient then less C02 would result from each usable ton of coal, billion cubic feet of natural gas and so forth. Here is yet another "no brainer". If one were to follow the typical lighting system of a residential house of the 100 pounds of coal put into the generator furnace about 2 pounds is used for usable light. Our typical lighting systems produce more heat than light with the precious fuels we use to produce the electricity. The typical toaster we use to cook our bread in the mornings in millions of homes is absurdly wasteful.

A lot of energy is lost in the transmission, distribution and use of electricity. We need to change the way we do things at many levels, not just at the generation plant. Smart grids are a start, but I do not see the required money or efforts being put forth for this to happen any time soon. I suspect the waste from electricity production is just being "swept under the rug" in order to not see it for what it is: one of the biggest sources of potential economic and other insecurities in the future -- if we don't do enough to help solve the many problems that will result from it.

In the US and globally the biggest source of wasted energy in the use of fossil fuels is in the production of electricity. The production of electricity is also the biggest source of C02 in total both in the US and globally. So why not focus on tightening up the electricity production, transmission, distribution and use?

The typical economist will say that if there is a $20 bill on the ground, well, it can't be there because someone would have already picked it up. There are trillions of dollars on the ground in energy efficiency. These are not being picked up. They are being swept under the rug of political confusion, and, yes, ignorance about what the real problem is here. It is not just switching from one hydrocarbon to another. It is also making the use of those hydrocarbons far more efficient. (The second largest source of C02 is in transportation, another astonishingly wasteful use of precious fossil fuels and our environment.)

In the long run we will need to move away from those hydrocarbons. But that will take a long time. So in the meanwhile we need to be smarter and more efficient in the use of these hydrocarbons in the production of electricity as we phase in toward a better, more sustainable future. We can do that in the medium run and in some cases even in the long run. That is if we want to. We could just keep on wasting all that heat, all of those fossil fuels, and all of that environmental quality and keep complaining about energy security and global climate change. We could also get smarter and get to more effective strategies for a better energy and environmental future.

A Dangerous Policy with Serious Negative Consequences

Demand for natural gas by the power sector has increased from 5.2 trillion cubic feet in 2000 to over 6.6 trillion in 2008, a 27 percent increase while production has increased by only 6 percent. By anyone’s perspective, this is a significant increase in demand and was done without financial incentives and without cap and trade. Total US natural gas demand in that same time period increased only 7.9 percent.

Consumers take a double hit. When demand for natural gas goes up, prices go up. And, because natural gas powered generation sets the marginal price of electricity in a growing portion of the country, so does the price of electricity.   

There is a direct correlation between manufacturing job losses and spikes of natural gas prices. Several manufacturing industry groups have concluded that high natural gas prices have significantly contributed to as many job losses as 3.7 million out of the total 5.4 million job losses since 2000.        

The power sector has several options like natural gas, renewable, nuclear, and coal to provide power to their customers – but consumers like manufacturers, homeowners and farmers do not. Manufacturers are especially vulnerable because they are dependent upon natural gas for both fuel and feedstock.

Congress should focus on encouraging energy options to compete with one another – when they do – consumers receive the benefits. 

It would be a mistake for Congress to drive natural gas preferentially into power generation.

Natural gas is an important, clean fuel that has a role in climate mitigation. At Dow, we hope the predictions about increased natural gas supply are right, but we think it’s too early to declare natural gas a silver bullet or bridge fuel solution. Natural gas should be a component of a comprehensive energy policy, but we must be sure that policy doesn’t create a “dash to gas” that destroys manufacturing jobs.

As we testified last week, we believe it would be a mistake for Congress to drive natural gas preferentially into power generation, as this could further erode our manufacturing economy and increase the volatility of natural gas. The result will be higher natural gas prices and higher electricity bills, which will be felt by every American. Congress instead should promote a diversity of energy sources while also creating robust energy efficiency initiatives. This will ensure a stable, low-cost supply of natural gas.

Over the last 12 years, there have been five significant natural gas price spikes due to increased demand. Those price spikes contributed to the loss of nearly 4 million jobs in the manufacturing sector. They also turned a $19 billion U.S. chemical trade surplus in 1997 into a deficit from 2001 to 2007. Even as demand for natural gas fell 22 percent from 1997 to 2008, average natural gas prices rose more than 160 percent. This price volatility causes demand destruction and job destruction.

Affordable natural gas adds value to our economy. For example, for every dollar Dow spends on natural gas, we produce over $8 worth of high-value products. Rather than focusing on natural gas as a preferred power generation source, we would see a greater bang for our buck in the economy by spurring increased manufacturing uses of gas. While some call natural gas a bridge fuel, if it causes a “dash to gas” it could be a bridge too far.

A key question is the relative cost advantage of natural gas over coal in a carbon-constrained world.

In assessing the policy proposal to replace inefficient coal-fired generators with modern natural gas plants, many of the responses have cautioned against interfering with market forces in the setting of climate and energy policy.  One responder argued that market forces are so complex that direct action such as this would be fraught with unintended consequences. Other responders have argued that current incentives for coal generation and renewables in pending climate legislation already distort the market for generation, and in this context direct action to incentivize the use of natural gas is necessary to create a more level playing field.

A key question in this discussion is the relative cost advantage of natural gas over coal in a carbon-constrained world, and what the price of carbon would need to be for natural gas to gain an economic advantage. There are many complicating factors, but if one considers only the cost of the fuel for generation, what allowance price makes, say, $6/mmBTU gas equivalent in cost to $2/mmBTU coal?  If one further takes into account the cost of building new replacement generation, at what carbon price do different forms of generation (gas, nuclear, wind, solar, coal with carbon capture and storage) become economically competitive for baseload generation?

It’s highly likely that utilities will “fuel switch” from coal to natural gas to reduce greenhouse gas emissions. In fact, this is already happening. From 1997 to 2008, natural gas consumption for electricity generation went up 62 percent, according to the U.S. Energy Information Administration.  This trend would accelerate in the event of federal climate legislation: Natural gas demand would soar because natural gas is one of the few lower-emission energy sources available today.  Others such as nuclear energy, carbon capture and storage, and alternatives and renewables (e.g. wind and solar) are all important pieces of a sound U.S. energy strategy, and any climate policy should encourage their development and deployment as quickly as possible.  Unfortunately, these sources are not yet available in the quantities needed to meet energy demand, nor is the infrastructure ready to connect these new generation sources with users.  Consequently, in the near-term, utilities would turn to natural gas to comply with climate legislation.  Aggressive, short-term emissions reduction and targets and timelines, in particular, would exacerbate fuel switching. Longer-term, natural gas would still be needed as “back-up” generation for wind and solar, as it is already used today.  Natural gas is used for other clean energies as well, including cleaner transportation fuels, renewable energy production, hydrogen for fuel cells and as a raw material, or “feedstock” for chemistry that goes into energy efficiency and renewable energy applications – from solar panels and wind turbines to building insulation and lithium-ion batteries. There is serious discussion of boosting the use of natural gas in these ways, which would further increase demand.

In recent years, the competition between industrial natural gas consumers and utilities for scarce domestic natural gas supplies created a “zero sum game” in which any increased demand for natural gas by utilities comes at the expense of industrials.  The availability, reliability and affordability of domestic natural gas supplies has been questionable, as evidenced by five U.S. natural gas price spikes since 1997, each caused by large lags between demand increases and stepped-up production.  This is important because chemistry companies make decisions on where to invest in future production largely based on their confidence in long–term U.S. energy and feedstock supplies. More than 120,000 U.S. chemistry jobs were lost – many to nations with lower natural gas prices.  While natural gas prices have since dropped, the assessment of many economists is that the change is largely recession-related industrial ‘demand destruction.’  

How about the supply side of the equation?  We believe recent news of natural gas supply discoveries in the United States, largely from unconventional sources such as shale gas, is positive for the U.S. manufacturing sector.  ACC has long supported efforts to increase U.S. natural gas supplies so that natural gas will be reliable and affordable and U.S. manufacturers can be globally competitive.  However, it will take time to gauge whether these sources will be developed, produced, approved and brought to market in a reliable and timely way sufficient to meet demand long-term.  Daniel Yergin and Robert Ineson had an interesting look at such questions in the Wall Street Journal this week " (America's Natural Gas Revolution," November 2.) They noted that with the new shale gas discoveries, "Energy-intensive manufacturing companies, which have been moving overseas in search of cheaper energy in order to remain globally competitive, may now stay home. But these industrial users and the utilities with their long investment horizons—both of which have been whipsawed by recurrent cycles of shortage and surplus in natural gas over several decades—are inherently skeptical and will require further confirmation of a sustained shale gale before committing."

We are urging Congress – including the new Natural Gas Caucuses in the House and Senate – to balance calls to legislate greater natural gas demand with steps that will create a reliable, affordable, accessible and adequate long-term supply of natural gas.  We hope that the Caucuses and other lawmakers will discuss both supply and demand issues and take care to address the specific concerns of the U.S. manufacturing base.  Doing so will not only strengthen the U.S. economy, but support environmental improvement: American chemistry holds many of today’s ‘green jobs,’ making products used for energy efficiency and renewable energy.  We can help create the lower carbon economy of the future – the products of chemistry save fuel, reduce greenhouse gas emissions, and drive innovation in renewable energy like solar and wind.  (See www.americanchemistry.com/climatestudy). But to do so, Congress must enact policies that will enable us to compete in the global marketplace, invest in higher efficiency plants and equipment, and retain and grow our highly trained and productive workforce.  The availability of a stable, affordable, and diverse supply of natural gas will help achieve these goals.

This proposal must be considered within the context of what already is part of the energy/climate change legislation.

I appreciate the question from Chairman Bingaman and the opportunity to continue the interesting dialogue begun at last week’s hearing before the Energy and Natural Resources Committee. The chairman asks several interrelated questions.

The first question concerns the suggestion that energy/climate change legislation include measures intended to affect the retirement of the least efficient coal fired powerplants. As noted by the witnesses at the hearing, we should not lose sight of the overall purpose of climate legislation, which is to reduce emissions of greenhouse gases. Consequently, we should look seriously at proposals that would accomplish significant near-term emissions reductions on a cost-effective basis while affecting only a limited number of existing facilities. Based on these criteria, the proposal makes sense.

Also, this proposal must be considered within the context of what already is part of the energy/climate change legislation. Should the legislation be enacted as it now stands, the coal industry and the operators of coal-fired power plants will receive significant benefits in the form of free allowances and generous incentives for the development and deployment of power plants with carbon capture and sequestration. As noted at the hearing, these benefits insulate them from much of the effect that would come from a pure cap-and-trade scheme in which all allowances were auctioned. Therefore, in the balancing that must occur as we move towards a final bill, it is only fair that there be some trade off between measures impacting coal-fired electric power generation and measures intended to ensure that coal remains a viable part of the U.S. energy portfolio as we move towards a substantially de-carbonized energy economy.

The chairman’s second question concerns how the demand for natural gas created by increased power generation load might affect industrial natural gas consumers. In answering this question it is important to point to one of the central themes of the testimony received by the committee: unconventional natural gas is a game changer in how we should think about the natural gas resource base and the role it can play in the U.S. energy portfolio. This message is being delivered by not only the natural gas industry, but also by widely respected energy experts such as Daniel Yergin. In this regard, the November 3, 2009, opinion piece, America’s Natural Gas Revolution, authored by Mr. Yergin and Robert Ineson and published in The Wall Street Journal, is well worth reading.

There is every indication that the natural gas resource base will support growth in electric generation demand as well as the historic residential and commercial and industrial natural gas users. Furthermore, while the chairman’s question suggests that the manufacturing sector has a growing need for natural gas, most analyses point to only slow growth in industrial natural gas consumption and similarly slow growth in the residential and commercial market where increased market penetration is offset by increased energy efficiency. While there is no doubt that the industrial sector is affected by energy prices, the forecasted low growth in natural gas demand from this sector is more indicative of larger changes in the U.S. economy as we shift to a more service oriented, high technology economy. In sum, there should be ample supplies of domestic natural gas, supplemented by imports from Canada and opportunistic imports of liquefied natural gas (i.e., LNG coming to U.S. shores when there is slack in global LNG demand) to satisfy reasonable forecasts of natural gas demand growth at reasonable prices.

Chairman Bingaman’s third question asks how likely is it that utility fuel will switch to natural gas in any case, independent of the passage of climate legislation or specific initiatives. Perhaps the best way to answer this question is to reference the August 2009 Energy Information Administration report Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009. Compared to the reference case, natural gas consumption is lower in both 2020 and 2030 under all but one of the six scenarios modeled by EIA due to the effects of the Waxman-Markey bill. As noted by the witnesses at the Energy and Natural Resources Committee hearing, the climate bill in its current form puts a squeeze on natural gas as a compliance option. On the one hand, to the extent that compliance with renewable energy standards results in less reliance on conventional electric power generators, natural gas fired generators get dropped first, because these generators typically have the highest marginal cost. On the other hand, because of the provisions of the bills intended to insulate coal-fired generators from the costs created by the cap-and-trade regime, there is little incentive for coal-fired generators to comply by lowering their emissions. Hence, there is less reason for electric power suppliers to look to natural gas fired generators as a means to lower emissions. 

These forecasted impacts on natural gas would not be the likely result of a cap and trade law that placed a price on carbon and then left it to the market to find the most cost effective solution. Rather, the forecasted results are heavily influenced by add-ons to the cap and trade regime either intended to provide certain energy sources with an additional leg up or intended to shield other energy sources from the intended effects of the cap and trade regulation.

The root of the chairman’s third question would appear to be the statement at the hearing by the witness representing an industrial energy consumer that natural gas will do so well in the marketplace based on its inherent advantages that there is no need to pay special attention to the role of natural gas in crafting energy/climate change legislation. This likely would be true if, in fact, we were dealing with legislation in which the cap and trade program had not been compromised by so many provisions intended either to incent or protect certain sources of energy. That, however, is not the reality of the current structure of the energy/climate change bills that are under active consideration. Consequently, unless the Congress chooses to go back to the drawing board and start with a clean sheet of paper, it is entirely appropriate to be exploring what needs to be changed within the structure of the bills to ensure that natural gas has an opportunity to compete as a compliance option.

These answers are mine alone, and do not necessarily represent the views of INGAA or its individual member companies.

We do not believe that the public interest is well served by policies that approach our energy future as a zero-sum game.

Public policies encouraging the replacement of coal based electricity generation with natural gas are the bridge for accelerating the export of our manufacturing base and, with it, millions of high-wage jobs. Look no further than actual experience over the past decade.   As the use of natural gas increased for generating electricity, our manufacturing sector paid substantially higher prices for electricity (56 percent) and natural gas (200 percent). The Senate Energy and Natural Resources and Environment and Public Works Committees received testimony last week describing the consequences of this one-two punch to the U.S. manufacturing sector, which requires affordable electricity and natural gas to remain competitive. According to the Industrial Energy Consumers of America, our manufacturing sector lost more than 5.1 million jobs in the last 10 years and more than 40,000 manufacturing plants closed between 2000 and 2008. As Dow Chemical Company explained to the Energy and Natural Resources Committee, “The manufacturing sector . . . has become the shock absorber for high natural gas costs.” 

The “dash to gas” began a decade ago and, in its present form, the climate legislation under consideration would further exacerbate the consequences of higher electricity and natural gas prices for every manufacturer, farmer and homeowner. The proposal advanced last week by B.P. America, Inc. to retire 30 GW of coal generation capacity through “transitional incentives” for natural gas is simply a formula for subsidizing the accelerated off-shoring of our manufacturing base. Perhaps, as B.P. America suggests, such a substantial increase in natural gas consumption in the power sector can be met from existing reserves:   But at what price?   Economic dispatch is the reason why natural gas combined-cycle power plants run at less than 40 percent of their capacity. If natural gas could be delivered reliably at a price closer to the $2 MMBTU coal delivered last year, rather than the $9 the power sector paid for natural gas, those plants would run at higher capacity factors. Such a prospect is, apparently, out of the question without suspending the rules of economic dispatch through a natural gas subsidy. 

In a report released last year, the National Energy Technology Laboratory (NETL) warned that “policies that encourage the use of natural gas to substitute for coal in power generation could very well lead to spectacular price increases for households and industry.” Coal-based electricity, according to NETL, restrained the price of electricity and has constrained the price of natural gas from matching the rise in the price of oil. We do not believe that the public interest is well served by policies that approach our energy future as a zero-sum game. As Paul Cicio of the Industrial Energy Consumers of America reminded us last week, “Almost any product produced in the U.S. can be produced offshore and imported.” The shale gas play may be a game changer for the natural gas industry, but we should eschew policies that make it a job ender for everyone else.

In shifting to natural gas as a preferred source we need to be certain that the supply system can be created in a cost-effective manner and in time to meet the emissions reduction goals. We also need to be sure that siting such facilities meets with the expectations of the host communities. If a balanced portfolio of energy sources is to also be met with wind, solar, etc., what percentage is properly allocable to natural gas?

The development and use of shale gas should be determined by the cost of production and technology.

The promise of an abundance of shale gas and a shift from coal to gas in electric power generation is appealing. Clearly, there would be environmental benefits. But benefits that are achieved by interfering with market forces are likely to be illusory.

Not too many decades ago, regulators curtailed natural gas consumption, even limiting its use for home heating as a result of policy induced shortages. Then as a result of decontrol, the pendulum swung in the other direction and federal officials encouraged utilities to switch from coal. That was followed by utilities moving back to coal when natural gas demand outstripped domestic supplies and Canadian imports. As domestic and eastern Canadian production declined, there was increased talk of the need to build LNG facilities to meet our needs for natural gas. Now, there's talk of a natural gas boon that could meet our needs for 100 years, if incentives and policies are structured to unlock the abundance of shale gas. This energy history is reason for caution and prudence.

Recent energy policies have been dominated by political considerations and rent seeking while energy realities have been ignored. As a result they have neither been stable nor achieved important national objectives.  

Utilities as well as consumers should rightfully be dubious about this latest proposal to replace older generating capacity. The economic forces that drive energy markets are too complex and unpredictable for government to take the regulatory actions to bring about such a shift without creating a large risk of producing unintended consequences than economical supplies of shale gas.

The development and use of shale gas should be determined by the cost of production and technology, not policies that distort market forces. Policy barriers that impede the market’s ability to determine the highest valued use of additional gas supplies -- such as permit and leasing restrictions or tax policies -- should be removed.

An extensive debate about the potential for shale gas has been going on for at least several years. The optimist and pessimist camps have wildly different estimates about production costs, profitability, and production potential. Given our recent experience with bubbles and busts -- and the tendency to underestimate costs to attract investments -- it would probably be prudent to go slow in pushing shale gas. 

There is no doubt about the abundance of shale gas, but the cost of production is currently too high to make it commercially competitive. Many producers are saddled with large debt because they bet on ever increasing natural gas prices.

Instead of crafting a legislative policy focused on shale gas production for use in replacing coal fired generators, a better energy policy would be to increase oil and gas leases, on shore and off, that could lead to increased production of conventional gas.

Policymakers should also examine incentives for accelerating the turnover of older, inefficient power generating capacity and the existing policies that result in “older and inefficient” generating facilities remaining service. It is likely that New Source Review requirements and other Clean Air Act regulations along with depreciation rules create impediments to building new, more efficient generating facilities. Removing policy impediments would be a more productive route and one that would lead to lower emissions.

Fuel switching to cleaner primary fuels for the production of electricity, while we build a more renewable infrastructure, is a perfectly logical bridging strategy. In doing this, it is critical that we create policy that most effectively increases the availability of cleaner fuels, specifically natural gas.

One strategy that is often overlooked, or at least rarely treated analytically inside climate and/or energy policy options, is the major role buildings can play in this.

In 2008, 41% of the energy consumed in the U. S. was used to operate buildings. This was split at 22% residential and 19% commercial. Today, there are about 129 million homes and over 70 billion square feet of commercial space. These buildings are, in general, performing poorly from an energy efficiency standpoint. For example, it’s estimated that some 80 million homes are underinsulated. With some notable exceptions, we continue to add underperforming buildings to this stock every day.

In the context of fuel switching opportunities, it is instructive to look at the impact that energy efficiency gains could have on primary fuels consumed on-site as well as those used to produce the electricity that is delivered to our buildings. The natural gas consumption in buildings, from direct use and electric power generation, is about 12.6 Quads, or 31% of the total energy that buildings use.

The Business Round Table’s report: “More Diverse, More Domestic, More Efficient; A Vision for America’s Energy Future” outlined pathways to achievable building energy efficiency penetration. Savings of 6.3 Quads was found to be quite attainable. Coupling these energy savings with the Department of Energy 2008 Buildings Energy Data Book’s conversions to primary fuel, and looking at the granular savings in space heating, lighting, space cooling, and water heating, we can draw some interesting conclusions.

From implementing these energy efficiency improvements, direct on-site natural gas consumption would drop 1.9 Quads. This liberated fuel could be redeployed for lower carbon electrical production. There is an additional 3.82 Quads of electric use reduction, which would directly drop electricity demand (the remaining .58 Quads comes from other on-site fuels). We could chose, through policy and/or incentives, to remove this 3.82 Quads via low cost, high carbon coal fired electricity. However, lacking policy in this area, it is more likely that higher cost natural gas fired electricity would be idled, of which there is plenty to absorb this demand reduction.

From an energy independence point of view, it’s interesting to note that we could also use this fuel switching to reduce oil imports. The 1.9 Quads of natural gas could go direct to transportation using natural gas vehicles and the 3.82 Quads of electric savings could be deployed to power electric cars or fuel-switched to power natural gas vehicles. In this way, from building energy efficiency savings alone, we could reduce our oil imports by about 28%. This is a critical supporting element of the well known Pickens Plan.

In summary, we need energy/climate policy that:

1) Drives rapid and substantial energy efficiency retrofits of residential and commercial buildings.

2) Assures that the buildings we add to our infrastructure each year are at least 50% more efficient than what we (on average) build today.

3) Assures that the saved on-site combusted fuels and delivered electricity are fuel-switched and managed to maximize carbon reductions.

(One Quad = 10¹⁵ Btu or 172 million barrels of oil equivalent)

There are tremendous opportunities to reduce carbon emissions by putting natural gas to more use in the electric sector.

It’s a no-brainer that we should provide incentives to encourage the retirement of power plants that are inefficient and produce high amounts of carbon, so that they can be replaced with cleaner, more efficient power plants. And it’s equally obvious that there are tremendous opportunities to reduce carbon emissions by putting natural gas to more use in the electric sector. For example, combined cycle natural gas-fired generators are often the most efficient generation facilities in service, but they run at only about 40 percent of their potential. Here's the big advantage to using existing gas-fired plants more often: No new capital investment is needed to reduce carbon emissions. We still need an incentive to retire old, inefficient carbon-intensive plants – and that includes even old, inefficient natural gas plants as well as other fossil fuels -- so that more electric load will switch to existing combined-cycle gas plants that aren’t fully utilized, and we could make significant strides toward meeting our future emission targets.

Would generators eventually move to using natural gas anyway even without a congressional incentive? Perhaps, but it’s hard to say if they would do it as soon because both the House and Senate climate bills contain measures that disadvantage natural gas in the distribution of emission allowances to a degree that could distort and delay a shift to natural gas-fired power generation.

We are aware of the concern in Congress that using more natural gas to make electricity may result in a "dash to gas" and thereby put upward pressure on prices. But our natural gas resources have grown remarkably in the past few years. In fact, new techniques allowing us to economically produce natural gas from abundant shale formations found across the United States have resulted in a recent, astounding 39 percent growth in the estimated amount of natural gas in the U.S. Shale production is a game changer and will enable us to respond quite well to increased gas demand for both generating electricity and satisfying the manufacturing sector. In short, climate change legislation should appropriately acknowledge and encourage the increased use of natural gas for power generation through inexpensive incentives, thereby resulting in earlier carbon reduction than would be possible otherwise.

If there is a devil in the detailed Kerry-Boxer, we're going to get a lot closer to finding it. Environment and Public Works Chairwoman Barbara Boxer, D-Calif., has released her chairman's mark, and the Environmental Protection Agency completed its analysis on the bill. And this week, Boxer's committee begins a series of hearings on the bill, with top administration officials set to testify Tuesday.

What's your initial take on the chairman's mark and EPA's analysis? What changes would you like to see and what changes do you expect? How do you think this EPA analysis compares to the agency's report on Waxman-Markey? Do you think the hearings will help trigger substantive discussion on key provisions now lacking in the bill? Or do other committees need to mark it up before certain provisions can be addressed?

Moderate Democrats Push Back

The big news of day one of the EPW hearings was Sen. Max Baucus, D-Mont., along with other moderate Democrats like Arlen Specter of Pennsylvania, expressing concerns over the greenhouse gas reduction goal for 2020 and EPA's regulatory authority.

Do you agree with Baucus that 20 percent below 2005 levels is too strict a reduction to meet by 2020? Do you think this target will need to be changed in order to get to 60 votes? What else do you think may need to be changed to get the votes?

Will the economics of climate change continue to dominate the debate Wednesday and Thursday?

Congress should treat all renewable energy sources equally, whether they are used to generate electricity or supplement natural gas supplies.

The American Gas Association (AGA) commends Congress for keeping a spotlight on our nation’s energy issues by giving careful consideration to several different bills on the table right now, including Kerry-Boxer.  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 also urges members of Congress to take a look at the successful track record of America’s natural gas utilities and their customers. During the past 40 years, while the number of natural gas customers has doubled, actual gas use and greenhouse gas emissions have remained essentially flat. 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 proven and successful approaches.

We believe that natural gas could, and should, be used as a tool to improve environmental quality and energy efficiency. To that end, AGA believes that as lawmakers craft climate change and energy legislation, the following key points should be considered.

If a cap-and-trade approach is implemented, Congress should maintain or increase the four-year delay for natural gas utilities coming under that program, while increasing their allowance allocation from nine percent to 12 percent and extending their allocated allowance phase-out from 2030 to 2040. Congress should also significantly modify or delete the provision that stipulates one-third of the value of allowances allocated to natural gas utilities should go to energy efficiency programs, as this approach will not reduce emissions and will only raise costs.  In addition, Congress should treat all renewable energy sources equally, whether they are used to generate electricity or supplement natural gas supplies.

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. AGA asks that Congress strengthen this approach rather than impose the higher costs and greater uncertainties that would result from a cap-and-trade approach.

Pete Sepp, Vice President for Policy and Communications at the National Taxpayers Union, submitted the following:
 

Households will suffer under a burden of between $2,000 and $4,000 per year.

As the EPW Committee listens to testimonies this week from experts representing small business owners, farmers, truckers, and taxpayers more broadly, we can only hope that all Senators on the panel recognize one fact: millions of their constituents will bear the brunt of this "cap and trade" economic assault. No matter how many bells and whistles are attached to the Kerry-Boxer bill, be it through subsidies, weak nuclear power incentives, or half-hearted offshore drilling provisions, hard-working Americans will suffer under a cap and trade system that is designed to raise the cost of energy and transportation fuels we rely on every day. This is the last thing hard-working taxpayers need just as we're pulling out of recession.

Supporters of the Kerry-Boxer bill have pushed back against these claims, citing lower-range cost estimates from the CBO and EPA. However, these studies tend to employ much narrower assumptions when taking effects into account, such as discounting. The fact that the Treasury Department projected as much as $200 billion a year in higher revenues from cap and trade, plus as much as several hundred billion more in added costs, means there is still a huge difference of opinion over what the expense of the final cap-and-trade legislation will be.

In addition, other estimates by Charles River Associates, the Heritage Foundation and the American Council on Capital Formation have found that the legislation would impose huge new costs on consumers and businesses.

The bottom line: households will suffer under a burden of between $2,000 and $4,000 per year, when all costs and scenarios are accounted for realistically.

Another falsity that supporters are promoting is that smaller firms, which are mostly exempt from emissions requirements, won't be adversely impacted.  However, as Competitive Enterprise Institute's Marlo Lewis points out, the extent to which emissions exemptions gives them cover is likely way overstated.

That's because the "findings" of the bill, which state that even exempted firms can be dangerous C02 emitters, creates an actionable presumption for lawsuits. Small companies that use a lot of transportation fuel may find themselves staring at court action rather than regulatory action.

If the Senate is sincere in its pursuit of a comprehensive energy policy, we recommend putting a cap on this legislation and trading it for an alternative that won't muzzle our economic growth. A better approach is through tax incentives and regulatory abatements that will work to economize fuel use. For example, H.R. 1799 would raise the weight limits on trucks to a level close to that found in Canada, adding a sixth axle to heavier trailers so as to mitigate pavement damage. The fuel savings to companies that haul consumer goods -- and hence the reduced emissions -- are really staggering (which is why the National Taxpayers Union, to give just one of dozens of examples, has endorsed the bill.)

It won't do as much as it should to jump-start the clean energy revolution we need for economic recovery.

It's really quite amazing. The main response at Tuesday's opening hearing of the Senate Environment Committee on the Clean Energy Act was that its 2020 goal -- a 20% reduction in US emissions of greenhouse pollution -- was over-the-top ambitious. Senators both Republican and Democratic expressed grave concern that it would somehow tank the economy. In fact, its somewhat alarmingly unagressive, and won't do as much as it should to jump-start the clean energy revolution we need for economic recovery.

It appears that those who complain that 20% is too ambitious haven't been tracking our progress for the past three years. Every year the Energy Information Agency does a forecast of how much carbon dioxide the US economy will emit over time. At the end of 2005 EIA projected that the US would be emitting 7,500 million metric tons of CO2 in 2020 -- up from about 6,000 mmt in 2005 -- so a big increase. Over the next three years 100 coal fired power plants were cancelled, 24 states adopted renewable energy standards which collectively added up to about 10% of national electrical generation, and Congress passed 35 mpg fuel efficiency standards. So at the end of 2008 EIA issued its new estimate, which was that America's CO2 emissions wouldn't grow at all between 2008 and 2020 -- and in 2020 we would only be emitting 6,000 million metric tons.

Then this year, as a result of the Obama Administration's stimulus package, its adoption of even more agressive vehicle fuel economy and emission standards for 2016, more coal fired power plants being cancelled, and the economic downturn, EIA projected that by 2020 emissions would actually decline to 5,900 mmt.

So in four years we reduced our 2020 emissions trajectory by 1,600 mmt.

So is it now so ambitious to take another 10 years to reduce those 2020 numbers by another 1,200 mmt, which is all that the Senate Clean Energy bill would require? Have we already taken all the easy, cheap steps we can to reduce carbon waste in our economy?

No way. Not even close. A few simple data checks show that there is more than 1200 mmt's in reductions we can get by 2020,depolying a few simple improvements we could make in our energy sector -- things that would create jobs, enhance our national security and clean-up pollution -- without breaking the bank and speeding the economic recovery.

Not only did I find 1,200 mmt's of potential "no regrets, good investment" savings we could make, I found a little more. . A few samples: just continuing to improve vehicle performance from 2016-2020 saves another 109 mmt; state energy efficiency standards could yield another 401 mmt. A modest national renewable energy standard would cut emissions. 350 mmt.  We could reduce CO2 by by almost 200 mmt if we just made heavier use of affordable natural gas units.  And cleaning up old power plants would save at least. 125 mmt. This package of steps -- which is only illustrative -- requires no increase in our energy bills -- the savings from the efficiency measures easily make up for the costs of things like switching from coal to natural gas and cleaning up old power plants. So this scenario is far short of what we can and should achieve -- yet all the Beltway can do is moan, "it's too hard."

Washington, join America.

What defines a 20% reduction as "too strict"?  Certainly not according to what will be required to stabilize global CO2 emissions.  Any objective analysis of the proposed legislation has made clear that a 20% reduction is in fact readily achievable with the technology options, both supply side and demand side, that we currently have on the table.

The most important thing is to establish a set of market rules - a cap - that will provide industry with the clear guidance necessary to inform investment decisions moving forward.  Establish the cap and then turn American capitalism loose to demonstrate the multitude of ways that are available to meet such a target. 

The Clean Air Act demonstrated the effectiveness of market mechanisms such as cap and trade in achieving least cost solutions.  That earlier legislative battle demonstrated something else that we see prominently today - the extent to which the opponents will go in exaggerating the costs of compliance.  Shall we trot out some examples of those earlier "end of civilization" claims just to compare with today's rhetoric and wildly inaccurate consultant studies?

If cutting manufacturing is the path to achieving climate goals, Senator Boxer has introduced the perfect bill to do the job.

Senator Boxer’s bill is headed in the wrong direction, and definitely is a step backward from the Waxman-Markey bill.   At the EPW hearings, Senator Boxer announced "we have already made 8-9% emissions reductions, so the real goal (20%) is easy to meet," without acknowledging this as being the result of the greatest economic collapse since the Great Depression.  This is not the kind of logic you want to use to bolster your defense of a climate provision.  In my sector, for example, steel production has been down 40 to 60% since October 2008.   If cutting manufacturing is the path to achieving climate goals, Senator Boxer has introduced the perfect bill to do the job.   Unfortunately, sending American manufacturing jobs to places like China and India, will not only harm the economy but it will also increase global emissions, the opposite of what Senator Boxer and her EPW colleagues hope to achieve.

The House climate bill has many shortcomings that would cause severe job losses here and a shift of emissions to less regulated countries:  the allowances for energy intensive manufacturers are too few; there are no provisions to counter an almost-certain sharp rise in energy cost (a huge competitiveness risk for domestic energy intensive, trade-exposed industries); and, it contains a weak border provision.  In the Boxer-Kerry bill, the allowance provisions are not only less (it provides 2 billion fewer allowances for energy-intensive trade exposed industries than the House bill) because the 2020 cap is 20% vs. 17% in the House, there is a 16% across-the-board reduction in the allowance pool.  This means that not only has an insufficient allowance pool for energy intensive, trade-exposed industries gotten worse, but allowances to energy providers such as utilities will also take a 16% cut, making energy prices subject to an even sharper rise.  There remains no provision to counter energy cost increases, the need for which is more acute under Boxer-Kerry...and there is no border provision.

It is clear that the current structure of cap and trade legislation is incompatible with a growing and healthy manufacturing sector in the US.

It is important to keep in mind that the quality put into an economic analysis is crucial to the quality of the product put out. With that in mind, there are some serious problems with current EPA analysis of Kerry-Boxer:

• First, it should be noted that the Kerry-Boxer analysis is based on their June 2009 analysis of the Waxman-Markey bill from the House of Representatives.

• Second, its important to note   the assumption used in most scenarios   in  the new EPA report on Kerry Boxer  about new nuclear plants for electricity generation. The EPA report says that the new Kerry-Boxer report is based on their Waxman-Markey analysis which assumes  a 150% increase in the number nuclear plants by 2050. It seems likely that that is also the number assumed for the Kerry-Boxer report. The U.S. currently has approximately 100 nuclear plants, so to increase that number by 150% would mean that we would have to build 150 new plant by 2050, or about 4 per year for the next 4 decades. Since we haven’t built a nuclear plant in the last 30 years in the U.S., this assumption seems highly unlikely. See slide 17 for the details of the EPA nuclear assumptions.  See http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf.  The significance of this is of course that when you assume a large number of carbon free sources of electricity will be put in place, the cost of reducing GHG emissions is substantially reduced. Thus the allowance prices and economic impacts shown in Table 4 on page 17 of the new Kerry-Boxer report are likely to be seriously underestimated.

• The EPA’s Kerry-Boxer analysis also assumes that the institutions are put in place to process the domestic and international offsets need to realize reductions on the magnitude shown in the analysis. assumption, if it came true, would allow U.S. companies to purchase less-costly offsets from developing countries, which have emission reduction targets in place.  In reality, the assumption is not likely to be realized since China and India have made it quite clear they will not undertake programs that would set limits on Chinese GHGs.
   
• EPA assumes that CCS for coal and natural gas fired utilities will be available in 2020, but most experts think CCS is 15 years away.

It is troubling assumptions like these that could lead astray legislators just trying to enact good policy. The lesson:  erroneous assumptions  lead to bad policy.
 

 It seems much of the discussion around this bill, and even the analysis of its impact, ignores the issue of where we will get our energy today and tomorrow.  If we are actually going to pass a climate change bill, shouldn’t we also be working to actively expand our near and long-term energy solutions?

Our hope is that the analysis and discussions on this issue will press further to provide transparency into all aspects of the bill. This bill, if passed, could have a significant impact on the US economy and the process should be accessible to consumers so they understand its full implications – including the legislation’s impact on US business competitiveness vis a vis the rest of the world. This means a global solution, not just a US solution to a real global problem.

The emission reduction mandate of 20% below 2005 levels by 2020 lacks any connection to economic, energy, or technology realities.

Over 40 years ago, a group called the Lovin Spoonful made the song Do You Believe in Magic popular. That should be the theme song for the Kerry-Boxer cap and trade legislation and this week’s hearings.

The emission reduction mandate of 20% below 2005 levels by 2020 lacks any connection to economic, energy, or technology realities. According to analysis by the Energy Information Administration, achieving a reduction of that magnitude would require a reduction of about 1 gigaton. To provide a frame of reference, 1 gigaton of CO2 is the equivalent of doubling the miles per gallon of every car on the road, building over 100 nuclear power plants, or over 300 clean coal electric generation facilities. Only someone who believes in magic would assume that is realistic.

If the reduction goal can’t be achieved directly, the sponsors must have in the back of their minds that “offsets”—the equivalent of indulgences to keep sinning-- would be used to claim success. But, once companies and the government get involved in the offset market, there will be incentives to create the type of risky financial instruments and schemes that contributed to the collapse of financial markets. The EU experience with offsets has demonstrated that they lead to rampant fraud and abuse.

During this week’s hearings, the sponsors and their supporters will claim that the economic impact of the legislation will cost less than 30¢ a day or as was asserted with Waxman-Markey, less than the cost of a postage stamp. Analyses that come to this conclusion represent of triumph of gimmickry and a rebirth of the “rosy scenario”. The over whelming conclusion of serious analyses—for example those conducted by Rob Shapiro, Bill Nordhaus at Yale, and Richard Cooper at Harvard—is that the cost of cap and trade could be in the hundreds of billions of dollars. And that cost will be borne by consumers and those who represent lost jobs.

What Senators Kerry and Boxer should be asked to produce is a road map for achieving the 2020 target and an explanation of how it can be achieved while also achieving the robust economic growth that Americans expect. Of course, they will not do that because they cannot.

Kerry-Boxer would give a competitive advantage to non-U.S. refiners.

The Kerry-Boxer bill is similar to the Waxman-Markey bill, but its impact would be even worse.

Consumers, farmers, truckers, airline passengers, and all businesses relying on petroleum fuels would pay the lion's share of the costs. According to numerous studies about the Waxman-Markey bill, it appears that the more costly Kerry-Boxer bill could raise the cost of gasoline and diesel fuel to more than $5.00 a gallon, destroy more than 2 million U.S. jobs--even allowing for the creation of new green jobs--and would send jobs and refining capacity overseas, doubling imports of refined products. Since the bill does not provide "energy-intensive, trade-exposed" status to the U.S. petroleum industry, despite being the second most energy-intensive industry according to the federal government, it would give a competitive advantage to non-U.S. refiners.

The Kerry-Boxer bill also could increase costs by reducing the availability of less costly international offsets. Further, it proposes to reduce the allowance allocations to all regulated entities below Waxman-Markey levels by putting more than 20 percent of the total allowances in "reserve" to be used for deficit reduction and other purposes.

Although the Environmental Protection Agency (EPA) was directed to assess the Kerry-Boxer bill, it did not conduct a formal analysis. Instead, it chose to rely on its earlier assessment of the Waxman-Markey bill, which was fraught with overly optimistic assumptions that greatly downplayed energy costs. The government's own Energy Information Administration (EIA) has projected that the Waxman-Markey bill would drive up total costs by as much as $1,870 per household in 2030, which is much higher than the often-quoted "price of a postage stamp a day."

The Kerry-Boxer bill, like its predecessor in the House, is too costly for too little positive impact on the climate. The Senate should reject it and start over.

The best thing that can be said about the new Kerry-Boxer mark is that it retains the Clean Air Act as a catalyst and backstop for reducing greenhouse pollutants that cause climate change.  The Act is the only legal mechanism, a proven one at that, which can get U.S. emissions down to the requiste levels (e.g., 350 ppm of CO2) as demanded by science.  It is no surprise that the oil, gas and coal industries are taking aim at the Act.  But the public interest clearly mandates retention of the Clean Air Act.  Any backsliding in this area will immediately erode support for Senate legislation (and significantly reduce the potential to actually get the job done against global warming). 

The bill's energy efficiency provisions could be even stronger.

The Chairman's Mark distributed on Friday provides an excellent starting point for Senate Environment Committee consideration.

As expected, it specifies the distribution of allowance value, and I am pleased to see that the vast majority of the allowances go to well defined public purposes, such as helping consumers, providing a level playing field for energy intensive industries, deploying low-carbon technologies, and preventing deforestation.

The bill includes several key elements. It has dedicated investments in energy efficiency, clean transportation, and renewable energy deployment. It also has an effective mechanism to stabilize allowance prices, with a bigger allowance reserve and a greater clarity about when this reserve will be tapped than in the House bill. And the bill's consensus approach to promoting the deployment of carbon capture and storage technology should bring additional political support.

Perhaps most important of all is the fact that the EPA has concluded the bill is affordable. Its analysis shows that the legislation brings an average cost of less than $120 per year per household.

The agency also found that it will be more effective than the House bill at avoiding excessive allowance price volatility, and it will result in an increase in net farm income--a key finding for the prospects of the bill in the Senate.

Still, I see two areas for further work. First, the bioenergy loophole must be closed. Right now, the bill doesn't properly account for emissions from bioenergy, and without that information, we can't guarantee bioenergy is fighting global warming rather than actually costing us forests.

Second, the bill's energy efficiency provisions could be even stronger. A new study by University of California economists shows that the legislation could produce up to 1.9 million jobs with strengthened energy efficiency provisions, compared with 900,000 jobs with provisions similar to those that passed the House.

I hope that the hearings this week will bring out these key points and cut through the overheated rhetoric of opponents who are making ridiculous claims about the cost of this legislation in order to score political points.

Cap-And-Trade Still Achilles' Heel

The benefits, if any, are greatly outweighed by the cost to the economy and by unintended consequences.

At close to midnight on Friday, Senators Kerry and Boxer released a 923-page version of global warming legislation with an overview of emission allocations that closely resembles the widely unpopular House cap and trade bill. Even with further modifications and compromises, it’s difficult to imagine a scenario in which the Senate legislation can secure the 60 votes necessary to pass.

Climate legislation driven by wishful thinking rather than hard facts simply will not work. The Senate’s current efforts to repackage Waxman-Markey into a politically viable, environmentally effective policy amounts to rearranging deck chairs in an effort to keep the Titanic from sinking; it looks like considerable work but ultimately will have little effect.

Since the Kyoto Protocol, there have been an overwhelming number of studies analyzing cap and trade. The vast majority of this research has arrived at the same conclusion—the benefits, if any, are greatly outweighed by the cost to the economy and by unintended consequences. Just recently, the CBO issued an analysis that came to the same conclusion. What we can be fairly certain of is that cap and trade system will cost the U.S. economy $100 billion or more annually, become a regulatory nightmare, enrich Wall Street and special interests, spawn fraud and abuse, and put an unnecessary burden on American consumers.

The European Union has, in effect, already conducted a real world experiment with cap and trade. And the results are clear. It hasn’t worked, and households -- not to mention the Planet – have paid a high price.

The fundamental problems with cap and trade should be obvious. No member of Congress, nor anyone else, is smart enough to be able to set a cap that is just tight enough to spur innovation but not so tight as to constrain economic growth. And, none of the advocates for this emissions trading scheme know how to bring forward commercially competitive alternatives to the fossil fuels that would be forced out of our energy system. Bottom line: the notion that this nation could reduce emissions 20% below the 2005 level by 2020 without causing serious economic damage is a flight from reality.

Unfortunately, the scheduled hearings will not be organized to illuminate as much as they will be designed to provide a cloak of legitimacy for this bad legislation. Cap and trade advocates will stack the witness lists. Yet if Senators Kerry and Boxer were genuinely interested in obtaining helpful information, they would ask one question: “How can we reduce emissions by 1 gigaton in a decade while still achieving our economic objectives?” For the foreseeable future, the honest answer is “we cannot.”

But, in a world where image trumps reality, that question and answer will likely remain buried.

EPA’s analysis -- which will be used to justify the Kerry-Boxer approach -- is a triumph of the power of assumptions. It simply demonstrates that if you control the assumptions, you can get any answer that you want. But, in the real world, reality and facts prevail and the reality is that EPA has low-balled the cost and consequences of this legislation.

Anyone who doubts that only needs to look to the E.U. experience and compare its success to America’s impressive achievements through existing policies and measures. In part, this may explain why past efforts to cobble together 60 votes for cap and trade have fallen short. And if the nation is fortunate, this one will too.

What obstacles do you think are holding up nuclear development? Should the climate bill include provisions to help revitalize the industry, such as streamlining the process of getting new plants built? And if so, how? Would nuclear provisions help Senate leaders win 60 votes? Alternatively, why do you think nuclear energy should not be an integral part of Kerry-Boxer?

If we’re serious about addressing global climate change, new nuclear power must be part of our strategy. Nuclear power currently accounts for about 20 percent of our country’s electricity production. But by 2050, when the final carbon emission reductions in proposed legislation would take effect, all of our existing nuclear power plants in the United States will be retired (including those approved for 20 additional years of operation).

Add to that another 50 percent of current generating capacity that is likely to be shut down early (in the case of many older coal-fired plants) or will reach the end of its normal operating life by that time, and you get a sense of the monumental task ahead of us. Just to ensure that electricity remains available in 2050, we need to replace about 70 percent of the generation sources currently operating in the United States. And that assumes no growth in demand.

We can assume some gains in energy efficiency and renewable technology development. But to reach the 2050 goal of reducing CO2 emissions by 80-plus percent from 2005 levels while keeping our economy moving forward with reliable electricity, we must build scores of new nuclear plants.

Responsible climate legislation must put in place the framework, policies and incentives to build a new generation of nuclear power plants to meet the country’s electricity needs. Wind, solar, biofuels and other technologies all have a key role in our nation’s energy mix, but nuclear is the only large-scale, emission-free, 24/7 source of electricity generation capable of filling the void we will leave by retiring power plants.

Of all forms of clean-air electricity, nuclear energy has the smallest impact on the environment.

 It is indeed encouraging to see Congress turning more attention towards nuclear energy as a source of affordable domestic energy. Greater use of nuclear energy is absolutely a necessary step to becoming a more environmentally responsible, energy-producing nation. Nuclear energy is not only the most readily available form of clean-air electricity, but it is also the most sustainable and cost-effective.  Of all forms of clean-air electricity, nuclear energy has the smallest impact on the environment.  If we invest in this form of power now, we will see benefits for years to come.

In any discussion of climate change, nuclear power is a must.  Just like other major sources of clean-air electricity, such as hydroelectric power, wind energy and solar energy, nuclear power plants do not emit any carbon or greenhouse gases.  And nuclear energy is the only large-scale, clean-air electricity source that can be expanded widely to produce large amounts of energy.   In fact, it makes up nearly 74 percent of the nation’s clean-air electricity.

As we potentially work toward a new generation of nuclear plant development, it is important to note that average nuclear production costs have already declined more than 30 percent in the past 10 years to 1.87 cents per kilowatt-hours, and new and more complex forms of technology are continually being explored to make this cost even lower.  Currently, it is the lowest-cost producer of baseload electricity.  

We believe that any legislation that addresses climate change and decreased dependency on foreign oil should also encourage increased use of nuclear energy as part of an overall push toward a balanced domestic energy program and should expand tax incentives for construction of new nuclear plants and nuclear electricity generation.  It should also provide $2 billion over 10 years from federal energy research, development, demonstration and deployment budgets for demonstration of one to two new advanced nuclear facilities.  

From a consumer perspective, the key to a reliable, abundant and affordable supply of energy for our country is a very diverse supply of energy. Consumers win when there is competition between and among energy supply options. Reliability and affordability becomes jeopardized, for example, if we become too dependent on anyone source of energy.   

It is important to keep nuclear in the mix and increase its capacity. It is a very reliable, secure and importantly, a low carbon option that we need. It is important that we develop a policy that will facilitate the construction of nuclear energy without breaking the bank. Perhaps we can learn from other countries that are driving ahead with construction of new plants. We also must not forget that our existing fleet of nuclear plants are ageing and will need replaced.

Importantly, we do not need cap and trade legislation to build new nuclear plants. If you doubt this, how are countries all around the globe building theirs since cap and trade is essentially non-existent in these countries?

Nuclear reactors are uneconomic for supply-side and demand-side reasons.

Nuclear power does not fit the bill because it is far from the least cost approach to meeting the need for electricity in a carbon-constrained environment. Nuclear reactors are uneconomic for supply-side and demand-side reasons. Studies by half a dozen major national research, Wall Street and consulting firms estimate power from nuclear reactors costs three or four times as much as efficiency. The California Energy Commission has identified a dozen supply-side options that cost at least 40% less than power from nuclear reactors. The technology-driven expansion of the resource base of natural gas and the bursting of the speculative bubble in natural gas markets has lowered the cost of this fuel, which emits less than half the carbon of coal. 

Demand has declined sharply as a result of the recession and a fundamental shift in consumption patterns is expected as households adjust their spending and saving patterns after the debt bubble of the past decade. Combining this shift in demand with the fact that climate policy is eyeing substantial reliance on efficiency and renewables and the need for central station power facilities like nuclear reactors is likely to be dramatically reduced, while the cost of carbon allowances will be far lower than originally thought. 

Nuclear reactors are also highly risky projects because the industry has been unable in the past and is currently incapable of designing and building reactors on time and on budget. The leading candidates to be the “reference” designs for new reactors have been subject to constant revision. Recently, the Nuclear Regulatory Commission concluded that the most popular design (which account for 14 of the 29 reactors that are seeking licenses) has not demonstrated that certain structural components of the revised AP 1000 shield building “can withstand design basis loads… This is a situation where fundamental engineering standards will have to be met before we can begin determining whether the shield building meets the agency’s requirements.” 21 of the 29 units have been delayed, cancelled, suspended, or failed to find the needed partners. Of the eight that have not suffered the scheduling problems, half have suffered downgrades in their financial rating or negative financial advice.     

Because the economic prospects of nuclear reactors are so dim, even in a carbon constrained environment, its backers have given up any pretence that nuclear reactors can compete in the marketplace. Recognizing that Wall Street won’t support nuclear construction, they have turned to Main Street, seeking to force taxpayers (through loan guarantees) and ratepayers (through charges for construction work in progress and guaranteed cost recovery) to foot the bill. However, shifting risk does not eliminate it. Taxpayers and consumers will end up paying for cancelled plants, excess capacity, and bearing the burden for electricity that is far more costly than need be.  

The plight of nuclear reactors can best be seen in the conclusion to a recent analysis of nuclear reactor economics, based on an MIT study that was highly favorable to nuclear reactors in a number of ways and openly sought to promote nuclear power. The best it could dues was arrive at the following, tepid conclusion. “All things considered, the best economic case supporting a significant expansion in nuclear power capacity involves significant CO2 emissions charges, moderate to high fossil fuel prices (including implicit prices reflecting energy security considerations), declining nuclear plant construction costs, and an efficient licensing regulatory framework. (Paul L. Joskow and John E Parsons, “The Economic Future of Nuclear Power,” Daedalus, Fall 2009, p. 58)

None of the four conditions that might make the economics of nuclear reactors attractive is present. The absence of those conditions is not a mistake or market failure; it is actually a market success – capital markets turning thumbs down on an uneconomic technology. It reflects the six fundamental risks that nuclear reactors face in the real world. CO2 emissions charges are projected to be modest because policy is contemplating promoting options that are low cost approaches to carbon reduction (policy risk); fossil fuel prices have moderated and there is growing confidence in efficiency and renewables (technological risk creating marketplace risk,); nuclear plant construction costs estimates have risen substantially (technology risk and execution risk) and the licensing process has proven challenging because designs are not well conceived and site-specific issues are substantial). As a result, the financial risk of the projects has grown to the point where they cannot be financed in capital markets.  

Simply put, the economics of nuclear reactors today are a worst case that will cost taxpayers and ratepayers dearly if they are forced to subsidize a new generation of nuclear reactors with loan guarantee and construction work in progress.

High Costs Constrain Nuclear

The major barrier is financial in nature.

The major barrier facing nuclear power in this country is not nuclear waste or safety concerns or regulatory constraints or public opposition.  The major barrier is financial in nature. 

Getting a new power plant built is in many ways a matter of understanding, managing and pricing risk.  Those plants with the lowest perceived risk are the ones that receive investment today.  That is a major reason why both natural gas and wind have done as well as they have over the last five years.

On the other hand, we have not had a new nuclear plant ordered in the U.S. since the 1970s and the capital cost of a new unit is between $8 and 15 billion, which is more than the balance sheets of most electric utilities. Given a history that includes major defaults on nuclear bonds and other gigantic hits to investors, the barriers to investment in new nuclear are enormous. That is one reason why "right sizing" the technology - smaller plants with a smaller capital investment required - is getting increased attention.

As we are moving into a new carbon-constrained world, there is an understandable interest in the nuclear option, and there will be strong efforts to resuscitate the industry.  But even very aggressive nuclear provisions in the legislatiion will be irrelevant if the financial community continues to view the nuclear option as too high risk for comfort.

Fuel diversity in electricity generation is critical to the success of a sustainable grid, and nuclear power can and should play a key role in producing clean, baseload energy for the nation. But the reality is that the last new nuclear reactor built in America was 32 years ago—in 1977—and today, despite having received applications for 26 new nuclear reactors, the Nuclear Regulatory Commission has yet to approve a single one, let alone the hundreds that would be needed to do the job that Sens. Kerry and Boxer seem to envision.

The reasons are no secret—many in the environmental community consider nuclear power a danger to both the natural and man-made environment, even though nuclear power emits no carbon-dioxide or other greenhouse gas emissions, making it, from a global warming perspective, the most environmentally benign way to generate electricity. It is also important to note that since the 1970s rapid advances in technology have made nuclear power far safer and more efficient—and the nuclear industry's safety and security standards are the highest in the world.

The American Gas Association (AGA) believes that any climate change legislation should support the increased use of nuclear power as a way to enhance fuel diversity in the generation of electricity, while at the same time meeting our national goal of reducing greenhouse gas emissions. Currently natural gas, the most environmentally friendly fossil fuel, is the fuel of choice in electricity generation. Yet the best use of natural gas—meaning its most efficient and environmentally superior use— is directly in America's homes and businesses.

AGA does not believe that natural gas should not be a part of the electricity generation mix. Rather, we believe that increased fuel diversity, including the increased use of nuclear power, would allow more natural gas to be used directly in the residential and commercial market, where, for more than 40 years, natural gas customers have led the way in increasing energy efficiency and conservation.

Electricity consumption is an indispensible contributor to prosperity. That can be seen in the strong correlation between economic growth and electric power consumption As our standard of living population continue to increase, so will our need for reliable and affordable electric power

EIA's forecast to 2030 shows electricity consumption growing between 26% and 36%. Renewable energy is projected to grow much faster than overall electric power consumption but none the less is projected to supply no more than 15% of our electric power needs, even with mandates and large subsidies. So, if we are to meet the needs of a growing economy and growing, more prosperous population while reducing the growth in greenhouse gas emissions, nuclear power should play a more significant role.

In spite of being a proven technology that provides 20% of our electric power needs and one widely used in other countries, especially France, nuclear power is not without its challenges. These include, but are necessarily limited to, cost, waste disposal, political acceptability, subsidies, potential liability, and the creation of moral hazard.

The government through recent legislation has provided loan guarantees, a production tax credit, Price-Anderson renewal, and increased R&D support. While some of this might be appropriate to jump start an industry that has struggled since Three Mile Island, the extent of government subsidies is troubling. Some estimate that subsidies exceed the amount of private capital put at risk. As a matter of principle, government should remove barriers to entry and streamline permitting and then let the private sector respond. And, perhaps, a production tax credit can be justified as a proxy for a price on carbon. But, extensive government involvement creates investment distortions and unintended consequences that are troubling.

Even if the private sector is willing to increase its investment, the cost of new nuclear facilities is very expensive and results in energy costs much greater than coal or natural gas produced electricity. Until the costs of production can be reduced, nuclear power's growth in the market place will and should be limited.

And finally, the government needs to resolve the waste disposal issue once and for all if nuclear energy is to have a brighter future. The failure to move forward with Yucca Mountain or to develop a commercially viable alternative is a serious obstacle to increasing nuclear power as a source of no carbon electricity.

The bottom line is that if the Congress and Administration are really serious about reducing the growth on CO2 emissions there will have to be a more focused and effective public-private effort to make nuclear power more cost effective and politically acceptable to the public.

One of the major obstacles holding up nuclear development is policy uncertainty. If a company or a group of companies is thinking about investing $7-15 billion in a new nuclear facility then surely they would want policy environment that will be as favorable as possible.

A cap and trade policy could be helpful to the nuclear industry given that nuclear plants are "green" to the extent that their CO2 output is tiny compared to conventional coal and natural gas plants. Nuclear energy companies could sell credits, if they are given them, to the coal, natural gas and other carbon-effusive industries and electricity producers.

Another policy that needs to be clarified is what to do with the nuclear waste. Right now all of the nuclear waste from commercial facilities (and others) sits in the backyards of these facilities. All of the nuclear energy companies made a deal with the US Government that they would help pay for the Yucca Mountain storage facility. Many billions have been paid for by the nuclear industry, and yet the nuclear industry cannot use Yucca Mountain yet. Many of the people of Nevada and their leaders are against the Yucca Mountain facility. There still remains a huge amount of ambiguity and uncertainty on what to do with nuclear waste outside of the use of the Yucca Mountain facility. The nuclear industry needs to know where this is going before the huge amounts of money needed to be invested in the industry starts to free up.

As I have said in many other venues previously: the nuclear industry is the only energy industry that has been forced to account for all of its waste. If this were done for the coal, oil and natural gas industries the world would be a far different place in many ways. The nuclear industry has faced an extreme cap, and without trade, on its major effluent, nuclear waste, for decades. There are good reasons for this. Nuclear waste is downright dangerous, especially the high-level nuclear waste, such as the plutonium made in most reactors from neutrons attaching to U-238, etc. Containing this waste is important. It is also important, as we have all learned, to contain and mitigate CO2, other greenhouse gases and the pollutants from the non-nuclear parts of the electricity and transport industries.

Other policy and legal obstacles involve where the new plants would exist and what liabilities and other rights and obligations would the nuclear industry need to consider with regard to where the sites will be, decommissioning in the future, and more.

Getting back to the financial issues we can see one of the obstacles to the nuclear industry is the huge amounts of money that are needed to build conventionally sized and configured nuclear plants. It can also take a very long time to complete one of these plants. The bills need to be paid when the plants are being built.

 Getting such massive investments together in an environment of policy and financial uncertainty is proving to be very difficult. We are still in a financial crisis. Credit is not as easy as it once was. There are other alternative uses for this money competing with the nuclear industry. Also, we need to consider in projects that take a long time to finish that there will likely be some inflation associated with the huge bailouts and other fiscal and monetary policies used to date and expected in the future. The smart money in the nuclear industry understands that there could be serious cost creep when a project starts. The longer an energy project takes to implement the more complex and important some financial, policy, and economic uncertainties become.

On the other hand, it is clear that many of our nuclear plants are getting old and may be decommissioned in the coming years. This could lead to some significant energy shortages if alternatives to the lost nuclear gigawatts are not built smoothly in as these inevitable changes happen.

It would be a grave error on the part of policy makers and others to rule out nuclear power as an option in the future. If done right it is one of the cheaper ways of making electricity on a large scale. It is also one of the most efficient ways of making electricity on a large scale. (This would be even better if we had a requirement on all future nuclear plants that they use combined heat-power-cooling-etc. as a way to capture the 65-75% of the waste heat that is produced by not only nuclear, but coal, oil, and natural gas plants. It would also make sense to consider such regulations on the entire electricity industry, given that it is the major source of wasted energy in the US. This, of course, would not apply to wind, hydropower, and non-heat generating sources of electricity. But they have their own energy waste issues.)

Nuclear energy production is not a major source of CO2. The largest source of CO2 and other greenhouse gases in the US and in the world is electricity production with fossil fuels. The second is transportation with fossil fuels. Combining nuclear electricity with plug-in vehicles could help to reduce CO2 from at least two major sources of the greenhouse gas and help the US and the world move toward a more sustainable future. Nuclear power can also be turned into something of a renewable energy source via reprocessing and projects like the Global Nuclear Partnership. But there is quite a bit more to be done on this.

There are surely the proliferation and other issues to consider. If we can somehow get a better handle on the proliferation issues by focusing more on alternative nuclear technologies, including those using thorium, we might just get a better handle on this situation. But the proliferation issue is complex indeed, and will likely not be solved in the near future. Energy-Environment-Security connections are daunting to say the least of it.

Getting a better handle on the proliferation issues can also help on the financial, nuclear waste, and other sides of the choice equations to either go forward or not to go forward with nuclear power. The more nuclear power developed throughout the world the more investments can gain from economies of scale in production of units, learning by doing gains, invention gains, and more. Some of these gains could be directed at better ways of enriching and reprocessing nuclear fuels that would lead to safer and more secure outcomes. A rejuvenated and more creative nuclear industry may also have more time and money to put efforts toward helping to resolve the many dangerous and vexing problems associated with the nuclear energy- nuclear weapons nexus.

Should the climate bill include provisions to help revitalize the industry, such as streamlining the process of getting new plants built?

To be blunt: most of the other energy lobbies are pushing hard for their own. The nuclear lobby is part of this rather tough game. Should there be streamlining? Yes, but not at the expense of security, safety, and the environment. The nuclear industry has proven that it can make vast improvements on all three of these issues with the right pressures put on them. The nuclear industry is technologically complex and has some very good engineers and others working in it. They can make this industry a safer, more secure and more environmentally sound industry than it is today -- with the right incentives. Those right incentives could also help the US make sure it has electricity security in the future.

We cannot sacrifice our energy security in the future to bad science and bias. There should be a full review of the environmental, economic, safety, and security issues surrounding all forms of electricity production. However, this will never happen. Maybe muddling through might help at a less than optimal effort.

Alternative energy sources such as solar updraft towers, CSP, wind, tidal, geothermal, and the like do not have proliferation issues, and may have even better environmental impacts than nuclear. However, the diffusion of gigawatts from these sources has not lived up as advertized as yet. The growth in wind and solar has been remarkable relative to how they started. But to make these competitive with nuclear they need to be placed in line on the grids, etc, in a much faster pace and with much bigger investments. Could they be alternatives to the nuclear plants to be decommissioned?  This is one of the major questions of the future of energy. So far it does not seem possible.  Also, logically, it makes very good sense to make them a much larger investment in the energy portfolio in the future. But these alternatives face financial, technical, and other constraints that need to be worked out as well.

 Coal, oil, natural gas, and, yes, nuclear, will need to be considered a part of  this portfolio as the US and the world transitions from where we are now in energy to where we need to go. Those who want to change energy systems overnight and shut down their least favorite energy sources are not thinking clearly at all. Alternatives with even greater electricity generation capacity need to be in place. Otherwise, we could see nightmarish economic, political, social and other problems. Electricity is a key part of economic growth and development. Transitions to a new energy future require steady and well-educated leadership at many levels.

The energy and environment choices we make today could have very significant effects on the peace, prosperity and security of many future generations. Let's put bias aside and focus on the best portfolio of energy sources we could have in the future. Nuclear is just one of them, and it has its own set of problems and uncertainties, but it is an important one that should be considered in full seriousness, just as I hope we will consider the others.

Regulatory impediments to safe nuclear power should be removed with or without carbon caps.

Cap and trade will be very costly to the economy. In a great irony, many proponents cite studies showing the cost to be very low. The irony because the assumptions in the “postage stamp” studies are inimical to positions these groups take on certain topics—most notably on nuclear energy.

Without going over all the strained assumptions necessary to keep the projected cap-and-trade costs below hundreds of billions of dollars per year, note that a consistent and critical assumption is the doubling of nuclear power generation over the next 25 years. 

Since capacity utilization of the current fleet of nuclear power plants exceeds 90 percent, doubling output means doubling capacity. We have about 100 nuclear plants and since we haven’t licensed even one in the past 30 years, doubling the capacity will require a big change from business as usual. Those who would continue to block nuclear power while trumpeting cost estimates that depend on a nuclear renaissance commit hypocrisy of the highest order.

On the other hand, if nuclear power is a viable, cost-effective energy source, it shouldn’t need subsidies. Balancing the damage done by economy-killing taxes in one energy market with inefficient subsidies in another is policy that makes sense only on Capitol Hill and K Street.

Regulatory impediments to safe nuclear power should be removed with or without carbon caps. In addition the federal government cannot continue with its policy of monopolizing the waste disposal stream while completely neglecting its obligations to take the waste. My colleagues Jack Spencer and Nick Loris have outlined a no-subsidy, market oriented nuclear policy here: http://www.heritage.org/Research/EnergyandEnvironment/wm2475.cfm.

Representative Barton ought to know – in the case of the nuclear revival, waste disposal is a big elephant in the living room. Let us,for the moment, ignore the problem of storing high level waste – the stuff we don’t know what to do with and thought we could just dump at Yucca Mountain. Let’s look at low level waste – which in theory we ought to be able to take care of. And let us decide if we can really entrust nuclear energy to the nuclear industry and its allies like Barton.

 Andrews County, Texas, down the road a fair piece from Barton’s sixth district, just finished a brutal contested election over the fate of a proposed $75 million taxpayer bond to pay for a low level waste site to be run by a company called Waste Control Specialists. The vote was agonizingly close – 642-639 – but the Courts ruled the vote was valid. But yes, this looks awfully much like a taxpayer bail-out. And who is being bailed out?

 A chap named Harold Simmons owns WCS. Simmons, a Dallas billionaire, was most prominent recently as the financier of television ads attacking the presidential candidacy of Barack Obama for his alleged connections to former radical William Ayers. Simmons, however, is also a major direct funder of political candidates, including Joe Barton. to Rep. Robert Talton, one of the Republican legislators who stood in his way. Talton turned him into the District Attorney, and the bill was killed -- only to be resurrected and passed later on. Overall, Simmons has spent $150 million to grease this deal. He gave Governor Rick Perry $500,000, so it is perhaps not surprising that the Perry appointed Texas Commission on Environmental Quality approved the permit which would allow WCS to handle much more dangerous nuclear waste than it was designed for. 

When Simmons tried to get legislation authorizing the Andrews County site through the Texas legislature, his fellow Republicans fought him bitterly. Simmons just threw his weight around. In fact, he ended up being charged with offering a $60,000 bribe

Simmons wants to make Texas the dumping ground for as much of America's nuclear waste as he can. The site he has chosen sits on top of America's biggest and agriculturally most critical aquifer, the Ogallala. The site has not been properly analyzed for whether or not it can safely store any kind of radioactive waste, much less the huge volumes of enormously toxic stuff Simmons wants to import. An interoffice memorandum submitted to the Texas Commission on Environmental Quality in August 2007 concludes that "Groundwater is likely to intrude into the proposed disposal units ... the Applicant has failed to use numerical modeling to predict the future location of one water table that is expected to intrude into radioactive waste .... the Applicant has not demonstrated that the site is suitable for near surface disposal of radioactive waste." But Glenn Shankle, the executive director of the Commission, overruled his technical staff.

It appears that the other commissioners may not have known of the staff's findings. Three staff members resigned in protest of the decision to recommend the license. In the middle of 2008, Glenn Shankle stepped down from his post, having made sure that the Commission was poised to approve the license for Waste Control Specialists. Six months later he signed on as a lobbyist with the company. One of the staff who had resigned commented of this journey, "Even the mafia was more circumspect."

So we have a major nuclear-waste-disposal facility, recklessly located on top of one of America's premier sources of groundwater, authorized after a tainted legislative process involving attempted bribery, licensed by a regulatory body whose technical staff strongly opposed the permit, under the influence of a governor who is deeply financially compromised, at the direction of a CEO who subsequently took a lucrative position with the applicant.

And we think this industry is ready for a major revival?

We need regulatory reform in order to speed up the process of approving new nuclear reactors.

Nuclear energy is a viable, clean alternative form of energy that can help strengthen America’s energy infrastructure now.  But, in order to make that happen, we need regulatory reform in order to speed up the process of approving new nuclear reactors, while ensuring the highest safety standards are observed.  Our regulatory structure should be encouraging innovation, not stifling it.

No legislation intended to move us toward clean energy should be taken seriously unless it includes nuclear energy. I fully support efforts to get wind, solar, and other renewables online, but we all know that these sources of energy only get us part of the way toward achieving our clean, domestic energy goals. Modern, industrialized nations like France and Japan are much more reliant on nuclear power to meet their energy demands. In fact, eighty percent of electricity in France is from nuclear generation; they have never had a major accident; and waste that used to be stored is now safely reprocessed and used again.  There is no reason the United States cannot vastly increase the portion of our electricity that comes from nuclear energy.

One of the many disappointing part of the House cap and trade bill passed earlier this year was its almost total silence on the issue of nuclear power, while pages of the legislation was devoted to energy efficient light bulbs and Jacuzzis.

This prompted me to introduce the bipartisan bill, H.R. 3448, the SAFE (Streamline America’s Future Energy) Nuclear Act, which would reduce the time needed for approval of a new reactor to roughly two years when certain criteria is met. The reactor design must already be certified and any new reactor must be on or adjacent to an existing generation site in order to qualify. Additionally, the operator must not have any outstanding violations on any current reactor with the Nuclear Regulatory Commission (NRC).  My bill makes public safety a top priority in any approval of new reactors.

The SAFE Nuclear Act also better equips the Nuclear Regulatory Commission to approve new designs to compete in the marketplace. Innovation will help us develop safer and more efficient designs that could also help reduce to costs of new reactors.

Finally, my bill establishes a new National Nuclear Energy Council to coordinate the federal government’s nuclear policy. Currently, we have a jumble of conflicting priorities at the Department of Energy, Department of State, and other government agencies when it comes to our nuclear energy policy. If we want to truly advance nuclear energy, we need everyone on the same page.

There is no reason people across the political spectrum cannot embrace a future in which the United States produces a majority of its electricity from safe, clean, nuclear energy.  Though we may not all agree on issues like cap and trade, we can all agree that we need to find way to produce the energy that fuels our lives in a way that is environmentally friendly and sustainable.  Nuclear power fits that description, and the SAFE Nuclear Act will go a long way toward making that safe, clean future a reality.

We lag behind other technologically advanced nations in expanding the use of nuclear energy.

Provisions to help expand the use of nuclear energy must be part of the Kerry-Boxer legislation if America is to meet the bill’s carbon reduction goals while holding the line on costs to consumers for electricity production.

Leaders from both parties agree that nuclear energy is part of a common-sense, balanced approach as we shift toward low-carbon sources of energy. A diverse portfolio of clean energy sources is essential to protect our environment and promote energy security and reliability and expand our economy. More than 21,000 high-paying jobs will be created by building the 25 reactors now in the federal permitting process, but that is only one element of economic growth that would be generated by these projects. U.S. manufacturing of nuclear energy components will expand, as will workforce development and the service industries to support these facilities.

Nuclear energy is ready now to be a central part of a balanced approach to clean energy diversity. Congress must include a robust nuclear energy title in climate change legislation if the projected expansion of nuclear energy is meet projections developed by the Environmental Protection Agency (187 new reactors by 2050) and Energy Information Administration (69 new reactors for 33% of U.S. electricity generation by 2030.)

Broadly, Congress should expand financing support for all clean energy sources, including nuclear energy. The legislation should also allow for a more efficient, transparent licensing process for advanced reactor projects and provide direction to the nation’s used fuel management policy, including the potential for uranium fuel recycling.

Because carbon-free nuclear energy can produce more electricity than other clean sources, it can lead the way in a low-carbon electricity mix, along with solar, wind and other sources. Policymakers should view the inclusion of nuclear energy as part of a broad solution—a comprehensive energy framework that uses the benefits of all low-carbon energy sources.  In addressing this issue last week in New Orleans, President Obama said “There's no reason why technologically we can't employ nuclear energy in a safe and effective way. Japan does it and France does it and it doesn't have greenhouse gas emissions, so it would be stupid for us not to do that in a much more effective way.”

As the president said, nuclear energy is being implemented worldwide to meet the global reduction of greenhouse gases in the near- and longer-term, with 53 reactors under construction around the world. In addition, Germany and Belgium are rolling back moratoria on operating nuclear energy facilities because they are critical to meeting their CO2 goals.

Here at home, scores of fossil-fueled power plants will be closed in the next 20 years because of age or new air quality controls. The federal government must play a role in a private-public partnership to replace this electricity capacity in a manner that enhances energy security and reduces greenhouse gases. If  America cannot build new nuclear energy facilities in the numbers needed in the EPA and EIA analyses, the cost of electricity, natural gas and carbon allowances will be higher.
 

America’s nuclear energy industry is a world leader in safety and reliability, but we lag behind other technologically advanced nations in expanding the use of nuclear energy. Nations like France, South Korea and Japan generate 76%, 35% and 25%, respectively, of their electricity from nuclear energy, compared to 20% in America. If those countries can grow the use of nuclear energy efficiently and safely, it’s time for America to do the same.

 

A simplistic response would be that our government should focus on setting goals and frameworks, and not be in the business of picking technology winners and losers.  We all know this is unrealistic.  As a nation, we pick winners and losers all the time through our public policies and market-nudging incentives and tax structures.  This realization moves us from a discussion of technology selection to a more robust debate over the logic for selecting incentive structures around competing strategies.

First, we are talking about electrical power supply here; however, inside this discussion we must also consider demand reduction strategies and the resultant fuel switching opportunities for a greener supply.

With 2008 EIA data showing electrical consumption in buildings at 72% of the U.S. production, and the work of McKinsey (and others) articulating greenhouse gas abatement investment economics, it's clear that massive and rapid building energy efficiency improvements need to be at the top of the "winning strategies" list.  Two complimentary things happen with this as a leading strategy: first, there is an electricity demand reduction (typically cooling loads) and second, on-site direct fuel use is reduced (typically natural gas for heating) that can then be fuel-switched into either lower carbon electricity and/or CHP production (our electricity generation is about 50% coal today) or transportation (displacing oil-based fuels).

With nuclear energy supplying at about 20% of our power today, through a network of low cost, highly depreciated assets, the question is still “what’s next on the supply side?”  Looking at the cost projections for renewables and those for new-nuclear, my bets (simultaneous with investment in sweeping energy efficiency improvements) are on renewables…particularly wind.

Pursuing nuclear may well result in a landscape littered with unfinished nuclear reactors.

Having failed to birth nuclear power that would be “too cheap to meter,” the nuclear power establishment wants to deliver a nuclear “renaissance,” ostensibly to help save us from climate change.  Many proponents of this view believe that excessive regulation and the difficulties of financing projects for a moribund industry are the main obstacles preventing new nuclear reactor construction.
 
Yet the Nuclear Regulatory Commission (NRC) has already streamlined the licensing process.  It has certified two new reactor designs – the Advanced Boiling Water Reactor (the ABWR) and the Advanced Pressurized Water reactor (the AP1000) – independently of any particular reactor order.  It is in the process of certifying other designs.  Should we abandon even minimal oversight and go back to the lax regulation that contributed to the Three Mile Island accident?  Have we forgotten that one of the findings of the Presidential Commission on Three Mile Island was that “NRC's primary focus is on licensing and insufficient attention has been paid to the ongoing process of assuring nuclear safety”?  Should the NRC not require new reactors to withstand aircraft impact?  Should it not consider earthquakes or water use in a time of drought?  Nuclear reactors can be very dangerous if not designed, built, and operated to the most exacting standards.  Less oversight could come back to haunt the whole industry financially as did Three Mile Island.
 
As for incentives, the 2005 Energy Policy Act gave the first several reactors the same production tax credit as new wind power plants.  Since then, wind power developers have secured financing for and built more than 20,000 megawatts of capacity – equivalent to about six 1,000-megawatt reactors  of nuclear; nuclear has not even been able to get financing for a single reactor.  Indeed, Wall Street has flatly refused to finance new nuclear reactors.  Why?  Because nuclear projects just too risky.    They are even less viable now in as the country is mired in a deep economic crisis, with electricity demand well below last year’s levels, even as economic growth has resumed without employment growth.
 
As a result nuclear power developers want taxpayers to take the financial risk, via loan guarantees, while offering them none of the profit, while investors stand to gain the profit should a project come to fruition.  Congress seems only to willing to go along as reflected both in the Kerry-Boxer climate bill and in the Senate energy bill (S. 1642), which in combination would provide vast new loan guarantees with only modest public oversight.
 
Even with that, nuclear is unlikely to do the job.  For one thing with natural gas reserves skyrocketing in this country and around the world.  Prices are likely to stay modest.  The underlying technology for finding and producing gas has changed substantially.  Even at a sustained $7 per million Btu price (well above the recent $3 to $5 spot price) and a medium level carbon price tacked on, combined cycle power plants will likely be cheaper than nuclear with federal loan guarantees or at most about equal to nuclear – with much less risk.  Proponents of nuclear power seem to have forgotten that since the 1990s the lack of nuclear orders was not due to over-regulation but to low to modest natural gas prices, despite brief price spikes.  As evidence, consider that from 1995 to 2007, total electricity generation in the United States grew by 24 percent, while natural gas generation grew by 81 percent. 
 
While no one has a perfectly clear crystal ball, pursuing nuclear may well result in a landscape littered with unfinished nuclear reactors -- again.  Remember this: not a single nuclear reactor ordered after the start of the energy crisis in October 1973 was completed.  Over a hundred reactor projects were abandoned.  Many of the conditions are similar today.  For instance, the relationship of electricity growth to economic growth appears to be changing again, as it did then.  Only this time around, taxpayers will be left holding the bag, rather than ratepayers and investors.
 
I won’t elaborate radioactive waste issues for the moment, other than to say that the French have NOT solved the waste problem.  Indeed, in some ways they have made it bigger since reprocessing considerably increases the volume of waste that needs to be disposed of in a deep geologic repository (fission-product vitrified wastes plus long-lived plutonium-contaminated waste).
 
There is a simpler, more efficient, surer way to a low-CO2 future that does not require us to create more waste or to put tens or hundreds of billions of taxpayer dollars at serious risk.  Wind energy is already economical relative to nuclear.  Existing natural gas capacity (which is more than three times the nuclear installed capacity) can be redeployed to support renewables.  In 2008, natural gas capacity utilization in the United States was only about 26 percent.
 
Solar thermal power plant costs are coming down; heat storage technology is available.  The ensemble is comparable to unsubsidized nuclear even now.  With new “power-tower” technology, these plants can be dry-cooled, making it possible to build them in the desert.  When combined with efficiency, existing gas and hydropower resources can provide a more secure, reliable, and economical transition to a fully renewable electricity sector in thirty or forty years.  You can download my evaluation of the feasibility of a fully renewable U.S. energy system by 2050 free at http://www.ieer.org/carbonfree/CarbonFreeNuclearFree.pdf

The missing ingredient is not technology but political will to create a path to a smart, efficient energy system that will mean real U.S. energy leadership in the 21^st century.  Nuclear reactors are just a costly, complex Cold War way of boiling water by sticking radioactive rods in a huge pot.  The great lesson of the French electricity sector for the United States and the world is not that we should adopt nuclear or any other particular technology.  It is that with a firm policy direction, the electricity sector can be transformed in three decades, and maybe faster.
 
There may be 60 Senate votes in the compromise described in the October 10, 2009 Kerry-Graham op ed in the New York Times.   But putting nuclear and a “Saudi Arabia of clean coal” in the center of energy policy will suck the financial air out of the energy policy arena and marginalize efficiency and renewables.  It is also a mistake to think that over-regulation is inhibiting a nuclear revival.  As for making financing easier, there are already loan guarantees for nuclear reactors of 18.5 billion dollars in the 2005 Energy Policy Act.  Let’s see if the nuclear industry can do something with that before risking vastly more taxpayer dollars.  Encouraging Wall Street to throw large amounts of dollars at a nuclear mirage based on federal loan guarantees will generate lots of commissions, but it is not likely to solve our energy problems or be healthy for the federal budget.

Nuclear energy is emissions-free and it means real economic growth, jobs and affordable electricity for working families. However, first we'll need to restore some sanity to our nation's nuclear policy, both in the building of new plants and the storage of waste.

The Nuclear Regulatory Commission's published information indicates that the commission staff is conducting safety and environmental reviews for up to 12 of the pending applications by 2011 or 2012. But publicly, Chairman Gregory Jaczko says that he believes the NRC might review just one of the 18 filed combined license applications, covering 28 new reactors, by 2012.

U.S. Rep. Greg Walden, R-Ore., and I have asked Chairman Jaczko to explain his resistance to nuclear power. "In analyzing the pending climate change legislation and making projections about the costs and impacts of such legislation," we wrote, "the Environmental Protection Agency, the Energy Information Administration and other entities have assumed the expanded use of nuclear power in the coming years. The assurance of timely development and expansion of new reactors is critical to future energy supply and is highly relevant to consideration of whether the mandates of the proposed cap-and-trade legislation will be achievable."

Also, back in the summer when we were marking up the Waxman-Markey global warming bill, Rep. Walden tried to add language allowing nuclear energy, as well as any other comparable low-emission source of energy, to qualify under the Waxman-Markey bill's renewable energy standard. Most Democrats voted no and most Republicans voted yes, and the effort lost on a vote of 29 to 26.

Finally, there's the question of waste. The administration decision to turn away from the repository at Yucca Mountain, Nev., seems likely to have significant adverse consequences for the nation and the American taxpayer. For example, the federal government's total potential liability from delays in accepting used fuel and nuclear waste could be significantly higher than the past estimates of $11 billion if Yucca Mountain is no longer an option.

The administration's latest position that the Yucca Mountain repository is no longer an option also raises significant regulatory and legal issues that may not only adversely affect the licensing and development of new nuclear plants, but also may impact existing operating nuclear plants.

Building new reactors will get in the way of climate goals.

New subsidies for new reactors do not belong in this climate bill.  If we are serious about addressing climate change, then we need to focus on the fastest, cheapest and cleanest technologies.  Nuclear is slow, expensive, and polluting.  No new reactor will go online in the U.S. before 2020, simply because they are complex and face predictable construction delays. Olkiluoto, the showcase French nuclear reactor being constructed in Finland, is currently 3.5 years behind schedule and 75% over-budget.  But more importantly, new nuclear reactors are two to three times more expensive than average efficiency measures and renewable energy costs (6 cents per kilowatt hour compared to 12 to 20 cents per kilowatt hour for new reactors). And nuclear reactor costs are going up, not down as is the case for renewables.

Moreover, we don’t need new reactors to meet climate goals. Numerous studies, including a recent study from the National Research Council, found that energy needs through at least 2030 can be met through existing efficiency technologies alone.  The fact is that building new reactors will get in the way of climate goals.  Why?  Because utilities would be spending the next 10-20 years building risky, long lead-time nuclear projects that sink huge sums of capital in inflexible projects that result in expensive excess capacity.  Electricity demand is sharply down due to the current recession and the long-term growth rate is expected to remain lower. This means that (a) there will be little incentive to invest seriously in demand-side management or small renewable projects and (b) even if these projects are required by law, the nuclear project will result in expensive excess capacity, leaving ratepayers to once again bail out the nuclear industry’s “stranded costs” as they did during in the 1990’s deregulation.

All of the current discussion about “adding” nuclear subsidies to the climate bill ignores the fact that the Senate energy bill, which is to be added to the climate bill, is already chock-full of nuclear subsidies.  Most importantly for the nuclear industry, the Senate energy bill authorizes unlimited loan guarantees.  The nuclear industry asked the Energy Department for $122 billion worth of guarantees in 2008. According to the Congressional Budget Office, the likelihood of default on new reactors is “very high – well above 50 percent.” Proponents argue that loan guarantees are “free” for taxpayers, because the “risk of default” must be paid in advance.  The fact is that this risk is extremely difficult to calculate (how much exactly is “well above 50 percent”?). According to the Congressional Budget Office, the government is more likely to underestimate the risk than to overestimate it, leaving taxpayers on the hook to bail out yet another industry from its bad investments. 

In addition to unlimited loan guarantees, the Senate energy bill also authorizes the design and evaluation of reprocessing facilities, $5.17 billion for nuclear energy and reprocessing research, and nuclear energy career grants.  All of this is on top of the cradle-to-grave subsidies already available for new reactors, such as loan guarantees, “risk insurance,” production tax credits, limited accident liability, and guaranteed spent fuel management.

Although it appears that Congress has forgotten, the Nuclear Regulatory Commission’s reactor licensing process was already “streamlined” in the Energy Policy Act of 1992 to a one-step Construction and Operation License (COL) process, which has yet to be fully tested.  In addition, the NRC further truncated the licensing process in 2004 by eliminating the public’s right to take depositions or cross-examine opposing witnesses in individual licensing hearings.  The intention of the one-step licensing was to create an application process using standardized, pre-certified reactor designs that can be incorporated by reference into a COL application.  Instead, the nuclear industry is attempting to certify reactor designs at the same time it is applying for COLs that refer to these yet-to-be finalized designs. This artificial rush to submit applications was created by deadlines to qualify for $18.5 billion in federal loan guarantees.  The stakes are too high to move even faster without adequate public safeguards. 

Only one of the 16 applications for new reactors pending at the NRC refers to a design – the ABWR – that has been fully completed and certified by the NRC. (This design has a poor performance record in Japan.)  Another design, the AP-1000 was certified, but on October 15, the NRC announced that the design is inadequate because it cannot withstand severe weather and earthquakes.  Almost half of the COL applications pending at the NRC refer to this design.  Further “streamlining” of the NRC licensing process would jeopardize public health and safety, but it wouldn’t address the real licensing problem: premature submission of incomplete and poor-quality applications by the industry. 

So the question remains:  who actually benefits from all these proposed nuclear subsidies?  Follow the money.  The American people don’t benefit.  Truly renewable alternatives don’t benefit.  Future generations saddled with nuclear waste don’t benefit.  There’s a reason Wall Street has stayed away from nuclear.  Congress should not provide a lifeline to an inherently risky industry. 

[The author thanks Michele Boyd from Physicians for Social Responsibility for her significant contribution to this submission].

Tying nuclear provisions to a profoundly bad idea still leaves a profoundly bad idea.

The talk of the Beltway climate change debate these days is nuclear power. Suddenly a potential compromise has emerged to couple cap-and-trade legislation with provisions to advance construction of new nuclear power plants. But is it real, or just another mirage concocted by the industry’s fiercest opponents?

As of now, one can only speculate. But if last year’s debate on Lieberman-Warner is any guide, one should expect little of anything that matters for nuclear. During the debate, former Sen. John Warner (R-Va.) said, “We’re going to have a nuclear provision, I can assure you of that.” Democratic opposition assured that the final bill was nuclear-free.

Such opposition, of course, is unsurprising. Consider that some of the same senators who now talk of nuclear compromise have plainly identified themselves as staunchly anti-nuclear. During the debate on the McCain-Lieberman bill in 2005, for example, Sen. Barbara Boxer (D-Calif.) said, “Nuclear power is not the solution to climate change, and it is not ‘clean.’”

But let’s assume that the industry’s opponents have a “road-to-Damascus” conversion, and agree to support provisions that can encourage construction of new nuclear power plants, including, to name a few, further streamlining the regulatory process, support for reprocessing, and loan guarantees for new plants. These are steps that Congress can and should take. But we can’t forget the essential point: attaching them to a national energy tax doesn’t cancel out or eliminate a national energy tax.

The national energy tax in question, of course, is cap-and-trade, a misguided, flawed, and ultimately ineffective approach to addressing global climate change. Yes, let’s do things to support more nuclear plants, but those things should be detached from the Waxman-Markey, Kerry-Boxer, Massachusetts-California style energy tax. This tax will affect just about every good and service in the economy. It will mean higher electricity and gasoline prices, fewer jobs, and a less competitive American manufacturing sector. Again, tying nuclear provisions to a profoundly bad idea still leaves a profoundly bad idea.

Some assert that cap-and-trade, or setting a price on carbon, is the prime mover that will usher in the nuclear renaissance. Why, then, do we need nuclear provisions in cap-and-trade legislation at all? Indeed, this is the view of Sen. Tom Carper (D-Del.), chairman of EPW’s Subcommittee on Clean Air and Nuclear Safety, who said recently: "The [Kerry-Boxer] legislation as drawn provides enormous incentives for the generation of electricity from sources that don't create carbon. Nuclear is right there. So there'll be a lot of incentives, just from the way the allowance system will be set up." In other words, cap-and-trade by itself necessarily means more plants.

The Congressional Budget Office (CBO) has a different, more nuanced, view. According to CBO’s report, titled, “Nuclear Power’s Role in Generating Electricity,” the price of carbon must reach $45 per ton before nuclear becomes the technology of choice over natural gas. EPA’s analysis of Waxman-Markey shows that the price of carbon doesn’t reach that threshold until after 2040. Here is the translation: unless the price of carbon goes sky high, we won’t get enough nuclear plants built to meet the carbon reductions mandated in the Kerry-Boxer bill; and, if we don’t get enough nuclear plants built, the price of carbon will go sky high.

The “grand compromise” on nuclear power, which hasn’t even hatched yet, probably won’t have much of anything to encourage the nuclear renaissance. Yet even if it did, we can’t forget that whatever is proposed is being tied to a fundamentally flawed policy that will destroy jobs, raise energy prices, and weaken America’s energy security. Let’s pass an energy policy that makes nuclear power a strong component of our energy mix. But let’s keep cap-and-trade out of it.

What do you see as its strong points? Weak points? What programs, incentives or industries' interests are missing that should be included or were in the House-passed bill? What are the missing components that should be front and center when other committees mark it up? If there's going to be one issue that serves as this bill's bottleneck, what will it be?

(Updated at 1:03 p.m. on Oct. 14) How do you think this weekend's New York Times op-ed by Kerry and Sen. Lindsey Graham, R-S.C., changes the landscape for the bill? Environmentalists and industry representatives alike are calling this a game-changer; do you agree? Do you think this means more controversial issues, like offshore drilling and nuclear energy, are more likely to be included in the bill?

Senators Kerry and Graham’s recent opinion editorial, “Yes we Can (Pass Climate Change Legislation),” (October 11, 2009), and show of bipartisanship ignited thoughts that consensus on comprehensive climate change legislation this year might yet be possible. Admirable as that goal may be, we should not hold our breath.

Regardless of how likely or unlikely it is that Congress will pass climate change legislation this year or next, or the year after, one thing is clear – climate change and the challenges and opportunities it presents are real and will be with us for some time. 

Fortunately, the same can be said of natural gas. Natural gas gets short shrift in the national debate on how to address climate change even though it’s the cleanest of all fossil fuels, containing just one carbon atom. It’s abundant – study after study shows the nation easily has a 100 year supply, and that number is likely to grow. It’s domestic – 97 percent of the gas we use is produced in North America. And it’s efficient – over the past 40 years, while the number of natural gas customers has doubled, actual gas use and greenhouse gas emissions have remained essentially flat.

Even with those incredibly positive and unarguable facts to support it, natural gas too often takes a backseat to other traditional fuels that do not possess the immediate climate-change and efficiency benefits it does – it can benefit us right now, not tomorrow or 10 years down the road. Even senators Kerry and Graham have managed to ignore the benefits of natural gas and have instead stated emphatically (in their bipartisan opinion) that “The United States should aim to be the Saudi Arabia of clean coal.”

The United States should not aspire to be the Saudi Arabia of clean coal . . . or nuclear, or renewables, or natural gas for that matter. The United States should aim to be what it is, and what it is counted on being, a leader among nations. We have the wherewithal and the technology to use all of our many abundant resources and should not shackle ourselves to any singular fuel or aspiration.

The United States and Congress have a tough road ahead, one that is not likely to culminate in a Copenhagen solution. To meet the energy challenges we face now and in the future, we will need our best thinkers to develop the best plans—plans that make full use, and best use, or every fuel available, including natural gas, nuclear, renewables and even clean coal. Any climate change legislation we pass should be mindful of that.

I cannot understand how anyone could conclude that adding provisions for nuclear and offshore drilling will move the Senate closer to 60 votes.

 The Kerry-Graham grand alliance is only a game changer for those who practice suspending disbelief. Politics is supposed to be the practice of addition; not subtraction. I cannot understand how anyone could conclude that adding provisions for nuclear and offshore drilling will move the Senate closer to 60 votes. The environmental zealots in the Senate and their supporters are adamantly opposed to both nuclear power and more domestic oil production. So, from my perspective, the Kerry-Graham road will lose votes; not gain them.

Senator Graham deserves some credit for trying to find a path forward but an effective compromise cannot be built on a flawed foundation. Study after study has concluded that cap and trade is not a cost-effective strategy for addressing global warming and yet Congressional advocates ignore that reality while pursuing a clearly flawed policy; one that has not worked in Europe and won’t work here. 

Senator Graham bases part of his support on the need to address energy security which is an important national objective. We need more nuclear energy and more domestic oil production to reduce the growth in imports and create more jobs here instead of in foreign oil producing countries. But, cap and trade advocates don’t want more domestic production. Their objective is to mandate a reduction in fossil fuel use with little regard for the economic consequences. Their belief in that alternatives will magically appear is a triumph of wishful thinking over experience and reality.

The recent CBO analysis is just the latest to conclude that cap and trade will cost jobs and reduce economic growth. The American people are showing a growing resistance to the growth in government debt, the growth in government mandates, the growth in government spending and the lack of a return to robust economic growth. The prospect of adding $100-$200 in additional burdens on struggling consumers is almost certainly going to produce another backlash.

The solution to the climate change risk and the growth in greenhouse gas emissions is not to penalize production and economic growth, it is to get serious about policies that work, that promote job creation, and incentives to accelerate the decarbonization of our economy. There are proven measures to do that and one that keeps being tossed aside is a reasonable carbon tax that recycles revenues by reducing a more distorting tax.

An agreement between two Democrat and Republican leaders in the Senate that climate change is a real threat and the the United States must lead is a huge step forward.  it is the strongest point of the op ed by Senators Kerry and  Graham .  Some of the details on efficiency and renewables are also positive.

But the details that are likely to dominate the actual evolution of energy under the approach suggested in the Kerry-Graham op ed are not encouraging.  Indeed, they could undermine the very goal of greatly reducing CO2 emissions and also pose grave risks to the taxpayer.

The op ed would put nuclear power reactors and "clean coal" at the center of the new energy picture.  Senate energy legislation in the works contains essentially unlimited loan guarantees for nuclear.  Given new technology in natural gas production and skyrocketing natural gas reserves worldwide (see the New York Times front page article 10-10-2009), prices of natural gas are unlikely to rise to high levels again.  At prices of $7 per million Btu or less, nuclear will be uneconomical relative to combined cycle power plants, even with a carbon price of $35 per metric ton added on.  This will probably be true even if the federal government provides loan guarantees.  Since the nuclear industry already wants to build nearly three dozen reactors, each costing $6 billion or more -- but only with loan guarantees -- there is a strong likelhood that the financial disaster of the 1980s (Forbes called it the largest managerial disaster in business history) will be repeated.  Only this time, it will be the taxpayers who would pick up the tab for up to a couple of hundred of billion dollars of failed loans.

Nuclear plants are not being held up by licensing problems or overregulation.  They are being held up because they are too costly and they take too long to build, which makes them even more risky.  They are not being bult bbecause private capital does not want to finance them and is waiting for the taxpayer to pick up all the risk, while the private investors pick up all the profit.   Does this sound familiar?  It describes what has gone on with the Wall Street bailout over the past year.  Except this time a bailout is being promised in advance.

"Clean coal" is a contradiction in terms at least until carbon sequestration is securely demonstrated and until a site licensing procedure that will work can be put into place.  This will take 10, 15, 20 years.  I am not opposed to development of this technology, but we cannot count on it. 

The need for CO2 emission reductions is over the next decade.  Only efficiency and renewable energy sources can accomplish this.  Wind and solar projects take from sixx months to 2 to 3 years.  Natural gas can serve as a bridge fuel to a fully renewable energy system, especially in the context of serious efficiency improvements. The Waxman Markey bill has some excellent provision regarding buildings.

We don't need a Saudi Arabia of "clean coal."  We already have it in renewables.  The wind energy potential of the United States is about equal to all the oil production in all OPEC coutnries.  Solar is an even greater resource.  For those who doubt that the intermittency problem can be overcome, they can visit the website of the National Renewable Energy Laboratory, where a baseload wind energy system is outlined.  It depends only on commercially available technologies.

Bottom line; The announced intentions are good. The goal of reducing CO2 by 83 percent by 2050 is very good.  The details are not promising.  Indeed, the financial demands of the nuclear industry could suck all the financial air out of the room and leave efficency and renewables marginalized.  There is a real world example of that in Finland right now.

Solution: Keep the CO2 reduction goal for 2050, strengthen it at least somewhat for 2020.  And become a leader in a renewable, efficicient smart grid energy system.

Providing a disproportionate amount of subsidies for natural gas use could distort energy markets and undermine investments in cleaner technology.

The Union of Concerned Scientists (UCS) and others who want Congress to take action to curb global warming were pleased to see that the Kerry-Boxer bill has a stronger emissions reduction target than the House bill. That target -- cutting emissions 20 percent by 2020 -- shouldn’t be weakened. Short-term emissions reductions are going to put us on the right path to achieve the deep cuts we need to avoid the worst consequences of climate change. This target will send a strong signal to companies and homeowners that it’s time to invest in clean energy technologies, which can spur economic expansion and job growth. Moreover, a strong short-term target would give the United States more credibility and greater influence on international climate negotiations.

Another provision that would help bring developing countries on board an international agreement would set aside allowances under a cap-and-trade system to fund projects curbing tropical deforestation. A section in the Senate bill cites the goal of reducing emissions from deforestation, but it doesn't spell out how many allowances would be set aside for this purpose. The Senate should ensure tropical deforestation receives at least 5 percent of the allowances under the bill, as the House did in its version. Because tropical forests sequester large amounts of carbon, they are key to stabilizing our climate. Protecting forests will serve the interests of the United States and the world. The bill should also include provisions to aid nations with adapting to climate change and developing their own clean energy sources.

There are other provisions in the Kerry-Boxer bill that lawmakers should reconsider. For example, the bill would give large taxpayer subsidies to coal carbon capture and storage (CCS) projects over the next few years, before the technology is likely to prove its worth. The CCS subsidies should go to a limited number of demonstration projects to test the technology’s commercial viability so as to not shortchange proven low-carbon energy sources. 

The bill also includes two new programs that would benefit the natural gas industry. These provisions are not well fleshed out. Natural gas power plants will already benefit from a carbon price. Providing a disproportionate amount of subsidies for natural gas use could distort energy markets and undermine investments in cleaner technology. The natural gas provisions should be more clearly defined in terms of their scope and intent and should be more tightly focused to ensure a smooth transition to a clean energy economy.

Finally, the way the bill defines how the federal government should incorporate the latest climate science should be improved. The Senate bill's “science review provision,” like the one in the House bill, would require the Environmental Protection Agency to review the latest climate science and the National Academy of Sciences to review technological developments and make recommendations to the president. If the NAS finds that further emissions reductions are needed, the president can propose new legislation to Congress. But this provision should add a requirement for Congress to quickly respond to any such legislative proposals.

For more information, see a UCS summary of key provisions in the Kerry-Boxer Clean Energy Jobs and American Power Act and detailed comparison (pdf) of the Senate bill with the House’s American Clean Energy and Security Act.

 For the 4 pillars of Kerry-Graham - revitalized nuclear, the Saudi Arabia of clean coal, border taxes, and price collars - the beauty is in the details.  For the first two, the question is how much base load capacity do we really need if financial incentives are changed from rate base to demand management?  For the third, the concept of a globally coordinated border tax might avoid the trade war that a unilateral one risks.  But the fourth pillar is where details matter the most - the dynamic process of a co2 market driving investment to find the cheapest abatement alternatives could easily be neutered by a low cap price where risk-averse emitters pay-to-pollute rather than invest-and-abate (and then no green jobs either).  A fixed supply of Coupons, issued upfront, is an alternative to a price cap that would let the co2 market perform its raison d'etre (www.nicholas.duke.edu/institute/policy_brief.09.14.pdf ).

I find it hard to believe that Charles Drevna, president of the National Petrochemical & Refiners Association, really believes it’s energy reform that threatens our national security. As Sen. John Kerry (D-MA) and Sen. Lindsey Graham (R-SC) detailed in their op-ed in Sunday’s New York Times, it’s our energy status quo that’s the danger. The senators’ collaboration is a clear signal not only that clean energy & climate action are above partisan politics, but that the Senate can and will pass the Clean Energy Jobs Act this year.

That message is being echoed in cities across the country this month. A veterans group called Operation Free has launched a national bus tour in support of clean energy & climate action. If we can break our dependence on dirty oil, we'll free our foreign policy from ties to the hostile regimes that feed our oil addiction.

The Kerry-Boxer Clean Energy Jobs Act will move America forward in the new clean energy economy, create new jobs and help ensure our country is a leader in developing and selling clean energy technology around the world. Senators supporting the bill have a strong majority of Americans behind them, asking for comprehensive climate and clean energy action now. Americans are ready for a new direction that will repower our economy with clean energy jobs, break our dependence on oil and reduce climate change pollution.

In the findings section of S. 1733, Senators Kerry and Boxer state that “Creating a clean energy future requires a comprehensive approach that includes support for the improvement of all energy sources.” We could not be in stronger agreement. There simply is no silver bullet or one-size panacea to the dilemma before the nation and this Congress, and Senators Kerry and Boxer are to be applauded for recognizing this at the outset.

Just as America is a diverse nation with varying energy needs, demands, infrastructure and resources, any effective legislation that addresses climate change and its many challenges must be diverse and flexible in its approach.

Natural gas currently meets 25 percent of America’s energy demands and is abundant and available now to meet our energy needs. It has also been leading the drive toward energy efficiency and conservation for more than 40 years, because while the number of natural gas customers has increased, actual gas use and greenhouse gas emissions have remained essentially flat.

Natural gas is already the cleanest fossil fuel—it contains just one carbon atom—and combined with new, highly efficient natural gas technologies, natural gas used directly in America’s homes and businesses is the easiest and fastest way to achieve a low- or zero-carbon option. Natural gas should be used as a primary tool to improve environmental quality and improve energy efficiencies in a host of applications.

To that end, AGA proposes a programmatic approach to reducing emissions – one that is focused on appliance efficiency standards, building codes, and utility-supported conservation/efficiency programs –a proven track record for residential and commercial natural gas customers.

Such an approach is only directed at those factors over which natural gas utilities and their customers have some control.  AGA asks  that Congress recognize natural gas and its many attributes for what they are and support a programmatic approach rather than imposing the higher costs and greater uncertainties that would result from a cap-and-trade approach that attempts to force fit us all into a one-size fits all that really fits few.

The Kerry-Boxer bill avoids the overbroad changes to the Clean Air Act that occurred in the House bill.

The Clean Energy Jobs and American Power Act is the right step at the right time. It will help us revive the economy, reduce carbon emissions before it’s too late to avoid the worst impacts of global warming, and create jobs when we need them most.

The bill will no doubt change as it moves through the Senate. But it is starting off well.

The bill’s target of reducing emissions by 20 percent by 2020 is slightly stricter than the House bill calls for, but still eminently achievable. A recent NRDC analysis shows that the new 2020 target would only increase allowance prices by 6 percent over the modest prices estimated for the House bill. 

I am pleased that the Kerry-Boxer bill retains important environmental safeguards to reduce the risk that increased reliance on bio-energy will inadvertently cause widespread deforestation and other ecological damage. This is a significant improvement compared to the provisions that were strong-armed into the House bill at the last minute. Still, a better solution for the climate would be to also cover the life-cycle emissions related to bio-energy within the pollution cap.

The Kerry Boxer bill avoids the overbroad changes to the Clean Air Act that occurred in the House bill: it retains performance standards and certain other tools in the existing law.

The bill also takes smarter steps to ensure market stability, which will protect consumers. Current analysis shows that allowance prices will cost about $10 to $15 in 2012 then rise gradually. But models don’t always reflect the volatility of real markets. Both bills have a pool of allowances set aside so if prices reach a certain level above what was expected, you can buy additional allowances out of the reserve and that will put downward pressure on prices. The Senate bill is much clearer than the House version on this point. In the Senate bill companies can gain access to the reserve pool of allowances if the carbon price reaches $28 in 2012.

We have concerns that a merchant allocation will result in windfall profits, similar to what happened in the European Union.

This is a tough question to answer right now because we know the bill will change as it goes through the legislative process. Chairman Boxer has already indicated she will produce a Chairman’s mark, so much of what we have seen thus far can and will likely change.

That said, we see plenty to like and dislike. And, of course, there are lots of unknowns. As I’ve mentioned before in this forum, if Congress pursues a cap-and-trade policy, and if it determines to allocate rather than auction emission credits during a transitional period, any no-cost allocations within the electricity sector should go exclusively to rate-regulated Local Distribution Companies (LDCs). In fact, NARUC just released a Frequently Asked Questions document detailing why this is such an important policy [http://www.naruc.org/Publications/FAQ1_Consumer_Benefits.pdf].

We have opposed the allocation of any allowances to merchant generators who have no obligation to return allowance benefits to consumers and could instead increase costs for consumers in a cap-and-trade system. We also have concerns that a merchant allocation will result in windfall profits, similar to what happened in the European Union.

As of now, Kerry-Boxer includes allocations to both LDCs and merchant generators, but does not designate how much each sector would receive. Until we see those details, it will be hard for NARUC to reach any conclusion about the bill. Interestingly, and perhaps tellingly, the draft includes language giving the Environmental Protection Agency and the Federal Energy Regulatory Commission authority to implement new rules for merchant generators if they find evidence of windfall profits. This, of course, begs the question: If there is any risk of windfall profits at consumer expense, why allocate to merchant generators in the first place?

In addition, we are pleased that the draft contains House-passed language establishing a corporation to research and develop carbon-capture and sequestration technologies. We are also encouraged by the recent editorial penned by Sen. Kerry and Sen. Lindsey Graham that stressed the need for nuclear power and a price collar, both of which will reduce the costs of compliance if the legislation is passed.

Still, we have great concerns about the workability of the legislation. As I stated in my last post, this draft and the House-passed bill include language significantly limiting how State commissions can distribute LDC allowance proceeds. Both bills require the benefits to be shared “ratably” and “equitably” within and among consumer classes. They also appear to require that industrial and residential consumers receive a direct cash rebate from allowance proceeds if it is proven that the cap-and-trade system caused their energy bills to increase.

These provisions are problematic because they foster uncertainty and potential litigation. Just who will determine what “ratably” and “equitably” mean, and how will that impact the decision to issue flat rebates when the industrial and residential consumers demonstrate that their power bills have increase? The Senate needs to think carefully before handcuffing State regulators’ ability to ensure that allocation proceeds truly benefit consumers.

Well, there sure are a lot of placeholders in this thing. But on balance, the Kerry-Boxer climate bill provides as good a starting point as any for the imperfect wrangling, posturing, and dealmaking ahead. Whether that wrangling leads to a good bill will depend, then, on how those blanks are filled—and especially, on how the Senate deals with clean energy innovation issues.

Basically, the Senate outline looks a lot like the Waxman-Markey bill that passed the House earlier this year, for better and worse.  

Like the Waxman-Markey legislation, the Senate version sets emissions targets (a little stricter than the House standard with a 20 percent emissions reduction from 2005 levels required by 2020 and 83 percent by 2050). Like Waxman-Markey, Kerry-Boxer proposes a pricing and emissions trading mechanism (now called, euphemistically, a Pollution Reduction and Investment tool, with revenue allowances left undetermined).  And on those points much attention will need to be focused as the details come in.

But what matters almost more than those issues—in my view at least—is how extensively and smartly the Senate piles onto energy innovation. 

On this front, the Kerry-Boxer bill tracks—albeit with few details--both the Waxman-Markey proposal and the Department of Energy’s FY2010 budget request by proposing the creation and funding of a string of energy innovation hubs, a concept informed by an influential MPP paper. Along these lines, climate legislation again appears poised to call on the DOE secretary to establish a new program to competitively award cap-trade revenues to eight innovation hubs--each with a specific technology focus, including renewable power generation; building and transport energy efficiency; smart grid development; more efficient energy transmission and storage; advanced sustainable materials; and water security. All of which is important and good. 

But there is work to do: As passed by the House, Waxman-Markey invests far too little in energy innovation, largely because so many of the bill’s carbon-emission permits were given away free to ensure its passage and mitigate its impacts on carbon-intensive activities and places. Assuming an average pollution allowance price of $15, therefore, the House bill will generate just $9 billion annually for technology innovation activities, broadly defined, as notes an analysis by the Breakthrough Institute. That sounds like a lot, but in fact, those numbers pale in view of that fact that my group at Brookings has called for the nation to invest as much as $20 to $30 billion per year on energy R&D alone even as President Obama has called for investing $15 billion annually. And the House bill’s numbers pale further given the fact that cap-trade revenues represent the nation’s best shot at sufficiently funding game-changing innovation in the face of the punishingly tight budgets that will prevail for the foreseeable future. All of which means it’s up to the Senate to change the dynamic and increase those numbers. Specifically, the Senate needs to about double the House’s clean energy innovation commitment. 

In view of that, then, Sens. Kerry and Boxer deserve credit for insisting upon the presence of several crucial placeholders for innovation in their bill. However, the future quality of the ultimate bill depends heavily on how well the senators and their colleagues fill in the blanks on innovation. Such specifications will spell out whether or not the bill delivers on the most crucial use of cap-trade money of all—investments to catalyze a radically cleaner energy future.

The proposal’s emission reduction timetable is even more onerous and stringent than that of the House-passed legislation.

H.R. 2454, the Waxman-Markey climate change legislation that narrowly passed the House of Representatives in June, represents policy that directly threatens our nation’s economy, our energy security, and American jobs. While the flaws in the House-passed measure are numerous enough to qualify the bill as nothing short of an abject policy failure, unfortunately the authors of the climate legislation proposed for consideration in the Senate chose not to learn from H.R. 2454’s significant shortcomings; nor did they seem to heed the considerable – and highly merited – backlash from consumers after the bill’s House passage.

Among its numerous flaws, the Waxman-Markey legislation poses particular challenges for domestic refiners through its emissions allocation scheme. The bill grants refiners a mere 2.25 percent of allocations, yet under the legislation’s program, domestic refiners are accountable for nearly half of emissions covered under the bill – including those from consumers’ use of the fuels refining businesses produce. 

While the Kerry-Boxer bill’s allocation structure remains as yet unclear, the proposal’s emission reduction timetable is even more onerous and stringent than that of the House-passed legislation. In addition, the Senate proposal fails to harmonize existing federal laws specifically by removing the preemption of New Source Performance Standards for capped sources. This means that large facilities will be subject to both the emissions cap and EPA NSPS regulations.

These proposals also threaten to make the United States more reliant on imports of refined fuel products, as domestic refiners – who already face stiff competition from overseas producers – would be subject to such costly, burdensome regulation that many may be faced with the prospect of reducing their operations or even closing their facilities. At the same time, cap-and-trade would ensure both the export of American jobs and increases in consumer costs economy-wide.

The Senate is expected to debate the Kerry-Boxer bill soon. With our economy still in the throes of a severe recession and our nation’s unemployment levels at their highest since the early 1980s, Senators will likely soon be faced with a choice critical to our economic recovery and energy security. While Kerry-Boxer remains short on many policy specifics, what’s clear is that the legislation promises to undermine domestic manufacturing, our economy, American jobs, and our nation’s energy security. Let’s hope that in considering it, Senators will put rational policy ahead of political considerations and ensure the defeat of this harmful, misguided legislation.

Our chief concern is that Kerry-Boxer will advance the same complicated, grossly inequitable provisions as Waxman-Markey, threatening to eliminate millions of jobs, including some of the 9.2 million supported by America’s oil and natural gas industry, and risking sharply higher energy costs for farmers, truckers, the airlines, railroads, and anyone else who relies on petroleum fuels, including most American families and businesses.

According to the U.S. Energy Information Administration, Waxman-Markey could increase gasoline and diesel prices to above $5.00 a gallon and raise household energy costs by as much as $1,870.  A study by EnSys Energy found that in 2030 Waxman-Markey could cut U.S. refinery production by 25 percent, slash refinery investment by $90 billion, and double imports of refined products, such as gasoline, as a percentage of fuel use.

While Kerry-Boxer may eventually include provisions that encourage greater use of clean-burning natural gas or even, as has been recently discussed, increased access to America’s oil and natural gas resources – both distinct positives – the legislation falls short in many other critical areas.  For example, it would discourage the use of international offsets, which are an important mechanism for reducing emissions and costs.  It would fail to pre-empt regulation of greenhouse gases under other laws, which is an invitation to inefficiency and higher costs.  And it would exclude U.S. refiners (and only U.S. refiners) – the nation’s most energy-intensive manufacturing industry according to the U.S. Department of Energy – from any yet-to-be-defined programs designed to address international competitiveness issues for energy-intensive industries.  

These deficiencies are in addition to the prospect of adopting the same unbalanced approach for distributing emission allowances as in Waxman-Markey, which is the primary factor for the sharply higher petroleum fuel costs projected by multiple studies.

Public opinion polling shows that Americans are skeptical about Waxman-Markey.  The similar Kerry-Boxer bill is unlikely to be better received.  Despite proponents’ spin, this legislation would be bad for jobs, for consumers and for energy security.  We can do better.

The best thing about Kerry-Boxer bill is that it has rekindled the discussion in the Senate in a way that might actually create some movement where things were otherwise stalled - including the possibility of bipartisan participation.  The largest challenge to forward movement right now has nothing to do with this bill itself, and everything to do with current priorities, specifically healthcare.

While we’re busy comparing a bill with a 17% reduction against a bill with a 20% reduction, and weighing one tactic against another, the real question is…”are we even in the right neighborhood?”

To have a material impact on CO2 emissions, in the urgent time frame needed, we need to use all mechanisms, public and private, to rapidly accelerate the penetration of energy efficiency and clean energy solutions - at scale.  Having this bill introduced now, complete with its placeholders, has established a launching-off point to be improved upon.  I’m sure we will all be using our influence and advocacy over the coming weeks to help further shape this into legislation that will be good for our country and our planet.

At this point, we can only characterize this bill is a major step backwards from the House version.  It has major segments concerning energy intensive industries missing, and calls for a 20% absolute emissions reduction by 2020. Clearly, a 20 percent emissions reduction by 2020 places a higher burden on our economy in general (compared to 17% in the House bill) and this burden would be particularly acute in the manufacturing sector.   For example, does a 20% reduction (vs. 17% in the House) not place even more cost pressure on energy prices? The bill lacks specificity in the energy intensive provisions to give us any assurance that the competitive position of U.S. manufacturers will not be negatively impacted.

Meanwhile, there is only a placeholder for an as yet unwritten border adjustment provision that will be critical to preventing the loss of U.S. jobs and transfer of manufacturing from the United States to nations where the cost impact of climate policy, if any, is much less.  Much more needs to be done to make this bill acceptable, and we will be working to address these issues with those Senators who have expressed their commitment to ensuring a level playing field for American manufacturing. 

The United States must start somewhere and the best thing about the Kerry-Boxer bill is that it does not exempt all the effective provisions of the Clean Air Act as did the House bill.   But the overall greenhouse pollution goals absolutely pale in comparison to what the best available science tells us (i.e., get atmospheric CO2 to 350 ppm or less).  So while some environmentalists and analysts are cheering the 20% cuts by 2020 from 2005 levels, the number should be at least 40% cuts in 2020 from 1990 levels.  Will this be easy?  No.  Must it be done to prevent the world from changing dangerously and radically?  Yes.  My read of history is that the United States can accomplish whatever it puts its collective mind and heart into.  The challenge is upon us, and the massive economic benefits of changing our current energy ways is clear.  Kerry-Boxer is a baby step, but we need to grow up and face the reality that nibbling around the edges will not work in the long run.  

We currently do not possess the technology or energy alternatives to make absolute emission reductions while meeting the aspirations for a growing standard of living.

Just as pigs can't fly and houses built on sand don't last long, there's no quick fix for legislation stemming from flawed concepts and unrealistic mandates. Though the Kerry-Boxer bill may contain several individually good ideas, its overall approach to climate policy is fatally flawed.

Time has shown that the cap and trade system of the Kyoto Protocol and the EU trading system does not effectively reduce emissions. Hard targets may be seen as a sign of bold leadership, but in reality they're what Frederic Hayek termed the "fatal conceit." Neither international bureaucrats nor politicians can possess the knowledge necessary to set accurate emission reduction targets a decade or more in the future. The problems witnessed in the EU trading system have demonstrated that there are too many unknowns are further out in time too many unknowables.

Rife with industry exemptions and exploitable loop holes, Europe’s Emissions Trading Scheme (ETS) has led to the flight of capital to other countries, higher energy prices for households, and rampant cheating -- all while falling short of the EU-15's targets and commitments. One of the reasons for these failures is that energy, economic, and political realities have been stronger than acting on the rhetoric of climate orthodoxy.

The notion that emissions can be reduced 20% below 2005 levels by 2020 lacks any connection with reality. For a point of comparison, just look back to 2008; it has taken the worst recession in decades to reduce our annual emissions by more than 2% That's a sobering reminder that deep reductions in emissions are inconsistent with a growing population, the economic gains expected by the American public, and energy and technology realities.

The Congress and the Administration would serve the American people and the global community better by admitting what most serious people recognize: we currently do not possess the technology or energy alternatives to make absolute emission reductions while meeting the aspirations for a growing standard of living. At best, the growth in emissions can be slowed until such time as low and no carbon alternatives to fossil fuels can be developed and made commercially available.

In 2005, the proposed Hagel-Pryor energy legislation laid out a plan for technology development and deployment that offered a great deal of promise. Some of their ideas were incorporated in the Energy Policy Act of 2005. I think that the Senate would do better by examining the provisions of that legislation to make sure that they have all been implemented and working as envisioned and then reconsider the other provisions of the Hagel-Pryor bill before venturing further down the road they are on.

Instead of digging a deeper hole with flawed and unrealistic notions of how to address the climate risk, the Senate should stop digging and focus on actions that have a strong scientific and factual foundation and a good likelihood of working. Actions that impose large costs on the American economy and taxpayer and enrich traders and rent-seeking special interests don’t meet that objective.

Editor's Note: This week Sen. Lisa Murkowski, R-Alaska, is providing the question and joining in the discussion as the Senate begins consideration of the Kerry-Boxer climate change legislation.

Discussions over how to mitigate climate change's worst effects -- which policies we can and should implement -- have set off one of the most important and most complex debates to take place in Congress.

Only one idea, a carbon cap-and-trading scheme, has received significant attention on Capitol Hill. And yet, serious doubt has been cast on such a system's ability to keep energy affordable and our economy strong while still achieving substantive emission reductions. Other policy options -- a tax on carbon, massive investment in advancing clean energy technology, even geo-engineering -- have largely been ignored.

I recognize that time is short and that action is needed soon. But at what point did we decide cap-and-trade was the most effective way to address climate change? Setting politics aside, are there other approaches capable of achieving the same results at lower cost and with greater regulatory efficiency? Would the debate over climate policy benefit from an attempt to re-evaluate our options?

-- Lisa Murkowski

We are wise to build off the proven track record of cap-and-trade rather revisit unproven options.

I share Senator Murkowski’s concern that we find a climate solution that triggers a strong investment in clean technologies and reduces CO2 emissions at the lowest possible cost. I believe that a properly designed cap-and-trade system does exactly that.

Congress’s interest in cap-and-trade stems from the success of federal, state and local trading programs that have been in place since the 1980s. These programs overall are well known for reducing emissions much faster and more cheaply than command and control programs. I agree with Senator Murkowski that time is short. That’s why I think we are wise to build off the proven track record of cap-and-trade rather revisit unproven options.

To be clear, however, cap-and-trade alone is not the solution to effectively accomplishing our energy and climate goals. Our success will rely on a set of actions that include a price on carbon emissions, domestic oil and gas resource development, alternative energy development including nuclear, reduced reliance on fossil fuels, investment in and development of clean technologies, and incentives for developing countries to lower emissions.

Focusing on cap and trade; there are four key advantages to a cap-and-trade program, two of which speak to Senator Murkowski’s important concerns regarding affordable energy, a strong economy and the deployment of clean technologies.

First - certainty: A cap-and-trade program provides the kind of regulatory certainty critical to businesses and industry. It sets long-term and near-term environmental targets. This allows companies like Shell to begin planning how we will reduce emissions to reach those targets most efficiently. The more time we have to plan against certain targets, the more innovative and cost effective we can be in meeting those goals.

By contrast, a carbon tax is largely a guess at a CO2 price that Congress thinks will effectively reduce emissions.  If the tax isn’t high enough, emissions are not reduced and Congress has to increase the tax. If the tax is too steep, the economy suffers and Congress has to decrease the tax. In a cap-and-trade program, the free market drives the carbon price, and as such, the carbon price reflects the inevitable growth and contraction of the economy. With a carbon tax, Congress may have to rush in to lower a tax during a recession or raise it during economic growth. Congress fiddling with tax levels makes it tough for businesses to plan strategies and choose technologies, not to mention it’s an inefficient use of Congress’ time when other pressing issues face the nation. More troubling, however, is the notion that reaching critical environmental goals becomes time consuming guesswork on an issue we can ill afford to waste time in addressing.

Second – lower cost: Lower cost is an inherent attribute of a cap-and-trade system. Fundamental in a cap-and-trade system is the flexibility for covered entities to choose the lowest cost pathway to compliance while still guaranteeing that an environmental target is met. A carbon tax can’t do that. Shell continues to advocate for a cap-and-trade system because we believe it reduces emissions at the lowest possible cost to consumers and the economy.

Third – innovation: I share Sen. Murkowski’s urgency regarding the development and deployment of clean technologies. Global deployment of key climate technologies is critical to achieving our environmental goals. And while government investment in these technologies is critical, government spending alone probably won’t be enough to stimulate the level of investment needed to commercialize known technologies and stimulate investment in new yet unknown technologies.

Shell is particularly focused on the development, demonstration and deployment of carbon, capture and storage (CCS.) We believe global deployment of commercial-scale CCS by 2030 is necessary to meet the steep 2050 environmental targets. One commercial-scale CCS project is expected to cost in excess of a billion dollars. Hundreds of such projects are needed around the world. USCAP calls for 72GW of such projects in the United States alone (equivalent to 72 large power plants.)

Governments need to select the policies that encourage businesses to invest their capital in clean technologies – technologies that will stimulate the economy and create jobs now and well into the future. An emissions cap creates the incentive and the trade reduces the cost of compliance sufficiently to maximize investment.

Fourth, a cap-and-trade program provides the capability for linkage with other nation’s trading systems to establish a globally compatible carbon markets. This is important because climate change is a global issue and linking carbon markets through cap and trade can not only reduce the cost of achieving environmental goals but establish a globally recognized carbon price important to stimulating action on reducing GHG emissions and the investment in technologies needed to do so. To this end, I believe it’s particularly important that we plan towards the development of a North American trading scheme, ultimately joining efforts with our closest trading partners to reduce emissions at the lowest possible cost to all three of our economies and strengthening our existing trade ties.

The upcoming United Nations Climate Change Conference in Copenhagen is good opportunity to look for tangible progress in developing a global carbon market as a way of putting a price on greenhouse gas emissions.

The world needs diverse energy supplies and with energy demand continuing to grow, we should focus on legislative efforts that help us produce the diverse energy supply we need, while pursuing a CO2 reduction pathway.  Call me an optimist, but I think it’s possible to do both.

Senator Murkowski raises the right question - whether cap and trade is the best policy. The answer is no -- there are much better options than cap and trade. A good example is a sector approach that tailors a combination of incentives, and possibly mandates, coupled with technology development that is tailored to reflect the characteristics of each industry. A workable climate/energy policy should put a priority on the removal of barriers to accelerating usage of “existing” energy efficient products and technology. Common sense policies like removing barriers to greater use of highly energy efficient CHP and recycled energy should be a top priority. Policies that accelerate capital stock turnover are the key to not only quickly reducing GHG emissions, but improving productivity, exports and jobs. And, by the way, these are the policies that are desired by manufacturing companies around the world – not cap and trade. A critical question that should be asked first is “does the policy increase or decrease capital investment?” For the manufacturing sector, cap and trade, at least in the versions expressed within proposed legislation, encourages companies to either delay capital spending or to increase capital spending in other countries. Cap and trade adds so much uncertainty that it makes the U.S. a poor place to invest relative to other countries. Cap and trade makes each increment of increased production more expensive – hardly a model for long-term economic growth. 99% of all manufacturing CEOs will tell you that international competitiveness concerns cannot be satisfied through legislation. Our competition, the global manufacturing sector, is too smart and nimble to be boxed in by U.S. legislation. And then there is the issue of reciprocity...

Kevin Knobloch is away. Lexi Shultz, Deputy Director of the Union of Concerned Scientists’ Climate Program is the author of this response.

In response to Senator Murkowski’s follow-up, I’d like to point out that adopting a number of clean energy policies along with an emissions cap is the right strategy to maximize emissions reductions and deliver energy and gas cost savings to American households and businesses.

The Union of Concerned Scientists’ 2030 Blueprint found that an emissions cap plus a suite of complementary energy and transportation policies -- such as energy efficiency standards, renewable electricity standards and clean car standards -- would help meet a cap set at 56 percent below 2005 levels by 2030 while saving consumers and businesses $1.7 trillion in energy and transportation costs. The study also found that this policy suite delivered bigger savings than a cap-and-trade program on its own.

Policies targeting efficiency and renewable energy work. They have a long track-record of delivering savings to consumers, creating jobs, driving down emissions and improving public health. California’s energy efficiency standards have kept electricity costs in the state down over the past several decades, even as its economy has greatly expanded. Money saved on electricity was invested in other areas of the state’s economy, generating an estimated 1.5 million jobs. And twenty-nine other states and the District of Columbia have adopted renewable electricity standards that are a key driver in the recent record growth of the U.S. renewable energy industry. A strong national renewable electricity standard can build on these state efforts, helping the industry overcome market and institutional barriers while creating additional jobs and driving economic development. Meanwhile, new car and truck standards from the Obama administration will cut emissions by the equivalent of taking 32 million of today’s cars and trucks off the road while saving consumers $26 billion in 2020 alone (based on a gas price of $2.25 per gallon).

The American Council for an Energy Efficiency Economy found that by 2030, energy efficiency provisions in Waxman-Markey could create more than 600,000 jobs and deliver nearly $500 in annual household savings — all while reducing nationwide carbon emissions 8.6 percent.

Efficiency and renewable energy policies aren’t an added complication; they are necessary pieces of the puzzle. Yes, it’s a big puzzle. But climate change is the transcendent issues of our time – affecting our health, our environment, national security and the way we use energy. Big, complicated problems need big, ambitious solutions.

From the rising seas lapping at the coasts of Florida to the wind-battered shores of Shishmaref, Alaska, Americans are demanding action to address dangerous climate change caused by our dependence on coal and oil. We must rise to this challenge with every tool at our disposal. Switching to a clean energy economy will save us from the worst effects of climate change and make our country stronger, healthier and more prosperous.

The developing countries (elephant one) have not been mentioned once. Yet until July, the key argument for a U.S. cap was its ability to lead China and India into a global system and thereby cap global emissions. That agenda has failed. In fact, as I’ll explain, it has backfired.

Also not mentioned, the U.S. negotiating strategy for Copenhagen shows the same bias Senator Murkowski notes for domestic policy. U.S. negotiators never mention a carbon tax, only carbon caps. But of all the reasons explained in the posts below, only one can explain the U.S. aversion to carbon taxes in other countries. So that one common reason is likely the real answer to Senator Murkowski’s question.

Finally the two most prestigious U.S. economists to focus on climate policy go unmentioned—they are elephant number three. Not only have their views gone unmentioned in this room, but also in every environmentalist’s blog and academic paper arguing for cap and trade that I have had the pleasure to read in the last few years, and these number in the hundreds. There is something unhealthy about a debate that so assiduously ignores the most brilliant advocates of a carbon tax, both of whom are striving for a strong climate policy.

The most telling clue to the solution of the Murkowski mystery is elephant number two, our lopsided negotiating strategy. The same people who have argued strenuously against a carbon tax for twenty years are in control of the U.S. negotiating strategy that so carefully avoids offering China and India the option of a carbon tax. Is this because “tax” is a four letter word in India and China? Hardly. Instead, “caps” insult the populations of Indian and China, and caps have been ruled off the table by them with great vehemence for fifteen years. In fact China is even now considering carbon taxes in spite of their dismissal by U.S. negotiators.

So, to shift the focus of the Senator’s question for a moment, why has “only one idea, a carbon cap-and-trading scheme,” received significant attention by our negotiating team? Given the dire consequences of this mistake and the early warning from Joseph Stigilitz that a cap stood no chance and that a carbon tax avoided the problems of a cap, this presents an even greater mystery.

None of the tactical or political reasons given in these posts apply to negotiations, so what remains is the one real difference between a cap and a tax. Both put a price on carbon, and both have their effect only through that carbon price. So, the real difference is that a carbon tax is a pure market approach that simply prices carbon—no more and no less (as first elucidated by Pigou in 1922).

But cap-and-trade includes a huge dollop of command-and-control tossed on top of a carbon tax. I’ll wager this difference also solves the Murkowski mystery. Only cap and trade is considered because only cap and trade has a cap. That’s why the environmentalists and “card-carrying environmental economists,” like Robert Stavins, have stuck by cap and trade for twenty years. As Stavins told us in 1988, “Permits are preferable in many cases, as they can start with a firm decision as to how much pollution is the limit.” In 2008 he listed “three criteria that stand out.” The first was “environmental effectiveness,” which “considers the certainty with which a policy will achieve emission or other targets.” He concluded “a cap-and-trade system can achieve emission targets with high certainty because emission guarantees are built into the policy.” He believes that only a cap, and not a tax, can achieve his first criteria for climate policy.

That is why a tax has always been ruled out by those now guiding U.S. policy. It passes economic muster by pricing carbon, but it does not pass environmental muster because it does not command compliance with the ultimate control—the cap on emissions.

This also explains why economists usually prefer a tax. They cannot approve of the economic implications of a cap. First, it implies that for emissions below the cap, emission reduction has no value. Second, it implies that when emissions are above the cap, we are willing to pay any price to reduce emissions. Normal economics is highly skeptical when it comes to such rigid black-and-white judgments, especially when they fly in the face of all the findings of the U.N.’s IPCC concerning uncertainty. Harvard economist Richard N. Cooper seems incredulous, noting that “well-ordered societies do not generally attach infinite economic value to any single objective.” (See page 19.)

With these clues from the second elephant, it becomes clear why the other two elephants have not been mentioned. Even though, as Senator Murkowski notes, the primary goal of national climate policy should be to achieve an effective global policy, that can no longer be mentioned when defending caps, because failure on this front has now been admitted by our chief negotiator, Todd Stern. (“We’re not talking a national cap for China.”). China and India are not having caps, and that means caps cannot “achieve emission targets with high certainty” in the only context that really matters, global emissions.

In fact, the distaste for caps by developing countries has driven them to Nationally Appropriate Mitigation Actions (NAMAs), which are now all the rage but which are, unfortunately, the antithesis of carbon pricing. Environmental economists should be upset by this because they really do see carbon pricing as important.

The two most prestigious U.S. economists working on climate policy cannot be mentioned because one of them, Joseph Stiglitz, predicted the failure of caps as a global policy years ago and for exactly the right reasons. The other economist, William Nordhaus, explained why caps would likely be disastrous as a global system. No one can question Stiglitz’s seriousness about climate change. And Nordhaus has run his climate-change-policy model, DICE since 1990 ("Mankind is playing dice with the natural environment”). Both economists focus on developing countries as the main reason caps will not work as a global policy. And only a global policy can meet this challenge.

So to answer Senator Murkowski, we never did decide cap-and-trade was most effective—not if “we” includes the top U.S. economists, the favorite climate scientist of environmentalists, the inventors of cap and trade, or the majority of the economics profession. But if “we” means the driving forces behind current policy, the answer is that they decided in the late 1980’s, and it’s time to rethink.

But what about the claim that cap-and-trade is the best domestic policy, and a carbon tax would be a disaster like Clinton’s BTU tax? First, the Waxman-Markey bill did just a hair worse in the house than the BTU tax did. Second, the only people who still don’t know that a cap is a tax are pro-environment and not allergic to a tax. But what makes a carbon tax unpopular is that the pro-cap establishment refuses to advocate the economically prescribed, fully-refunded tax of the type invented by Pigou in 1922 to curb pollution. Notably, President Obama’s proposal came closest to the full refunding recommended by economics.

Give all the money back, and those who tar caps and taxes as too expensive will have a very hard time indeed. The problem is that most of those who favor caps would want an expensive tax, that like the Waxman-Markey cap, pays many constituencies for political support and funds a plethora of green programs.

Although cap and trade is simply a variable carbon tax that adjusts to make emissions hit a target, those unpredictable tax-rate adjustments have two important consequences. First, they mean the same average tax will accomplish less if imposed by a cap, because fluctuations cause investment delays. Second, since our best hope of a global carbon price is for developing countries to adopt carbon taxes, a fluctuating permit price cannot align with, for example, a steady carbon tax in China. This creates boarder adjustment problems. Matching carbon taxes would best protect American competitiveness. 

As the week wraps up, I’ve been asked to post a few concluding comments on this thread.  I’d like to start by thanking the National Journal for this opportunity and all of the experts who submitted responses. 

While my intention was not to endorse one approach to climate policy over another, I do think it has been valuable to broaden the conversation and re-examine some proposals that are now habitually left out of it. Again, I believe it’s important to act quickly on climate change – but it’s more important to find the right policy.  Whenever the slower pace of action in the Senate affords us the chance to review our options, as it has right now, we’d be remiss not to take full advantage.  

From this week’s discussion, it’s clear that this topic generates quite a bit of interest – and disagreement – even among experts. Some believe cap and trade is the right path forward; some think it is exactly the opposite; and some are willing to try it out for lack of a better option. All of these viewpoints are thoughtful and carefully considered. Taken together, they’re the latest sign that we haven’t reached consensus on a particular policy, and that a considerable amount of additional work will be required to get to that point. 

With so many involved in this ongoing debate, and so much at stake in its outcome, I’d like to outline a few priorities that I believe can help us move forward on climate policy.

First, the Senate should emphasize meticulous debate of climate policy over hasty passage. While just one bill was given an opportunity to move through the House, there are many senators who feel strongly about climate change and who have a history of introducing measures to address it. Before all is said and done, I believe a number of different proposals – in addition to the bill offered by Sens. Kerry and Boxer – will be put on the table. We should consider each of them on their merits, even if that means spending a bit more time on this issue than some would like. 

An essential part of that process will be senators’ ability and commitment to weigh in on all aspects of proposed legislation. In the House, the only question up for debate seemed to be who would receive free allowances. In the Senate, I suspect we will not only have a conversation about who gets them, but whether allowances should be given away for free at all. Remember, the president has endorsed the latter approach, with a full auction, and he will have final say on the enactment or veto of any legislation that makes its way to his desk.

Many other matters will need to be addressed, and I posted a comment partway through the week about one that is particularly important to me. The main argument for cap and trade is that it will create a market in which economically efficient and environmentally compliant decisions can be made. Despite this, the sweeping measures introduced so far this year display a clear lack of faith in cap and trade’s ability to function on its own. What other explanation is there for provisions that require efficiency requirements for food warmers and light bulbs, programs that dictate how and where to plant shade trees, and performance standards for emitters that are already covered under the cap and therefore required to participate in the carbon market? 

If a given policy purports to address climate change, it should be allowed to do just that.  In the face of legislative action on climate policy, we should take additional layers of regulation – which may only prove duplicative, inefficient, or counterproductive – off the table.  We should pre-empt the climate-related use of the Endangered Species Act, EPA greenhouse gas regulations under the Clean Air Act, and the variety of state and regional programs that could work against our ultimate goal of establishing a global, not local, approach.

I also believe the Senate will take a serious look at our ability to encourage, require, or otherwise force international action on greenhouse gas emission reductions.  We know for a fact that the United States, acting alone, can do relatively little to mitigate climate change. And as much as I want to believe that leading by example will result in global progress, history has shown that’s not often the case. Our nation has made tremendous progress on everything from civil rights and labor standards to education and water quality in years past, but those advances have not always been met with similar progress throughout the rest of the world. 

It’s often said that global climate change is a global challenge that requires nothing short of a global solution, which is why the Copenhagen negotiations are so incredibly important.  I’m troubled by recent efforts to manage expectations going into these talks, and even more troubled by accusations that many of my Senate colleagues would not support ratification of a binding global treaty. To the contrary, I think many who are concerned about the impact that unilateral action could have on American competitiveness want nothing more than to vote for an inclusive and binding international treaty. Perhaps inconveniently for some, while the Senate ultimately votes on the ratification of treaties, the task of negotiating their contents is very explicitly in the hands of the Executive branch.

Finally, to those who suggest time has run out to pass climate legislation this year, I simply disagree. If a measure capable of garnering 60 or more votes is put together, I suspect we would be on the Senate floor debating it in very short order. The difficulty is making it to that point – as always, the devil is in the details. I remain convinced that the threat of economically damaging regulations from the EPA should not and will not compel the Senate to accept a bill that is more stringent than the unpopular measure passed by the House. We need to recognize that consensus will not be forged through measures drafted to appeal to a specific constituency – or through criticisms meant to narrowly appeal to some other constituency – and proceed accordingly.

I was one of many Republicans to co-sponsor cap-and-trade legislation in the last Congress, and sincerely hope the members of the Senate can come together and reach agreement on climate policy. We know this will be difficult, but simply communicating our views – especially in a positive and thoughtful manner as we did here this week – will only help us build momentum going forward.

Sen. Murkowski raises a legitimate question when she asks whether a cap-and-trade system for greenhouse gas emissions should be the only option in the coming Senate debate on climate change.

Of course it shouldn't be. Policymakers should always ask themselves if there is another way to achieve the same goal more cheaply and effectively.

And the senator is right to imply that cap-and-trade did become prematurely a point of almost religious doctrine among environmentalists.  Cap-and-trade need not have become the "only" option.

And yet, for all that one is hard pressed to see what other truly adequate strategy Sen. Murkowski might embrace for meeting the massive challenge posed by climate change.

After all, any plausible response to climate change, as I wrote recently at The New Republic's Avenue blog, needs to achieve two essential goals.  First, any climate program needs to greatly limit near-term emissions and get industry and consumers to accelerate the deployment of existing clean technologies.  And second, it needs to pour--starting now--some $20 to $30 billion per year into clean energy R&D aimed at overcoming the market failures that depress energy innovation and producing the radical scientific and technological breakthroughs needed to deliver the massive 80-percent greenhouse-gas emissions cuts necessary by mid-century.

In light of all that, I appreciate Sen. Murkowski's search for new approaches, but wonder what policies she has in mind that would answer to the needs of the hour.

Would she prefer the imposition of a steep carbon tax, with a huge chunk of the revenues dedicated to clean energy innovation pursuits? I'm with her if she does.  But somehow I doubt that approach would meet her approval.

Would she prefer draconian "pollution" rules to reduce emissions and the annual appropriation of $25 or $30 billion a year in new money to catalyze the clean energy R&D we need? Somehow I doubt the senator would embrace a huge new federal R&D program and vote for it year after year.

In short, it's easy to share Sen. Murkowski's doubts about the hyper-complicated, inelegant Rube Goldberg contraption that is cap-and-trade. And she's right to be frustrated by the absence of serious alternative regimes.  But in the end it's really quite difficult to think of another system or array of them that would deliver flexible, comprehensive regulation to depress emissions while generating massive long-term revenue year after year that can applied to game-changing innovation investments.

The Alliance to Save Energy is neutral on the question of whether to reduce the cost to society of greenhouse gas (GHG) emissions through a cap-and-trade program, a tax or another policy.  But it’s not clear how we can or should “set politics aside” in choosing among such policies.  The realities are first, that we must act quickly and meaningfully if we are to avoid calamity (which sounds like too trite a word for what could happen as the Earth warms!); and second, that a cap-and-trade program is the only meaningful climate policy that has been well-vetted by Congress, and is it already a long way down the legislative road, giving it an opportunity to be enacted into law in time to provide real help in staving off the consequences of global warming.   

And, cap-and-trade is not a bad way to go.  The climate legislation passed in the House and being considered in the Senate would provide certainty on GHG emissions levels while containing abatement costs through various mechanisms, including strategic reserve allowances, offsets and energy efficiency programs.    According to the U.S. Environmental Protection Agency, House-passed energy efficiency measures would actually reduce household energy bills, relative to business-as-usual projections, by about 7 percent in 2025 – an average saving of about $144 per household!

While we absolutely need a massive investment in clean energy, and especially energy efficiency, that is no substitute for an economy-wide policy to reduce GHG emissions and their impacts. The two strategies will work best hand-in-hand, as energy efficiency will help to contain the costs of abating emissions under a GHG emissions reduction program. Moreover, it is unlikely that energy efficiency will ever receive the level of investment that is economically efficient without a climate policy.

Cap-and-trade provides allowance value that can be used to ease the transition to a low-carbon economy, especially for households and industries that have become heavily reliant on low-cost coal.  While we can argue over how much assistance should be provided, the political fact of the matter is that we will never get a climate policy without providing transition assistance.  Rather than focus on how we can avoid “unfairly” helping the beneficiaries of cheap coal, many of us have decided it is more productive to focus on how to make all of us better off. 

If there are meaningful policies besides a cap-and-trade program that could gain the support of 60 Senators and a majority in the House and could be enacted in time to provide a chance of reducing GHG emissions by 80% by 2050, we’re all ears.  If not, then we view such discussions as a way for opponents of meaningful climate policy to further delay action.  Cap-and-trade will not be perfect – nor likely would any other such overarching policy – but it is far superior to protracted debate and inaction.   

In this second message, the Senator's key message is that it is important not to load down a carbon pricing policy -- such as a cap-and-trade system -- with lots of additional, regulatory policies "which could reduce the efficiency of a carbon market."  I completely agree. 

As I have written about elsewhere, the supplemental regulatory parts of the Waxman-Markey bill (and for that matter, the developing Senate legislation) will -- to a large degree -- accomplish little or nothing additonal for the environment (under the cap-and-trade umbrella), and simply drive up aggregate costs by re-locating emissions-reduction efforts from the cost-effective pattern established by the unconstrained carbon market. 

Some may argue that this is a reason to oppose Waxman-Markey and Kerry-Boxer, but this would be throwing out the baby with the bath water.  Instead, the Senator's insightful comments should -- in my view -- be taken as a call to keep our eyes on the prize (reducing CO2 and other GHG emissions), focus on the carbon market, and streamline these legislative approaches.

Energy is – literally – the capacity to work.  The availability of affordable and abundant energy is inextricably  linked to our ability to grow our economy and enhance both our economic and environmental prosperity – prosperity made possible by the very sources of abundant, affordable energy that cap-and-trade seeks to make more expensive and less available.   Indeed, the cap-and-trade plan, by its supporters own admission, is intentionally designed to increase the price of 85 percent of the energy that fuels the American economy and makes life as we know it possible.  Increasing the price of energy not only limits our capacity to do work and put more Americans to work producing American products,  it necessarily increases the price of just about everything else we use and consume on daily basis – computers, cell phones, makeup, toothpaste, food, clothing, medicine, you name it. 

So what exactly is the goal of cap-and-trade?  Is it really all about the environment? Because throughout our history, as we have increasingly and more efficiently used the very sources of energy cap-and-trade seeks to make more expensive and less available, we have increased our wealth and productivity, all the while improving our environment. 

Is it all designed to potentially reduce global temperatures by less than one tenth of one degree Fahrenheit by 2050, as the government’s own models estimate?  Is it to unilaterally destroy the U.S.’s ability to compete in the global economy, while hoping China and our other competitors around the world “follow our example?”  Or is it all about creating a massive, unprecedented new source of government revenue (tax) to fund a rapidly expanding, big federal government and its never-ending list of new and existing government-run programs?  

Perhaps the goal (or ultimate result) of cap-and-trade, as a recent IER study concluded, is to create a massive transfer of wealth from the poorest Americans among us to the wealthiest?  Maybe our Congressional leaders simply want to follow Spain’s model, a model in which the government spend hundreds of billions of taxpayer dollars on unsustainable, temporary, government make-work jobs – at the expense of more than twice as many real, well-paying private sector jobs – in hopes that it will lead to yet another economy-killing bubble? Or is it just another, albeit far worse, example of the government attempting to pick winners and losers (or more accurately, simply picking losers)?  

If those are our goals, then yes, cap-and-trade is the way to go.  But if we are truly interested in protecting our environment for future generations, history tells us that limiting our use of energy is exactly the wrong direction to take.  The availability of affordable and abundant energy is inextricably linked to our capacity to do work and grow our economy, which is, in turn, inextricably linked to a cleaner environment. 

As Senator Murkowski points out, there could be more than one route to the country’s goal of reducing greenhouse gas emissions, and a robust discussion of all possible options is in the best interest of finding the best ideas.

Forest products manufacturers believe the following principles should guide policymakers when they evaluate the alternatives for encouraging greenhouse gas reductions.  Three of these key principles include:

· Competitiveness matters.  Climate change policies should strengthen the competitiveness of the forest products industry and the U.S. Economy.  The U.S. forest products industry is facing growing competition from other high-emitting countries such as China and Indonesia, which have lower energy costs and lower forestry, labor and environmental standards. Imposing a carbon regulation on U.S. manufacturing without requiring equal actions from other high-emitting countries will weaken American competitiveness.

· Be reasonable.  Climate change legislation should ensure reasonable emission allowance prices, adequate allocations, and realistic compliance timelines to address higher energy prices from a lower carbon economy.  Energy is the third-largest manufacturing cost for the pulp and paper industry. If the industry has to pay high energy costs resulting from a carbon regulation, it must receive an adequate allocation of allowances in order to compete in the world economy since we cannot simply pass on higher energy costs and remain competitive. 

· Forest products are part of the solution.  Climate change legislation should recognize the forest products industry’s important role in fighting climate change.  Forests and the paper and wood products that come from them offset 10 percent of annual US carbon dioxide emissions and should be eligible for offset credits.  Also, climate change legislation should encourage increased recycling and recognize recycling projects as eligible carbon offset project types.  Paper recycling reuses a renewable resource that sequesters carbon and helps reduce greenhouse gas emissions through avoided methane emissions and the reduced energy required to make a number of paper products.

Regardless of the end policies that Congress and the President enact, reflecting these principles is essential if we want the forest products industry — almost one million green jobs generating 6 percent of U.S. manufacturing GDP and the leading industrial producer of carbon-neutral renewable energy — to continue to be viable in the U.S.  Accomplishing that goal requires policymakers to make any climate policy as low cost as possible by allowing maximum flexibility on key issues like timeframes, allocations and offsets, and harmonizing timelines with available technology.  Doing so will allow the forest products industry—the original green jobs provider—to continue to contribute to a sustainable future for our country.

Many of the comments try to build a case for cap and trade being preferable to a carbon tax.  That case does not withstand close scrutiny because the virtue of fixing the outcome does not guarantee that it will be achieved as the EU trading system and Kyoto prove.  Resources for the Future published a paper in the early 2000s that concluded that a carbon tax was 5 times more cost-effective than a cap and trade system.

The comment that we have tried a carbon tax --the Clinton BTU--and failed miserably is not an accurate rendition of history.  The petroleum industry which led the opposition to the BTU tax did so because it discrminated against oil and had a bias toward coal.  If it had not been structured as it was, the Petroleum Industry would not have fought it. 

A carbon tax which is used to reduce a more distorting tax--the payroll tax for example--is strongly favored by most economists who have addressed the subject. 

Congress must put a price on carbon in order to effectively control greenhouse gas emissions. To do this, it can mandate a specific price on carbon, via a tax; or set a carbon emissions limit—a cap—and enable businesses to trade allowances to discharge emissions.

A carbon tax is not as simple as it may sound. There is little evidence to suggest that the government could accurately set the tax to deliver the right level of emissions reductions. There is even less chance that Congress would be willing to raise the tax regularly in order to keep emission levels falling. Efforts to ensure regional fairness would create a lot of complexity and opportunities for loopholes. You would have to love the IRS code to believe a tax would be fair and simple.

That’s why we believe the most effective way to control greenhouse gases is through a cap and trade mechanism designed to guarantee steady emissions reductions, encourage innovation, and ensure a measure of fairness to low income consumers and coal dependent regions.

Cap-and-trade programs are not new; they have been a proven staple of environmental regulation for decades. The acid rain program in the United States employs a sulfur emissions cap and trade system that successfully produced a 50 percent cut in emissions - at much lower cost and greater efficiency than predicted. Three US regions are already implementing successfully, or designing, cap and trade programs for CO2. Australia’s Parliament is currently debating a cap and trade system and will likely vote on one in the lead-up to Copenhagen. Japan’s new government also announced it will introduce cap and trade to help implement its 25% below 1990 by 2020 target.

The European Union also has a fully-functional cap-and-trade program. During its pilot phase, the EU trading system was over-supplied with allowances, reducing the price signal to the market and reducing its effectiveness. The current and future phases have increased the amount of permits auctioned, which has led to a much smoother system. The point is that the experience in pilot phase doesn’t mean that cap-and-trade is fundamentally flawed, as some have suggested. Europe has in fact stuck with cap and trade due to its cost-effectiveness and environmental certainty.

Both the Waxman-Markey and Kerry-Boxer climate bills would do much more than put a price on greenhouse gas emissions. Only about 200 of Waxman-Markey’s 1,428 pages are devoted to creating a carbon market; the rest would impose an unprecedented series of new federal programs, standards and requirements. The Kerry-Boxer proposal puts the Senate on the same track. 

A long bill is not necessarily a bad bill, and some ideas, such as the creation of a Clean Energy Deployment Administration, are worth pursuing as complementary policies. But this year’s climate bills stand in stark contrast to those introduced last Congress when none were longer than 350 pages, and almost all were less than 130 pages.

I’m concerned that we risk a counterproductive proliferation of policies and requirements that could reduce the efficiency of a carbon market and increase the cost of energy. If  Congress adopts a carbon price approach to reducing greenhouse gas emissions, we should give it room to work and fully pre-empt other existing approaches to climate change mitigation. We should do so because  a “belt-and-suspenders” approach is not necessary if we have faith in a legislative solution’s ability to reduce emissions. This issue should not be treated as a point of negotiation, it’s a threshold question.

Any cap-and-trade system must be workable, flexible, and adaptable. It must provide the right structure so that consumers are not overly burdened and investments can be made to lower the cost of compliance over time. Unfortunately language we’ve seen in both House and Senate climate bills may create unintended outcomes that frustrate the smooth implementation of the allocation process and the use of allowance values.

Here is the problem: In an attempt to keep electricity rates from skyrocketing in the early years, House and Senate lawmakers imposed numerous conditions on the regulatory treatment of no-cost allowance values distributed to rate-regulated Local Distribution Companies (LDCs). While NARUC has long advocated for the allocation of any free allowances within the electricity sector only to LDCs, the prescriptive language in both House and Senate bills may likely complicate the distribution of the benefits of these assets.

In a cap-and-trade system, the LDC serves as a proxy for their consumers. Because they are rate-regulated, any benefit an LDC receives from no-cost allowances—e.g revenues from allowance sales or reduced compliance costs—would be captured for their consumers through longstanding State regulatory procedures. State commissions have gained significant experience in addressing similar regulatory issues through the successful Acid Rain trading program.

Although the House and Senate bills recognize the value of this regulatory process, they also impose detailed requirements that unnecessarily complicate the rate-setting entity’s ability to protect consumers and share any allowance proceeds. Language in both bills requires that allowance benefits be shared “ratably” among and within consumer classes. Language also appears to direct State commissions to provide cash rebates to industrial and residential consumers if the cap-and-trade system results in higher electricity bills. 

On top of that, the bills seem to place the Environmental Protection Agency in the role of overseeing retail ratemaking decisions nationwide through new authority to require and approve LDC plans for distributing allowance proceeds.

These conditions not only prevent State commissions from determining how best to protect consumers, but it also risks making the cap-and-trade system unworkable. Instead of benefiting consumers, ambiguous language in both bills guarantees litigation on both the federal and State level. Consumers risk seeing their benefits held up in court as lawyers debate congressional intent. The end result could well be years of litigation instead of true progress on clean energy programs.

NARUC recognizes the need for some kind of federal oversight over these programs, given the amount of money that is at stake. But ambiguous and overly prescriptive intervention makes the whole system far less predictable. State commissions and other rate-setting entities are legally obligated to assure just and reasonable rates. They are accountable to their constituents and already have processes in place that address these concerns.

As the Senate begins its work on cap-and-trade legislation, it should keep in mind that the system has to be workable and flexible. There should be enough oversight to keep all parties honest, but enough flexibility to foster innovation and investment in clean energy programs that will benefit all customer classes.

NARUC stands ready to help in any way it can. We support a market-based, economy wide system for reducing carbon emissions, and we look forward to working with Senators Boxer, Kerry, and the rest of the Senate as this issue moves ahead.

Congress first began considering an emissions trading model for climate change in 1989, right as the acid rain law neared final passage. It isn’t new. This first proposed legislation, introduced that year by Reps. Jim Cooper and the late Mike Synar, proposed capping power sector emissions and allowing offsets for compliance. In the 1992 Energy Policy Act, Congress rejected their full-blown emissions trading proposal in favor of a voluntary registry, the “1605 (b)” greenhouse gas reduction reporting program at DOE. Given the early state of those climate policy debates, it was no surprise when the bipartisan majority felt that we should give voluntary measures a fair chance to work before considering mandatory controls. As we look back 20 years, voluntary measures were a fine place to start – but they failed to solve the problem.

Then came the detour. In 1993, President Clinton proposed a BTU tax as part of his climate and budget policies. It didn’t turn out well.  By the time it emerged from the legislative process, the tax rate was so low and riddled with loopholes that it barely effected emissions at all. But it effected several Members of Congress who supported it: it contributed to several Democratic losses in the mid-term elections of 1994 and contributed the phrase “to be BTUed” to the political lexicon. 

The BTU tax offered several important lessons:

First, the politics of carbon taxes are horrible – far worse than cap and trade.

Second, a carbon tax will not be simple or easy. It begs some of the same questions as emissions trading – who will bear the responsibility – and how hard will they be hit? Who will get exemptions, credits and alternative tax rates? How will the revenues be used? But it adds the more fundamental question of how to set the tax levels right so that they produce the desired pollution reduction? And when you’re done, it won’t perform. It will have loopholes, complex exemptions and endless opportunities for confusion – or manipulation – that prevent companies from cleaning up their act, literally.

Third and most importantly, taxes are an inferior environmental policy, because they attempt to control emissions indirectly through the fiscal measures rather than direct emissions limits. Don’t be fooled: setting the tax at the right level is not a trivial task. On something this important, we aren’t likely to simply trust the IRS to set it at the “right” level. The odds of setting the tax at precisely the right level through our rough-and-tumble legislative process are extremely low. Either the tax will be set too low, which will mean we miss the intended environmental goal (as with the BTU tax), or it will be set too high and cause undue economic harm.

In contrast, a cap addresses the real pollution goal, no more and no less. And the “trade” provisions will deliver the cost effectiveness goal. The “trade” provisions need to tap into cost containment measures, like offsets, banking and borrowing – to ensure that we get the biggest bang for the buck. These approaches will allow us to take advantage of “where” and “when” flexibilities, which economists like Dr. Richard Richels and Dr. Jae Edmunds have cited since the 1990s as the most cost-effective course. 

We know how to do emissions trading right. American invented emissions trading for solving air pollution problems. The acid rain law is the proof. It works better than any other clean air program in existence. America's energy industry cut SO2 emissions by more than 40 percent between 1990 and 2007, reaching the 2010 target three years early at just a quarter of the originally predicted cost. That is unparalleled success. We can do the same on climate change.

Like other commentators, I applaud the Senator’s question. I think it’s wise to think through every option before reaching a conclusion. But I’m jaded enough to believe that many tax proponents really just want another delay. 

The consensus around the cap and trade model this year is profound. Most environmental organizations support it, and a large swath of business supports it. Certainly the pending Senate legislation is imperfect – but the focus should be on improving and amending, not ditching it. Senators should seize the momentum and adopt carbon trading legislation soon. So that we can start improving and rebuilding our energy infrastructure for a new century.

Congress certainly shouldn’t abandon the great progress it has already made in the House when it passed comprehensive climate and energy legislation. The Senate needs to follow suit and deliver a bill before the international climate treaty negotiations in December.

The most effective way to address climate change is through a suite of policies and cap-and-trade is among the most important components. Other key elements include energy efficiency and renewable electricity standards, funding for research and development, and clean technology deployment. Fortunately, auctioning emissions allowances under a cap-and-trade system can raise revenue for many clean technology investments, as the success of the Northeast Regional Greenhouse Gas Initiative (pdf) has demonstrated.

A cap-and-trade system can ensure that we meet a science-based emissions reduction target  while letting the market set an appropriate price on carbon. By contrast, an economy-wide carbon tax would ensure a price for carbon, but wouldn’t guarantee a given emissions reduction target. Additionally, the price of carbon in a cap-and-trade program adjusts with changing economic conditions, allowing businesses to make decisions based on their real-world emissions. A carbon tax would not offer entities that need to reduce emissions the same flexibility.

The cap-and-trade system in the House-passed bill and the Senate’s Clean Energy Jobs and American Power Act offers additional flexibility for polluters. Under both bills, there would be strong oversight for the carbon market, a strategic reserve of allowances that can be introduced to the market to lower carbon prices, and allowances set aside to benefit consumers. The plan’s smart design is part of the reason the Congressional Budget Office said the cost of the House bill would be low for consumers – less than a postage stamp a day. And that analysis didn’t even count the money people will save through increased energy efficiency.  

Such success wouldn’t be unprecedented for cap-and-trade. The first such system, implemented under the 1990 acid rain amendments to the Clean Air Act, was wildly successful. The Economist called it “probably the greatest green success story of the past decade.” That program not only reduced acid rain pollution below the levels required, but did so at a cost that was less than a third of what was projected by the Environmental Protection Agency in 1990.

Geoengineering, meanwhile, is no substitute for reducing emissions now. With the cost of inaction so high we can’t afford to gamble with possibilities that may not work. Meanwhile, the message from climate scientists is getting ever more urgent and we know that we have the technology we need – energy efficiency, wind turbines, fuel-efficient cars – to get started on reducing emissions today.

Senator Murkowski’s constituents know how dangerous climate change is and how it’s affecting us now. The recent United States Global Change Research Program report from scientists at 13 federal agencies identified Alaska as one of the most at-risk areas for climate change. If we are to secure an international climate deal that protects Alaska as well as the rest of the world from climate change, the Senate needs to move forward with a bill now.

Americans know we face interconnected economic, energy and climate crises. That's why they support comprehensive solutions like American Clean Energy and Security Act that passed the House and the Clean Energy Jobs Act in the Senate. Each bill would that cap global warming pollution and invest any revenue into protecting consumers, developing clean energy technology, and safeguarding our natural resources from the impacts of global warming. And with each passing day as we hear more dire climate science and see more energy prices go up, the urgency only heightens.

It's an especially urgent threat to Sen. Murkowski's home of Alaska, which has been called the poster state of global warming. Winter temperatures have already risen 6 degrees. Sea ice that protects coastal villages from winter storms forms a week later than it used to. Forests are under siege from wildfires and insects. Melting permafrost is shifting foundations of homes and drying up lakes. The state's best-known animal, the polar bear, is seeing its habitat literally melt away and is the first land animal to be listed as a threatened species under the Endangered Species Act because of global warming.

Cap and trade has become something of a yogic mantra for many in Washington and elsewhere who do not want to think about other options. There are many other options.

One of the most important is to give proper incentives to companies via tax breaks, investment incentives and more to help drive them toward greater energy efficiency and less carbon effluent production.

Take for example your typical gas or coal electric generating plant. About 85 percent of the fuel used is wasted in heat that goes up into the atmosphere at the plant, losses on transmission lines and other losses. If you are going to follow these losses to the typical electric light bulb used in the US then about 97 percent of all fuel used to produce the electricity to make that light bulb work goes up in heat and other losses. The typical light bulb produces more heat than light.This is sort of like the debate on the energy-environment connections in Washington and elsewhere,

There are many technological, behavioral and other options that could reduce this energy waste. Giving the right incentives to industry and the general public could go a long way to reducing the energy waste and, hence, reducing the environmental problems from the production and use of such energy.

Similar things could be said for the typical transport vehicle in the US. These are massively wasteful, built on the concept of the heavier is better and safer, and environmentally not a smart way of doing things. Light-weighting of transport vehicles, greater movement toward trains (and building more extensive and smarter train systems), and reconfiguring the energy equations in transport vehicles to use the heat and friction wasted toward usable energy could go a large distance toward solving some of our energy and environment problems.

The greatest potential source of energy is in greater efficiency. Greater efficiency in energy use leads to less environmental degradation per unit of end-use services and goods. In plain English that means if we use the energy smarter we also help the environment and may reduce some of the global climate change that so many scientists expect to occur.

Why none of these other options has been seriously considered is baffling to me. All we seem to hear about is cap-and-trade. It may be that this seems like a more understandable solution, and a faster solution, than inventions, innovations, and positive behavioral change. By behavioral change I am not talking about social engineering, but bringing companies and people to first realize that the energy-environment addictions we have are not just for oil.

The biggest and most damaging energy-environment addiction is the addiction to waste. We are the world champions of energy waste. It is astonishing that this is not at the very top of the agenda.

Cap and trade is also a lot more complex and has a lot more implications than some may think. Let’s look at the term itself. What are we capping? Are we capping carbon production? That is the way most see it. Maybe we should be capping energy waste. Who determines the cap? Are they the scientists and other experts who have toiled over these issues for years? Well, no.

This is a political decision. Political decisions often lead to what we economists call sub-optimal results. The less optimal the solution the less likely there will be much benefit to the environment, our energy use and our economy.

Now let us look at the term trade in cap and trade. Who trades? Who defines the market? Who defines the price? Who are the investors in this business? How will derivatives and speculation be handled? Above all, who defines the price of carbon? If the wrong price signals are sent than there could be heavy costs to pay. We need to be very careful to develop these costs and the trade market. Also, why not trade other things on these cap and trade markets? How about trading waste certificates?

How about focusing in on the real problems here instead of heading toward the yoga mats and getting into the trance of cap-and-trade?

Cap-and-trade could be a good thing if it is done right. It could be downright economically damaging if it is done in the wrong way. We are facing down unemployment rates that are likely to head to 10 percent in the next quarter or so. 15 million Americans are out of jobs. Is this the time to give even further reasons to American industry to fire a few more breadwinners from our suffering working classes?

Global climate change is a huge issue that we need to handle in careful, thoughtful and strategic ways considering many aspects the results of our policies. Are we? Not really.

Another rather silly mantra being accepted as the calming way to solve our environmental and economic problems simultaneously is “green investment”. This is, and let me be very clear about this: a tea cup in a tempest. We have heard of tempests in teapots. Those are big arguments on small issues. A tea cup in a tempest is a very small argument that will have a very small result in the time period in which we will need results for the big issues, the tempests, of the day. Can we get real on this?

The new green energy investments can be very good solution starts for the medium and long runs to solve the medium and long run issues we face. However, they will take time to implement. They will likely be tiny proportions of our total economic activity (which is in the quadrillions of dollars per year) in the next few years. They are much less effective than the obvious answer: getting people jobs in industries that are able to ramp up quickly.

What kind of green investments do we need to really make a dent on the economic-energy-environment problems we face? That would be in the many trillions over the next decade. Where will this come from?

If we are going to be serious about greening our energy systems then let us be serious about it. A few billion here and there is chump change. I am not arguing against green investments. I am arguing against the claim that fairly small green investments will make big impacts. We need monumental, epic and aggressive changes in our economic-energy-environmental system. But this is a long term solution. It should not be seen as a short term quick fix.

Also, the “absurd” notion of tax breaks for the working people, for investors and for others is not so absurd if they are targeted properly. The “Great Recession” is far from over. Let us get real with this as well.

Cap-and-trade can be a good idea if done right, but I have my doubts on how this is being done and when it is being done. If anything, there should be a phasing in of any of the sticks to industry over time period that does not cause more job losses. There should be a quicker phasing in for the carrots for industry and others that may lead to greater energy efficiency and great environmental efficiency. Instead of further bailing out of financial giants we should start to bail in companies, entrepreneurs, investors and others who can help develop this better economic-energy-environment system.

Do we really want a policy that may or may not help the environment depending on the concessions that can be developed on many issues, and at the same time may increase unemployment? I don’t think so. We need policies that give industry and others hope in these difficult times. We need policies that will help generate inventions and innovations in the medium and long runs. There are many trade offs here. These are not easy issues and there are no easy answers..

We need to construct policies that work in the short run to get the economy back on its feet and not wobbling. We need to also construct policies that will help develop better energy and environmental efficiencies, and a better economic-energy-environment system in the medium to long run to help resolve or at least mitigate those massive looming tempests, such as peak oil, global climate change and more. But tea cups and mantras won’t do this.

 Fair question.  Does society want a cap on emissions or a cap on policy cost?  If you view climate risk as a fat-tail risk of catastrophic consequences then capping emissions is better.  Capping emissions ensures that low-carbon investments get made and that (with global participation) atmospheric concentrations of co2 decline.  In theory, a variable carbon tax could do the same thing - but the reality of that is unlikely.   Nonetheless, why not use both?  Cap and trade for power plants and large industrial sources makes imminent sense (as Europe has done).  I think this could be done simply and effectively without permits (see www.justcapit.org).  Then a carbon tax for the transportation sector might be set at a level where we get more emissions cuts from that sector than we would under cap and trade (remember, even the effects of $4 gasoline were tolerable).  In any case, Lieberman-Warner in 2003 was 58 pages.  ACES is 1426 pages.  We need simple, clear policy that lets the private sector compete to create both clean domestic energy supply and more efficient means of managing demand.

Let’s credit Senator Lisa Murkowski (R-Alaska) for raising questions about the viability of cap-and-trade versus other approaches for the United States to employ in addressing CO2 and other greenhouse gas emissions linked with global climate change.

Senator Murkowski claims that only one approach – cap-and-trade – has received significant attention in the Congress. Let’s put aside for the moment the reality that most of the 1,428 pages of H.R. 2454 – the American Clean Energy and Security Act of 2009 (otherwise known as the Waxman-Markey bill) – is not about cap-and-trade at all, but about a host of other regulatory approaches to reducing emissions that lead to climate change. We can also put aside the fact that both conventional regulatory approaches and carbon taxes have been discussed repeatedly in numerous House and Senate committees over the past decade, and received detailed attention from a succession of U.S. administrations.

So, let’s not quibble about the Senator’s claim that cap-and-trade is the only approach that has received serious attention. Instead, let’s address the key substantive questions which Senator Murkowski raises, because they are important questions: Is cap-and-trade the most effective way of addressing climate change? Are there other approaches capable of achieving the same results at lower cost? From my perspective, as a card-carrying environmental economist, these are indeed the key questions.

While political leaders in the European Union, Canada, Australia, New Zealand, Japan, and the United States (Congress) move toward cap-and-trade systems as their preferred approach for achieving meaningful reductions in emissions of CO2 and other greenhouse gases, many people – including some of my fellow economists -- have been critical of the cap-and-trade approach in the climate context and have endorsed the use of carbon taxes. So the Senator is correct that we should reflect on the merits of that alternative approach.

But, first, what about conventional regulatory approaches, that is, performance standards and technology standards? Experience has shown that such standards cannot ensure achievement of emissions targets, create problematic unintended consequences, and are terribly costly for what they achieve.

Why can conventional standard not ensure achievement of reasonable emissions targets? First, standards typically focus on new emissions sources, and do not address emissions from existing sources. Think about greenhouse gas standards for new cars and new power plants, for example. Second, standards cannot possibly address all types of new sources, given the ubiquity of energy generation and use (and hence CO2 emissions) in a modern economy. Third, emissions depend upon many factors that cannot be addressed by standards, such as: emissions from existing sources and unregulated new sources; how quickly the existing capital stock is replaced; the growth in the number of new emissions sources; and how intensively emissions-generating plants and equipment are utilized.

Next, what about those unintended consequences? First, by reducing operating costs, energy-efficiency standards – for example -- can cause more intensive use of regulated equipment (for example, air conditioners are run more often), leading to offsetting increases in emissions — the “rebound effect.” Second, firms and households may delay replacing existing equipment if standards make new equipment more costly. This is the well-known problem with vintage-differentiated regulations or “New Source Review.” Third, standards may encourage counterproductive, unintended shifts among regulated activities (for example, from purchasing cars to purchasing SUVs under the CAFE program). All of these unintended consequences result from the problematic incentives that standards can create, compared with the efficient incentives created by a cap-and-trade system (or a carbon-tax, for that matter).

If you favor a regulatory approach, then you may welcome what’s coming from EPA as a result of the Supreme Court ruling of a few years ago combined with the Administration’s endangerment finding. For my part, I don’t welcome it; I worry about it, because the set of regulatory approaches that could be forthcoming will accomplish relatively little, and do so at an unnecessarily high cost. (More about that in some other, future post.)

To virtually all participants in the policy world, it has become increasingly clear that the only approach that can do the job and do it cost-effectively is one which involves at its core putting a price on carbon. That leaves cap-and-trade and carbon taxes. Let me take these in turn.

To think about cap-and-trade in this regard, let’s stand back from the debate regarding the details of the Waxman-Markey House bill or the new Senate proposal by Senators Boxer and Kerry, and think about the essence of the cap-and-trade approach. (For some of those details, however, please see my previous posts, where I have commented on various aspects of Waxman-Markey and described a proposal I developed for The Hamilton Project of an up-stream, economy-wide CO2 cap-and-trade system to cost-effectively achieve meaningful greenhouse gas emissions reductions.)

Here are the basics. First, aggregate emissions from regulated sources are capped, and the cap is enforced through a requirement for affected firms to hold emissions allowances. Importantly, allowance trading minimizes costs of meeting the cap. It does this because allowances migrate to the highest-valued uses, covering emissions that are the most costly to reduce. So, the emission reductions undertaken are those that are least costly to achieve. In essence, the uniform market price of allowances creates incentives for all covered sources to reduce all emissions, and do so cost-effectively.

A cap-and-trade system can be more environmentally-effective and more cost-effective than standards. First, in terms of environmental-effectiveness, a cap-and-trade system can ensure achievement of emissions targets. Cap-and-trade allows policymakers to set specific overall emissions targets. And a well-enforced system guarantees achievement of those targets, because emissions will not exceed available allowances. An economy-wide, upstream cap-and-trade system on the carbon content of fossil fuels can cover all fossil-fuel-related CO2 emissions without needing to regulate each emissions source individually.

In terms of cost-effectiveness, a well-designed cap-and-trade system minimizes emission reduction costs. Unlike NOx, SO2, and other pollutants, GHG emission reductions have the same effect no matter how, where, or when they are achieved. This makes the climate change problem unique in the degree to which compliance flexibility can be used to lower costs without compromising environmental integrity. Hence, a cap-and-trade system can minimize costs while still meeting environmental objectives by offering three forms of flexibility: what flexibility; where flexibility; and when flexibility.

In regard to “what flexibility,” many types of actions offer low-cost emission reductions, and a cap-and-trade system allows emission reductions through whatever measures are least costly. By contrast, standards can target only certain identified emission reduction measures, leaving other cost-effective opportunities untapped. Furthermore, predictions of what measures are cost-effective may be wrong.

In regard to “where flexibility,” the costs of emission reductions vary widely across industries, across facilities, and even across users of the same equipment. A cap-and-trade system exploits this variation in costs by achieving reductions wherever they are least costly. By contrast, standards would only be cost-effective if they accounted for all of the variation in costs across sectors, technologies, and regulated entities — but it is completely infeasible for standards to do this. Emission reduction costs across sectors and technologies change over time, making the flexibility offered by a cap-and-trade system even more valuable. Also, lower-cost opportunities to reduce emissions may exist in other countries. Importantly, a cap-and-trade system creates a common currency (emissions allowances) that makes it possible to link with other systems.

A cap-and-trade system also minimizes costs through “when flexibility.” Costs can be reduced through flexibility in the timing of emission reductions by avoiding: premature retirement of capital stock or lock-in of existing technologies; and unnecessarily costly reductions in one year due to unusual circumstances when less-costly offsetting reductions can be achieved in other years. A cap-and-trade can incorporate “when flexibility” without compromising cumulative emissions targets through: allowance banking and borrowing; and multi-year compliance periods.

Beyond such “static cost-effectiveness,” cap-and-trade creates incentives for innovation, and thereby lowers long-run costs. By rewarding any means of reducing emissions, a cap-and-trade system provides broad incentives for any innovations that lower the cost of achieving emissions targets. Although standards may encourage development of lower cost means of meeting the standards’ specific requirements, they do not encourage efforts to exceed those standards.

Several cap-and-trade systems have been successful at achieving environmental goals and cost savings: the phase-out of leaded gasoline in the 1980s; the phase-out of ozone depleting substances; and the Clean Air Act amendments of 1990 SO2 allowance trading program to cut acid rain by 50%. Perceived shortcomings in other cap-and-trade systems reflect design choices, not problems with the policy instrument itself. This applies both to California’s RECLAIM program, and the pilot phase of the EU Emissions Trading Scheme (which is operating successfully in its real, Kyoto phase).

In summary, compared with conventional standards, a cap-and-trade system can be more environmentally-effective and more cost-effective. As with any policy instrument, however, careful design is important.

As I mentioned, it is clear that the only approach that can do the job and do it cost-effectively is one that involves putting a price on carbon. So, what about the other carbon-pricing approach -- a carbon tax?

I am by no means opposed to the notion of a carbon tax, having written about such approaches for more than twenty years. Indeed, both cap-and-trade and carbon taxes are good approaches to the problem; they have many similarities, some tradeoffs, and a few key differences. I am opposed, however, to the confused and misleading straw-man arguments that have sometimes been used against cap-and-trade by carbon-tax proponents.

While there are tradeoffs between these two principal market-based instruments targeting CO2 emissions -- a cap-and-trade system and a carbon tax – the best (and most likely) approach for the short to medium term in the United States is a cap-and-trade system. I say this based on three criteria: environmental effectiveness, cost effectiveness, and distributional equity. So, my position is not capitulation to politics. On the other hand, sound assessments of environmental effectiveness, cost effectiveness, and distributional equity should surely be made in the real-world political context.

The key merits of the cap-and-trade approach I have described above are, first, the program can provide cost-effectiveness, while achieving meaningful reductions in greenhouse gas emissions levels. Second, it offers an easy means of compensating for the inevitably unequal burdens imposed by a climate policy. Third, it provides a straightforward means to harmonize with other countries’ climate policies. Fourth, it avoids the current political aversion in the United States to taxes. Fifth, it is unlikely to be degraded – in terms of its environmental performance and cost effectiveness – by political forces. And sixth, this approach has a history of successful adoption and implementation in this country over the past two decades.

Having said this, there are some real differences between taxes and cap-and-trade that need to be recognized. First, environmental effectiveness: a tax does not guarantee achievement of an emissions target, but it does provides greater certainty regarding costs. This is a fundamental tradeoff. Taxes provide automatic temporal flexibility, which needs to be built into a cap-and-trade system through provision for banking, borrowing, and possibly a cost-containment mechanism. On the other hand, political economy forces strongly point to less severe targets if carbon taxes are used, rather than cap-and-trade – this is not a tradeoff, and this is why environmental NGOs are opposed to the carbon-tax approach.

In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and – depending upon design -- the distributional consequences of the two approaches can be the same. But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table. But political pressures on a cap-and-trade system lead to different allocations of allowances, which affect distribution, but not environmental effectives, and not cost-effectiveness.

Proponents of carbon taxes worry about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax is sensitive to the same political pressures, and may be expected to succumb in ways that are ultimately more harmful: reducing environmental achievement and driving up costs.

The Hamilton Project staff concluded in an overview paper (which I highly recommend) that a well-designed carbon tax and a well-designed cap-and-trade system would have similar economic effects. Hence, they said, the two primary questions to use in deciding between them should be: which is more politically feasible; and which is more likely to be well-designed?

The answer to the first question is obvious; and I have argued here that given real-world political forces, the answer to the second question also favors cap-and-trade. In other words, it is important to identify and design policy that will be “optimal in Washington,” not just from the perspective of Cambridge, New Haven, or Berkeley. In “policy heaven,” the optimal instrument to address climate-change emissions may well be a carbon tax (largely because of its simplicity), but in the real world in which policy is developed and implemented, cap-and-trade is the best approach if one is serious about addressing the threat of climate change with meaningful, effective, and cost-effective policies.

Without a price on carbon, other strategies for reducing emissions would fall short. There would be limited incentive to develop and deploy cleaner energy technologies on the scale necessary to reduce emissions significantly. Likewise, there would be little inducement to invest in geo-engineering, which in any event is highly speculative at this point, with a bramble of unresolved technological, cost, environmental, legal, diplomatic, and national security issues.

Lost in today’s debate about cap-and-trade is the idea’s Republican pedigree. Cap-and-trade emerged in the Reagan administration’s second term as a market-friendly alternative to command-and-control regulation for reducing sulfur dioxide emissions linked to acid rain. George H.W. Bush’s administration’ embraced the idea and insisted on including it in the Clean Air Act Amendments of 1990, in spite of skepticism from environmentalists and some in the business community. The record shows that cap-and-trade has worked, reducing sulfur dioxide emissions more quickly and at lower costs than initially predicted.

If cap-and-trade cannot gain approval, then a carbon tax, with all or most of the proceeds returned to taxpayers, would be a good alternative for putting a price on carbon. Unfortunately, the “cap-and-tax” rhetoric has serves to polarize both approaches.

Whether Congress sticks with cap-and-trade or goes the carbon tax route, putting a price on carbon cannot wait. The most recent science shows that the impacts of carbon pollution on the climate are happening at a rate faster than scientists projected a few years ago. We are taking dangerous chances with the only atmosphere that we have.

Polling shows that voters across the political spectrum want climate change addressed. Congress needs to act expeditiously to pass balanced and effective legislation that puts a price on carbon emissions while avoiding economic harm. That end product will be better if stewardship-minded Republicans are constructive players in shaping it. Simply opposing the Democrats’ legislation will not help solve climate change. Republicans must be equally committed to reducing emissions and putting forward sound ideas to achieve the reductions needed. The end product will have the greatest chance of success if it passes with broad, bipartisan support.

If the parties in Copenhagen stay with the Kyoto model, nothing will happen that can get passed by the Senate. Developing Countries are exempt from Kyoto and it is hard to imagine a set of circumstances that would lead them, especially the major ones—China and India—to agree to binding emission reductions commitments. A different construct for global action is clearly called for.

Arbitrary emissions reductions are a fiction in a world with a growing population and growing economic aspirations and a world where fossil fuels will remain dominant for decades to come. At best, we can slow the growth of emissions by investing in technology, creating incentives to use energy more efficiently, and creating incentives for existing and emerging technologies to be deployed here and in developing countries as quickly as possible.

Politics is supposed to be the art of the possible. So, global action would be promoted by the US delegation and those from the EU focusing on what is possible and what is consistent with our state of knowledge and economic, energy, and technology realities. Climate orthodoxy may give advocates a feeling of moral superiority but it won’t produce an effective agreement.

The United States Senate should also focus on what is practical and realistic. An open and honest debate of climate policy options—cap and trade, carbon tax, or policies and measures—would show that cap and trade is the worst choice. Such a debate should also consider what the US has accomplished this decade. Although conventional wisdom is that we have sat on our hands, good progress has been made in reducing carbon intensity in the economy. Our improvement, in fact, is better than most of the EU countries who ratified the Kyoto Treaty. We can do better but only if we focus on realistic objective and practical, cost-effective ways of achieving them.