May 2009

Today, Reps. Henry Waxman (D-CA) and Ed Markey (D-MA) released a new 932-page version of their cap-and-trade bill and a summary explaining how emission allowances will be allocated.

President Obama had campaigned on a cap-and-trade plan in which 100% of the emission allowances would be auctioned. His FY 2010 Budget also calls for a 100% auction system (pp. 21 and 100), generating anywhere from $646 billion to nearly $2 trillion in revenues over ten years.

Of course, the last thing companies subject to emission caps want to do is pay $646 billion or more for the right to produce or use energy. So U.S. CAP, the main corporate lobby for cap-and-trade, lobbied for a system with mostly free rationing coupons, and that’s what they got.

Under the revised Waxman-Markey bill, from 2012 through 2025, the electricity sector will receive 35% of the allowances gratis and natural gas distribution companies will receive 9%, with free distributions phasing out from 2026 through 2030. In all, 85% of the rationing coupons are allocated free-of-charge to industry and other interests.

The bill instructs gas and electric utilities to use the free allocations to “protect consumers” from ”price increases.” This is odd. The whole point of cap-and-trade is to raise energy prices. As candidate Obama said in a moment of candor, electricity prices will “necessarily skyrocket.” That’s how cap-and-trade discourages consumption, which reduces emissions. It’s also how cap-and-trade rigs the market in favor of non-carbon energy, which also supposedly reduces emissions.

Perhaps what Waxman and Markey mean is that U.S. utilities will not be allowed to double-dip as European utilities did in Europe’s Emission Trading System (ETS). European utilities got emission allowances for free but claimed them as an expense and then passed the imaginary costs on to customers by raising electric rates (see pages 43-46 of Open Europe’s report on the ETS).

Does this mean Waxman-Markey would not have severe economic impacts of the sort the Heritage Foundation projects in its May 13, 2009 study? No!

The Heritage study estimates that by 2035, the Waxman-Markey cap-and-trade plan will:

• Reduce aggregate gross domestic product (GDP) by $7.4 trillion,
• Destroy 844,000 jobs on average, with peak years seeing unemployment rise by over 1,900,000 jobs,
• Raise electricity rates 90 percent after adjusting for inflation,
• Raise inflation-adjusted gasoline prices by 74 percent,
• Raise residential natural gas prices by 55 percent,
• Raise an average family’s annual energy bill by $1,500, and
• Increase inflation-adjusted federal debt by 29 percent, or $33,400 additional federal debt per person, again after adjusting for inflation.

The Heritage folks are undoubtedly going to re-crunch the numbers in light of changes made to the bill.

However, the big picture should not change just because Waxman and Markey have decided to distribute 85% of the ration coupons free-of-charge. What chiefly determines any cap-and-trade scheme’s macro-economic and energy price impacts are the stringency of the caps, not how allowances are distributed under the caps.

As the caps tighten, the number of ration coupons declines, and so does the supply of carbon-based energy. As the supply falls relative to demand, energy prices increase, which then reduces economic output and employment.

So don’t be fooled! Electricity and fuel prices will reflect allowance prices, which will be determined by supply and demand, not by whether the allowance was initially auctioned or handed out for free. Think of it this way. The price at which a scalper can sell Super Bowl tickets outside the stadium is the same whether he buys the tickets himself or finds them on the ground.

It is therefore noteworthy that although the caps are identical in both versions of the bill from 2030 through 2050, the caps are generally less restrictive in the revised bill from 2012 through 2029. For example, the original version caps 2020 emissions at 4,873 million metric tons, the revised version at 5,056 mmt. 

I’m counting on our friends at Heritage to explain what these changes mean in terms of jobs, energy prices, and GDP. Once thing is certain. The bill is still a de facto energy tax; and if enacted, it will still be the biggest tax hike in American history.

The San Francisco Chronicle reports that Rep. Henry Waxman thinks (despite what Rep. Joe Barton says) he has a deal to pass his cap-and-energy-tax legislation out of an Energy and Environment Subcommittee:

Congressional leaders who support a new cap on greenhouse-gas emissions reached agreement on a plan Thursday to ease the burden it will impose on refiners, paving the way for a key House panel to vote on the climate-change proposal next week.

Rep. Henry Waxman, D-Los Angeles, chairman of the House Energy and Commerce Committee, and Rep. Edward Markey, D-Mass., signed off on the compromise with Texas Democrats Gene Green and Charles Gonzalez. The cornerstone of their deal was a commitment to donate 2 percent of valuable carbon dioxide emissions permits to refiners.

Coal and electric have been declared the “big winners,” but the refinery permits do not appear to be enough (see 5/15 entry) for “Big Oil:”

Unfortunately, while the proposal is meant to solve a serious environmental challenge and spur growth in our weak economy, its inequitable system of allocations will have a disproportionate adverse impact on consumers and producers of gasoline, diesel fuel, jet fuel, crude oil and natural gas. Those who drive, fly or take the bus or train to work will shoulder a disproportionate burden and this must be rectified. Emission allowances will be distributed inequitably, ultimately imposing greater costs on consumers and producers of oil and gas.

No official comment was immediately available from residential thermostat adjusters or do-it-yourself gasoline pumpers.

Never mind the allegedly detrimental effect biofuels have by increasing greenhouse gas emissions and therefore global warming — the Obama Administration will continue to blast CO2 in the atmosphere by burning vegetation. It’s not a surprise as the president talked about it during his campaign, but now the ugly details are coming out and the new subsidies are being unveiled. From a May 5 White House press release:

President Obama today announced steps to further his Administration’s commitment to advance biofuels research and commercialization.  Specifically, he signed a Presidential Directive establishing a Biofuels Interagency Working Group, announced additional Recovery Act funds for renewable fuel projects, and also announced his Administration’s notice of a Proposed Rulemaking on the Renewable Fuel Standard.

The BIWG is to be co-chaired by Obama’s superheroic force of top eco-bureaucrats: Agriculture Secretary Tom Vilsack, Energy Secretary Steven Chu, and EPA Administrator Lisa Jackson. Part of their responsibilities will be to:

• Immediately begin restructuring existing investments in renewable fuels as needed to preserve industry employment; and
• Develop a comprehensive approach to accelerating the investment in and production of American biofuels and reducing our dependence on fossil fuels.

How is this plan to reward/subsidize failure and nonproductive jobs to be accomplished? Via bailout funds, of course:

The President also announced that $786.5 million from the American Recovery and Reinvestment Act will be provided to accelerate advanced biofuels research and development and expand commercialization by providing additional funding for commercial biorefineries.

So thanks to taxpayers, you can add bailouts for projects like this to the “rescued” banks, insurance companies and automakers:

Auction of F&S Oil’s biodiesel plant attracts just one bid

CHESHIRE, Conn. — A New Hampshire-based wholesale petroleum distributor submitted the only bid Thursday for F&S Oil’s biofuel production facility, but the total amount of the bid is uncertain and the bidding process remains open.

Frank Day, of Total Energy Solutions of Portsmouth, N.H., offered $75,000 for the entire plant during Thursday’s auction…

The bid was significantly lower than the $4 million to $12 million value suggested by a consultant…

The auctions, which attracted about two dozen people, were conducted by Thomas Gagliardi Jr., president of Thomas Industries of Guilford. Carlton E. Helming, the court-appointed receiver for F&S Oil, said he was “very disappointed” with the bid….

Or this:

Athens Biodiesel Facing Foreclosure

Problem-plagued Athens Biodiesel (in Alabama) is facing foreclosure on its local operation by a California lending institution. The News Courier has run foreclosure notices on March 31, April 7 and Tuesday stating that the Temecula Valley Bank in Temecula, Calif., has instituted foreclosure proceedings on a loan taken out July 13, 2007.

In early March The News Courier reported Athens Utilities had cut electrical service to the plant off East Airport Road on the site of the old Knight Lumber Co. for non-payment of bills. Melvin Kilgore, owner of Athens Biodiesel, also acknowledged that he was a pay cycle behind in his payroll of about nine remaining employees….

Or this:

VeraSun auction of U.S. BioEnergy planned by March

NEW YORK, Jan 16 (Reuters) – Ethanol maker VeraSun Energy Corp received interim approval from a Delaware bankruptcy court judge to auction most of its U.S. BioEnergy ethanol plants by the end of March, according to court documents.

VeraSun, which filed for bankruptcy in October due to high corn prices, weak ethanol prices and a lack of access to financing, has had the U.S. BioEnergy plants idled since last year. It bought the plants for less than $700 million in 2008….

Should I keep Googling? These aren’t hard to find…perhaps some of the cap-and-tax carbon credits can also help bail these folks out.

Back in 1999 and 2000, a fierce debate raged as to whether digital networks and devices increase or decrease electricity consumption and emissions.  Does the growth of the digital economy jeopardize the Kyoto agenda by increasing emissions? Or is the Internet a “green” force reducing our energy and carbon intensity?

On one side of the debate, researchers at the Lawrence Berkeley National Laboratory argued that the Internet could help reduce emissions by, for example, promoting telecommuting, online shopping, and efficient supply-chain management. On the other side, technology analyst Mark Mills and co-author Peter Huber argued that the rapid proliferation of digital devices and networks was increasing demand for high-quality (largely coal-based) power.

The Berkeley Lab researchers directed a lot of fire at Mills’s ”ballpark” estimate that Internet-based equipment and networks already accounted for 8% of U.S. electricity demand. I won’t try to settle that part of the controversy.

However, a just-published study by the International Energy Agency (IEA) shows that Mills was right about the big picture. Climatewire (subscription required) gives the gist of the study in its headline: “Soaring electricity use by new electronic devices imperils climate change efforts.” Herewith a few highlights:

• Efforts by countries worldwide to reduce greenhouse gas emissions and increase energy security are in trouble if nothing is done to check the energy gobbled by both information and communication technologies and consumer electronics.
• Energy used by computers and consumer electronics will double by 2022 and increase threefold by 2030.
• The projected increase is equivalent to the current combined total residential electricity consumption of the United States and Japan.
• To operate these new devices, households around the world will spend around $200 billion in electricity bills and require the addition of approximately 280 Gigawatts (GW) of new generating capacity between now and 2030.
• The number of people using PCs will exceed 1 billion over the next seven months, and nearly 2 billion television sets are in use worldwide, averaging more than 1.3 sets per each household with access to electricity.
• More than 3.5 billion people will be mobile phone subscribers by 2010.
• In many households in OECD countries, electronic devices–a category that includes televisions, desktop computers, laptops, DVD players and recorders, modems, printers, set-top boxes, portable telephones, answering machines, game consoles, audio equipment, clocks, battery chargers, mobile phones and children’s games–consume more electricity than do traditional large appliances.
• Household use of electronic devices is the major reason that residential electricity consumption is increasing in most countries.
• Computers, related equipment and consumer electronics are responsible for close to 15 percent of total residential electricity consumption today, a share similar to that of other major appliance categories such as water heating or refrigeration.
• Even with improvements foreseen in energy efficiency, consumption by electronics in the residential sector is set to increase by 250 percent by 2030.
• “The share of electricity consumption by these appliances is therefore increasing to the extent that they will most likely comprise the largest end-use category in many countries before 2020, unless effective steps are taken,” said IEA Executive Director Nobuo Tanaka in a press release.
• “These estimates suggest that total residential electricity consumption will increase more than many previous forecasts, and therefore pose a serious challenge to all governments with policy ambitions to increase energy security and economic development, and to mitigate climate change,” states the report.

Criticism of Huber and Mills got pretty nasty at times. But, as the old adage says: He who laughs last, laughs best.

Team Obama was embarrassed earlier this week when a leaked interagency memorandum  acknowledged that EPA’s proposed finding that greenouse gases endanger public health and welfare could impose severe economic burdens on small business. The memorandum said, in part: 

 Making the decision to regulate CO2 under the CAA [Clean Air Act] for the first time is likely to have serious economic consequences for regulated entities throughout the U.S. economy, including small businesses and small communities.  Should EPA later extend this finding to stationary sources, small businesses and institutions would be subject to costly regulatory programs such as New Source Review.

An unnamed Administration official dismissed the memo on the grounds that it was written by a “Bush holdover.”

Rep. Darrell Issa (R-CA), Ranking Member on the House Government Reform and Oversight Committee, takes issue with the Administration’s spin on two counts. First, the “holdover” put-down is an ad hominem argument–as if merely being associated with Bush is sufficient to discredit whatever the memo author has to say.

Second, and more importantly, it is untrue! The so-called Bush holdover, Issa reports, is “a career civil servant who was originally hired during the Clinton Administration and worked at one time for a Democratic Member of Congress. Shawne Carter McGibbon is now Acting-Chief Counsel, keeping the office running until a Chief Counsel for Advocacy is confirmed by the Senate.”

Kudos to Mr. Issa for setting the record straight–and to Ms. McGibbon for speaking truth to power.