Not So Ancient History – How CEI (and friends) Nixed Early Action Crediting (on three separate occasions)

I’m posting* three relatively obscure items by which CEI and friends killed a mischievous Trojan Horse strategy for Kyoto-style regulation variously known as credit for early action, credit for voluntary reductions, and transferable credits. The items in question are:

• Indiana Rep. David McIntosh’s legislation to block funding for an early action credit program.
• CEI’s comment to the Department of Energy explaining why it does not have legal authority to award regulatory credits for voluntary greenhouse emission reductions.
• My unsolicited testimony to the Senate Energy and Natural Resources Committee advising the Senate not to give DOE the authority it lacks.

The brainchild of Sen. Joe Lieberman, the Environmental Defense Fund, and the Pew Center on Global Climate Change, early action crediting was designed to establish the framework for a future cap-and-trade program while growing a corporate lobby of energy-rationing profiteers.

An early credit scheme works as follows. Companies “volunteering” to reduce their emissions before Congress enacts a mandatory program receive regulatory credits they can later apply to meet their obligations under a cap-and-trade scheme. This would quickly corrupt the politics of energy policy. Every “early actor” would have an incentive to lobby for a cap in order to transform his otherwise worthless credits into tradable emission permits worth millions of dollars.

In addition, early credit schemes are zero-sum rather than ‘win-win,’ and coercive rather than truly voluntary. To avoid credit inflation (bursting the cap in ‘cap-and-trade’), the supply of emission allowance in a future mandatory program must be reduced by the exact number credits awarded for ‘early action.’ This means that in the mandatory period, those who did not act early would have to pay higher prices for a smaller supply of emission allowances and/or buy ‘surplus’ credits from the early actors.

Consequently, many firms would ‘volunteer’ just to avoid being pushed to the shallow end of the credit pool under a future mandatory regime. This dynamic would further increase the number of companies motivated to lobby for mandatory reductions in order to monetize their investment in early credits.

Had Congress enacted an early action program, or had the Department of Energy succeeded in awarding early credits under its own authority, a coalition like the U.S. Climate Action Partnership would likely have formed earlier than it did and be stronger than it is today.

H.R. 2221, introduced by Rep. McIntosh in the 106th Congress, upstaged, and preempted Republican support for, H.R. 2520, New York Rep. Rick Lazio’s companion bill to Sen. Lieberman’s early action  bill (S. 547). McIntosh lined up 32 co-sponsors compared to Lazio’s 15. McIntosh also held a hearing titled Credit for Early Action: Win-Win or Kyoto through the Front Door? Credit for early action became politically radioactive with anti-Kyoto House Republicans. Without a viable House companion bill, Sen. Lieberman’s bill went nowhere.

Three years later, on Valentine’s Day 2002, President Bush naively brought early crediting back from the political graveyard by directing the Department of Energy to “give transferable credits to companies that can show real emission reductions.” DOE convened several comment periods and stakeholder meetings over the next three years to figure out how to transform the existing Voluntary Reporting of Greenhouse Gases Program, established by Sec. 1605(b) of the 1992 Energy Policy Act, into a crediting program.

Through this comment and others, CEI helped persuade DOE’s General Counsel that Sec. 1605(b) provided no authority to implement an early credit program. Dozens of rent-seekers spent hundreds of billable hours trying to game the rules of a revised 1605(b) program, only to have DOE’s GC pull the rug out from under them in the 11th hour.

Our un-invited testimony in April 2005 clarified for Senators Larry Craig (R-Idaho) and Chuck Hagel (R-Neb.) why they should withdraw S. 388, a bill that would give DOE the authority it lacked. The late John Berthoud, then President of the National Taxpayers Union, clinched the argument by confirming for Sen. Craig that blocking transferable credits was an issue of key importance to the free market coalition.

* Updated 2/23/2015; 8/16/2021