The Edison Electric Institute (EEI), the association of shareholder-owned electric power companies, opposes the Kyoto Protocol, the McCain-Lieberman Climate Stewardship Act, and kindred proposals to regulate carbon dioxide (CO₂), the inescapable byproduct of the carbon-based fuelscoal, oil, and natural gasthat supply 86 percent of all the energy Americans use. Why, then, is EEI pressing the Bush Administration to institute an early credit programthe accounting framework and political setup for Kyoto-style energy rationing? Edison has a lot of explaining to do.

Liebermans Ploy

Although the implementing rules of an early credit program can be bewilderingly complex, the basic idea is simple. Under such programs, companies that take steps now to reduce emissions of greenhouse gaseschiefly CO₂ from fossil energy useearn credits (emission allowances) they can use later to comply with Kyoto or a similar compulsory regime.

 All such schemes are Trojan horses for Kyoto-type policies. Credits awarded for early reductions are assets that mature and attain full market value only under a mandatory emissions reduction target or cap. Consequently, every credit holder acquires an incentive to lobby for emission caps.

 Unsurprisingly, credit for early reductions originated as a brainchild of the Green Left. Senator Joseph Lieberman (D-Conn.), Environmental Defense, and the Pew Center on Global Climate Change championed early credit legislation during the 105^th and 106^th Congresses. Liebermans bill went nowhere, attracting only 12 co-sponsors on its second go-round. Similarly, a House companion bill in the 106^th Congress garnered a mere 15 co-sponsors. Neither bill saw floor action or even made it to the committee markup stage. By mid-2000, credit for early reductions was politically defunct.

 So why is this an issue today? On Valentines Day 2002, the Bush Administration naively resuscitated Liebermans ploy. President Bush directed the Department of Energy (DOE) to enhance the measurement accuracy, reliability, and verifiability of the Voluntary Reporting of Greenhouse Gases Program (VRGGP), established under Section 1605(b) of the 1992 Energy Policy Act. More importantly, Bush tasked DOE to develop recommendations to give transferable credits to companies that can show real emissions reductions under a revised, more rigorous reporting system.

 To carry out those directives, DOE in May 2002 launched an extensive stakeholder dialogue, which has included three public comment periods, four regional workshops in November-December 2002, and a national workshop in Washington, D.C. on January 12, 2004. A fourth comment period is planned for this summer, and DOE may host another workshop as well.

 Legally Challenged

Scores of industry representatives have spent literally thousands of hours helping DOE enhance the VRGGP, and will likely spend thousands more before the years end. Alas, Bush officials not only endorsed early credits without thinking through the political ramifications, they also never bothered to check whether current law allows DOE to set up a credit program in the first place.

 This was not a difficult topic to research. Section 1605(b) is only one and a half pages long. It makes no reference, or even allusion, to tradable credits. Similarly, the Conference Reports discussion of 1605(b) does not say or imply anything about credits. Equally telling, when House and Senate conferees produced the final version of 1605(b), they considered and rejected language that would have established a credit program.

 During the first (May 6-June 5, 2002) comment period, several stakeholders who support early credits in principlethe Pew Center on Global Climate Change, the Northeast States for Coordinated Air Use Management, and a coalition of environmental groups led by the Natural Resources Defense Councilcautioned DOE that it lacks statutory authority to implement a credit program. During the second (September 2002-October 2003) comment period, the Competitive Enterprise Institute debated the issue at length with the Electric Power Industry Climate Initiative, an association of which EEI is a member. In all that time, DOE declined to explain its understanding of the law.

 On November 26, 2003, DOE released its proposed revised general guidelines to make voluntary emissions reporting more rigorous, consistent, and auditable. Startlingly, the guidelines said not a word about credits, even though whole point of the exercise was to build the accounting system for a credit program. Pressed for an explanation at the D.C. stakeholder workshop this past January, a DOE official  s sss stated, sheepishly and without elaboration: DOE has determined it doesnt have explicit authority now to issue transferable credits.

 An EEI representative at the workshop chided DOE for waiting so long to address this matter and never requesting the legal authority it now believes it lacks. Behind the scenes, EEI has been advising the White House to move ahead with a credit program notwithstanding DOEs legal qualms.

Case Against Credits

Several free market organizationsthe Competitive Enterprise Institute, American Conservative Union, Americans for Tax Reform, American Legislative Exchange Council, Citizens Against Government Waste, Citizens for a Sound Economy, Consumer Alert, Frontiers of Freedom, National Taxpayers Union, Small Business Survival Committee, and 60-Plus Associationhave repeatedly warned the Administration about the political and economic perils of early credit programs. Not once has any Bush official attempted to rebut their arguments. 

However, EEI and its member companies spend millions of dollars on campaign contributions, and in politics, money talks.[1] Unless conservatives on Capitol Hill quickly weigh in, Lieberman, Pew, and Environmental Defense may achieve under Bush-Cheney what they could not under Clinton-Gore. In their conversations with DOE and White House officials, the friends of affordable energy in Congress should stress the following points:

(1) Transferable Credits Will Mobilize Pro-Kyoto Lobbying.

Transferable credit programs are inherently mischievous. Credits awarded for early reductions become valuable assets only under a legally binding emissions cap. That is because, although many companies would like to sell carbon creditsespecially if they can earn the credits by reducing or, easier still, avoiding emissions they would reduce or avoid anyway, in the normal course of business operationsno company will buy credits unless faced with a cap or the threat of a cap. Without buyers, there are no sellers and, hence, no market.

 Consider the embarrassingly low opening bids at the Chicago Climate Exchange (CCE). The Greenwire news service reported that, at the first auction, the exchanges 22 member companies and municipalities paid an average of less than $1 for the right to emit one ton of CO₂.[2]  Why? Former CCE senior vice president for sales and marketing Ethan Hodel explained: Without regulation and governmentally imposed sanctions, the early evidence is that the American business community is not very interested in a voluntary greenhouse gas cap-and-trade program. Were it not for the risk that Congress may cap carbon emissions in the future, the bid price for credits today would be zero.

 Enacting a cap would instantly pump up demand, boosting credit prices by orders of magnitude. For example, according to the Energy Information Administration (EIA), carbon equivalent credits that sell for next to nothing today would fetch $93-$122 per ton under Sen. James Jeffordss (I-Vt.) Clean Power Act, $79-$223 per ton under McCain-Lieberman, and $67-$348 per ton under Kyoto.[3]  Clearly, credit holders must lobby for regulation and governmentally imposed sanctions if they want to turn voluntary reductions into real money.

(2) A Credit Program Will Coerce Companies to Volunteer.

 Proponents are fond of describing credits as voluntary and win-win (good for business, good for the environment). In reality, transferable credits would set up a coercive zero-sum game in which one companys gain is anothers loss.

 A explained above, credits have no value apart from an actual or anticipated emissions capa legal limit on the quantity of emissions a firm, sector, or nation may release. The cap makes credits valuable by creating an artificial scarcity in the right to produce or use carbon-based energy. Both the market value of the credits and the programs environmental integrity absolutely depend on enforcement of the cap.

 And theres the rub. If the cap is not to be broken, then the quantity of credits allocated to companies in the mandatory period must be reduced by the exact number awarded for early reductions in the voluntary period. Thus, for every company that earns a credit for early action, there must be another that loses a credit under the cap. Companies that do not volunteer will be penalizedforced in the mandatory period to make deeper emission cuts than the cap itself would require, or pay higher credit prices than would otherwise prevail.

 The coercive, zero-sum nature of an early credit program is easily illustrated. Assume for simplicitys sake that there are only four companies in the United States (A, B, C, and D), each emitting 25 metric tons (MT) of CO₂, for a national total of 100 MT. Also assume that Congress enacts a mandatory emissions reduction target of 80 MT, and authorizes the Environmental Protection Agency to issue 80 tradable allowances or credits (1 credit being an authorization to emit 1 MT). Absent an early credit program, each company would receive 20 allowances during the compliance period, and have to reduce its emissions by 5 MT.

 Now assume there is an early action program that sets aside 20 allowances for reductions achieved before the compliance period. That reduces each companys compliance period allocation from 20 credits to 15 (4 companies X 15 credits each = 60 + 20 early action credits = 80, the total U.S. emissions budget). Finally, assume that Companies A and B each earns 10 credits for early reductions. In the compliance period, A and B will have 25 credits apiece (10 + 15), which is 5 more (25 instead of 20) than an equal share under the cap would give them. In contrast, C and D will each have 5 fewer credits (15 instead of 20). C and D must make deeper reductions than the cap would otherwise requireor they must purchase additional credits from A and B. Either way, the early reducers gain at the expense of non-participants.

 Programs that penalize non-participants are coercive, not voluntary. Programs that enrich participants at the expense of non-participants are zero-sum, not win-win.

 (3) Credits Will Corrupt the Politics of Energy Policy.

 Once companies figure out that the program will transfer wealthin the form of tradable emission allowancesfrom those who do not act early to those who do, many will volunteer just to avoid getting stuck in the shallow end of the credit pool later on. The predictable outcome is a surge in the number of companies holding conditional energy rationing couponsassets worth little or nothing under current law but worth millions or billions of dollars under Kyoto, McCain-Lieberman, or the Clean Power Act. Credits will swell the ranks of companies lobbying for anti-consumer, anti-energy policies.

 (4) Credits Will Limit Fuel Diversity.

 Coal is the most carbon-intensive fuel (CO₂ emissions per unit of energy obtained from coal are nearly 80 percent higher than those from natural gas and about 35 percent higher than those from gasoline).[4] Consequently, Kyoto-type policies can easily decimate coal as a fuel source for electric power generation. For example, according to EIAs analysis, the McCain-Lieberman bill would reduce U.S. coal-fired electric generation in 2025 by 80 percentfrom 2,803 billion kilowatt hours to 560 billion kilowatt hours.[5]

 A transferable credit program will send a political signal that mandatory reductions are in the offing and, hence, that coals days are numbered. As environmental lawyer William Pedersen observes, the Administrations plan to develop company-by-company greenhouse emissions accounts makes little sense except as a step towards legally binding controls. Indeed, why would firms go to the trouble and expense of earning offsets applicable to a future regulatory program unless they believed such a program was coming?[6] DOE cannot issue or certify early credits without ratifying the opinion, tirelessly asserted by green groups, that some form of carbon regulation is inevitable. Anticipating such constraints, many companies will make plans to switch from coal to natural gas. That, in turn, will put additional pressure on already tight natural gas supplies.

 According to a recent study by the Industrial Energy Consumers of America, the 46-month natural gas supply crunch has increased average natural gas prices by 86 percent, costing residential and industrial consumers $130 billion. High gas prices have also contributed to job and export losses, because many manufacturing firms use natural gas both as a feedstock and as fuel to power their plants.[7]

 However unfairly, Democratic candidates blame Bush and the GOP for the loss of 2.8 million manufacturing jobs since January 2001. Politically speaking, the last thing the Administration can afford to do is imperil additional manufacturing jobs by driving up further the demand for and cost of natural gas. An early credit program would have exactly those effects.

 (5) Credits Have No Redeeming Environmental Value.

 A study in the November 1, 2002 issue of the journal Science examined possible technology options that might be used in coming decades to stabilize atmospheric CO₂ concentrations.[8] Such options include wind and solar energy, nuclear fission and fusion, biomass fuels, efficiency improvements, carbon sequestration, and hydrogen fuel cells. The report found that, All these approaches currently have severe deficiencies that limit their ability to stabilize global climate. It specifically disagreed with the U.N. Intergovernmental Panel on Climate Changes claim that, known technological options could achieve a broad range of atmospheric CO₂ stabilization levels, such as 550 ppm, 450 ppm or below over the next 100 years.

 As the study noted, world energy demand could triple by 2050. Yet, Energy sources that can produce 100 to 300 percent of present world power consumption without greenhouse emissions do not exist operationally or as pilot plants. The bottom line: CO₂ is a combustion product vital to how civilization is powered; it cannot be regulated away.

 Given current and foreseeable technological capabilities, any serious attempt to stabilize CO₂ levels via regulation would be economically devastating and, thus, politically unsustainable.

 Why is this relevant to the debate on early credits? No good purpose is served by creating the pre-regulatory ramp-up to unsustainable regulation. An early start on a journey one cannot complete and should not take is not progress; it is wasted effort.

 Insuring Disaster

 The rejoinder to the foregoing criticisms is that companies participating in the Administrations voluntary climate programs need credits as an insurance policy, hedging strategy, or baseline protection mechanism so that they will not have to do double duty (reduce emissions from already lowered baselines) under a future climate policy.

 However, an insurance policy that makes the insured-against event much likelier to happen is a prescription for disaster. Kyoto insurance in the form of early credits would do exactly that. To repeat, credits worth little or nothing under current law would be worth big bucks under a carbon cap-and-trade program. Early credit holders stand to gain windfall profits if they successfully lobby for mandatory reductions. A Kyoto hedge fund dramatically increases the odds that Congress will enact Kyoto-like policies.

 Not all hedging strategies deserve approbation and support. A prizefighter caught placing bets on his opponent might sayand possibly even believethat he was just hedging. However, most people would conclude the fix was in. That early credits are part and parcel of a Kyoto fix for U.S. energy markets may be inferred not only from the cap-and-trade clientele such a program would build, but also from the fact that Kyoto insurance salesmen work both sides of the street.

 Many leading proponents of early creditsSen. Lieberman, Environmental Defense, the Pew Center on Global Climate Change, Resources for the Future, Dupont Co., British Petroleum, and the Clean Energy Groupare also among the leading proponents of emissions cap-and-trade programs. They are in the odd position of advocating a hedge against, or demanding baseline protection from, the very policies they promote!

 The U.S. Senate would never ratify Kyoto, nor would Congress ever enact McCain-Lieberman or the Clean Power Act, unless pushed to do so by many of the same policymakers, companies, and activist groups advocating credit for early reductions. If they really wanted to, Sen. Lieberman, Pew, Dupont, et al. could easily ensure that good corporate citizens are not penalized in the future for voluntary reductions today. All they would need to do is disavow their support for cap-and-trade!

 Instead, those worthies try to sell protection from a threat they have in large measure created. Moreover, they do so knowing full well that Kyoto insurance would (a) make the threat of carbon suppression more imminent and certain, and (b) penalize firms whose only offense is not complying in advance with emission control requirements that Congress has not yet enacted.

Economy in the balance

 The carbon in coal, oil, and natural gas is not an impurity or contaminant but an intrinsic component of their chemistry as fuels. That is why carbon dioxide is an unavoidable combustion byproduct of those fuels, why capping CO₂ emissions is a form of energy rationing, and why there is no logical stopping point short of total suppression once government starts to regulate energy production based on the carbon content of emissions or fuels. 

 The core issue underlying all climate policy debates is whether politicians and bureaucrats should have the power to regulate America into a condition of energy poverty. The Edison Electric Institute surely believes government should not have such power, which is why it opposes Kyoto and other carbon cap-and-trade schemes. Yet EEI, beguiled by the prospect of turning voluntary reductions into easy cash, is leading the charge for transferable creditsa political force multiplier for the Kyoto agenda of climate alarmism and energy suppression. This is about as sensible as selling the rope by which one will be hanged. The nations premier electric industry lobby can and should do better.

 

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