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New Proposed Climate Change Bill in Washington Is Simpler and More Equitable

Happily, a new climate bill drafted by Sen. Maria Cantwell may change both the nature of the debate and its outcome.
 
 
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On Sept. 22, in a speech to 100 world leaders gathered at the United Nations to discuss climate change, President Barack Obama declared the U.S. "determined to act."

But at the same time, word began to circulate on Capitol Hill that the Senate might be equally determined not to vote on the climate bill any time soon.

"We are going to have a busy, busy time the rest of this year," said Senate Majority Leader Harry Reid, D-Nev. "We still have next year to complete things, if we have to."

The bill is bogged down in part because of contentious and extended negotiations over health care. But to a greater degree, it is stalled because it is so flawed.

Indeed, the House bill is so bad that even those who supported it did so reluctantly. During the House debate, my friend Denis Hayes, president of the Bullitt Foundation, board chairman of the International Earth Day Network and veteran of many a legislative battle wrote a column that offered four strong reasons to reject the bill and then concluded, "If I were in Congress, I would hold my nose and vote for the Waxman-Markey bill."

Happily, a new climate bill drafted by Sen. Maria Cantwell, D-Wash., may soon be introduced that wouldn't require us to hold our noses at all. Indeed, it could change both the nature of the debate and its outcome.

Cantwell brings impressive credentials to the climate issue. Elected in 2000, she chairs the Senate Democrats 20/20 Energy Independence campaign and co-chairs the Apollo Alliance. Among her legislative achievements are the passage of a bill to prevent energy-market manipulation and the successfully blocking of an attempt by GOP Alaska Sen. Ted Stevens to allow drilling on the Arctic National wildlife refuge.

In its introductory text, Cantwell's Carbon Limits and Energy for America's Renewal (CLEAR) Act of 2009 promises "simplicity, transparency and equity." It delivers on all counts.

The bill is blessedly brief, 32 pages compared to the mammoth 1,427 pages in the Waxman-Markey bill (a number that will only grow in the Senate). You can actually sit down and read CLEAR in one sitting and understand how its pieces fit together.

Upstream vs. Downstream

Cantwell's approach to greenhouse-gas reductions is fundamentally different from Waxman-Markey. Rather than focus on carbon emissions, she concentrates on carbon inputs.

CLEAR limits the quantity of fossil carbon allowed to enter the U.S. economy. In other words, rather than requiring a downstream power plant to reduce its CO2 emissions, the bill requires the upstream coal, natural gas and oil companies that supply the power plant to limit their carbon production.

By shifting the responsibility upstream to the wellhead or mine or port of entry, the bill slashes administrative costs to a fraction of what they will be under Waxman-Markey. Only a few thousand energy-producing or importing firms would be covered, versus the hundreds of thousands or more entities covered under Waxman-Markey.

Peter Dorman, at the blog EconoSpeak, noted in May:

The decision to issue permits on an industry-by-industry basis -- to cap the uses of carbon fuels rather than their sources [invites] ... never-ending bickering over who is allowed to emit how much. Every little tweak of the system -- whether to include freight transportation or agriculture [which crops!] -- has to be hammered out separately. Reductions are calculated from a baseline, but there are acres of wriggle room about how to measure who emitted how much in the base year, and therefore how much should be reduced tomorrow. Enforcement is complex, expensive and full of loopholes.

Auctions vs. Allowances

Focusing upstream allows Cantwell to avoid this administrative swamp. It also allows her to do what Waxman-Markey should have done: require carbon polluters to pay for their pollution. CLEAR requires carbon producers to buy 100 percent of the carbon shares they need. None are given away. Waxman-Markey, on the other hand, gives away 85 percent.

The Cantwell way of dealing with the question of how U.S. companies that must use more expensive fuels can compete internationally is also much simpler and transparent than that contained in the Waxman-Markey bill.

Here's a brief summary of the Waxman-Markey strategy: U.S. exporters will receive free carbon allowances in the form of rebated charges for 2012-2025. Under certain conditions, U.S. producers of finished goods could also receive rebates, if producers petition for coverage and the EPA determines they meet statutory criteria and should be covered.

The EPA would create a pool of international reserve allowances separate from the allowances domestic entities must use to comply with their cap-and-trade obligations. Importers must purchase 85 percent of these allowances from countries that have an emissions-reduction commitment as stringent as that of the U.S.. There is an exemption from this provision if the country is listed by the U.N. as a "least developed" developing country, or if it is responsible for less than 0.5 percent of global emissions.

Got all that?

Here's how CLEAR addresses the same problem. Impose fees on the carbon used in production processes for commodities imported into the U.S. Lift the fee for countries that have adopted comparable limits to fossil carbon use. Sounds easier, right?

Limited vs. Unlimited Trading

CLEAR allows for carbon trading, but unlike Waxman-Markey, which creates an elaborate -- some would say Byzantine -- carbon-trading architecture that promises much mischief, CLEAR puts significant limits on trading.

As befits a congressional leader who has fought against speculation and price manipulation in the energy and financial markets, Cantwell has included in her bill many mechanisms to prevent hoarding and speculation. There are monthly carbon auctions. Carbon shares expire after two years. No entity can buy significantly more carbon shares than it needs. Any sale of carbon allowance must be offered to an eligible "first seller." All relevant transaction dates, carbon share quantities and prices must be made available publicly.

Universal Refunds vs. Set Asides

Still another fundamental difference between Waxman-Markey and CLEAR is revealed in their approaches to the equity issue.

Restricting carbon will raise carbon prices, and thus general prices. This will disproportionately burden the poor. Waxman-Markey deals with this by setting aside 15 percent of the carbon allowances to assist households that can prove they are sufficiently poor.

CLEAR makes consumer equity a central consideration rather than an afterthought. Three-quarters of the proceeds from the carbon auction will be refunded on an equal per capita basis to any legal resident of the U.S. The remaining 25 percent will go into a fund that can be used for many purposes: clean-energy development, compensation for dislocated workers, climate-change mitigation and adaptation.

The creation of a direct per capita refund achieves several ends.

In terms of equity, the refund will offset the pocketbook impact of any energy price increases for most low- and moderate-income households. Indeed, my colleague John Bailey at the Institute for Local Self-Reliance has estimated that the net impact may well be redistributive, because the poor use less energy and buy fewer carbon-intensive goods than the rich. Thus, any increase in carbon-related prices would be more than offset by the receipt of their carbon-related dividends.

Politically, a direct universal refund could generate the popular support for a greenhouse-gas reduction bill that has been so conspicuously lacking to date. One reason for the tepid support is that Americans know that when you put a price on carbon you will raise prices on all products.

Waxman-Markey tries to minimize price increases by giving polluters a huge number of free carbon allowances and directing them to use these to limit price hikes. In a May memorandum, Rep. Henry Waxman, D-Calif., and Rep. Ed Markey, D-Mass., called the three largest categories of allowances: "Protection from Electricity Price Increases," "Protection from Home Heating Oil Increases" and "Protection from Natural Gas Price Increases."

One could say that Waxman-Markey has given polluters about 75 percent of the carbon allowances in the expectation that they would use these to restrain price increases. It is a messy and largely unmonitorable process. The public is understandably skeptical.

Cantwell on the other hand, accepts that putting a value on carbon will increase prices. She doesn't need to dissemble to the American people on that important point.

Her bill holds the majority of U.S. households harmless by giving all households 75 percent of the money raised by the carbon auction. Such a strategy is not only much simpler, it might generate an additional carbon reduction through changes in personal behavior since the less carbon an individual household uses the greater its net income from the refund.

A universal refund strategy has still another advantage: It promises to maintain popular support even if carbon prices rise significantly, because as the price of carbon increases, the carbon refund will grow commensurately.

Private vs. Common Ownership

A universal refund reflects a fundamentally different philosophical approach to pollution than Waxman-Markey. By putting a value on carbon, the Cantwell and Waxman-Markey bills put a value on the carbon-absorptive capacity of the sky. The question then is, who owns that suddenly valuable capacity? Or as the title of the path-breaking book by Peter Barnes asks, Who Owns the Sky?

Barnes persuasively argues that we all do, equally. By giving companies essentially free pollution rights, Waxman-Markey, in essence, says that polluters own the sky. By requiring polluters to pay for pollution rights and returning 75 percent of that revenue directly to all on an equal per capita basis, CLEAR says that we all own the sky. The sky is a commons. A discussion about the role of the commons may be one of the most significant outcomes of CLEAR. (For more discussion see onthecommons.org.)

One other feature favorably distinguishes the Cantwell bill from Waxman-Markey that deserves mention. CLEAR does not ban EPA from regulating greenhouse-gas emissions. Waxman-Markey does. Why would we want to strip the executive branch of its ability to regulate greenhouse gases at this historic moment?

CLEAR has yet to be introduced. Cantwell has circulated it for comment and reportedly has gotten push-back from a number of environmental organizations. Some oppose it simply because it may delay a vote on Waxman-Markey in the Senate. They appear willing to support any climate bill, not matter how bad.

Others offer more substantive and valid criticisms.

One is that Cantwell's bill requires far less greenhouse-gas reductions in the early years than Waxman-Markey. Waxman-Markey requires a 17 percent reduction from a 2005 baseline. CLEAR requires a 1.5 percent reduction from a 2012 baseline by 2020. Cantwell should increase the required reductions.

However, the spread between CLEAR and Waxman-Markey's effective carbon reductions might not be as wide as the numbers suggest. Some reports estimate that the combination of free allowances and offsets in Waxman-Markey could limit domestic carbon reductions to as little as 2 percent by 2020.

The economic collapse also may narrow the gap. The Energy Information Administration recently announced that total U.S. greenhouse gas emissions might be 8.5 percent lower by the end of 2009 than they were in 2005 and anticipates a very slow increase over the next two years. Thus, CLEAR's baseline of 2012 may well be significantly lower than Waxman-Markey's baseline of 2005.

The second substantive criticism of the Cantwell bill is that it establishes a safety-valve carbon price, something Waxman-Markey does not do. That is true.

CLEAR sets an initial minimum carbon price of $7 per ton and a maximum price of $21. But the Cantwell bill increases both the minimum and the maximum prices by about 10 percent per year after 2012, which means by 2020 they could be close to $14 at the low end and $42 per ton at the high end. The estimated price of carbon under Waxman-Markey in 2020 is $15-$20 per ton.

Some environmentalists offer a third objection. Cantwell's bill has no dedicated allowance for clean energy, while Waxman-Markey dedicates 10-15 percent for this purpose. Again, that is true.

CLEAR offers 25 percent of the auction proceeds for several purposes. Clean-energy advocates will have to fight with those wanting money to mitigate dislocation impacts from high-priced carbon, or for adaptation or mitigation strategies. I expect they would end up with about the same total revenue as under Waxman-Markey.

I hope we can collectively encourage Cantwell to introduce her bill, even without the co-sponsors she would like. Her bill represents a fundamentally different philosophical and strategic approach to fighting climate change: simple, transparent, equitable and, I would add, effective. That approach deserves to be part of the national debate on climate change.

David Morris is co-founder and vice president of the Institute for Local Self Reliance in Minneapolis and is director of its New Rules project.