The New Energy Bill May Create a 'Super Lobby' of Powerful Opposition

The recent passage of the American Clean Energy & Security Act (ACES) through the U.S. House of Representatives drew different reactions from climate and environmental advocates. But one key perspective shared by most advocates is that, despite its weaknesses, the bill is a good first step. ACES builds a solid foundation for future progress on U.S. climate mitigation, the argument goes, and climate advocates will be well-positioned to strengthen the legislation in years ahead.

But what are the prospects for strengthening ACES in future years? This question is subject to many uncertainties, depending on the vagaries of the political climate. But a closer examination reveals that ACES could create a "super-lobby" of interest groups that will significantly diminish the possibility of achieving future reforms.

The newest climate lobby -- and potentially one of the most powerful in years to come -- is the financial industry. If ACES is signed into law, the global carbon market could become the largest commodity market in the world. According to Bart Chilton, Commissioner of the U.S. Commodities Futures Trading Commission (CFTC), "The potential size and scope of a structured carbon emissions market in the US is unequivocally vast. It is certainly possible that the emissions markets could overtake all other commodity markets."

A growing number of analysts are expressing concerns about the emergence of a new financial climate lobby and the potential for gaming in a new U.S. carbon market. A recent report by Friends of Earth (FOE), "Subprime Carbon," argued that cap and trade proposals like ACES could create a system with similar financial and political interests to the housing market bubble. Just as financial practices during the housing bubble caused deteriorating standards in mortgages, cap and trade could create "subprime" carbon offsets -- offsets that do not represent actual emission reductions and carbon derivatives based on future carbon reductions with high risk of not being fulfilled.

"We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market," says Robert Shapiro, former undersecretary of commerce in the Clinton administration and a cofounder of the U.S. Climate Task Force.

The best projections on the size of the U.S. carbon market that would be created by ACES range between one and two trillion dollars by 2020. The CFTC estimates a $2 trillion carbon futures market within five years, with up to 180 million private contracts per year -- larger than the sweet crude oil and natural gas markets combined. This estimate was echoed by a Point Carbon report in 2008 on the potential impacts of the Lieberman-Warner Climate Security Act, and a recent report by New Energy Finance projects ACES will create a $1.2 trillion carbon market in the U.S. by 2020.

Wall Street firms recognize the lucrative potential of the carbon market and have already stepped up their lobbying efforts. According to Public Integrity, "Wall Street banks like Goldman Sachs and JP Morgan Chase, insurance companies like AIG and private equity firms had virtually no reps on Capitol Hill working on global warming policy in 2003; by last year, they had about 130 climate lobbyists, the Center for Public Integrity's analysis of Senate lobbying disclosure forms shows. About 20 additional lobbyists worked for firms and organizations wholly dedicated to carbon marketing last year."

The policy demands of these financial firms may vary, but most will push for weaker regulatory standards on carbon markets, larger volumes of carbon offset authorization, and provisions to increase the volatility of carbon prices, all of which would hinder progress on reducing U.S. emissions. For example, the financial industry will continually call for carbon allowance trading to be allowed OTC (over-the-counter), a form of derivatives trading that gives firms and traders the most leeway to leverage, speculate, arbitrage, and maximize profit by avoiding regulations. And the greater the volatility in the carbon allowance and offset market - and the larger the volume of offsets allowed - the more trading, arbitrage, and speculation these firms can benefit from.

The financial industry has already begun lobbying for weaker regulatory standards on carbon markets. According to the FOE report, "Carbon markets [are] particularly vulnerable to inappropriate lobbying and regulatory capture... Carbon trading firms have strongly advocated self-regulation as a way to govern this market... In a letter to Senators Feinstein and Snowe, who introduced a carbon market governance bill, the International Emissions Trading Association asserted that 'the market itself recognizes the importance of integrity and exerts discipline on participants,'" citing a number of self-policing tactics.

Indeed, a significant issue that arose during deliberations on ACES was which agency or agencies would oversee what could become trillion-dollar markets for trading in emissions allowances and offsets, and related financial products. The ACES bill would authorize the Federal Energy Regulatory Commission to oversee emissions allowance and offset markets. But it leaves it up to an interagency working group to decide where jurisdiction over the larger derivatives market will lie. According to a recent investigation by Mother Jones:

"[The] bill leaves many vital specifics to the White House, directing the president to form a task force to determine precisely how to avoid "fraud, market manipulation and excess speculation." Andy Stevenson, finance adviser at the National Resources Defense Council, says, "I would feel comfortable if much more of it were explicit."

The financial industry is one of several industry groups that may join in opposition to future policy reform, particularly around the use of carbon offsets. Utilities and fossil fuel industry groups are likely to continue lobbying for an increase in the authorized volume of relatively cheap domestic and international carbon offsetting to avoid the more expensive task of reducing their own emissions. The demand for an increase in offsetting is likely to grow increasingly large after the lowest-cost emission abatement options are used in the early years of cap and trade.

The use of offsets to meet emissions reduction targets has very large implications when evaluating the impacts of ACES. Offset utilization may in fact be the single greatest variable in the proposal determining both economy-wide emissions reductions and reductions in capped sectors of the economy, established carbon prices, revenues raised through auctioning allowances and the revenues dedicated to clean energy, levels of private investment in clean energy driven by the program, and the revenues transferred from households and other domestic energy end-users to international interests through offset purchases.

In addition to utilities and fossil fuel firms, producers and sellers of carbon offsets will push for weaker evaluation standards in order to increase their potential sales. This was on full display during the House debate over ACES, with numerous agricultural interests successfully lobbying for the sympathetic Department of Agricultural to have jurisdiction over domestic agricultural offsets, instead of the Environmental Protection Agency.

It wasn't only the agricultural lobby pushing for weak oversight of the new carbon offset industry, however. The largest proponent was the House Committee on Agriculture itself, with Chairman Collin Peterson deftly maneuvering to strike a deal with Congressman Waxman, holding his committee members' votes hostage unless his demands were met. This example is testament to the fact that many policymakers will oppose future measures to strengthen oversight over carbon offsets and other provisions in order to protect domestic industries.

Carbon offsets are just one example of how ACES could create a powerful lobby opposed to future policy improvements. Similar principals will apply to other areas of the legislation, such as allowance distribution, emission reduction targets, renewable portfolio standards, and more. For example, reducing the free allocation of allowances to utilities and other incumbent energy industries in order to increase funding for clean energy technologies may be increasingly difficult in the future. The bill doesn't begin phasing out these free allocations until the mid-2020s, and existing subsidies have a long track record of producing entrenched interests -- agricultural subsidies being just one example. Free allowances will also shield the profits of these industries, ensuring they remain powerful lobbying forces. And as the cheapest, low-hanging fruit of emissions reductions becomes depleted, the calls for weaker legislation may only grow stronger.

The current moment may offer progressives and climate advocates the single best opportunity in a generation to achieve the policies necessary to overcome climate change and build a clean energy economy. Unfortunately, progressives have so far failed to seize the moment, and the result is a critically weak climate bill which sows the seeds of its own weakening by creating a new climate super-lobby. ACES must be strengthened now, or our climate opportunity will be jeopardized.


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