U.S., rest of the world ponder CO2 emissions, with utilities caught in the middle.

Four months from now, in Kyoto, Japan, international policy negotiators will decide how quickly to curtail carbon dioxide emissions and allay the world's fears of melting ice caps and rising temperatures.

The amendments to the United Nations Framework Convention on Climate Change, or FCCC, are likely to be founded more on world and domestic politics than on science. Industry climatologists, after all, insist the atmosphere is not warming as fast as others predict, and could be, in fact, cooling. Economics may be a spoiler in the debate (em can business bear the brunt of regulation? (em and the role of developing nations is a question mark.

For utilities, Kyoto's a toss-up. The U.S. can expect considerable opposition on four provisions critical to the power industry, including the banking and borrowing of emissions credits, emissions trading between countries, commitments from developing nations and credit for actions utilities have taken to reduce greenhouse gases.

The amendments will address issues important to the industry's future, but equally pressing topics could arise on the way to Kyoto. Several subsidiary body meetings were scheduled, including those in Denver and New York.

At the United Nations in late June, President Clinton went head to head with European leaders. They were calling for specific targets for reduction of greenhouse gases. Clinton wanted to be certain the goals were attainable. He could have been waiting for results from an economic analysis that his administration had long promised. However, Clinton did pledge to win public opinion for legally binding global goals by December, when world leaders were to meet in Kyoto.

How much longer will industry have to wait to know what negotiators' targets (em which could reduce emissions by as much as 20 percent by 2020 (em will mean to their pocketbooks? And what effect will all of this have on federal electric restructuring legislation?

A Climate Timeline

The Clinton administration's global warming economic report was promised in May, then again in June. At press time, it still had not issued a report and Rep. John D. Dingell (D-Mich.) was taking the administration to task, saying that if it now came as promised by late July, only six months would remain before Kyoto.

Two federal officials, from the Department of Energy and EPA, predict delays in restructuring legislation from the outcome of Kyoto. Adding to the legislative slowdown could be the EPA's proposals to "package" pollutants, including greenhouse gases, for easier, more economic control.

Congressional resolutions and industry moves calling for targets or alternative studies also could influence U.S. negotiators prior to their jaunt to Japan:

• Binding Targets. Clinton's statement aside, a U.S. State Department official who asked not to be named says it's hard to ignore Sen. Robert C. Byrd (D-W.Va.). Byrd, with 60 other legislators, has called for developing countries to agree to quantified, binding emissions targets. If those countries can't agree, Byrd maintains, the U.S. shouldn't sign the protocol.

• State Department Input. A proposed authorization bill would require the State Department to perform an economic analysis to rival that of the White House.

• Private Industry Studies. And then there are private efforts, like the CEO-sponsored Washington Post advertisement urging U.S. negotiators to take a reasoned approach to the climate change summit.

Post-Kyoto, more political issues will arise. The Senate must approve the treaties by a two-thirds vote. Then Congress must approve implementing legislation ... in an election year.

Paying Up

The U.S. is closely awaiting the economic fallout from Kyoto (em from the impact climate change policy will have on utility control costs to the higher cost of trade for manufacturers tapped into "clean energy" grids.

Rachel Hopp, the first chief of EPA's acid rain permits program, and now a lawyer who works primarily with utilities in emissions trading, says it's unlikely that negotiators will agree on the ideal global concentration of gases, which could affect industry. "You try to define the parties' obligations in a way that achieves that environmental goal, but also assures equity from an economic standpoint." Otherwise, she adds, "You're going to end up with some trade disadvantages and a lot of unintended economic consequences."

It's clear to most that the utility industry is the sitting duck of any environmental regulation. Since November, the Clinton administration has been working with three economic models to estimate the cost of CO2 emission caps, according to Duncan Austin, a World Resources Institute economist.

"I know that they've completed all the simulations," he says. "They're sort of bound by

confidentiality at the moment. They can't talk."

Bill White, an EPA special assistant in policy planning and evaluation, says the analysis accounts for the effects of various environmental policies.

"We want to have a strong environmental target, lots of flexibility to keep the costs down and keep the impacts to the economy as low as they can be," he insists. "It's just figuring out how best to do that."

The State Department official points out the department has always promoted "realistic and achievable targets. [The analysis] probably does reinforce our calls for flexible implementation schemes, emissions trading, joint implementation (em trying to give countries the channels and avenues through which they can have reductions at the most cost-effective manner."

One industry observer says his fear is that one administration "bottom up" economic model might make assumptions about "no regrets," "cost-free" technologies. "No regrets" technologies include pollution controls or energy efficiency measures that also have climate benefits.

"Well, if they're cost free, why is no one doing them?" asks John Novak, issue manager for global climate change at the Edison Electric Institute. "Someone [at EEI] once asked a representative of the EPA, 'If all this is out there, why don't you quit the government and go hire yourself out and have industry pay you millions of dollars to save them billions of dollars?'"

Based on the June 1996 White House Conference on Analysis & Assessment, an auction permit fee (or carbon tax) of $125 per metric ton of carbon would be required to reduce emissions to 1990 levels in 2010. According to EEI, the tax would raise electricity prices an average of 32 percent nationwide, with industrial rates 46 percent higher.

But "we're not proposing to use taxes to implement the policy," counters David Doniger, counsel to the EPA assistant administrator for air and radiation. "We've also supported the notion that there be trading between countries and between companies in countries so that as the systems mature it would be possible for a firm in the United States first to look around to say, 'What can I find in the way of a reduction opportunity in the States,' but also, 'What can I find in another country?'"

Restructuring and Trading

Besides supporting a "no regrets" policy, the EPA is considering combining pollution control technologies and market-based methods so the industry saves more money.

EPA's Doniger says there is good news with fused implementation: If you combined SOx and NOx reduction, then the costs would be lower than if those pollutants were regulated separately. (The electric power generation industry accounts for most of the sulphur, about a third of the carbon dioxide and a large block of the nitrogen oxide emitted into the atmosphere.)

Looking at pollutants as a package, Doniger believes, is one reason why electric restructuring plans will be delayed.

Doniger believes that Congress is unlikely to complete federal legislation on electric industry restructuring during the current session. But Federico Peña, energy secretary, promised to debut the administration's restructuring bill in July. Key representatives and senators promised action this summer in their perspective chambers.

"When the industry is going through such a fundamental restructuring. ... So many assets are potentially changing hands and decisions have to be made at the margin level," Doniger says. "It doesn't make sense not to know what the environmental responsibilities of those facilities are going to be."

Still, Doniger is not certain restructuring legislation would include an environmental module.

"But that is the EPA's position: that you need to have an environmental component in restructuring and there are a lot of agencies and offices that agreed," he says.

Is the EPA recommending that the White House not take action on the DOE's restructuring bill because of Kyoto and other clean air concerns?

"We're definitely not recommending that," Doniger insists. "I won't say what we are recommending ... but we think it makes sense when restructuring the utility industry for a period extending 15, 20 years into the future to be looking at all of the important issues that affect that sector, especially if they have economic feedback."

Doug Smith, the DOE's deputy general counsel for energy policy, says the department also is analyzing the consequences of various environmental policies on consumers, the environment and markets. Those policies include those that might come out of Kyoto.

Says Smith: "Almost any CO2 policy that goes beyond the sort of volunteerism we have now ... is going to have a significant effect, at least it could have a significant effect on the utility industry. Presumably we will know before any electricity legislation happens, whether or not there was an agreement in Kyoto, and if so, whether or not it's the kind of agreement that the senate might ratify in the near future."

Outside the agency world, on the legislative side, a spokesperson for one leading proponent of restructuring, Rep. Dan Schaefer (R-Colo.) says she hasn't heard from bureaucrats on delays in plans for industry restructuring legislation.

"I think they're wrong," says Dana Perino, Schaefer's spokesperson. Perino suggests their tactic could be to stall or discourage House and Senate action. "We'll just have to see," she says.

Others in the industry feel adamant about not making the restructuring legislation an environmental bill.

"Let's not have save-the-planet legislation," says Terry Thorn, senior v.p. at Enron Corp. "Let's focus on what is the problem in the context of electric restructuring. And that is you have a whole generation of plants that are exempted. You could have one paragraph in this bill that basically says all power plants in the United States ... will meet new source performance standards. ... And the second part of this paragraph would be, 'To meet those requirements, there's authorization to set up a trading program.'"

Novak is more concerned that the regulations mesh. For instance, he says, if he owned a coal-fired power plant and had to invest in it to meet ambient air quality standards, it would mean he would want to operate it longer to recoup his costs. But CO2 regulations might dictate just the opposite, requiring shorter run times or even shutdowns.

"Between deregulation, the national ambient air quality standards ... between CO2, boy imagine trying to be a utility company and make decisions on how to meet increasing electricity demand," he says.

Policy and Projections

Will Kyoto end up a mere prelude to a later, more far-reaching agreement?

"Right now, things seem, to be honest, kind of bleak," says the State Department official. "Because [the nations] are very far apart and I'm not sure that will become very clear after October. But we're in a wait-and-see game. Things can happen quickly."

Hopp seems more hopeful. "There will be some form of

agreement that will result in additional obligations being committed to by (em the way it looks now (em the Annex 1 countries," Hopp says. "With very little in additional commitments on the part of developing countries."

Annex 1 countries include the U.S., the European Union, Japan, Canada, Australia and New Zealand.

Doniger says the administration believes any agreement will comprise four key elements: binding targets, flexible domestic implementation, flexibility of trading and international implementation and reasonable participation by developing countries.

"We need to share the burden of achieving the environmental objective," he says.

Hopp says the U.S. government must preserve its sovereignty to implement voluntary approaches over mandatory ones, even if it assumes mandatory obligations on the international level. Others point out that part of the reason for that approach is to maintain leverage with developing countries like China. China has huge coal deposits and is building power plants whose CO2 output will equal that of all Annex 1 countries by 2010, according to EEI.

China's output now is one-tenth that of the U.S., Doniger says.

Thorn, of Enron, which has several major projects in developing countries, says those countries should be required to curb their CO2 emissions. "The difference: They're not at the level we are. They want to have free rein to exploit their resources and be as dirty as the U.S. and the rest of Europe was in the last 50 years. We say no, there should be an emphasis on them introducing clean technologies now and not go down the same path.

"China's a disaster," Thorn adds. "But there are things the Chinese can be doing in the way of technology. These developing countries default to dirty technologies for two reasons: One, usually it's cheaper to put a dirty plant in. So they have capital restrictions. At the other end of the wire, they have targets on how much electricity can cost."

The State Department has been pushing China to agree to future steps, even though the Berlin mandate excludes the possibility of new commitments.

Meanwhile, the status of other U.S. positions at midsummer going into Kyoto follows:

• Credit for early reductions. The State Department says it's under consideration. Credit for early reductions in greenhouse gases could be factored into later targets, giving credit to companies that are "out front" and making reductions.

• Timetables. None should be binding before 2005, the U.S. suggests. The U.S. has been pushing for medium-term targets, meaning after 2005.

• Emissions trading. The cornerstone of U.S. proposals is emissions trading jointly implemented through various countries, but the European Union is an obstacle. The Japanese, too, seem wary of emissions rights. Hopp believes emissions rights should be a precondition to U.S. participation in an accord out of Kyoto. "It should be a precondition for any country," she says.

• Banking and Borrowing. The U.S. has proposed the idea of banking and borrowing of emissions credits, but those in industry suspect this provision will be thrown out because there are no other proposals on the table.

"We're against that," says Thorn. "We're the number one sulphur trading people in the United States. ... And the absolute key to any trading program is that these credits can be certified, verified and they're legitimate credits.

"If you're telling me that I want to trade a credit in 1997 (em that I promise to take action to produce reductions in 2001 but I want credit now (em the integrity of that system is violated. What if the company goes out of business?"

Utilities Can't Wait

U.S. utilities are not waiting to start reducing greenhouse gas emissions, according to Novak.

More than 630 utilities are participating in Climate Challenge to reduce, avoid or sequester emissions. Climate Challenge is an industry-DOE effort. One such project, spearheaded by EEI and 40 electric utilities under the nonprofit umbrella of UtiliTree Carbon Co., is developing carbon sinks to offset CO2 emissions (see related story, page 24).

Some 46 million metric tons of carbon equivalent will be reduced in 2000 via the Climate Challenge program. That's a small dent in the 1.5 billion metric tons of carbon equivalent emitted in the U.S. in 1990, but it's a start, Novak says.

Utilities are looking at controlling greenhouse gases more as an obligation, from the CEO down through management, and are considering the issue when building new plants.

"Utilities I work with have substantial programs, including voluntary programs," Hopp says. "We're not talking about hundreds of thousands, we're talking about millions of dollars to improve their environmental management. A lot of that is because of regulation, but a lot of it is because it's common sense and an interest in being environmentally aware.

"The utility industry is way ahead of the rest of the business community on climate change issues," Hopp adds. "And that's probably a reflection of having learned some difficult lessons as a result of the acid rain debate.

"I don't think it's a joke. I think utilities, more than any other industry, are taking it seriously." t

Joseph F. Schuler Jr. is associate editor of PUBLIC UTILITIES FORTNIGHTLY.

Key Element Positions of the Early Kyoto Protocol

U.S. Utility Industry Other Nations

Credit for Draft protocol is silent on Was promised credit by the Not addressed.

Early Action this issue. Administration for actions to reduce,

avoid or sequester greenhouse gas.

Targets/ No firm position. Emissions Opposes binding targets and timetables, E.U.: Negotiating position

Timetables timeframe should be 2010-2020: but if imposed, not before 2010. calls for 15% reduction in

first target stable, second at up CO2, methane and NOx

to 10% below 1990 levels. below 1990 levels in 2010.

Banking/ Would allow: banking at govern- Believes banking must be mandatory; No countries have similar

Borrowing ment's discretion and borrowing borrowing penalty should not provisions.

for emissions not used, for a penalty. exceed 5%.

Emissions Would allow emissions trading Opposes a cap, notes U.S. proposal Varying support for

Trading and between countries with real ignores countries with economies not emissions trading and joint

Joint commitments and joint imple- in transition. implementation, but also

Implementation mentation between developed opposition.

and developing.

Commitments Proposes policies to push commit- Believes U.S. proposal should add Ignored issue of real

for Developing ments in developing countries, timeframes for inventory and commitments.

Nations especially "no regrets" measures; mitigation actions.

requiring annual emissions inventories

and reports on steps to reduce

emissions.

Policies and Opposes common policies and Agrees with U.S. position, which gives E.U.: Favors common

Measures measures. each country options. policies and measures,

including environmental

taxes, energy efficiency

upgrades for power plants

and tradable permits.

Source: Edison Electric Institute, U.S. Department of State

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.