Hobson's Hamburger

Deck: 

It’s time to end the uncertainty about carbon costs.

Fortnightly Magazine - August 2009

This summer marked a pivotal moment for the energy industry. In June, the U.S. House of Representatives approved the American Clean Energy and Security Act (ACES), a.k.a., the Waxman-Markey bill, which among other things would require the U.S. economy to cut its greenhouse-gas (GHG) emissions 83 percent by 2050.

Of course, Waxman-Markey hasn’t yet become law; at this writing the Senate just had put the bill on its calendar for consideration later in the session. However, the political stars seem to be aligning in a way that might allow enactment. As one Washington insider put it, “It’s now or never.”

Why? Because now, with Al Franken (D-Minn.) having been seated in July, Democrats in the Senate are positioned to break a Republican filibuster and force a floor vote. This situation creates a narrow window of opportunity for climate legislation; next year many members of Congress will be too focused on the 2010 mid-term elections to spend political capital on such a massive and contentious issue.

Additionally, if the United States is going to enact GHG regulation, it should do it this year, so the U.S. negotiation team will be in a position to lead the debate at the U.N.’s Copenhagen climate conference in December.

Those reasons aside, however, the Waxman-Markey bill itself represents a political compromise that Congress actually might be able to approve.

EES North America

That doesn’t mean it’s a great piece of legislation—not by a long mile. In fact it’s a mess. The bill’s 1,400 pages are crammed full of exceptions, exemptions and caveats, written to win support from wavering lawmakers and their constituents. But that’s exactly what gives it a fighting chance in Washington’s political meat grinder. If Congress can’t enact this bill, it might never be able to enact climate legislation—and that would just prolong the agonizing uncertainty about carbon costs.

Never Say Never

Opponents of mandatory GHG constraints might prefer ACES to fail—hoping its failure would delay GHG regulation in the United States, and perhaps hasten the collapse of the whole carbon-regulation concept. That’s a naïve hope, for at least three reasons.

First, failure to enact Waxman-Markey won’t stop GHG regulation from happening in the United States. Instead, the country’s climate policy would continue evolving as a patchwork of state and regional laws like those in California, 10 Northeastern states and soon several Midwestern states. Additionally, in the absence of Congressional action, the Obama administration’s EPA likely would issue some kind of national mandate. President Obama is on the record favoring an auction for 100 percent of emissions allowances, in contrast to Waxman-Markey’s relatively lenient allocation schedule. So if Waxman-Markey fails and the EPA implements Obama’s wishes, carbon emissions might become more expensive, sooner than they would if Congress acts this year.

Second, the Copenhagen conference will move forward with or without ACES, and the United States will be at the negotiating table. But if the bill fails, then America will be in a weak position to bring China, India and Russia into an international accord. Failure to exercise international leadership won’t exempt America from the costs of carbon constraints, but it might give our global rivals an excuse to stay on the sidelines at Copenhagen—further weakening the competitiveness of U.S. exports in global markets.

Third, any GHG constraints that are likely to emerge from this session of Congress will be moderated by economic concerns. Elected officials appreciate the fragility of the economy, and any GHG regulation enacted this year would be easier for American businesses to swallow (at least in the short term) than would regulation that’s likely to emerge at some future date, when the U.S. economy is growing again. In other words, if Congress kills the bill this year, its ghost might return with a vengeance at some future date.

So “now or never” doesn’t really mean GHG regulation can happen only this year. It means this year is the best time for it to happen. And it means that if you don’t like the Waxman-Markey mangle, then probably you’ll hate the alternatives.

Price Visibility

The compromise nature of the ACES bill means that many of the best reasons for supporting it have less to do with the legislation itself than they do with the threat of something worse. We might’ve wanted a nice sirloin steak, but instead we’re getting a greasy hamburger, and we’d better accept it or we might find ourselves choking on spoiled liver.

That makes it difficult to get excited about the bill, or, frankly, to be particularly optimistic about its chances for accomplishing its stated goals.

For example, the bill contains massive subsidies for corn-based biofuels, encouraging investments in an inefficient and uneconomical industry. It provides a large allocation of emissions allowances to auto manufacturers, effectively slowing the transition toward plug-in electric vehicles. And it includes a raft of federal mandates that will force states to change their building codes to improve efficiency by an arbitrary percentage—30 percent at the outset, and 50 percent by 2015. This kind of prescriptive, top-down approach concentrates power in federal hands, and invites litigation from states that already have stringent building-efficiency codes.

Additionally, ACES allocates allowances to retail electricity distributors rather than emitters. Arguably, this approach would ease the pain on consumers, and would reduce the regulatory burden for utilities. But it seems like a peculiar and convoluted way to assign responsibility for GHG reductions, and it might undercut states’ authority over resource-planning decisions.

Further, to the degree this approach allows utilities to insulate consumers from the cost of emissions, it perpetuates the bulk-rate scheme that has effectively hidden the true costs of energy from consumers for nearly a century. Plus, ACES seems to assume the current regulated industry structure will remain unchanged, with today’s retailers continuing to own the market for all eternity. Such assumptions seem obtuse, given prevailing trends toward smart metering, time-of-use pricing and distributed resources—and given the lessons of the telecom industry and its technology revolution.

Nevertheless, despite these and many other shortcomings, Congress should accept this greasy hamburger and enact ACES, for one primary reason: The bill will end the uncertainty about carbon costs that has kept power-infrastructure investment in a holding pattern in recent years.

ACES might be only a starting point, and an unwieldy and complicated one at that. But it creates a mechanism for assigning a price to GHG emissions, and that’s what’s really important. Additionally, the enabling regulations probably won’t be truly final for years, so there’s still time to improve it. EPA will have to do its work to ascertain emissions levels and allocate credits, and Congress likely will revisit the legislation in the future—perhaps repairing some of its weaknesses, and making it more or less stringent, as seems appropriate to serve economic and environmental goals.

Nevertheless, once ACES gets on the books, America’s energy companies and their regulators will know, with certainty, that carbon emissions carry a price. That’s all we can expect from the legislation, and fortunately, that’s all we really need.