Ten Myths of Waxman Markey

On June 26th, HR 2454, The Clean Energy and Security Act of 2009, passed the house. More commonly known as Waxman‐Markey, the bill has spawned myths on both sides of the aisles.

On June 26th, HR 2454, The Clean Energy and Security Act of 2009, passed the house. More commonly known as Waxman‐Markey, the bill has spawned myths on both sides of the aisles. Here are some of them.

Myth1: The bill calls for billions–maybe trillions–in clean energy spending. We cannot afford it.

The billions mentioned are the value of allowances, which are a key‐‐if confusing‐‐aspect of the bill. The cap and trade program creates a limited number of ‘allowances’ for each ton of carbon emitted under the cap. Some of these allowances, or their equivalent in cash, are used to invest in clean energy R&D.

The way it works is that emitters (that’s really most industries) are allocated allowances, which are a percentage of allowable emissions based on current emissions. Emissions over the allocation must be mitigated (cleaned up) or the emitter must pay for additional credits to cover the amount of emissions over their allocation.

For example, in year one the steel industry will be provided with allowances which equal 85% of its current emissions. They must then either reduce the remaining 15% to reach the 85% figure, or pay for additional credits. One way to reduce their emissions would be to invest in clean energy, such as a furnace that burns biomass (e.g. wood residues) instead of coal. Another way is to get credit from an outside project (called “offset”), such as capturing methane from agricultural waste. They can then use the credit for compliance instead of an allowance.

Myth 2: The bill is just a license for utilities to pollute for 25 years.

The bill does provide major allocation to utilities, starting with almost half the allowances helping energy end‐users and limiting the increase in energy prices. What this means is that while utilities will have to find some immediate carbon reduction strategies, major pain is deferred until 2025, leading to the big drop to 0 in 2030. Putting this in perspective, utility projects have a time line of a minimum of ten years, and most are much longer. In utility time, 15 years is tomorrow.

While the reality is that the bill provides 25 years to get to 0, the concern is not that the bill isn’t strict enough, but that it may allow utilities to do too little, hoping that a new administration in 2025 will ease their pain.

Myth3: There’s no need for a price on carbon.

Waxman Markey does price carbon. Using the EPA’s estimates, that could reach $26 per ton in 2030. Since we emit over 16 million tons per day, http://www.eia.doe.gov/environment.html the value of that carbon is extensive. What does that mean? Carbon emissions has costs for the environment, for the depleting fossil fuel supply and thus for our national security. This is an external cost of production which has not been included in final cost estimates. Other external costs‐‐externalities‐‐which have been passed along in the past have included the cost of superfund sites and reforestation. Pricing externalities will mean that products and services accurately reflect the true cost of production, rather than passing these costs along to future generations or to governments‐‐ie taxpayers. An estimated $1.5 trillion figure is the value of allowances between 2012 and 2030.*

*Price assumptions: $13/ton in 2012, rising linearly to $22/ton in 2030, based on EPA’s modeling of the bill, April 2009

Myth 4: It’s a lose‐lose. If business does better than expected at reducing emissions, they won’t get anything for it, but if they do worse, they’ll have to pay for it.

Waxman Markey provides several ways to trade allowances, which creates powerful incentives to find carbon reduction strategies or to team up with another entity. The core logic of cap-and-trade is that companies that go over and beyond their requirement get rewarded by being able to sell the extra credits they’re not using for their own compliance.There are three such mechanisms.

• Offsets: Emission reduction credits from project‐based activities, such as developing new technologies, that can be used to help reduce emissions. The use of offsets is usually subject to a quantitative limit, or quota, known as ‘supplementarity.’
• Grants: the bill provides for a number of grants or other forms of subsidies to fund clean technology, and R&D for auto makers to develop more fuel efficient cars, and to retrain workers. Rebates are provided by the government for specific purposes, as opposed to offsets which are traded.
• Auctions: Some allowances will be auctioned off by the government to carbon producers who are not able to meet their targets. The proceeds will then be distributed to help low and moderate income families, heating oil subsidies and reduce the deficit.

Myth 5: Waxman Markey is not going to help build new jobs and industries.

The bill specifically targets sectors and approaches to grow new jobs and industries. They include:

• Consumer protection: allowances are allocated to electric and gas utilities to help them mitigate the expected rise in energy prices. The revenue from the auction of some allowances also goes directly to help low income consumers. Residential heating is one example of proposed protections.
• Subsidies: High energy use manufacturing that competes internationally with countries that do not have carbon pricing, can receive rebates. Industry sectors are selected by the EPA, through designated North American Industry Classification System (NAICS) codes.
• Investments: Investments in approved emission reduction projects provide credits which can be used to offset the carbon footprint of the parent corporation, or can be sold to another entity to reduce their overall emissions.
• Adaptation: Adaptation refers to activities that help the economy–or nature—adjust for actual or anticipated effects from climate change, such as coastal damage. International projects must accord with the United Nations Framework Convention on Climate Change (UNFCCC), while Domestic projects will be covered under a National Strategic Action Plan. Uses could include allowances for states and Indian tribes, as well as “Major Disasters” designated by the President.

Myth 6: The bill is a further barrier for US manufacturers trying to compete with countries that don’t price carbon.

The bill is very cognizant of the need to support manufacturing in the US, and contains important measures to support high energy use companies in trade‐vulnerable industries. The bill includes “border adjustments” (tariffs), rebates and sector specific (EPA selected based on NAICS codes) credits and targets.

For a major discussion of this topic, please see Point Carbon’s May 5, 2009 Carbon Policy Update, “Competitiveness and Carbon Leakages.”

Myth7: Creating legislation that extends to 2050 is wrong. In uncertain times, we need a shorter term plan.

By setting long term targets, industries can see the “writing on the wall,” and plan accordingly. Executives and board members can create plans to meet the provisions, investing in new ideas and technologies secure in the knowledge that their strategies are working toward the right goal. By creating regulatory certainty, the bill provides an essential tool for successful, long‐term business growth.

Myth 8: It’s a “land grab” by the federal government, and will lead to utility prices that are too high in some regions.

The bill distributes free allowances for utilities across the country. Utilities, under the supervision of Public Utility Commissions, have to use this money to mitigate the electricity price increases. This provision is meant to ensure consumers and industries don’t face too high electricity prices, and avoid windfall profits for power generators.

One of the most significant aspects of the bill is that it provides many mechanisms for utilities to aggressively expand their portfolio of renewables and energy efficiency policies and strategies, which results in de‐coupling the utilities from their usual practice of incentivizing consumers to use more energy.

All that said, in the long term utility rates are likely to raise somewhat, which will incent us all to become clean, efficient energy users.

For a major discussion of this topic, please see Point Carbon’s May 22, 2009 Carbon Policy Update, “Will Coal Break Even? A closer look at the allocation to merchant coal generators.”

Myth 9: It’s just too complicated.

It is complicated, just not too complicated for the task at hand. Addressing 150 plus years of market growth based on a dwindling supply of fossil fuels is no easy task. The job is further complicated by other legislation and private markets, which are developing parallel methods for reducing carbon through incentives, various mandates such as Corporate Average Fuel Economy (Café standards which affect transportation fuel economy) a national Renewable Electricity Standard (RES), and market forces.

Myth 10: I shouldn’t support it. We just don’t need it.

Everyone should support it. To quote Emilie Mazzacurati from Point Carbon, we need it:

Because the cost of not taking action and bearing large changes in climate is much larger than the cost of taking action.

Whether we like it or not, we live in a carbon constrained world. Business‐as‐usual is a formula for obsolescence: A formula we especially do not need at this time.

Article written by The Green Economy editor, Tana Kantor, in conjunction with Point Carbon reports and interview with Emilie Mazzacurati, head of Carbon Market Research in North America. Additional information on adaptation supplied by Lisa Zelljadt, a senior analyst on the carbon market research team.

Point Carbon is a world-leading provider of market analysis for global power, gas and carbon markets. Point Carbon’s comprehensive services provide professionals with market-moving information through monitoring fundamental information, key market players, and business and policy developments.