Will Enron kill climate change legislation?

Is it possible that Enron and the late Ken Lay (that's him in cuffs) will come from beyond the grave to doom a relatively tough climate change law?

The environmental lobby cried foul this week over attempts by Senate staffers who want to add a friendly sounding "safety valve" to the climate change law that is most likely to be brought up for a vote. Some are saying they'd rather have no bill at all.

Promoters of agricultural carbon offsets also screamed, fearing their investments will be dead on arrival.

The Lieberman-Warner bill establishes a cap-and-trade system to control greenhouse gas emissions, and is considered the most aggressive bill in the current Congress. But a recent report from the Congressional Budget Office made a case for the safety valve which sparked the green lobby outcry.

The bill aims to cut carbon-related emissions by more 70 percent by 2050 by requiring polluters to purchase allowances to pollute, which are capped in number. Over time, the number of allowances will drop, forcing businesses to cut carbon emissions or buy permits to pollute from a business that has some to spare. Obviously, the price of those permits could soar if it becomes more difficult to meet reduction targets.

Enter the CBO report's safety valve.

This feature would set a price cap on permits. Environmentalists hate it because it removes an incentive to cut carbon pollution. Business claims it will promote long-term investment by creating certainty in future prices.

But what exactly did the CBO report say?

It looked at current cap-and-trade markets, and praises the one launched in the 1990s in the United States that cut sulfur dioxide emissions:

The Acid Rain Program is run by the Environmental Protection Agency (EPA) and is widely viewed as being very successful, bringing about large reductions in SO2 emissions for lower-than-expected costs.

So far, so good.

Later in the report it cites the need for a safety valve to avoid a repeat of the volatility in the sulfur dioxide market -- that's the successful market it praised earlier in the report. It even included a graph from an academic paper (free registration required) on the subject by William D. Nordhaus.

But it did so selectively..

Nordhaus's graph included more information than the reprint in the CBO report, and Nordhaus's showed that sulphur dioxide permits were less volatile than crude oil futures..

Nordhaus doesn't say it, but one can imagine a scenario in which pollution permits trade inversely to fossil fuel prices (as it happening in Europe). So while they may be volatile, overall energy costs including the allowances will be far less so, undermining some of the argument for the safety valve.

The CBO report cites another piece of selective evidence in support of a safety valve: the volatility of California's nitrous oxide market in 2000 and 2001.

And here's the Ken Lay connection.

As California experienced rolling power blackouts, moth-balled power plants that lacked nitrous oxide controls were brought back online, and their owners scrambled for nitrous emission permits for those plants and paid up to 10-fold increases for allowances.

What the CBO fails to make clear is the context for that market volatility.

We now know that Enron was gaming California's power market to drive power prices sky high and in turn prices for emissions permits.

Without mentioning this, is CBO providing support for a safety valve by pretending the havoc brought about by the work of Ken Lay and his Enron cronies is a normally functioning market.

Not really, but their selective use of data is a little odd.

Bipartisan pressure on Washington

A Republican governor and Democrat governor are teaming up to press Congress to pass the Lieberman/Warner bill, which legislates cuts in greenhouse gas emissions. Environmental Defense enlisted Tim Pawlenty, the Republican governor from Minnesota (the state's two senators both signed on a sponsors of the bill), and Arizona's Democrat governor, Janet Napolitano, for a series of radio ads. It's hard to guess what sort of impact this might have, but it shows the stakes and fractured alliances.

Both Arizona and Minnesota have been in the lead with climate change legislation, and both realize regional solutions are merely placeholders -- just temporary measures while everyone waits for Washington to get involved.

Apparently, the ads focus on the cost to the U.S. economy of not acting now on climate change. They push the point that the United States will lag further behind Europe if Washington can't come up with some sort of law this year to cut emissions.

Meanwhile, President George W. Bush convenes his climate talks with the world's big polluters in Hawaii on Wednesday. He'll try to push the idea of using technology to beat carbon, pushing to open markets for U.S. science to cut emissions in India and China. The longer he waits, the more he risks that those "technology transfers" he craves will clear the way not for U.S. gadgetry, but European expertise.

Chaos isn't good for business

It seems loony greens and their tree-hugging friends aren't keeping executives up at night. Rather, the bogeymen spooking business leaders turns out to be the politicians who promote supposedly 'business-friendly' voluntary approaches to cutting greenhouse gases.

Why? Top execs want clarity on climate change policy and prefer a U.N.-brokered system to the voluntary approach championed by the White House and some leaders in the Republican Party, according to a study. Investors always prefer a nasty known to unknown that offers a glimmer of hope. An established system, even one involving a carbon tax or deep cuts to emissions would clear the way for businesses to adjust their forecasts and plan accordingly, according to the study.

Canadian political leaders are getting the same message. Policy chaos isn't good for business, apparently. The business leaders have no problem with the noble goals of various greenhouse gas policies being developing in Canada, they just wish the country had one national approach rather than a half dozen local ones. Will a uniform emissions policy drive business out of Canada? Just the opposite, apparently.

"This is affecting investment plans," said Tom d'Aquino of the Canadian Council of Chief Executives. "How can you make investment decisions on a 15 or 20 or 25-year horizon if you are living in a country that is totally fragmented on environmental policy? The danger is that of some people saying if Canada can't get it together, maybe we should go somewhere else. People have actually said that to me."

But why stop at national borders? If a national plan is superior to local ones, wouldn't an international policy trump local ones? The Washington Post (registration required) notes the similarity between the European Union plan unveiled last week and Lieberman-Warner bill on the floor of the Senate. The largest businesses in the United States, those with the biggest lobbying clout, already operate under greenhouse gas regulations in Europe. It's hardly a surprise many of these companies are actively pressing for Washington to get on board and bring some conformity to global policy.

Cue President George W. Bush in Monday's State of the Union address:

And let us complete an international agreement that has the potential to slow, stop and eventually reverse the growth of greenhouse gases. This agreement will be effective only if it includes commitments by every major economy and gives none a free ride.

Bush, with his roots in the corporate wing of the Republican Party, is playing catch up to his supposed base. He may try to pitch a voluntary system again this week in Hawaii when he convenes a meeting on climate change. He'll get few takers.

Pessimists were wrong. It's worse.

"The climate crisis is significantly worse and unfolding more rapidly than those on the pessimistic side of the IPCC [International Panel on Climate Change] projections had warned us."

Former Vice President and oracle of inconvenient truths, Al Gore, says climate change is accelerating but adds that all candidates for U.S. president will back policies to address the issue. He argues that a global carbon trading system is critical, which seems fairly obvious when dealing with a global problem.

Gore's influence may be questionable, although his comments about Republicans, even evangelicals, could be read as a sign he's angling for a say regardless of who wins.

At the moment it would seem the U.S. would be a late arrival to climate change party and would have to dance to the music already playing. The nice advantage of always being the 800-pound gorilla is that even if you're last on the dance floor, you call the tune.

The Financial Times points to a way in which the U.S. could quickly force the world to adopt a global greenhouse gas policy: a carbon tax on imports. Of course this would require the U.S. to have its own tax first, but that day may be approaching, once the election is out of the way. The EU also suggested taxing the carbon content of imports in the climate proposals unveiled this week. It's a long way off and the FT lists the lengthy number of hurdles, but the first one -- raising the issue and debating it -- seems to have been cleared.

The 10-step low-carb diet

The European Union president outlined to the European Parliament Wednesday the bloc's plan to cut emissions 20 percent by 2020. While not nearly ambitious enough to satisfy everyone in the green lobby (emission credits won't be fully auctioned until 2020 for some industries, for example), the outline seemed to win general praise.

What will the United States do in response? Several bills are working their way through Congress, but the momentum will shift to the presidential candidates this summer. Should one of those candidates be Hillary Clinton, than the Center for American Progress would probably be a good place to look for clues to her policy.

The center has been described as Hillary's think tank. The organization is led by former Clinton White House chief of staff, John Podesta. He testified before the House Select Committee for Energy Independence and Global Warming on Wednesday and outlined an energy policy that he insisted the next president must put at the center of his ("or her") economic policy.

He outlines 10 steps to move the country from a high-carbon economy to a low-carbon one. He makes the usual noises about the number of jobs that would be created by adopting and developing new technologies.

He fully embraces cap-and-trade, noting that it will happen on a regional level if Washington doesn't act. But he urges Congress to get moving, and emphasizes that emission credit should be auctioned, not freely given. The revenue generated by those auctions should be used to offset the impact on the poor, with 10 percent going to carbon-intensive industries to help them with the cost.

He also argues for steps to end suburban sprawl, increase fuel efficiency of cars, improve the efficiency of the electricity grid, using the buying power of the federal government to promote renewable fuel and helping to fund research into carbon capture technology.

Maybe most striking is his tone. These aren't some policy goals for incremental change.

The urgency of this issue demands a president willing to make the low-carbon energy challenge a top priority in the White House—a centerpiece not only of his or her energy policy but also of his or her economic program—to produce broad-based growth and sustain American economic leadership in the 21st century. This task is so encompassing it will demand that the incoming president in 2009 reorganize the mission and responsibility of all relevant government agencies—economic, national security, and environmental.

He ends by creating a vision of the United States leading the rest of the world in the fight against climate change. After eight years of denial, it's slightly hard to comprehend the potential for changes in 2009.

"It’s not too early to prepare for the emergence of markets"

Minnesota's governor is proposing a planning authority to explore a state-wide carbon market. The state is already a member of the Midwestern Greenhouse Gas Reduction Accord, a five-state project based around the Great Lakes, so it's a bit unclear what the governor is seeking. The state has a goal of cutting emissions 80 percent from 2005 levels by 2050.

“While it’s still too early to know exactly how the carbon credit market will develop, it’s not too early to prepare for the emergence of markets,” Governor Pawlenty said.

The authority seems to be following a similar path as San Francisco. The mayor proposed a carbon offset program that limits the market to the city. On a political level it makes great sense, but San Francisco isn't a very big place with aging gritty steel mills that will be easy to clean up and create credits. This was the whole point of the U.N.'s Clean Development Mechanism - if you need carbon credits, it's easier and cheaper to generate them in the poorer, less developed parts of the world.

"It's incumbent upon states to take steps to combat rising carbon dioxide levels"

New Jersey's governor signed into law a bill that requires a 10 percent cut from current levels in power plant emissions by 2019. The law authorizes the state to assign or auction what essentially amount to pollution permits, establishing a cap-and-trade market. If power plants can't meet their required reductions in greenhouse gas emissions, they must buy credits from competing plants that made extra cuts.

The key is how many permits are created and how the permits are distributed. In Europe, too many credits under its previous regime were assigned and prices for carbon collapsed. Also critical - will permits be freely given or auctioned? Critics argue freely distributing permits (as has been proposed) steals clean air from tax payers. New Jersey's effort is part of the Regional Greenhouse Gas Initiative, which is launching a carbon market among 10 East Coast states in 2009. New York plans to auction all of its permits, which should create encourage steeper cuts in emissions by placing a higher price on greenhouse gases.

It's now up to the New Jersey Department of Environmental Protection to decide what to do with those valuable permits. Expect intense pressure from utilities which want to see them handed over.

The cost of cap-and-trade

Since a cap-and-trade system seems increasingly likely in the United States, it's worth asking what the impact might be.

And since you asked, the the Environmental Protection Agency and the Energy Information Agency have an answer. It's not nearly as dire as critics want everyone to believe, and for good reason.

The good news: "Impacts on economic growth are modest. By 2030, cumulative GDP losses range from -0.02 to -0.07 percent across the different scenarios analyzed by EIA and EPA."

The bad news: "Total greenhouse gas emissions in 2030 fall from 9.1 to 9.7 billion metric tons CO2 in the “business-as-usual” case to 6.9 to 7.3 billion metric tons under S.1766 -- a 24 to 26 percent decrease."

Why is that bad news? That estimated cut in greenhouse gas emissions isn't much of a cut compared to current levels of emissions, which totalled 7.1 billion metric tons in 2006. Compare that to Britain, which is debating an 80 percent cut in emissions by 2050.

But I suppose it's a start.

Lawmaker promises cap-and-trade bill

Powerful Democratic lawmaker, John Dingell, promises at the Detroit Auto Show that he will introduce a bill to launch a cap-and-trade approach to cutting greenhouse gas emissions in the United States, according to Reuters. This is one of several efforts underway and it's unclear whether anything will pass in an election year, but that's not really the point. Dingell has made his reputation as a reliable battler ready to take on the environmentalists. His change of heart is the surest signal that United States is close to adopting a European-style emissions trading system. Wall Street wants this, the green lobby wants it, several states in the Northeast are already committed to it. Even big business wants it. The United States effectively demonstrated how a cap-and-trade might work with the success of a similar system to control sulphur emissions that contribute to acid rain. Dingell may not want it, but he wants to be in control of the debate and like the administration, he knows the country will join the global effort to cut greenhouse gas emissions. This is about having a hand in the way it's done.