Monday, June 29, 2009

Cap and trade

Some time Thursday or Friday I received an anxious e-mail from somebody at Environment Illinois urging me to call my congressman (woman in my case) to exhort them to vote for the new emissions bill. As it happens, my phone call was not needed because the The American Clean Energy and Security Act of 2009 (ACES) (aka the Waxman-Markey bill) was passed by a slender margin of 219 - 212. Onto the Senate it now trundles to what end we shall see. I doubt if my phone call would have had much impact as my congresswoman voted against it, and I doubt that my little voice would have swayed her. So, while she is all for earmarks for green fuel depots in Naperville (many thanks for that), Ms. Biggert is less persuaded by the proposed legislation for curbing carbon emissions on a national scale.

There are several questions, at least a couple being exactly what is a cap and trade system and will it have any effect? I have long been a bit mystified by the whole concept of cap and trade and how it could be preferable to a more direct approach such as simply setting limits and/or taxing emissions. As I understand it, there are annual targets of emissions established on a downward slope with the goal of achieving some ambitious reduction (17 % by 2020). Individual producers will be able to exceed the limits only by purchasing credits, which, in order for the system to function effectively, will be sold by those who have reduced their emissions below the established standards. Thus the cap and trade establishes economic incentives for industries to lower their carbon emissions. At the same time it accommodates those that can't or won't reduce their emissions, but a cost is imposed upon them.

There are already some free-market versions of the scheme floating about. For example, we have our very own Chicago Climate Exchange, which is a voluntary exchange operating a cap and trade system for greenhouse gases. According to their website, CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing contracts. The contracts are priced by the metric ton of CO2. The data show that the price has fluctuated wildly over the past few years (data begin in 2004) from a floor of about $1 a ton to a high of over $7 last summer. The bursting of the energy crisis bubble appears to have caused a similar deflation of the contract price. Good for polluters I guess. So why would anyone want to join an exchange like this? A review of the members reveals some interesting things. One brewery, New Belgium has signed up; beer drinking environmentalists should now flock to Fat Tire. There are just two coal mines, but quite a list of electric power producers. The longest list comprises participant members that represent "offset aggregators." They sport names like Carbon Green, LLC, Carbon Logic, LLC, Climate Bridge Ltd. and so on. I suppose these companies have all sprung up with the intent to make money on the regulation of emissions. If they invested last year at $7, then things are not looking good currently. On the free market, it is a polluter's world right now. And even then, there is no compunction to participate.

Critics have claimed that the cap and trade system will lead to an increase in energy prices. This of course is true if the sources of energy are carbon-based; and since some 80% of the current energy is carbon-based there is little likelihood of the sources changing to non-carbon sources any time soon. They say this is a bad thing for the economy and that prices will rise for consumers. Undoubtedly, yet that surely has to be the outcome if the objective of reducing emissions is to be accomplished at all. There are two alternatives: one, to replace all the carbon-based fuels by alternatives (or renewable carbon fuels); two, reduce consumption (drastically) of carbon fuels.

The critics further argue that the price increase will drive industries overseas to locations where energy is cheaper. It's a fair point, but industries have been becoming globalized for decades now for cost reasons, notably labor and materials.

The biggest question is whether or not the current legislation will be effective in reducing emissions. Many are skeptical. For one thing, the bill could not have passed without a host of compromises (the essence of politics being compromise - or quid pro quo). To that end, accommodations have been made for the coal industry. Since coal is both the most important fuel in electricity production and the most carbon-intense, there is little chance of significant progress unless there is a radical change in the coal business. While saying the right things by environmentalists, the new king of Camelot has not forgotten the lobbyists for the coal producers. Mattoon may again be the host for the once-and-Futuregen project for "clean coal." The talk is all about carbon sequestration and how it will revolutionize the coal industry, transforming it into an environmental friend. Even if it is technically successful, questions about cost and time required to implement on a national scale remain. I cannot believe it can be implemented without a massive price increase being incurred. How could it be otherwise? Oh, and wasn't there recent approval of that environmentally devastating coal mining technique that involves blowing the tops of the hills to expose the coal?

Meanwhile, I'll start hoarding CO2 credits.

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