U.S. climate change bill, radically bad law: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - The American Clean Energy and Security Act (HR 2454) that cleared its first hurdle last week when it was approved by the Energy and Commerce Committee of the House of Representatives is a radically bad piece of legislation.

But ironically the bill's many flaws are precisely what make it more likely to be approved.

Its arcane complexity and cartload of concessions to special interests is testament to the continuing and baleful influence of Washington lobbying firms. It typifies everything advocates of good government decry about the policy process.

In backroom negotiations, an unholy alliance of environmental groups, energy companies, Wall Street firms and regulators has been forged that will create a massive and arbitrary program to reward favored interests at the expense of the consumer and the taxpayer.

The result is a complex cap-and-trade system for reducing greenhouse gas emissions which legislators almost certainly do not understand and which will have unpredictable effects. Costs and benefits will be distributed unevenly to reward firms with the best connections and highest-paid lobbyists.

But there is enough complexity to hide its likely cost, and the authors have probably given away enough concessions to buy the votes they need to assemble a 60-vote super-majority in the Senate. As a result, the cap-and-trade system set out in HR 2454, or something like it, has a fair chance of being enacted into law later this year or in 2010.

A QUESTION OF ALLOCATION

Shorn of the detail and a rather illogical structure, the bill is actually fairly straightforward. It sets out a list of "covered industries" (mostly gas and power utilities as well as energy-intensive consumers such as steel and petrochemicals) that would be forbidden from emitting greenhouse gases unless they obtain an allowance issued by the Environmental Protection Agency (EPA).

Some allowances will be given directly to covered industries and other recipients. Others will be auctioned. Once issued, allowances can be traded, banked and borrowed in a free market. But the number issued each year will taper off to ensure that emissions targets are met.

Basic details are set out in the attached chartbook (here).

The most interesting, and controversial, aspect of the bill is not how the allowances will be traded, but how they will be allocated initially. The initial allocation, not the trading, will determine who wins and who loses.

A "neutral" allocation would have distributed allowances to firms that will eventually need them in proportion to their emissions in the base year (2005), then gradually reduced them on a pro rata basis. The costs of the scheme, in terms of higher energy prices, would have been explicit, but they would have been shared broadly across the economy.

But instead of a neutral allocation scheme, the bill has opted for a highly discretionary one. By divorcing the initial allocation of allowances from the companies that will eventually need them, the bill has created a new form of "currency" that can be used to reward particular industries by granting them valuable emissions rights conferring a competitive advantage or can be sold on the open market for conventional greenbacks.

In the first two decades, the largest share of allowances is reserved for suppliers of electricity, natural gas, home heating oil and propane, to insulate their customers from the impact of rising prices. But other tranches are reserved for promoting energy efficiency and renewable technologies, carbon sequestration and storage, clean vehicles, and something called "Clean Energy Innovation Centers", as well as a "Climate Change Health Protection and Promotion Fund".

In effect, the bill creates a new type of "pork" or largesse for legislators to distribute to favored causes and groups. This shadowy "carbon budget" is outside the regular appropriations process and allows the government to divert real resources toward favored sectors and projects without the spending showing up in the federal budget or the deficit. It will still impose real costs, however. All this "spending" will be funded by other energy producers and users that do not have reserved allocations.

Costs are set to be higher than proponents claim. Advocates point out only 15 percent of the allowances will be auctioned initially, implying that 85 percent will be given away "free" to reduce the impact.

This is not quite the whole truth. The bill stipulates any permits not earmarked for specific industries or other provisions will be auctioned. In the early years, almost all allowances have been earmarked. But by 2025-2030 a further 15-30 percent of permits will be up for auction, taking the percentage of allowances up for competitive bidding to almost half by 2030.

BAD BILL, COULD BE WORSE

For all its flaws, the bill offers substantial concessions that may reduce opposition from a wide range of energy producers and users:

(1) Power utilities, natural gas suppliers and heavy industries have secured long phase-in periods that will delay the impact for at least five years and in some instances more than 20. Petrochemical producers, steelmakers and producers of materials such as paper, ethanol and zinc have been granted exemptions until 2014. Power utilities and gas suppliers have been offered a huge share of valuable allowances that will not be significantly reduced until after 2025. The full impact has been deferred until well after most legislators and company executives have retired.

(2) The bill ends the damaging uncertainty surrounding future regulation of greenhouse emissions. It gives energy producers and consumers certainty about when and in what quantities they will be required to reduce emissions, making forward planning and investment easier.

(3) Crucially, state governments are pre-empted from introducing their own cap-and-trade emissions control programs. The bill explicitly invokes the federal government's constitutional right to regulate in this area and forbid states introducing their own systems. For energy producers and consumers, it ends the threat of a patchwork of regulations across the country that might become stricter or looser over time depending on local political pressure [ID:nLR468410].

(4) Covered industries obtained a valuable concession because they can meet almost a third of their obligations by investing in domestic and international abatement schemes (such as re-forestation) rather than buying allowances on the open market, which should reduce the costs of compliance sharply.

Even with all these concessions, this is still a very bad bill. It creates an opaque, complex and unpredictable system that picks arbitrary winners and losers. The real costs have been carefully obscured beneath layers of confusing detail. I doubt that even its supporters any longer under the measure.

But it may be a bill that energy companies and users would be advised to support as the least-worst option.

For that reason, after some concessions for special interests, the bill might just be able to secure the 60 votes it needs to get through the Senate and become law. Bad law, but law nonetheless.

(Edited by David Evans)