Sens. Cantwell (D-Wash.) and Collins (D-Ill.) have introduced a welcome addition to the debate over climate change legislation in the Senate. Their bill, with its strong architecture, and simple, fair, and transparent emissions reduction, can help restart the momentum to agree to climate change legislation early next year before the prospect of mid-term elections shuts down the legislative process.
Alan Durning and Eric De Place provide a thoughtful critique of the Cantwell-Collins bill, which was introduced last Friday. They justifiably praise certain aspects of the bill, and offer some thoughts on how it can be improved. Mainly they want more detail, which in some cases is probably a good idea. But part of the “genius” of the Cantwell-Collins bill is its simplicity, and if Durning and De Place want more details, they better be prepared for some devils to sneak in as well.
To start, the Carbon Limits and Energy for American Renewal (CLEAR) Act has a fundamentally sound approach to dealing with climate change: it places a cap on emissions, auctions off allowances, and returns the vast majority of the proceeds right back to the American public. This approach ensures that we get real emission reductions, and also makes sure that working and middle-income Americans are protected from the increased prices that will come about as we transition to more clean and secure energy sources. Under the Cantwell-Collins approach, the majority of Americans come out ahead because the “dividend” from the bill more than offsets price increases. This structure is not only fair, but it helps build and maintain a strong political coalition that can protect the cap over the long term.
Durning and De Place are critical of the bill for offering too few specifics for how to carry out the auctions and dividend. But these kinds of questions should be left up to administrative agencies that implement the bill, rather than the legislators writing it. Agencies, like the EPA, can be more flexible, are less subject to lobbying pressure, and their actions are independently reviewed by courts. Detail questions, like how to do the auction, or how to carry out the payments, are better decided through the agencies’ administrative process, rather than the give-and-take of legislative bargaining.
In other areas, Durning and De Place’s call for detail makes more sense. Specifically, the CLEAR Act achieves a good portion of its emission reductions through use of something called the Clean Energy Reinvestment Trust (CERT) Fund. The CERT Fund is filled up every year with 25 percent of the revenues generated by auction, and it is targeted at a range of climate change related activities, including “offset-like” projects both domestically and internationally that will reduce greenhouse gases. The CERT Fund can also be used for things like worker training or other forms of “transition assistance.” As it currently stands, spending from the CERT Fund is run through the normal congressional appropriation process — not a paradigm for effective and efficient budget prioritization. The CLEAR Act can be substantially improved by designating a minimal amount to be used for reduction of greenhouse gas pollution, to be run by the EPA. Just as the CLEAR Act wisely leaves many of the technical details on program design to the agencies, it should leave the specifics of how to spend most of the CERT Fund to the EPA as well.
Durning and De Place also take the CLEAR Act to task for including a price ceiling, which they see as potentially undermining emissions reductions. As far as they go, these concerns have merit. However, all of the legislation currently before Congress has some mechanism to avoid spikes in allowance prices. This issue should be considered open as negotiations move forward, and the mechanism that best protects the market from excessive price volatility, while ensuring the greatest level of environmental protection, should carry the day.
One of the major innovations in the CLEAR Act is how offsets are treated. Under the standard approach, offsets can be attained by achieving certified emissions reductions in areas outside the cap, either internationally or in a domestic sector that is not covered, such as agriculture. These offsets are then traded in the allowance markets as fungible commodities — an emitter must hold either an allowance or an offset for each ton of emissions. Typically, there are caps on the total number of offsets that can be used.
In this type of market, where there is competition between sellers and buyers of offsets, the price of all offsets, no matter how cheap they were to produce, are the same. Some offsets, especially when the program is just starting, can be produced very cheaply as initial investments are made to reduce emissions. Other offsets will be more expensive to produce. In a normal market, it is the most expensive offset that is sold that sets the price for all offset. Producers that can make offsets more cheaply keep the difference.
However, under the Cantwell-Collins method, the EPA is the sole purchaser of “offsets” for the American market. Because EPA will represent the entire market for offsets for the U.S. — billions of dollars a year — it will have a great deal of bargaining power, and can therefore achieve much more emission reductions for the same price. In this way, EPA can effectively leverage its position to get the most possible emissions bang for the offset buck.
There are some downsides to this mechanism. For one, EPA will have to incur significant transaction costs as they seek out good offset projects. Some of the benefits of private markets will be lost: instead of a large number of actors, with access to lots of different information, all competing to buy low and sell high, there will just be EPA trying to crunch the numbers and identify the best deals. But the benefit of having a single purchaser that can negotiate more emissions reductions for a lower price should not be understated.
Ultimately, the CLEAR Act will be one part of what is sure to be a lengthy and contentious deliberation process over final legislation. Passage in its current form is extremely unlikely. But it includes many important features — a 100 percent auction, a better mechanism to protect consumers, an innovative treatment of offsets, and less micromanaging of agencies by Congress — that should be adopted outright or at least given serious consideration in the negotiations. As the health care debate winds down and the nation moves to the next major legislative challenge, working these elements into the final bill will help make the case to the American public that we can do climate change legislation sooner rather than later.