The flaw in the Waxman-Markey bill is not the too-many offsets that domestic polluters are (potentially) allowed to purchase in lieu of actually reducing their own emissions. The flaw in Waxman-Markey is the too-mild 2020 target — a 17% reduction from 2005 levels — which will be so easy to achieve with various low-cost clean energy strategies that it’s hard to see why polluters would avail themselves of the higher-cost offsets option.

Yes, my thinking on rip-offsets has evolved, primarily because I have spent the last few months talking to leading experts, domestic and international, including the chief climate negotiator for a major European country.  Also, I’ve actually started to look closely at the international offsets market — and at how Waxman-Markey would dramatically change the domestic rip-offset market — something that the journalists and think tanks who have written critiques of the offset provisions do not appear to have done.  And I’ve looked closely at the lowest cost clean energy strategies — again, something the critics don’t appear to have done.

Since Waxman-Markey is the vehicle by which President Obama and Congressional Democrats have decided to pursue action on clean energy and global warming — and since it will take all of our efforts just to ensure it is not substantially weakened by the time it reaches the president’s desk — I think progressives need to understand exactly what they are getting here.  More importantly, we need to understand what is worth fighting hardest to preserve or change in the bill, and what is not worth expending significant political capital on.

As I think will become clear, trying to curtail the quantity of offsets allowed in the bill is simply not a high priority (or even medium priority) activity.   Keeping the 2020 target as strong as possible is.

As I wrote back in January, a U.S. climate bill should set a target of reducing U.S. greenhouse gas emissions 20% to 30% below 1990 levels by 2020 (see “Is 450 ppm politically possible? Part 8: The U.S. needs a tougher 2020 GHG emissions target“).  I won’t repeat that science-based analysis here, since, if anything, the science has only gotten more urgent (see recent posts in “Uncharacteristically Blunt Scientists“).  One point I will elaborate on is the assertion from that earlier post that the United States has the technology and resources to reduce its emissions levels substantially below 1990 levels by 2020.

After all, if a much tougher target was straightforward to achieve, then the relatively mild target of Waxman-Markey, which takes us just a tad below 1990 levels by 2020, must be pretty damn easy.  And when you throw in the huge clean energy push in the stimulus, Obama’s aggressive fuel economy standards decision, peak oil, the provisions of Waxman-Markey that accelerate clean energy into the marketplace, and the apparently much greater domestic supply of natural gas than anyone thought even a few years ago — suddenly the target because very easy to meet indeed.

The analysis that I am going to present is not something that any major economic/energy model can reproduce because none of them — including EPA’s — model clean energy well nor are they designed to look at things like the full impact of peak oil or how the electric grid’s dispatch order will change  with even a modest carbon price.  These models have historically overestimated the cost of reducing pollution and are doing so again.  Because there is no reliable model, my analysis is necessarily approximate, and it will take a number of posts to spell out exactly how the U.S. energy and economic systems will respond to Waxman-Markey.  This post will serve primarily as an overview of the key issues of how we will meet the 2020 target.  Later posts will explore individual issues — such as fuel switching from coal to natural gas — as well as what I think will happen in the 2020s and beyond.

 

OFFSETS — DOMESTIC AND INTERNATIONAL

Let’s start with this basic critique of Waxman-Markey — that the 2 billion offsets it allows polluters to buy in lieu of actually reducing their own emissions will vitiate the targets, a concern that I myself held until I looked into the issue closely.  The Breakthrough Institute (TBI) was among the first to detail this critique with “Waxman-Markey Climate Bill’s Emissions ‘Cap’ May Let U.S. Emissions Continue to Rise Through 2030,” which asserts “If fully utilized, the emissions “offset” provisions in the American Clean Energy and Security Act would allow continued business as usual growth in U.S. greenhouse gas emissions until 2030.”  That critique was picked up in Time, the WSJ, and NPR.  Independently, Reuters wrote a piece asserting:

The United States and European Union can pay to transfer to developing countries more than three-quarters of proposed carbon cuts over the next decade, draft and approved rules show.

These critiques are less alarming than they appear because they are, of course, hedged.  TBI uses phrases like “may let” and “if fully utilitized.”  Reuters used the word “can.”  After all, just because American companies can purchase international offsets to replace their own emissions, that doesn’t mean they will.  [I will also (ultimately) address the separate question of whether even Reuters’ hedged claim is true.]

Yet offsets aren’t free nor are they unlimited in quantity.  The important question is NOT how many offsets the bill permits.  The question is will the offsets will be available at a quantity and price that makes them more attractive than the vast amounts of moderate-cost near-term domestic emissions reductions strategies.  Answering that second question requires an understanding of

  1. How many million of tons of emissions will be required to meet the gap between the Waxman-Markey targets and what emissions would have been in lieu of those targets?  That is, how many allowances and/or offsets will emitters need to buy in 2020?
  2. What will be the price of international offsets available in quantity by 2020?
  3. What will be the price of low-cost domestic clean energy strategies available in quantity by 2020?

Neither of these critiques — or any I’ve seen — bothered to look at any of those questions.  Neither looked at the actual international offsets market.  And TBI did not avail itself of the existing analysis by EPA of the likely domestic offsets market.  Now TBI in general is not known for strong analysis — see “Memo to media: Don’t be suckered by bad analyses from the Breakthrough Institute the way Time, WSJ, NPR, and The New Republic have been.”  That doesn’t mean they are wrong this time — broken clocks and all that.  But anything coming from TBI should be viewed as suspect based on their track record.

I have previously explained at length why the domestic offsets provision does not undermine the target (see here).  In a regulated market with a cap, many of the domestic offsets will represent real reductions of US greenhouse gas emissions, and the total supply of cheap domestic offsets will be limited for a long time.  A recent EPA analysis of Waxman-Markey came to precisely the same conclusion.  TBI’s analysis never mentions this at all.

The EPA believes, as do I and many other people — including the moderates who pushed for changes in the Waxman-Markey bill from the first draft — that domestic offsets will be more expensive and less plentiful than international offsets.  That’s why the revised bill allows the EPA administrator to crank up the limit for international offsets to as high as 1.5 billion (with the domestic offsets limit dropping to 0.5 billion).  This isn’t a terribly surprising belief since the potential pool of international offsets is vastly larger than the potential pool of domestic offsets.

In its analysis of the first draft of the bill, EPA projected that some 100 million tons of domestic offsets would be used — although that rises in subsequent years.  Since that analysis did not model most of the bill’s other clean energy provisions, since the 2020 target was weakened, and since the EPA model has various flaws some of which I’ve mentioned, I would doubt that emitters would waste their money buying even 50 million tons in 2020.  The full reasons why will only become clear when we look at the clean energy alternatives in some detail.

I will discuss the international market — including the very legitimate concerns about the quality of those offsets — at length in a later post.  But here are the key points.  There is a market for international offsets aka the Clean Development Mechanism, an “arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex B countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries.”  Certified Emission Reductions (CERs) are “climate credits (or carbon credits) issued by the Clean Development Mechanism (CDM) Executive Board for emission reductions achieved by CDM projects” and independently verified by a third party under the rules of the Kyoto Protocol.

Point Carbon, which closely tracks and reports on the market for European allowances and CERs, noted last week (subs. req’d) that CER “prices in 2008 averaged €17.50 and last July were changing hands for as much as €22.90.”  The average exchange rate to dollars for the year was 1.47.  So the average price of CERs for the year — including the price crash that inevitably accompanied the economic crash — was about $25/ton.

In a separate article, Point Carbon reported on May 15, “Data released by the EU today showed factories and companies regulated by the region’s cap-and-trade market used 81.7 million certified emission reduction (CER) credits last year.”

So when the market was about 80 million tons of CERs, the price averaged $25/ton.  It is certainly true that the quantity of CERs is likely to grow significantly in coming years.  But then again, so is European demand (since just as our 2020 target isn’t especially demanding, their 2008 to 2012 target wasn’t either — but their subsequent targets will start to bite).  I think it is fair to say that if the United States swoops into the market and purchases tens of millions of CERS (let alone much larger quantities), the price is not going to go down. This is not the place to do a full potential market analysis.  But I’m going to assert that the price for CERs in 2020 will, to first approximation, not be significantly below $25/ton — and could be considerably above it depending on just how many CERs are demanded by the Europeans and the Americans (and Australie and anybody else who joins the market).

This post has already gotten long enough, but I think you can see where I’m going.  In subsequent posts I will look at

  • How big the 2020 “gap” is — how many millions of tons will polluters have to reduce emissions in 2020 given likely economic and energy policies and conditions.
  • What are the lowercost domestic clean energy alternatives to buying international offsets that will be available in quantity in 2020 — namely energy efficiency, conservation, biomass cofiring, and fuel switching from coal to gas (i.e. all of the emissions reduction strategies that don’t require building new power plants or siting new power lines).

I think it is quite safe to say that there will be an over abundance of such clean energy alternatives below $25 a ton.  Indeed, I think the market clearing price for those alternatives collectively in 2020 will be closer to $15 a ton, as I’ve said before (see here).

And so I doubt even 150 million tons of offsets will be used by emitters in 2020.

One final note:  Fence-sitting members of Congress who think the 2020 target will be hard to hit, who don’t believe my analysis that large quantities of clean energy strategies will be available at low cost by then — you have no reason to fear Waxman-Markey.  After all, larger amounts of international offsets are very likely to be available at moderately higher prices.  Even better, of course, is the clever “strategic reserve” cost containment measure in the bill, which is all-but-certain to ensure that the permit price is 2020 is not higher than about $20 — again, without resorting to offsets (see WRI’s bill summary here for a discussion of the reserve).