What’s this “price collar” I keep hearing about?

The bill sets boundaries on the prices of the carbon permits that are sold at auction, which is a very important feature for businesses, though of dubious worth for the program’s environmental aims. Still, all things considered, I’d say the Kerry-Lieberman bill gets the price collar about right. Here’s the skinny.

A price collar consists of two parts: a price floor (or reserve price) and a price ceiling. In this bill, the price floor will be set at $12 per ton of carbon dioxide in 2013. (The price floor rises at the rate of inflation plus 3 percent annually until 2050.) That means that authorities will not sell any permits for less than $12. This implies that not all of the permits available for sale under the cap will necessarily be used—good news for the climate and clean-energy jobs.

On the other hand, the price ceiling will be set at $25 per ton of carbon-dioxide in 2013. (The price ceiling rises at the rate of inflation plus 5 percent annually until 2050.) That means that authorities will sell as many permits for $25 as anyone wants to buy. This means that permits may be sold in excess of the cap’s limits, which is bad for the atmosphere. Fortunately, any permits sold in excess of the cap in any one auction are not actually in excess of the cap in aggregate. That’s because the bill provides for a “strategic reserve” of carbon permits. This stockpile of permits is assembled with a percentage of permits shaved off the annual cap in each year; and then replenished by unsold permits (in the event that the auction hits the price floor), by international offsets (at a discount of 5 offsets per 4 carbon permits added to the reserve), and then by domestic offsets, in that order.

The design of the price ceiling and strategic reserve leave something to be desired. There’s a potential for busting the cap, if carbon demand is strong enough. But I am not terribly worried. For one thing, the strategic reserve preserves the overall long-term integrity of the cap. For another, I don’t expect that permits in 2013 will sell for much more than $12, and a carbon price of $25 seems highly unlikely. Efficiency, renewables, and other emissions reductions opportunities are just too abundant.

What’s the deal with EPA authority?

A lot of folks are worried – and some are apoplectic — about the bill’s treatment of the EPA’s authority to regulate greenhouse gas emissions. I guess you could say I’m concerned.

As Senator Kerry pointed out in his blog post at Grist, the program is actually administered by the EPA. So in that sense, the agency maintains, and perhaps even gains, considerable power. Yet the bill does prevent the EPA from regulating greenhouse gas emissions as air pollutants under its Clean Air Act authority. (Possibly hair-splitting aside: the bill doesn’t provide carte blanche exemption for greenhouse gas emissions from the Clean Air Act. It says only that EPA can’t regulate them as a hazard to human health owing to their contribution to climate change or ocean acidification. Presumably, if they were shown to be unhealthful for some other reason, EPA may be able to regulate them directly as air pollutants.)

Restricting EPA’s authority is a deal-breaker for some greens. It’s not for me, though. Direct EPA regulation is not my first choice for dealing with carbon. It’s not even my second choice. That’s because it’s likely to be expensive, cumbersome, politically fraught, and possible ineffective. Don’t get me wrong, I’d very much like to retain EPA’s authority in case we run out of options, but it is something I’d trade away for a decent comprehensive energy and climate bill that puts a legal limit on carbon emissions. And that’s precisely what we’re getting with the American Power Act.

Consumer protection

The cap-and-trade program is remarkably oriented toward consumer protection—that is, it provides strong built-in protections for working families. (Much more so, I’d say, than the House-passed Waxman-Markey bill.) For reasons that I presume have to do with political influence, the bill takes a rather winding path between point A (the program) and point B (consumer protection), yet it does manage to arrive at its destination.

In the early years of the program, a significant chunk, around 60 percent, of the carbon permit value is returned indirectly to consumers. Rather than simply auctioning the permits and returning the money to families, the bill provides free allocation of permits to local utilities and energy providers. But the free allocation comes with strings attached. The strings require the local firms to pass along the financial benefits to their ratepayers on a per-capita basis. (It’s actually somewhat more complicated than I’ve described here, but I think the topic deserves its own post, later.)

Got that? Good. Now forget it.

Those free permits I just told you about, the ones earmarked for consumer protection, shrink in number more or less at the same rate as the overall cap is shrinking, phasing out completely by 2030. Meanwhile, starting in 2026, a new program comes online called the Universal Trust Fund, which is essentially a cap-and-dividend style rebate program. In other words, a small but growing share of permits are auctioned with the revenue directed to the Trust Fund, and then returned directly to households, adjusted for size and without income limits. (It’s up to the Treasury Department to determine exactly how the rebate mechanism will work.) The upshot is that by 2035, nearly 78 percent of all permits will be auctioned with the money set aside for what amounts to per capita dividends for American households. This is about as close to genuine cap-and-dividend as we’ve seen, and it’s evidence that Senator Cantwell’s climate bill has had a positive influence on Senate thinking about consumer protection.

Plus, in addition to all that stuff, the bill contains extra provisions for low-income households. They get direct cash refunds if they are below 150 percent of the poverty threshold. Households below 250 percent of the threshold are eligible for refundable tax credits.

I am pleased with these provisions. Sightline has always argued that those who have done the least to cause—and stand to lose the most from—climate change should be held harmless. Climate policy should help to right the egregious injustice of climate change itself.

What about offsets?

The bill devotes more than 120 pages to offsets, so my treatment of this potentially heartburn-inducing subject will be necessarily abbreviated. Why do I say heartburn-inducing? Because if done wrong an offsets program could prove to be the Trojan Horse of comprehensive climate policy. And there are reasons to worry about Kerry-Lieberman’s provisions, which I’ll get to in a moment.

Like most other flagship climate bills, it will use both domestic and international offsets. Domestic offsets are considered as good as emissions reductions; for example, a coal-burning power plant could substitute a certified ton of offset carbon (say, from planting trees on farmland) for a one-ton emission permit in its periodic compliance report to federal authorities. In other words, domestic offsets count, one to one, same as emissions reductions. International offsets, on the other hand, are subject to a discount rate such that five tons of international offsets must be supplied for every four tons of offset allowances actually awarded in the program. The discount rate helps cushion uncertainty about international offsets’ actual impacts.

The bill takes a “project type” approach to offsets, which means that it requires the program administrators to identify categories of projects — landfill methane capture or forest planting, just for example — and then develop carbon measurement techniques that can be applied to all the projects in the category. It’s a good idea. And to its credit, much of the reason the bill’s offset section is so long is that it goes to great length to provide rigorous oversight and quality assurance. I take this as reason for cautious optimism.

Why am I worried?

First, the bill includes a ton of offsets. Or, more precisely, 2 billion tons of offsets. In each year of the program. As a practical matter, that means that roughly 43 percent of the total capped emissions can be met with offsets, rather than permits, in 2013 when the program starts. By 2043, all capped emissions can be met with offsets. Now, assuming that the offsets are real, permanent, additional, verifiable, yadda yadda, there’s nothing wrong with this. But I’m a worrier, and this bill gives me 2 billion reasons a year to worry that we won’t be reducing carbon with the certainty and verifiability of, say, replacing coal-fired power plants with wind mills. Or replacing Hummers with plug-in hybrids. Or doing energy-saving retrofits on millions of homes and businesses. Or building compact communities in which walking, cycling, and riding transit can meet most of our mobility needs. It says, in short, “if it’s cheaper to plant trees than to convert to a super-efficient, clean-energy economy, it’s OK to plant trees.” Some observers think the supply of certifiable domestic or international offsets will simply be too expensive for most of the allowed 2 billion to ever see the light of day. But I worry.

Second, the bill assigns a large portion of the responsibility for the domestic offsets program not to the EPA, which will administer the bulk of the cap-and-trade program, but to the Department of Agriculture. Folks in the know tend to worry about this because the USDA has sometimes been the victim of “regulatory capture,” putting the interests of the farm and forestry lobbies ahead of the public interest.

I’ll think I’ll leave it at that. For my money, the expansive offset provisions is the most worrisome feature of the bill. Yet we haven’t seen any bill (no, not even the CLEAR Act) that doesn’t contain very large offset, or offset-like provisions. Offsets can be made to work, but I’m going to need some Pepcid if I keep thinking about them. My guess is that, once the United States passes a comprehensive climate and energy law, people like me will spend an awful lot of our time monitoring the workings of offset programs.