Sen. Byron Dorgan (D-ND) has a “Probability of Yes” vote (PrY) of 22% for the climate bill, as it’s currently written (see “Who are the swing Senators?“).   That is notwithstanding his April remarks:

North Dakota is the Saudi Arabia of wind. … I’m going to keep pushing for policies in Congress that help us develop our wind resource for the benefit of the whole country.

Hard to do more for wind than the stimulus bill did – other than pass something like the Waxman-Markey climate and clean energy bill (with a stronger renewable standard).

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Dorgan has, however, now published an op-ed in The Bismarck Tribune with a headline that befits his 22% PrY, “Reduce our CO2, yes … but cap-and-trade, no,” but with contents that mostly suggest he might actually be a real fence-sitter – and a potential filibuster buster – if somebody actually explained the bill to him and worked to address his concerns.

Indeed, the sole objections he raises to the bill – the potential for Wall Street to engage in questionable derivatives tradings and speculative bubbles that might drive the price of CO2 soaring – are actually addressed in Waxman-Markey by multiple provisions (as I discuss here and reprint below).  As an important aside, it would be almost impossible to write a bill reducing CO2 emissions that would not lead to “derivatives,” which, after all, include futures contracts and options.

If you are going to create a CO2 price – really the only way of reducing CO2 other than mandatory, command-and-control, sector-based emissions regulations (which it is impossible to believe Dorgan supports) – then Wall Street is going to create futures and options to allow companies to mitigate risk.  And that’s a very good thing, as even conservative economists will tell you.

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The only question is whether you design a system with checks and balances against fraudulent derivatives and speculation, which this bill does.  No doubt it could be improved, and perhaps after someone explains the bill to him – Browner, Biden, Reid, Boxer … anyone? – Dorgan will join an effort to add more oversight.

Now, you might say that Dorgan isn’t interested in a real bill, that he is just positioning himself for a “no” vote.  Well, if so, he has written a very strange op-ed.  Let me excise all the “railing against Wall Street” stuff, and see for yourself:

I’m in favor of taking action to reduce CO2 emissions and to protect our environment….

I support capping carbon emissions. But it has to be done the right way, with targets and timelines that allow us to accomplish our goals without driving the cost of energy for homeowners and businesses out of sight…..

I’m willing to cap carbon to address the threat to our environment. But it has to be done right. I will support a plan that establishes workable caps, invests in technology to decarbonize fossil fuels and sends the majority of the revenue raised to consumers to offset increases in the price of electricity resulting from the caps.

Energy is an important part of our lives. We need to work to decarbonize the use of coal so that we can use our most abundant fossil energy resource. We have to maximize the development of renewable energy. Green, renewable energy protects our environment and it also makes us less dependent on foreign oil (70 percent of our oil comes from other countries).

Here’s what we need to do to protect our environment and make us less dependent on foreign oil:

1. Establish caps on carbon that are accompanied by both adequate research and development funding and reasonable timelines for implementation to develop and commercialize technologies that will greatly reduce the CO2 emissions from the burning of fossil fuels.

Well, that’s certainly Waxman-Markey.  You can’t argue the targets are too tough or that the bill doesn’t spend tens of billions of dollars on technology development or deployment.  In fact, as Waxman’s summary explains, the bill “Invest[s] in new clean energy technologies and energy efficiency, including energy efficiency and renewable energy ($90 billion in new investments by 2025), carbon capture and sequestration ($60 billion), electric and other advanced technology vehicles ($20 billion), and basic scientific research and development ($20 billion)” – see “A useful summary of Waxman-Markey.”

2. Use the majority of the revenue from a plan that caps CO2 to provide refund payments to those who would otherwise experience increased energy costs.

Again, that’s Waxman-Markey (see Robert Stavins: “The appropriate characterization of the Waxman-Markey allocation is that more than 80% of the value of allowances go to consumers and public purposes, and less than 20% to private industry.” and UPDATED exclusive report: Preventing windfalls for polluters but preserving prices – Waxman-Markey gets it right with its allocations to regulated utilities).

3. Even as we continue to decarbonize the use of fossil energy, we should maximize the production of renewable energy from wind, solar, geothermal, biomass, and more.

4. Set an ambitious renewable electricity standard (RES) along with longer-term tax incentives for the wind, solar, biomass and other renewable energy.

5. To move this new energy, we need to build a transmission system to allow us to produce renewable energy where we can, and move it to the load centers where it is needed.

Check, check, and check.  Ironically, the Senate energy bill is weaker than the House on the RES, so presumably Dorgan will vote to strengthen it on the Floor.  And yes, the House RES cannot be called “ambitious” anymore, but that’s in large part thanks to the huge push on renewable energy in the stimulus (see “EIA projects wind at 5% of U.S. electricity in 2012, all renewables at 14%, thanks to Obama stimulus! Now can we get a stronger renewable standard?“).

6. To reap the benefits of cleaner energy and reduced dependence on foreign oil, we need to move toward using electricity to fuel our trans
portation fleet.

That’s already in Waxman-Markey (and was in the stimulus). Love to do more, Senator.

North Dakota and the nation have a lot at stake in this debate. We are a major energy-producing state, with our ability to produce large quantities of oil and our large deposits of coal, which is our country’s most abundant form of energy. We have the greatest wind energy potential of any state, and we have the ability to produce a large quantity of biofuels.

It’s clear we are going to have to use energy differently in the future to protect our planet. And to do that I will support a plan that puts achievable caps on CO2 emissions – if it is done the right way.

If that were his entire op-ed, you’d say he was at least 50-50 for the bill and certainly would be a realistic possibility for voting against a filibuster, like Sherrod Brown (D-OH).

But, here’s what I excised:

… But I don’t support the “cap-and-trade” plan now being debated in Congress.

“Cap-and-trade” is an approach that would have the government set caps on carbon emissions from certain sources, and then establish a market in which allowances for CO2 emissions would be bought and sold on a financial exchange. Supporters call it a “market-based solution.”

I think it is the wrong solution and I don’t support it.

[I support capping carbon emissions. But it has to be done the right way, with targets and timelines that allow us to accomplish our goals without driving the cost of energy for homeowners and businesses out of sight.] The cap-and-trade plan does not meet that test for me.

I know the Wall Street crowd can’t wait to sink their teeth into a new trillion-dollar trading market in which hedge funds and investment banks would trade and speculate on carbon credits and securities. In no time they’ll create derivatives, swaps and more in that new market. In fact, most of the investment banks have already created carbon trading departments. They are ready to go. I’m not.

For those who like the wild price swings in the oil futures market, the unseemly speculation in mortgage-backed securities, or the exotic and risky financial products like credit default swaps that pushed our economy into the ditch, this cap-and-trade plan will be the answer to their prayers.

Just last year, speculators overwhelmed the oil futures market, every day trading 20 to 25 times more oil than was being produced. That speculation drove the price of oil from $60 to $147 a barrel and gasoline to over $4 a gallon. The same speculators forced the price back down and made money in both directions. The American public paid the price for it.

Don’t get me wrong. I like free markets. But given recent history, I have little confidence that large financial markets are free or fair enough to trust them with a new, large cap-and-trade carbon securities market….

But I’m not signing up to create a new financial market to trade carbon securities. In my judgment, it is exactly the wrong way to address this issue.

Somebody needs to ask Dorgan if he is proposing to reduce emissions without using the free market.  It bears repeating that if you do this through non-market means you would have to impose onerous regulations that spell out in detail exactly what level of emissions each major industry can emit in a given year.  It ends up looking a lot like cap-and-trade in terms of the outcome – a shrinking cap –  but it is far more onerous and would have no chance whatsoever of garnering even a small number of votes in Congress.

In fact, Dorgan’s concerns about speculators and market fraud – which Mississippi Governor (and global warming denier/delayer) Haley Barbour has been playing up, along with James Hansen and Robert Shapiro – are ones that the authors of Waxman-Markey were quite aware of when they wrote the bill.

That’s why the bill has many provisions (and realities) that would stop “a financial meltdown from speculators trading frantically in the permits and their derivatives,” as Hansen put it, or someone cornering the market, as Barbour put it.

First off, the permit market is huge.  Even purchasing 2% of the permits in, say, 2015, would probably cost $1 billion.  And speculators would have to purchase several times that to significantly run up the price.

Second, it will be so easy to meet the targets for at least the first decade (see here) that the “real” price of a permit will probably be slightly below the auction price (which has a floor).  So it will be highly unprofitable to buy lots of permits, which would run up the price, in an effort to make money selling those permits sometime in the future.  I can’t imagine a plausible scenario in which this would make economic sense for any entity even if they could get away with it, which they cannot.

Third, the bill requires EPA to promulgate regulations to cover the auction.  As CQ‘s summary of the bill explains:

  • Bidders must disclose all parties sponsoring their bids;
  • Individual bidders would be limited to purchasing up to 5% of allowances sold at any quarterly auction;
  • EPA would have to publish information about winning bidders

So it would be very difficult to do any major purchasing in secret and virtually impossible to acquire a large fraction of the permits.

Fourth, the bill has a whole section devoted to “Carbon Market Assurance.”  As the WRI summary describes it:

The Federal Energy Regulatory Commission is given regulatory authority over allowance and offset markets and allowance derivative markets (Sec. 761, pg. 449). The President is also delegated authority to instruct agencies to take on pieces of market regulation based on existing authority as long as regulations are consistent with this section. The draft makes it a federal crime to commit fraud or manipulate any carbon market. In addition, the regulations facilitate and maintain market oversight and transparency and require market monitoring to prevent fraud, manipulation and excessive speculation.

That section explicitly includes derivatives, with further oversight by the Commodity Futures Trading Commission.

Fifth, the bill has a Strategic Reserve (with tons originally skimmed off from each year’s total target) that an entity can purchase permits from if the price sees a short-term run up of about 60%.  So again the bill will is designed to prevent someone from cornering the market or running up the price.

So these concerns, while potent from a populist perspective, are simply not a reason to oppose this bill if one supports the general goal of a shrinking cap that doesn’t force reductions down at an alarming pace, does mitigate most of the price risk to consumers, does spend many tens of billions of dollars on clean energy development, demonstration, and deployment, and promotes renewables (albeit not enough) and electrifying transportation system.

Clearly Dorgan and his
staff haven’t looked closely at the bill or any of the many summaries.  I would note that essentially all of these oversight provisions were in the original March draft – so they should not be a surprise to anybody.

But it is quite common for Senators not to pay much attention to how the House does things.  Just look at what’s going on with health care reform.

If Dorgan really supports the aim of Waxman-Markey but has problems with one aspect of the approach, well, that is precisely what the legislative process is designed to address.  Perhaps someone from the White House could sit down with him.  At the very least, the Senate leadership should extract a no-filibuster commitment.