The short, snarky answer is “No; Boxer-Lieberman-Warner is never going to become law.” The longer, analytical answer, which is the primary subject of this post, is “probably not, thanks to the bill’s many cost containment measures, but it would take us off the business-as-usual emissions path.”

Before explaining why, let me make clear that the vote on B-L-W is purely symbolic, since it is DOA as a bill can be. Most of the media, most of the public, and most of the world are unlikely to get much detail on the bill. They will just see whether a greenhouse gas cap-and-trade bill can get a majority, if not 60 votes, in the U.S. Senate. So I would recommend any senator vote for it — after giving a floor statement explaining that it was in fact too weak. I can’t see casting a protest vote against a symbolic bill while asserting it is too weak. The protest would get lost in the noise. Finally, it would be the height of hypocrisy for a conservative senator to cite progressive critiques of the bill, including mine, as a reasons to vote against it. Anyone who votes against this bill should at least have the guts to say whether they themselves think the bill is too weak or too strong.

Why the Boxer bill wouldn’t cut U.S. CO2 emissions by 2020

This story begins late Friday night, when Deep ’emissions cut’ Throat sends me the World Resources Institute’s 14-page summary of the Boxer substitute to the Lieberman-Warner bill [PDF], with a note, “Does this mean no emission reductions until 2028? See bottom of page 6.” Intrigued, I turned to the bottom of page 6 and read this bullet:

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If all cost containment mechanisms in the substitute are applied, the result could be almost no change in U.S. as compared to business as usual.

Uh-oh. When the solid analysts at WRI issue a warning, you can take it to the permit bank. I remember Deep ’emissions cut’ Throat’s advice to me many years ago: “Follow the cost-containment money.” That’s what led to my post on McCain’s climate plan.

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Now WRI cryptically says, “WRI intends to explore these issues further in forthcoming analyses.” But why wait for WRI’s solid, detailed analysis, when I have Boxer’s full text here and my own dependable abacus? I’ll post this as a draft analysis and if any of you out there can find holes in it, let me know.

My rough calculations say that if every cost containment measure were fully used, then U.S. energy-related CO2 emissions in 2020 could be about the same as if there were no bill. Needless to say, that’s not a good thing.

Needful to say, however, some of the cost containment measures are not super-cheap (although they are probably all much cheaper than the current cost of European Union’s emissions allowances) — and a lot of auction money is used to promote energy efficiency and low carbon technologies. So if this bill were to become law — which, of course, it won’t, because last week it was moved from the “morgue to anatomy class” — then I very much doubt emissions would actually follow business as usual (BAU) trends.

I do believe, though, that emissions in 2020 would probably not be much different than they are today, which is still not a good thing.

So what could happen and what would happen? And should a senator who is concerned about human-caused global warming vote for or against the bill on this basis?

(Warning: many numbers and acronyms to follow.)

If you turn to Title II, Section 201 (pp. 18-19) of the Boxer substitute, you’ll see the total quantity of emissions allowances permitted from 2012 to 2050. The 2012 emission allowance of 5775 million metric tons of CO2 (MMTCO2) is ~4 percent below 2005 levels (which was a little under 6000 MMTCO2).

The 2020 allowance is 4924 MMTCO2, about 18 percent below 2005 levels. Seems reasonable, especially since U.S. emissions may rise about 0.5 percent per year, so absent the B-L-W, we might be closer to 6400 MMTCO2. So the CO2 emissions cut in 2020 is closer to 23 percent compared to business as usual.

But, of course, the bill has a variety of cost containment measures that allow entities to avoid cutting their own emissions now — shifting those emissions cuts either into the future (borrowing) or to other entities, some of which are outside this country and all of which are not under the mandatory cap (offsets).


Offsets, of course, I have never liked. Nor should you. As I noted here, a major new Stanford study on offsets as a cost-containment measure found that

any offset market of sufficient scale to provide substantial cost-control for a cap-and-trade program will involve substantial issuance of credits that do not represent real emissions reductions.

Ouch! Unlike Sen. McCain, who recklessly begins by allowing unlimited offsets, the B-L-W bill only allows into the market offsets to cover “a quantity up to 15 percent of the total quantity of emissions allowances established for each year” (see Section 312, p. 23). What does Stanford say about that?

Offset caps as envisioned in the Lieberman-Warner draft legislation, for example, do little to fix the underlying problem of poor quality emission offsets because the cap will simply fill first with the lowest quality offsets and with offsets laundered through other trading systems such as the European scheme.

“Lowest quality and “laundered” — double ouch. Note that all 15 percent of the offsets could be domestic, or it could be up to 5 percent international offsets, and 10% international forestry offsets. That is, in theory, if the international offsets were the cheapest, we might be offsetting a full 15 percent of allowed U.S. emissions in other countries. (In no case can the total number of offsets [domestic and international] exceed 15 percent of total allowances for that year.)

Cost-containment auction and borrowing

According to Title V (“Federal Program to Prevent Economic Hardship”), Sections 532-539, there will be a “Cost & Containment Auction in each of calendar years 2013 through 2027.” The first, in December 2012, will auction up to “450,000,000 emission allowances,” which is almost 8 percent of the 2012 target. Each subsequent year through 2027, 1 percent fewer allowances will be auctioned, so that in, say, 2020, about 415 million allowances will be auctioned.

What is the price of these cost-containment auctioned allowances? That will be determined by the auction. The President does establish the starting price — the minimum or floor price — for the auction in 2012, which “shall be no lower than $22 and no higher than $30” per metric ton of CO2. Each subsequent year through 2007, the starting price then goes up inflation plus 5 percent. It is worth noting that the current price of allowances in the European Union is about $38 per metric ton of CO2 — and that does not appear sufficient to stop traditional coal plants from being built, which, arguably is the single most important result of any cap-and-trade system (see here).

Where do these allowances come from? The government will take “a total of 6,000,000,000 of the emission allowances established for calendar years 2030 through 2050 pursuant to that subsection and move them into the Cost-Containment Auction Pool.” Talk about borrowing from your grandchildren!

Short-term borrowing: According to Title V, Subtitle B (pp. 44-45), entities may borrow emissions allowances (from up to five years in the future) “in satisfaction of up to 15 percent of the compliance obligation.” The borrowed tons have to be repaid with interest — in this case by a higher number of tons equal to the original number times “1.1 raised by an exponent equal to the difference between the source year and the use year expressed as a positive whole number.” If you borrowed 1000 tons from four years into the future, you’d have to repay 1.1 x 1.1 x 1.1 x 1.1 = 1464 tons.

(Note to B-L-W authors — I don’t see a ban on repeated borrowing. Absent that, what is to stop someone from effectively borrowing 15 percent of their tons from 10 years in the future, albeit at a high interest cost?)

The math

In 2020, there are 4924 MMTCO2 of allowances. But 15 percent of the allowances in 2020 can be covered by offsets, which is about 734 MMTCO2 of allowances. And the cost-containment auction will provide up to 415 MMTCO2 borrowed from the far future at a price that looks to be below the current European price, so I am inclined to think that the auction will sell out. That means effectively, the “cap” in 2020 is 4924 + 734 + 415 = 6073 MMTCO2 — higher than current emissions but lower than projected emissions.

That does assume there is no short-term borrowing. There could be 734 MMTCO2, which means “allowed” emissions in 2020 would be above BAU. But that is a very unlikely worst-case scenario.

In the real world it seems highly unlikely that short-term borrowing would max out. It is not cheap and only buys you a few years. Over time, as entities see that that the allowance system is in fact going to continue through 2050 and beyond, with escalating prices and shrinking caps, they will do better planning and rely less and less on this mechanism.

(Note to B-L-W authors — Given the long-term borrowing in the cost-containment auction, I just can’t see why you also have up to 15 percent short-term borrowing. This should be dropped down to 5 percent — this borrowing is really for entities that confront very unusual short-term circumstances. It should not be widespread practice.)

In the real world, I would expect that within a few years of 2012, the regular allowance price will be at least as high as the cost-containment auction starting price, initially set by the President. Assuming, for instance, he (or she) splits the difference and starts the price at $26. Coincidentally enough, that means the allowance price in 2020 (in inflation-adjusted dollars) would be $38 a ton, just about what it currently is on the European market. (It has been suggested to me that there would be a lot of pressure on the president to pick a low price, especially if energy prices are still high at the time, which they probably will be, so $38/ton in 2020 is probably on the high side.)

The price of $38/ton does not appear sufficient to stop new coal plants today in Europe, as I discussed here. That price — and the certainty that the allowance price would continue to rise and the cap continue to shrink — would probably kill off most new coal plants post-2020. But I’m not sure how many it would stop in the next 10 years, at least until the market saw that the Congress and the President were stead-fast statesmen and -women who were sticking to the plan — and not, say, a bunch of weak-kneed politicians ready to embrace a “carbon price holiday” whenever economic times got a bit tough. I’m even less certain companies would shut down existing coal plants, which is, of course, the main way to get significant reductions in the short term.

In the real world, I would expect B-L-W as currently constructed to lead to neither its projected reductions by 2020 nor to BAU growth. From now through 2011, emissions would probably keep rising on their recent slow trajectory (because of high energy prices and perhaps lower than normal growth), taking us to maybe 6150 MMTCO2 in 2011, at which time the cap sets in, and I would expect U.S. emissions to stop growing for a few years as entities began to adopt the very cheapest emissions reduction measures while canceling plans for the most expensive new carbon-intensive projects. Then, toward the end of the next decade, we’d probably start to see a slow decline, returning us to around current levels by 2020. I don’t think we’d start to see really deep reductions starting until about 2025, when existing coal plants might start getting shut down and/or replaced with coal with carbon capture and storage.

This is not a great outcome, but then again, this is not going to be the actual outcome in the real world because B-L-W is never going to be enacted into law, which brings us to the final question.

Yea or nay on B-L-W?

If I were a senator, I would offer some floor amendments to cut offsets and short-term borrowing by two thirds and to cut the size of the cost-containment auction at least in half. No doubt they would fail. The bill could, of course, get worse on the floor, and possibly include unwarranted subsidies for nuclear power thrown. Should that occur, Sen. Boxer has indicated that she will remove the bill from the floor.

But would I vote for the final bill, and would I recommend other senators vote for it (assuming it is not significantly weakened on the floor)? If it stood a chance of actually being enacted into law, that would be a much tougher question I think.

But this is a purely symbolic vote. Most media coverage here and abroad will gloss over or skip entirely the subtleties of cost containment.

The basic message the U.S. Senate is sending is whether or not it would pass a cap-and-trade bill — ten years after the rest of the industrialized world did — to put this country on a path toward by deep reductions by 2050. So I’d vote yes, after explaining precisely what I was doing in my floor statement. And that’s what I would tell any Senator.

Again, I can’t see casting a protest vote against a symbolic bill because it is too weak. The protest would get lost in the noise of conservators proclaiming victory.

And I repeat that it would be the height of hypocrisy for a conservative senator to cite progressive critiques of the bill, including mine, as a reasons to vote against it. Anyone who votes against this bill should at least have the guts to say whether they themselves think the bill is too weak or too strong.

I would note that any conservative senator who voted against this bill on the grounds that it was too tough should be harshly lambasted for being on the side of catastrophic global warming, on the side of 1000 ppm.