Some points for Congress to consider on climate bills

Just about everyone seems to agree that the US needs climate legislation to curb carbon emissions in the hopes of preventing global warming. The problem is how best to get there. Both the House and the Senate have come up with their versions of the way forward. But industry analysts and energy companies themselves make some good points that Congress should consider before drafting any final legislation.

David Johnson, a managing director at Protiviti, the risk consultancy, says the exemptions, extensions and allowances offered under climate legislation being debated by Congress could drive prices of carbon credits below the cost of reducing emissions. This, he notes, would defeat the purpose of the Boxer-Kerry bill being debated in the Senate and the Waxman-Markey bill passed by the House. The bills also  would allow companies to shift emissions produced domestically to their international quotas. In his own words:

You could get price spikes with higher volatility, driven by bets on whether regulators will allow extensions, deferrals, accelerations, etc. But it could end up significantly cheaper to buy allowances than install scrubbers or any other equipment to reduce emissions.

And while few outside the industry want to take on concerns expressed by ExxonMobil, Rex Tillerson, chief executive of the world’s biggest publicly listed oil company, makes a good point when he says a carbon tax would be far more efficient, easier to regulate and, therefore, cheaper in the long run. He also believes cap-and-trade will lead to volatile prices for emission allowances, undermining the ability of businesses to invest in advanced technologies, creating economic inefficiencies and inviting manipulation in the markets for allowances. 

Steve Mitnick, partner at Oliver Wyman, the management consulting firm, said it is important that amid the horse trading on offsets, lawmakers do not lose sight of the need to reduce cumulative carbon emissions – which is the goal. He notes that too much putting off, and emphasis on distant future emission goals, will mean another 10-15 years of relatively unchanged carbon emissions.

Among some of the giveaways, Congress is considering requiring US states to produce 6 per cent of their electricity from renewables by 2012 – excluding power from hydroelectric plants built before 1992. That increases to 20 per cent by 2020, yet some states will be able to get away with 12 per cent. And, until 2030, Congress is considering giving away 85 per cent of carbon permits for nothing, mostly to electricity and natural-gas companies and manufacturers.

These are not the only concerns. Mr Mitnick said that while lawmakers are looking for ways to boost natural gas power generation, as the least carbon intensive of fossil fuels, the US has enough capacity. What Congress should be looking at, he said, are incentives to encourage power producers to use existing natural gas capacity, substituting it for some coal, which is marginally cheaper but about twice as polluting. This is a point the entire natural gas industry would agree with, particularly amid the current glut that has been driving down prices.

Jim Hackett, chief executive of Anadarko Petroleum, a big natural gas producer, notes that the industry is producing one of the cleanest hydrocarbons in the world. Yet Congress has yet to realise the potential of natural gas in its excitement to push for renewables.

Mr Mitnick says lawmakers are missing a key component of making renewables work. While lawmakers are including incentives for renewables, they are sidestepping the necessary reforms for transmission to be built to bring the alternative power to market. He explains:

Everyone knows the nation’s goals about growing renewables cannot be closely approached unless we have major reforms in transmission policies. If the transmission is not there, the zero-carbon power future is not going to happen.

Beyond that, Protiviti’s Mr Johnson noted that because the emission reduction targets are based on 2005 emissions, when companies were not tracking emissions, they will have to go back and estimate or audit what emissions were at that time. To the extent that the 2005 base is higher, it will be easier to meet the reduction targets, he said. And he explains the problems with that:

It’s not a precise science. I would presume an auditing process, but you’re talking about an awful lot of auditing work.

This is just one way climate legislation will raise costs for US business, which has been a chief criticism of the oil and gas industry. Larry Nichols, chief executive of Devon Energy, notes that the economy is still in a recession. All of these bills, he said, are very expensive, and they’re going to impose a major tax on American consumers.

Nonethless, Mr Nichols says there are a variety of things the US could be doing to reduce carbon emissions without costing the industry jobs and undermining the economy. These include tightening energy efficiency standards on everything from engines to appliances: That is something that could be done right now at minimum cost. It does seem remiss that this is something the Obama Administration is not moving swiftly to capitalize on as a fast emissions reducer.

The other point Mr Nichols makes is that the US could open up resources to encourage the drilling of natural gas – the cleanest of the fossil fuels – and other energy sources. That would generate jobs, revenue and royalties for the federal government. As he, and the rest of the industry often notes, the US  needs all forms of energy.

In line with that, John Rowe, chief executive of Exelon, the power producer, said there should be more provisions to encourage development of more low-carbon nuclear energy. Nonetheless, he, too, noted options like new nuclear plants, wind and solar, actually cost much more than commonplace solutions like energy efficiency.

Charles Swanson, Houston Office Managing Partner for Ernst & Young, said the challenge for Congress is finding the right balance between promoting new, cleaner, more expensive technology and keeping energy affordable. In his own words:

That balance is critical. If we go too fast into alternative energy, so that the cost of energy is too expensive, it will damage the economy and we won’t be able then to afford to fully develop alternatives.

Branko Terzic, regulatory policy leader for energy and resources at Deloitte Services, the consultancy, said it is important any US climate legislation does not put the country at an unfair disadvantage in trading with countries that do not have similar legislation. He notes the political realization is that the average citizen is concerned about today’s jobs first and tomorrow’s climate second.

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