Preemption Aside, New Climate Change Proposal Would Create Generally Similar Results as Prior Proposals (But Watch Out for Those Offsets)

by Victor Flatt

May 12, 2010

While Kerry and Lieberman (and before two weeks ago, Graham) have tried to pitch the proposed new Senate climate and energy draft legislation as a “game-changer” the truth is that, aside from the stronger preemption language limiting the states, its effect is not terribly different from what has come before. Sure, there are sweeteners for the conservascenti, such as enhanced loan guarantees and permit streamlining for nuclear energy, continued support for carbon capture and sequestration, removal of a natural gas “penalty,” and ostensibly an opening up of now closed offshore oil areas. But whether this would be different than what would have happened by adoption of the ACES bill is questionable.

ACES also allowed the coal industry to continue with the help of monetary support of carbon capture and sequestration. As for increased offshore oil drilling, even with revenue sharing, opening new areas is going to be a hard sell for a long, long time.  Alaska is a possible exception here, and the Alaska offshore revenue sharing provisions are clearly designed to get the Begich and Murkoswki vote. But even if offshore oil drilling is more attractive to Alaskans, the bottom line is that Alaska always wants to drill and the only thing stopping it has been the federal environmental reviews. The Deepwater Horizon spill called the prior MMS analysis of Alaska offshore drilling into question and has spurred another lawsuit.

The Kerry-Lieberman bill creates the very peculiar “linked” fee system for the oil and gas industry as a way to pay for their carbon intensity usage. While this is a strange and overly complicated part of the proposal and may be a boondoggle to the oil and gas industry, its ultimate effect on actual greenhouse gas reductions should be minimal.

Kerry-Lieberman mirrors the most important part of Waxman-Markey: it creates a cap and trade carbon market as the heart of the greenhouse gas reductions methods. The cap is in line with prior proposals (and the US commitment under the Copenhagen Accord), and even though the price collar of $10-25 dollars per ton is a feature absent from ACES and Boxer-Kerry, the amount that the cap can adjust upward every year (5%), and the market expectation of carbon prices, suggests that it won’t come into play much, except maybe in the beginning phases of the market, when the market is likely to be illiquid. 

Though the proposal’s sponsors also trumpet “controls” on the carbon market, it again doesn’t change much from what might have been. The proposal allows “market makers” to participate in the initial auctions (though by limiting the number, the bill could increase volatility), and there is no limitation to the secondary and derivative markets, save what is being generally proposed for all markets (that all trades be cleared through exchanges-section 2402).

On offsets, the bill generally follows the lines of Waxman-Markey, but has a few positive and negative changes that make the outcomes more clear (see my post specifically on offsets).

The Kerry-Lieberman bill shows some real compromises and more maturity in consideration of specific issues. But the real changes in this bill, except for the preemption section, are primarily one of degree, not of kind. Fundamentally, the heart of the greenhouse gas control provision, the GHG cap and trade system, should put an effective price on carbon, and ultimately provide a hard cap on emissions.

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Victor B. Flatt is the  Dwight Olds Chair and Faculty Director of the Environment, Energy and Natural Resources Center, University of Houston Law Center, and a Distinguished Scholar, Global Energy Management Institute at the University of Houston.

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