Eileen Claussen responds to questions about domestic and international climate policy in the US-focused June edition of CARBONfirst.

 

Do you believe a US cap-and-trade bill can be passed out of Congress in 2009? What chance does the bill have of passing through the Senate if it passes through the House?

It will be very challenging to get a climate bill through both houses of Congress, through a conference committee, and sent to the President by the end of 2009. I do think there will be a bill that passes the House in 2009, probably by the end of this summer. That bill will be the starting point for the Senate. But the Senate is likely to be much slower and will most likely move a bill in 2010. So there is a strong chance a bill will be signed by the President by the end of this Congress.

In the Senate there are a number of different committees that will deal with the various elements of the Waxman-Markey bill. Title III of the bill, the cap-and-trade bit, will probably come out of the Committee on Environment and Public Works, chaired by Senator Boxer. The Senate Energy and Natural Resources Committee, chaired by Senator Bingaman, will pass some form of a renewable energy standard, perhaps by the time the Waxman-Markey bill arrives in the Senate.

The real action will then happen on the Senate floor when these elements come together. The chances of not getting a cap-and-trade bill argued, dissected, debated and then rebuilt on the floor by the end of 2010 are very small.

How similar do you think such a bill will be to the Waxman-Markey bill as it currently stands?

The Waxman committee {the House Energy and Commerce Committee} contains Congressmen from a lot of industrial, coal, auto and oil states. So the interests and views that exist in the Senate are already present in the Waxman committee. The Congressmen’s views will have been to some extent accommodated in the bill that goes to the floor of the House. This is shown in the many agreements that have already been reached, in the form of free allocation to local distribution companies that supply electricity, to industrial companies that produce globally traded commodities, and a little to oil companies.

This is an excellent starting point in the Senate. That said, there may be a need for additional elements, and as mentioned above, the discussion on the Senate floor is key. The Boxer committee is not representative of the Senate as a whole and the Democrats on the committee do not come from industrial and coal states. This means that the perspectives and demands of more conservative Democrats will not be heard until the bill leaves committee. In addition, the Senate is very interested in nuclear energy. Including provisions for nuclear energy would help gain some Republican votes and some of the “iffier” Democratic votes.

The Waxman-Markey bill states that international offsets primarily need to come from US-administered sectoral crediting schemes and REDD programs, leaving little demand for UN mechanisms such as the CDM. This has created concern over CER demand. Do you see this changing in the future?

There is a rather jaundiced view of the CDM in the US, as the Waxman-Markey bill reveals. There is tremendous scepticism about the validity of CDM offsets and the CDM process. People need to be educated as to the elements that have and have not worked, and as to how the elements that haven’t worked might be fixed in a reformed CDM. But there remains between nine months and a year and a half to work on this issue in the House and Senate.

On the assumption that the Senate doesn’t act until after Copenhagen, what comes out of Copenhagen will be critical to changing the perception and the reality of what the interests and influences in the Senate are. For example, a re-doing of the CDM or a more sectoral approach emerging from Copenhagen would be very helpful in influencing the Senate to accept more CDM offsets.

What will be the impact of the Waxman-Markey bill on energy prices for consumers and on industrial sectors?

The allocation to local distribution companies will go a long way to mitigating the cost to consumers. Companies will pass on the value of the allowances they receive to consumers. This is because almost all the coal-burning utilities are in states where the power sector is regulated, and there is a regulatory body whose main purpose is to keep electricity prices low. It is thus unlikely that companies will make windfall profits as happened in Europe.

On the industrial side, energy intensive industries will be the most affected. They will receive free allocations equal to 15% of the allowances under the cap, which will be phased out after 2025.  We believe this should fully compensate them for any potential competitiveness impacts they might face.

A recent Pew Center study found that energy-intensive industries are likely to face only modest competitiveness impacts and that these can be managed through targeted policies like those in the Waxman-Markey bill.

It is difficult to know what the precise effects will be until the final version of the bill is revealed, though the EPA has analysed the draft bill. On that point, it is important to remember that economic models and analyses do not capture the costs or benefits of a whole host of important factors. For example, the cost of not acting, which we believe to be significant, is not built into these models, nor is the benefit accrued from the creation of new jobs and industries. The models also do not factor in the current disincentives to invest due to the regulatory uncertainty.

The US has in the past been sceptical of interaction with international and multilateral authorities in the climate space. How do you see this position evolving, in particular as regards a post-Kyoto agreement?

I think the situation is changing and attitudes are becoming more positive. Both from the Senate’s resolution and the position of the new administration, there is a real sense that countries have to be in this together and that no country can go it alone. That said, there are still those who will be reluctant to sign up to an international agreement. Some of the resistance will be softened if the US acts first, because it is easier to agree to what you have already decided to do and then persuade others to also take on commitments.

The Senate requires 67 votes to ratify a treaty. Achieving 60 votes to pass a bill is challenging and reaching 67 could be even more of a hurdle.

However, it is my belief that getting 67 votes may in fact be easier than getting 60 votes. The 60 votes will be reached on the basis of unilateral US action to establish a mandatory domestic emissions reduction program. The next step will be to commit to those reduction targets internationally, while convincing other countries to commit internationally to their own reduction targets or steps. Assuming that the US will have already passed domestic action, the international agreement serves to bind others to their commitments: a palatable idea to US legislators. So if the international agreement does not impose additional requirements on the US, passing the treaty may be easier than passing the bill.

Do you think that in the absence of a federal bill, the US can commit to a quantified reduction target in Copenhagen?

The real issue is how confident the US is about what the US target may be. Imagine I am the Administration. If the House had passed the bill but the Senate had not made much progress, I would not agree to a specific quantified target in Copenhagen. I would instead agree to a range of targets.

There are a lot of extremely difficult issues in the international discussions and it is uncertain whether enough progress has been made to reach a full, final agreement in Copenhagen, regardless of the US position. A framework may be agreed upon, with ranges for financial flows and ranges for targets, and kinds of actions to which some major developing countries might be willing to commit. Such a framework in itself would be a huge achievement, given how far there is to go. We therefore have to think of Copenhagen and beyond.

What do you think will be the defining elements of the US post-2012 position when push comes to shove in the international negotiations? And when will the US be ready to lay out its positions?

There is a need that the major emitting developing countries make commitments. An understanding exists in the US that they will not be the same commitments as the US, the EU or Canada themselves make, in form as well as in stringency.

There is still a lot of thinking to be done on finance. The demands for finance from some developing countries are very ambitious and are unlikely to be met by any developed countries. Developed countries thus need to find the best way of financing emissions reductions in developing countries (or in those developing countries that need financial assistance). What the US wants and is willing to do on finance has not yet been decided.

The third issue is that of comparability amongst developed countries. It is important to be realistic. The notion that the US will reduce emissions by 25-40% by 1990 levels by 2020 is not on the table.

The Major Economies Forums, one of which will happen at the end of May, are a very useful platform to discuss what can and can’t be done in Copenhagen.

What commitments and policies does the US expect or need from China if it is to come to an agreement in Copenhagen?

The US expects commitments from China, and it would help to be flexible about what those commitments might be. They almost certainly will not be economy-wide, but they might be sectoral in nature. Sectoral commitments would be viewed positively by the US, but the question would be how ambitious they are. The numbers are as yet unknown.

The EU would like to see an OECD-wide carbon market by 2015, and in particular to link the EU ETS with the US carbon market. Do you see this as firstly feasible, and secondly advantageous?

If the US passes legislation in 2010, it would be possible to link markets in 2015. The broader the net, the more cost effective the reductions will be. Linking is thus highly desirable. How long it takes to link with other markets depends on how long it takes to establish the rules and regulations of the domestic program after having passed a bill. The process of making rules is long and arduous, given how regulatory programs work. Having received the legislation, you have to propose rules, and then to take comments before going final with the rules, which might be challenged.

What do you view as the ideal price of carbon necessary to achieve domestic abatement in the US?
To begin with, the price of carbon will be relatively low, perhaps enough to achieve efficiency gains but not much else. It is for this reason that there are complementary measures included in the Waxman-Markey bill: measures that push renewables and deal with coal for example.  The combination of measures in the bill will get us to a reasonable carbon price by 2020. But again, it is unlikely to be high enough to promote CCS, which is why there are other provisions for CCS in the bill. Facilities built between now and 2015 have to be able to be retrofitted with CCS technology, and those built after 2015 have to have CCS technology. The Waxman-Markey bill is a carbon market bill with a host of complementary measures designed to help achieve the emissions reductions that we need.