U.S. businesses won't need to cut carbon dioxide emissions until possibly as late as 2018 under the cap-and-trade program that would be created by the House-passed climate bill, according to a new analysis that examined the recession's effects on emissions.
The Breakthrough Institute, which favors direct investment in clean energy sources, examined the House bill's policies in light of the federal Energy Information Administration's September report forecasting a 6 percent drop in carbon dioxide emissions in 2009, which followed a 3 percent decline in 2008. Declines were spurred by the recession and lower natural gas prices that caused power generators to switch away from coal, EIA said.
Those downturns equal almost half of the 17 percent reduction in carbon emissions that the bill seeks by 2020. Reductions in greenhouse gases mandated by the measure are pegged to emissions in 2005, which had levels higher than they are now.
The legislation would require businesses to buy allowances for their carbon emissions, but it would give away the bulk of those allowances in the program's early years. That, combined with the economic downturn, would create low allowance prices, giving businesses the option to sidestep penalties for several years, the Breakthrough Institute report says.
"This should be a shocking wakeup call for clean energy entrepreneurs and business leaders across the country, and to the leaders in the U.S. Senate who are working hard to deliver on the promise of new clean energy industries and jobs," said Jesse Jenkins, the institute's director of energy and climate policy. "The U.S. Congress may be poised to enact legislation that would rely on a carbon cap-and-trade program that ... is unlikely to provide any strong incentive to get the U.S. economy running on clean energy."
The institute issued the report to give the Senate important data as it crafts climate legislation, Jenkins said. But there were immediate questions about the study's credibility and the motivations behind it. An EIA expert said he was skeptical of the findings.
"The numbers sound awfully large for me," said J. Alan Beamon, EIA's director of the coal and electric power division, who worked on an April analysis examining the effects of the House bill. "If [emissions] are down a year or two because of a recession, they're not going to make that big of a difference over the long haul." Beamon said he had not looked at the Breakthrough Institute's analysis and said he did not immediately have time to study it.
The report is the 20th from the Breakthrough Institute examining the bill from Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) Some Democrats and environmentalists distrust the Oakland, Calif.-based institute because of its contrarian positions.
Breakthrough was founded by Michael Shellenberger and Ted Nordhaus, who in 2004 wrote "The Death of Environmentalism," an essay arguing that traditional environmentalism lacked solutions to address climate change. The institute does not back the cap-and-trade approach to driving down carbon emissions.
"The Breakthrough Institute keeps coming out with these pointless reports attacking Waxman-Markey," said Joe Romm, senior fellow at the Center for American Progress, a think tank headed by John Podesta, who was chief of staff to former President Clinton. "Waxman-Markey is kinda old news. The Senate is constructing a bill now."
"I'm confident that the smart senators and people who write this bill will fix it," Romm said.
Changes to legislation already are under way. Sen. Barbara Boxer, who chairs the Environment and Public Works Committee, which is writing a climate bill, will raise the House's 17 percent reduction in carbon emissions to 20 percent by 2020, Senate Democratic aides have said. The California Democrat will argue that it is not a sizable increase, given the EIA projection of a 6 percent drop in emissions this year (E&E Daily, Sept. 21).
But the Breakthrough Institute thinks that change won't be enough.
"There may be efforts in the Senate to transform the House version of the policy and make it stronger and more effective from the cap-and-trade side, but unless there's going to be a fundamental reworking of the House framework -- which doesn't seem to be happening -- then we're still going to need more proactive efforts to drive the innovation that we need," Jenkins said.
Report sees ineffective bill
The House bill creates a cap-and-trade program that would start in 2012 and reduce allowable emissions levels each year, hitting a 17 percent reduction below 2005 levels in 2020 and 83 percent by 2050. Because it is set to pre-recession emissions, when the cap starts, "U.S. emissions may still be recovering to pre-recession levels and may remain substantially lower than historic 2005 levels," the Breakthrough report says.
Breakthrough's report cites other factors that would collide to make the House legislation ineffective.
One is the large number of pollution permits that would be given away to businesses in the early years. Another is a program known as offsets, which would allow businesses to avoid buying carbon allowances if they instead invest in efforts that reduce greenhouse gases in amounts equal to their emissions. That, the report said, "will likely lead to a cap and trade program awash in both cheap emissions allowances and offsets during at least the first decade of implementation."
The report theorizes that the free allowances and the offset option will blend to create "slack demand for permits," which "may result in a large secondary market for emissions allocations in which permits trade for substantially less than $10/ton." The legislation sets $10 per ton as the lowest price allowed. But the report said the net effect of the free allowances and offsets will be "a functional carbon price substantially below the nominal $10/ton floor."
"Slack demand and the resulting low price for pollution permits would create a strong incentive for firms to hedge their future carbon liabilities by buying and banking emissions credits while they are in excess and prices are low, building up a bank of permits for the future while continuing with business-as-usual practices," the report says. "Furthermore, even if they utilized just a fraction of available offsets each year, U.S. firms would not be required to reduce their own emissions until as late as 2030 or beyond."
The study assumes an economic recovery in its modeling. A faster recovery scenario uses numbers from the Congressional Budget Office's August economic recovery forecast. A more conservative outlook uses EIA's September short-term energy outlook. Under the slower recovery situation, businesses can avoid cutting emissions until 2018, the report says. Under the faster scenario, they would need to act by 2014, two years after the legislation would take effect.
EIA in its analysis of Waxman-Markey, which was done in April, assumed a 3 percent downturn in emissions in 2009 and a 2 percent downturn in 2008, a total 3 percent short on the decline EIA now projects.
"It's hard to believe that 3 percent would really change the overall 40 years of the program," EIA's Beamon said. In addition, he said, businesses plan for the long term.
For his part, Romm said he does not trust the institute's analysis.
"They just keep publishing analysis after analysis, half of which are wrong, the other half of which aren't terribly original," Romm said. "They have many biased studies that do not stand the light of day."
The institute, he said, is "trying to scare people into opposing the bill."
"One assumes the people who write the final bill will use the new [emissions] numbers, and then the problem goes away," Romm said.
Jenkins said Romm has criticized Breakthrough Institute studies in the past but has not statistically discredited them, even though the institute provides the data, calculations and assumptions it uses.
Jenkins did the analysis for the institute. He does not have a background in economics.
"It's not an economic analysis," Jenkins said. "It's based on the economic forecasts of the EIA and CBO. Beyond that, it's relatively simple arithmetic that any old competent policy analyst such as myself is capable of."
A new analysis?
Romm, an acting assistant secretary for energy efficiency and renewable energy in the Clinton administration's Energy Department, questioned whether the Breakthrough report uncovers anything new. Romm in his Sept. 15 "Climate Progress" blog wrote about EIA carbon emissions numbers under the headline, "EIA stunner: By year's end, we'll be 8.5% below 2005 levels of CO2 -- halfway to climate bill's 2020 target."
In the blog post, Romm calls for tightening the emissions reduction target and reducing the number of free permits given to businesses in the early years.
"Everything claims to be a new analysis," Romm said. "It's a new analysis that they glommed from me."
Although Romm did post the blog item, Jenkins said, the Breakthrough Institute's analysis looked beyond the drop in emissions and at the implications of that EIA forecast.
The Breakthrough Institute report does not make recommendations. But the institute is skeptical about much of what is in the House bill and says a cap-and-trade program is "unlikely to be the driver of any new technologies." It wants policies that make clean energy less expensive instead of those that simply make fossil fuel more expensive, Jenkins said. It also wants actions that take effect quickly, over the next five to 10 years.
An investment of $15 billion annually in clean-energy research and development, bringing the total available for that each year to $20 billion, would help, Jenkins said.
If the carbon cap were set against 2008 or 2009 carbon emissions levels, a lot of the problem with a glut of free permits in the early years would go away, Jenkins said. But unless there are fewer safety valves, such as the offset program, there is not enough to force businesses to change their emissions practices and shift to clean energy sources, he said.
The institute has a "philosophical difference" with the Democratic leadership in that it does not believe that penalizing carbon emission would create a market for clean energy technology, said Eben Burnham-Snyder, spokesman for Markey and the House Select Committee on Energy Independence and Global Warming.
"The Breakthrough Institute seems to believe, much as the Bush administration did, that technology will solve all, even without a market," Burnham-Snyder said. "Waxman-Markey is predicated on the belief that we must invest in technology, but that more clean energy technologies will be invented and deployed by establishing a mandatory market for carbon."
The bill has $200 billion dedicated to clean energy development, Burnham-Snyder said, as well as mandatory carbon emissions cuts.
"By and large, we have tried to engage with those who are willing to have a constructive policy argument," Burnham-Snyder said. "We chose not to engage with those who are not trying to be constructive, with those who are merely trying to stir the pot."