CLIMATE:

Manufacturers worry of pitfalls from utility-only carbon cap

Capping greenhouse gas emissions from only the electric utility sector may present a possible political compromise on Senate climate legislation but that approach raises some concerns for industries that would be left out from the cap.

Some Senate Democrats and environmentalists are hoping Republicans and moderate Democrats might be willing to sign on to the narrower utility-only emission cap in lieu of an economywide cap-and-trade bill. One Republican, Sen. Olympia Snowe of Maine, publicly signaled support for such an approach earlier this week, and Sen. Jeff Bingaman (D-N.M.) is drafting a power sector-only bill.

Proponents say it makes sense for utilities to go first as the industry has long been subject to market-based rules, and companies are looking to make significant new investments over the next several decades. But manufacturing industry representatives say that approach could still create problems for them.

"At first blush, you'd think, 'Oh god, wonderful, we got a bye,'" said Andy O'Hare, vice president of regulatory affairs at the Portland Cement Association. "But in the end it sets up some difficulties."

For one thing, O'Hare said, "it sort of leaves us in an uncertain state under the EPA regulatory process."

If a utility-only measure were passed, it would likely exempt that sector from U.S. EPA climate regulations, he said, but "it would be difficult for a sector that's not included in the bill to be seeking an exemption."

EPA is planning to begin regulating greenhouse gas emissions from industrial sources next January, and many industry representatives fear the new rules will be costly and could be overturned in court, creating uncertainty for investors.

Manufacturers would likely be hit by increasing electricity costs because the bill would constrain greenhouse gas emissions from coal-fired power plants. "We'd be looking for some means by which to offset those cost increases in the bill," O'Hare said, but that could create political problems because the manufacturing sector won't be capping its emissions.

The American Iron and Steel Institute does not favor a utilities-only approach, said spokeswoman Nancy Gravatt. "Steel is a very energy-intensive industry thus such an approach would result in a huge spike in energy costs putting U.S. steelmakers at great competitive disadvantage to steel producers from other countries," such as China, India and Brazil, who do not face the same costs and produce steel with higher emissions than the United States.

Several moderate Democrats who are considered swing votes on climate legislation have also expressed concerns about how a utility-only approach would affect their region's manufacturing economy.

"What happens when utility prices go up for manufacturing?" Sen. Sherrod Brown (D-Ohio) asked last week. "There are more questions than answers at this point. I don't say don't look at it or don't try to figure out a way to do that, but I think the questions are not close to being answered."

Brown and Sen. Debbie Stabenow (D-Mich.) have said that their votes hinge on provisions to help domestic manufacturers, including free allowances for energy-intensive industries vulnerable to international trade, a border adjustment mechanism aimed at developing countries without strong environmental policies and federal pre-emption over state climate laws (E&ENews PM, April 15).

Stabenow said last week that she would consider the plan, adding, "I would want to have resources available for development of new technology and there's a question of that that we have to work on."

A utility-only bill is not a "comprehensive certainty and it's not the full amount of resources to really create clean energy in manufacturing, which is my focus," she added.

White House press secretary Robert Gibbs said President Obama is not ready to make a call on utility-only or any other form of climate legislation.

"We've not made any final determinations about the size and scope of the legislation except to say that the president believes, and continues to believe, that putting a price on carbon has to be part of our comprehensive energy reform," Gibbs told reporters yesterday.

Proponents of an economywide cap-and-trade program say some manufacturers won't want to be left behind if utilities go first.

"Under a utility-now cap, we have been considering ways in which manufacturers could opt into the system early in exchange for greater regulatory certainty," said Greg Baldwin, a spokesman for Dow Chemical Co.

Dow prefers climate legislation to EPA regulations, Baldwin said, and continues to support an economywide market-based program to provide maximum flexibility, although the company is open to considering sector-specific approaches. Dow is a member of the U.S. Climate Action Partnership, which was influential in helping to pass the House cap-and-trade bill in June 2009.

"Many businesses in the utility sector have been very practical about this: 'We want our fate resolved; we want certainty so that we can go forward and make these investments,'" said Environmental Defense Fund President Fred Krupp. "And what we've seen playing out just this week in Congress, next week, last week is increasingly manufacturers saying, 'Hmm, we'd like some certainty, too,' and how that all plays out, I don't know."

Eileen Claussen, president of the Pew Center on Global Climate Change, expects that some manufacturers won't want to be left out if something is going to move on the utility front, but "I don't think you have any of the manufacturing associations."

And nothing will happen on the manufacturing front, Claussen added, until the utilities "come clean on what they want" under a bill that caps their sector. "Without that, manufacturing doesn't matter because nothing is going to move," she said.

The National Association of Manufacturers did not respond to requests for comment for this story. NAM has opposed previous economywide carbon dioxide emissions limits.

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