How the GOP and a slumping economy killed a 'Republican instrument'

As the air leaked out of climate legislation in the Senate last month, Elizabeth "Betsy" Moler was still on the case, working on a cap-and-trade plan for utilities that might salvage something useful from the disintegrating debate over carbon policy.

Moler, Exelon Corp.'s executive vice president for public policy and head of its Washington office before her retirement last month, has been at the table at many critical moments over three decades of energy policymaking. As a staff attorney with the Senate Energy and Natural Resources Committee, headed then by Sen. Henry "Scoop" Jackson (D-Wash.), she worked on the creation of the Energy Department, the landmark Natural Gas Policy Act of 1978 and other legislative responses to the 1970s energy crises.

As chairwoman of the Federal Energy Regulatory Commission in the mid-1990s, she led its transforming policy changes in its orders 888 and 889, which opened wholesale electricity markets to competition and established an Internet-based market for trading electricity.

And as a leading member of the U.S. Climate Action Partnership (U.S. CAP), she worked with industry and environmental group leaders to support the House-passed "American Clean Energy and Security Act of 2009." Her personal contribution was the strategy of initially allocating a large part of carbon fees to consumers through their local electric utilities, to soften the climate bill's economic impact. The bill's critics objected that merchant power companies with nuclear generation, like Exelon, would gain a windfall under the plan. Merchant industry representatives disputed the claim.

A long series of wins ended this year with the collapse of climate legislation in the Senate, but Moler says she has not thrown in the towel.

In an interview, Moler said that her deep disappointment was the rejection by Republican leaders in Congress of a market-based strategy for raising the price of carbon emissions, to speed transitions by power plants, industry and consumers to cleaner energy.

The Democrats called it "cap and trade." Republicans labeled it "cap and tax," and the change in one word proved lethal.


"The thing that just amazes me, confounds me, surprises me is how successfully the Republican leadership and a lot of the people who would be potentially negatively impacted have been in vilifying what have historically been market-based solutions," Moler said.

Inventors turn on their invention

"Cap and trade is really a Republican instrument that grew out of a lot of the Republican thought leaders as a market-sensitive, market-friendly, anti-command-and-control mechanism" to reduce sulfur- and nitrogen-based air pollution in the 1990 Clean Air Act amendments. "Now, some of the same people who invented it have turned on it as an energy tax," she said. "It's a huge missed opportunity. I don't know where you go next."

Moler's regret is seconded by Philip Sharp, president of Resources for the Future, who, as a Democratic House member from Indiana, stood with Moler in the 1990s in the energy deregulation campaign. Sharp was a pivotal factor in Congress' adoption of the 1990 Clean Air Act amendments and the 1992 Energy Policy Act, which opened the way for FERC's electricity market orders four years later.

"I'm not here to say cap and trade is the only way to do this," Sharp said in an interview. "It worked magnificently with SO2 and a couple of other instances." Scaling it up massively to deal with economywide carbon emissions is another question. "We don't know we can manage it as effectively," he said.

"But what is really unfortunate in the public debate is that the current Republican leadership has overthrown one of the great Republican successes in this country [under President George H.W. Bush], to capitalize on the flexibility of the marketplace" in achieving regulatory change, Sharp said.

"I don't think people appreciate the extraordinary challenge that represented and the difficulty of getting it done" in the 1990s, he said. Now, with the demise of that approach, Congress has invited U.S. EPA to step in on the climate front "and regulate the living [daylights] out of everything and see how well a modern economy works doing that."

Some leading Republicans saw it differently. In 2008, Rep. Jim Sensenbrenner (R-Wis.), ranking Republican on the House Select Committee on Energy Independence and Global Warming, was branding Senate climate proposals "cap and tax" plans.

Sensenbrenner called instead for targeted federal support for commercializing cleaner energy technologies. "The emissions trading system [proposed by climate policy advocates] is nothing more than a complex scheme to disguise what is ultimately a transfer of wealth from the private to the public sector -- in other words, a tax. Other approaches must be found," he said on one occasion that year.

"Technology-based solutions are a better approach to achieving energy independence and combating climate change. Unlike cap-and-tax programs, advanced technologies can strengthen the U.S. economy, keep energy costs low and reduce emissions," he said.

Economists quarreled with each other and with government analysts over estimates of the climate bill's costs. Members of Congress from coal states feared its economic impact on their constituents. Energy cooperatives -- unusually dependent on coal-fired power -- sparred with investor-owned utilities about the distribution of carbon allocations. Critics warned that emissions trading in carbon credits risked creating Enron-like fraud. And a political split grew in the waning days of the George W. Bush administration.

Sensenbrenner commented to reporters at a U.N. climate conference in Poland at the end of 2008, "As a partisan Republican, if people on the other side of the aisle want to push a doubling or tripling of electric bills and $10-a-gallon gas, I can guarantee you that the Republicans may very well be in the majority after the 2010 election."

A bipartisan funeral

As long as a wide swath of Americans are worried about jobs, mortgages and retirement savings, the Republicans may have the best of this fight, Sharp acknowledges. He harbors hope for possible progress on climate issues next year, when the midterm election is over, the party divisions in the new Congress are settled, and its members are confronted by the prospect of increasing EPA regulation of greenhouse gas emissions.

"We might see a new kind of coalition emerge in the next Congress, where people are starting from scratch, trying to craft something different," he said.

Alternatively, Republicans and Democrats could spend the next two years in renewed, bitter battles as the EPA carbon regulations, sanctioned by the Supreme Court, spread from industry to industry.

Moler says it is hard to remain optimistic, given the partisan lock step that has taken hold in Congress. "So little solid legislative work is being done right now," she said. "You just don't take a bill to the floor of the Senate unless you have 60 votes. They aren't even taking bills to the House unless they can go on the suspension calendar. The place has gotten so nasty that it's almost dysfunctional."

The atmosphere is poles apart from where Moler started, she said. She worked as an intern in the House while attending American University, then became a Senate aide before getting a law degree and joining the staff of the Energy and Natural Resources Committee. Jackson was a mentor.

"At his funeral [in 1983], I realized what a profound experience it had been. He was our boss. Whenever you needed to see him, he was there. He traveled in very interesting circles. He worked collaboratively with Republicans and Democrats alike. It was a very different era."

Then-Sen. Pete Domenici (R-N.M.) and Jackson became close friends and worked many hours on the natural gas legislation, she said. Moler recalls evenings when Domenici, nursing a bad back, sat on the floor in Jackson's Senate office exploring areas of agreement. "They'd talk for hours and hours. Secretary of Energy Jim Schlesinger would show up. It was just a full-scaled engagement on what became five energy bills" in the Carter presidency. "It was just different."

The discussion and debate over the climate bill within the U.S. CAP group was similar. "I've sat around a table for three years talking to people about how to structure cap and trade so it will be both market-friendly but also guarantee results from a climate perspective; how to make sure the mechanism is designed in a way so electric customers won't have their rates go through the roof -- which is a real fear we have, because we know there will be an uprising against utilities if that happens.

"There are lots of ways to design the system so that it both guarantees results and protects customers, and does not have a disproportionate impact in any one region of the country."

Ongoing effort to build a smaller consensus

House passage of the climate bill assembled by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) kindled hope that a good design had been found. Despite party-line discipline, eight Republicans voted for it. But Republican support did not materialize on the other side of the Capitol. "We just couldn't sell it politically" in the Senate, she said.

"I don't think it gets easier to deal with in the next Congress because of the politics," she said, referring to expected Republican gains. "That does not bode well for passing a bill anytime soon."

But the U.S. CAP group has not quit. Moler is still working with it. "We've been talking lately about whether there is a way that in the waning hours of this Congress where we could get started on a utility-first, or utility-only bill, so that at least for the utility sector -- where there is more consensus -- we could make progress."

"We've started with some of the approaches in the Kerry-Lieberman bill," sponsored by Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.), Moler said. "But you have to revamp it if you're not going to have other sectors be subject to an overall [carbon] cap. You have to redo the numbers. You have to rethink how to restructure an offset program. You have to think about what you can afford to do with new programs." She noted that the funds raised by a utility-only program would be well below funding from an economywide program.

"Who gets the allowances? How are they distributed? Over what period of time? How do you structure a price cap?" These are questions being studied, she said.

"There is a very small chance we could pull that off ... certainly not before the election," Moler added. "But that hope is still out there."

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