Former CEQ Chairman Connaughton discusses Senate cap-and-trade bill

With the Senate Environment and Public Works Committee preparing to hold hearings on the Kerry-Boxer "Clean Energy Jobs and American Power Act," what are the prospects for passing a climate bill this year? How will allowances be distributed in the Senate's final bill? During today's OnPoint, James Connaughton, executive vice president at Constellation Energy and the former chairman of the White House Council on Environmental Quality, gives his take on the Kerry-Boxer climate bill. Connaughton also discusses the impact the upcoming international negotiations will have on the pace at which the Senate moves this legislation.


Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Jim Connaughton, executive vice president at Constellation Energy and the former chairman of the White House Council on Environmental Quality during the Bush administration. Nice to see you again.

James Connaughton: Nice to see you again, Monica.

Monica Trauzzi: Jim, Senators Boxer and Kerry have introduced their highly anticipated climate bill. They're seeking steeper emissions cuts than the House version, 20 percent by 2020. What's the strategy there? Are they starting high because they know that there's going to be some negotiation down the line? I mean is this a smart move on their part?

James Connaughton: Well, just like the House it's the opening bid, it's coming from the left, we already know where President Obama is, which is at 14 percent, but let's understand where the common ground is. They're at 83 percent in 2050, the House is at 83 percent in 2050, President Obama is at 80 percent in 2050, and you have the electricity sector supporting 80 percent by 2050. So this middle piece captures a lot of attention, but the real thing to look at is the overall ambition of the bill and whether it's constructed toward long-term investing.

Monica Trauzzi: Last year's debate in the Senate was quick. It was highly criticized. How has the overall strategy shifted this year and do you think that there's more political will to actually get something done?

James Connaughton: I think there's more political will. I think there's more industry interest, especially with EPA regulation hiding back there, but I also think more of the groundwork has been done to figure out where the price points are and where the policy design is to actually get a deal done. And so I'm actually very optimistic that a deal can be cut. The question is will the process unfold quickly enough to do it fast enough?

Monica Trauzzi: What indicators are you looking for to see if that process will actually come through?

James Connaughton: Well, let's go to the House. It was very clear early on that Chairman Waxman and Chairman Markey were willing to cut some deals and that really made the process go fast and I think the new offering by Senators Kerry and Boxer had a key indicator which was their willingness to put nuclear energy back into the mix, because that's highly important to the senators, Democrats and Republicans sitting in the middle. And the fact they had such a strong endorsement of the need for new nuclear, which by the way is a given, is a real signal. Remember, it was Barbara Boxer who voted against McCain-Lieberman because it had the nuclear in it and now as chairman of the committee she's saying I understand that's got to be part of the mix. I see that as a huge sign.

Monica Trauzzi: So they included nuclear, but a lot of people are complaining that it's not enough. I mean how far do they actually have to go to please those senators who are looking for strong nuclear provisions?

James Connaughton: Well, remember, we're in the third inning, right? We had the two innings in the House; you know the first bill and then a final deal. Now we've got the first bill out of the Senate EPW Committee and it's very clear that while Senator Boxer has said, you know, the bulk of the bill is there, the most essential details on nuclear energy, on allocations, and a few other issues that are going to make the difference as to whether there's a deal, those aren't filled in yet. And that's going to be the heavy lifting of the next couple of weeks.

Monica Trauzzi: Allowance allocation, you said it, a big deal. Are the electric utilities going to get to 40 percent that they're pushing for?

James Connaughton: They have to get the 40 percent if you want to get the bill through and here's why. Cap and trade is kind of like musical chairs and the way the game is supposed to work is everybody starts with a chair and then you slowly take them away over time and the people figure out who has to have a chair and who's got to go find an alternative. If you don't start everyone with a chair you drive prices through the roof really fast. You're basically making electricity consumers buy from someone, who has no role in this, the right to just keep operating and that just won't work. And it's particularly hard on the Midwestern coal-based utilities. What was offered to the Congress and to the Senate was a consensus among the electric power industry, which is 40 percent of emissions, that said, look, let us start where we are and we're going to support really aggressive cuts, but we need to start whole and then we can gradually work our way toward the technology investments that will cut our emissions. And they also then agreed on how to share the burden, which is the toughest political nut as to who bears which amount of this burden. And so if you really want to grease the skids to get a deal through I hope that they will take the electric utility sector's consensus lock stock and barrel. One other point on this, a huge innovation for cap and trade, the electric power industry is actually able to structure the deal so that our customers are not impacted heavily. And what we did is instead of the traditional way of doing cap and trade, where the allowances go to the generators of the emissions, in this case the allowances are going to the distribution companies, the generators have to buy the allowances and then the money from that is actually given back to the customers, hopefully, in full rebates. So we soften the blow to the consumer, accelerate the investment in technology, and we've got a political deal that should be able to bridge some political differences.

Monica Trauzzi: The bill is called the Clean Energy Jobs and American Power Act. I mean they're really focusing on the jobs aspect of the bill and the potential benefits that could come. Is this a good bill from an economic standpoint? I mean we're still hearing the economic arguments against a cap and trade. Does this go in the right direction?

James Connaughton: Well, first of all, in my view, there's no better tool when it comes to greenhouse gases than cap and trade. And the key is to keep the capping and the trading in the economy and if you do that what you're going to get is first you're going to get a lot of efficiency investment. Second, you'll get more of a build-out of sources like renewables and some new natural gas. And then if you construct it right, companies like Constellation can plan today to build the first new fleet of nuclear power plants in a generation. So, if we know today what the rules of the road are we can begin to do that. The key is not letting costs get out of control because then that will cause the policy to stop being sustainable. And so the talk is about the price collar, which, just to unpack that a little bit, in both the House bill and the Senate bill there's a price floor, which is good because that will keep technology investments going, so $10 a ton. But if you want to respond to legitimate concerns about prices running out of control you need a top price, right? And this is different than the safety valve from years past. What you're basically saying is EPA has projected the prices will be X and let's just be sure that they don't get way above that and so you put a cap on the upper bound. That still leaves plenty of room for trading and for investment in technology and, by the way, the numbers are higher, you know, when you think of the EPA numbers, are higher than what the environmentalists say the bill will cost. And so you have sort of some folks concerned it's too expensive on one end and the environmentalists say it will be much less expensive, so you can kind of call the question and say, well gee, if we put a collar at a place that's just above what the environmentalists say it will cost maybe we can find common ground. That's where the sweet spot of the deal is, so I hope people can find it.

Monica Trauzzi: You mentioned EPA regulation and they do seem to be moving quickly on regulating emissions. How will that impact momentum in the Senate?

James Connaughton: Well, first I think we should qualify it to say they're moving quickly on proposing regulations on greenhouse gases. I find it interesting that President Obama and President Bush and EPA administrator Johnson in the Bush administration and EPA administrator Jackson in the Obama administration all agree on one essential thing, EPA regulation is not the way to go. And they've all said we must have legislation and they're right. The Clean Air Act was not designed for greenhouse gases and it will become a lawyer's festival and so notwithstanding any best intentions to do it through a regulatory process, we know for a fact that it will be hung up for five to 10 years through litigation and then create all the planning uncertainty that people are trying to avoid. How do we know this? It just happened on Clean Air. You know, we did the most historic Clean Air cuts in history, in 2005, only to see the rules thrown out and only to see them now staggering back into implementation. And that was Clean Air, that was air pollution that actually harms people. You know, greenhouse gas is a little more removed from that and we can expect the same path, so I hope we can stay on the legislative track.

Monica Trauzzi: How much of an impact do you believe the international negotiations are having on the language of the Senate bill and also how quickly things are going to move in the Senate?

James Connaughton: Well, I do hope the Senate can speak, at least the Senate can speak before Copenhagen because I think it would be very useful to level set for the international process what's reasonably achievable in America. And that will then enable countries like China and Japan and Australia and others to feel equally comfortable setting ambitious goals, but not hopeless goals. And it's always been my view if all the major economies can set reasonably ambitious goals for the midterm and together commit to really aggressive goals over the longer term we're going to cut a lot of greenhouse gases. It's just we get hung up on 2020 and 2020 is not where the magic is, 2050 is where the magic is in terms of dealing with climate change.

Monica Trauzzi: Final question here. I want to get your take on recent news coming out of the Chamber of Commerce that several companies are leaving the chamber because of its stance on climate legislation. The chamber plays a very big role on the Hill in terms of lobbying on climate, so bigger picture, how significant are these moves by these companies to get out of the chamber in the overall debate?

James Connaughton: Well, I don't want to speak to individual companies. Let me just sort of set the dynamic with the chamber in general. The chamber is watching out for business in tens of thousands of small businesses, but the principle I think the chamber is trying to protect it is actually one shared by President Obama in his own speeches and also then President Bush in his speeches, which is we need to do this in a way that won't break the economy. So, if you run through the chamber's principles of what they actually say as a matter of policy, especially Tom Donahue their head, you're going to see a lot of alignment with his policy principles for legislation with what the folks on the Hill have been saying, including sort of the folks in the center who represent industrial America. And I say that because the one key thing about the chamber is they have said they will support climate legislation, they said if it meets principles. It's my view that Senator Kerry and Senator Boxer are going to be able to reach a deal that will satisfy chamber of commerce principles. I believe that is not just possible, I believe it can occur. And the question is how quickly we'll get there, not whether we'll get there. I'd like to see its fast because we've got a lot of investment capital sitting on the sidelines ready to be deployed for lower emission outcomes and it's not going to happen until we have some kind of legislative certainty.

Monica Trauzzi: OK, it will be interesting to watch. Thank you for coming on the show.

James Connaughton: Thanks, always good to see you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]



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