Friday, September 11, 2009

Tidwell, Chris Van Hollen and Global Warming, Part Two

By Marc Korman.

In Part One, we discussed CCAN founder Mike Tidwell’s concern with the Waxman-Markey cap-and-trade bill and his advocacy for Chris Van Hollen’s alternative. Today we will take a closer look at the Van Hollen proposal and what Maryland is already doing on climate change.

Before diving into the Van Hollen proposal, it should be noted that Congressman Van Hollen voted for Waxman-Markey and advocated for its passage, despite having an alternative proposal of his own.

The Van Hollen bill would place a cap on emissions that would be reduced over time, the same as the Waxman-Markey bill. The cap would be enforced by requiring permits to be purchased “upstream,” meaning those introducing greenhouse gas emitting fuels into the economy would need to purchase permits, as opposed to those actually causing emissions by using the fuels such as utilities. Unlike Waxman-Markey, 100% of these permits would be sold and none would be given away. The proceeds of the permit sales would be divided up equally among each American as a dividend.

As Tidwell said, Congressman Van Hollen’s proposal has the benefit of being simple and transparent. But the shortcoming is that it does not prepare emitters to reduce their emissions as the cap lowers. Tidwell said the invisible hand of the market would help emitters figure out how to cut emissions, since the price of energy would rise due to permits. In his view, those rising prices would lead to innovations by the emitters. The hands off approach is in contrast with the vast efficiency requirements and dedicated funding for research and development provided for in the Waxman-Markey bill.

The problem with the market-driven approach is that due to the presence of the dividend returning any increased costs to electricity consumers, there will not be heightened energy costs to encourage innovation. If an upstream provider of fossil fuels, for example a coal mine, is required to purchase permits for its coal, they will in turn raise the price of that coal when they sell it to a coal-fired power plant. The power plant will, in turn, raise its rates (different states regulate their electricity sectors differently and in many cases power plants would have some constraint in their ability to immediately adjust rates). That would be tough on electricity consumers, except that each year the proceeds of the permit sales, minus a small amount for administrative costs, would be sent to them in the mail. In fact, the dividend could even be structured to be credited right to their power bill. So everyone in the supply chain is paying more up front, but that is being compensated for by higher prices for the coal mine and power plant, and the dividend for the electricity consumer. So where will the market drive for increased efficiency come from?

Maybe the reality of a steadily lowering cap will encourage someone in the supply chain to seek better efficiencies or new technology, or it could just convince them to raise prices to decrease demand. That may bring down emissions, but it probably makes less sense then serious investments in new clean energy technology and increased efficiency standards. Ironically, Tidwell criticized these type of command regulations in federal legislation, while praising California for such policies which have left California using 50% less electricity per capita than Maryland. In a way, the cap-and-dividend approach is also essentially a command regulation, in that it sets a cap on emissions but provides no tools for consumers or utilities to reduce emissions or shift to alternative energy. Waxman-Markey is not perfect, but it gets this general concept right. Congressman Van Hollen probably understands it too, which is why he has other pieces of legislation providing financing for green projects.

Tidwell also gave some credit to Maryland for having some useful policies in place. Surprisingly, he did not praise himself or his organization for their commendable work in passing some of these policies. Maryland is part of the only functioning cap-and-trade program in the United States, the Regional Greenhouse Gas Initiative (RGGI). Along with other states in the mid-Atlantic and Northeast, Maryland has a cap on carbon emissions from power plants. Two other regional plans are being developed around the country, the Western Climate Initiative and the Midwestern Greenhouse Gas Reduction Accord. But only RGGI has been put into effect. Maryland also has a renewable portfolio standard, which requires a percentage of the state’s energy generation to come from renewable sources. A renewable standard is another piece of the Waxman-Markey legislation.

A national plan is needed, but happily Maryland is not just waiting for one but continuing to move ahead with state or regional transformative programs. That’s partly thanks to CCAN and other state leaders.