The flaw in the Waxman-Markey bill is not the too-many offsets that domestic polluters are (potentially) allowed to purchase in lieu of actually reducing their own emissions. The flaw in Waxman-Markey is the too-mild 2020 target — a 17% reduction from 2005 levels — which will be so easy to achieve with various low-cost clean energy strategies that it’s hard to see why polluters would avail themselves of the higher-cost offsets option.

Yes, my thinking on rip-offsets has evolved, primarily because I have spent the last few months talking to leading experts, domestic and international, including the chief climate negotiator for a major European country.  Also, I’ve actually started to look closely at the international offsets market — and at how Waxman-Markey would dramatically change the domestic rip-offset market — something that the journalists and think tanks who have written critiques of the offset provisions do not appear to have done.  And I’ve looked closely at the lowest cost clean energy strategies — again, something the critics don’t appear to have done.

Since Waxman-Markey is the vehicle by which President Obama and Congressional Democrats have decided to pursue action on clean energy and global warming — and since it will take all of our efforts just to ensure it is not substantially weakened by the time it reaches the president’s desk — I think progressives need to understand exactly what they are getting here.  More importantly, we need to understand what is worth fighting hardest to preserve or change in the bill, and what is not worth expending significant political capital on.

As I think will become clear, trying to curtail the quantity of offsets allowed in the bill is simply not a high priority (or even medium priority) activity.   Keeping the 2020 target as strong as possible is.

As I wrote back in January, a U.S. climate bill should set a target of reducing U.S. greenhouse gas emissions 20% to 30% below 1990 levels by 2020 (see “Is 450 ppm politically possible? Part 8: The U.S. needs a tougher 2020 GHG emissions target“).  I won’t repeat that science-based analysis here, since, if anything, the science has only gotten more urgent (see recent posts in “Uncharacteristically Blunt Scientists“).  One point I will elaborate on is the assertion from that earlier post that the United States has the technology and resources to reduce its emissions levels substantially below 1990 levels by 2020.

After all, if a much tougher target was straightforward to achieve, then the relatively mild target of Waxman-Markey, which takes us just a tad below 1990 levels by 2020, must be pretty damn easy.  And when you throw in the huge clean energy push in the stimulus, Obama’s aggressive fuel economy standards decision, peak oil, the provisions of Waxman-Markey that accelerate clean energy into the marketplace, and the apparently much greater domestic supply of natural gas than anyone thought even a few years ago — suddenly the target because very easy to meet indeed.

The analysis that I am going to present is not something that any major economic/energy model can reproduce because none of them — including EPA’s — model clean energy well nor are they designed to look at things like the full impact of peak oil or how the electric grid’s dispatch order will change  with even a modest carbon price.  These models have historically overestimated the cost of reducing pollution and are doing so again.  Because there is no reliable model, my analysis is necessarily approximate, and it will take a number of posts to spell out exactly how the U.S. energy and economic systems will respond to Waxman-Markey.  This post will serve primarily as an overview of the key issues of how we will meet the 2020 target.  Later posts will explore individual issues — such as fuel switching from coal to natural gas — as well as what I think will happen in the 2020s and beyond.

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Rep. Collin Peterson (D-MN)

Conservative Democrats in the 50-member Blue Dog Coalition are poised to block or weaken critical green economy legislation as it moves to the House floor. The Waxman-Markey American Clean Energy and Security Act (H.R. 2454) was approved by Rep. Henry Waxman’s (D-CA) energy committee after Blue Dogs and other “brown” Democrats successfully lightened the bill’s clean energy standards and funneled hundreds of billions of dollars to polluting industry. Blue Dog Collin Peterson (D-MN), chair of the Agriculture Committee, has threatened to block the bill if his demands on behalf of industrial agriculture are not met:

At some point it could become an issue where the leadership has to deal with these issues in order to get enough votes to pass it. But if they don’t want to change it, they’ll have to find the votes some other place. In my district, a ‘no’ vote would be a good vote.

Peterson has claimed he has “40 to 45 votes” against the legislation. Fellow Blue Dog and agriculture committee member Earl Pomeroy (D-ND) warned, “I don’t think he is bluffing. He has got the support he says he has.” In a remarkable coincidence, it would take 39 Democrats to thwart the legislation, as Democrats hold a 78-seat majority in the House.

Grist’s Jonathan Hiskes draws from an empirical analysis of polluter influence on Congress to identify nine key conservative Democrats at the center of the ideological spectrum on climate issues, seven of whom are Blue Dogs:

Let’s call them the Carbon Nine: Jason Altmire (Pennsylvania), Rick Boucher (Virginia), Artur Davis (Alabama), Baron Hill (Indiana), Charlie Melancon (Louisiana), Earl Pomeroy (North Dakota), Mike Ross (Arkansas), John Tanner (Tennessee), and Gene Taylor (Mississippi).

Of the four members who sit on the energy committee, Hill and Boucher voted in favor of the bill and Melancon and Ross voted against. All four Democrats voting against Waxman-Markey — Melancon, Ross, Jim Matheson (D-UT) and John Barrow (D-GA) — are Blue Dogs.

Hiskes drew his “Carbon Nine” from a draft paper by UCLA Institute of the Environment’s Matthew Kahn and the Brattle Group’s Michael Cragg, “Carbon Geography: The Political Economy of Congressional Support for Legislation Intended to Mitigate Greenhouse Gas Production.” The economists also found that ideology and pollution are strongly linked:

– A one standard deviation increase in a county’s representative’s conservative ideology is associated with a five percent increase in county carbon emissions.

– The average Republican in Congress represents a district whose carbon emissions are 14 percent higher than the average Democrat in Congress.

– The average Republican member of the Energy and Commerce Committee represents a district whose carbon emissions are 21 percent higher than the average Democrat on this committee.

The study reveals why Waxman skipped over the House Energy and Environment Subcommittee chaired by Rep. Ed Markey to markup their bill in full committee: The average Democrat on the subcommittee “represents a district whose per-capita carbon emissions are 31 percent higher than the average Democrat in Congress.”

[This article is reprinted from the Center for American Progress website.]

• Details on Big Oil’s small investments in clean-energy technology and fuels, by company
• Read about Big Oil executives’ protests over President Obama’s proposal to reduce oil industry tax breaks
• Download a table of the Big Five’s nominal profits (.xls)

It should come as no surprise that last year’s record high oil prices also led to near record profits for big oil companies. The price of oil climbed from January 2 to July 14, 2008, repeatedly setting new price records until it peaked at $147 per barrel””more than twice the price of the previous year. The big five oil companies””BP, Chevron, Conoco Phillips, ExxonMobil, and Shell””made record profits during the first three quarters of 2008 due to these record prices. When oil prices collapsed along with the world’s economies, the oil companies’ profits were reduced, too. However, the big five companies still made a combined profit of $100 billion for 2008 ^ (see note below).  The sum is the second-highest combined big oil profit on record, exceeded only by the 2007 combined total of $123 billion.

The 2008 big oil profits bring the grand total under the two terms of the Bush administration to $656 billion, which is nearly two-thirds of a trillion dollars. Given the urgency to restart the economy with clean energy investments, and the need to slash U.S. oil use, you would expect these wealthy energy companies to be taking steps to develop new clean-energy technologies and fuels to address these economic and security concerns. Despite their soaring earnings, the big five companies were very stingy with investments in renewable and low-carbon energy technologies and fuels that would reduce oil dependence. In fact, a CAP analysis of their investments reveals that the big five oil companies invested just 4 percent of their total 2008 profits in renewable and alternative energy ventures. This reality contrasts with their ads that promote greener, cleaner images.

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GE eyes $1.5 billion in cleantech research by 2010

General Electric Co aims to boost its investment in clean-tech research and development to $1.5 billion a year by 2010, the largest U.S. conglomerate said on Wednesday in its annual “Ecomagination” report.

The maker of products ranging from electricity-producing wind turbines to energy-efficient compact-fluorescent lights, wants to grow green-business revenues to what it called a “stretch” target of $25 billion next year, up from $17 billion in 2008 and $6 billion in 2004….

GE said it expects stimulus spending in the United States, China and elsewhere around the globe to create about $400 billion of new demand for green technologies and clean-energy products, including wind turbines and solar panels.

The company earlier this month said it was building a plant near Albany, New York to build a new generation of high-capacity batteries that would power its upcoming hybrid railroad locomotive. Last month, it said it was working with Florida utility company FPL Group on the roll out of a “smart grid” system intended to encourage homeowners to lower their electricity consumption during peak demand times.

Global CEOs back greenhouse gas cuts, carbon caps

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UPDATE:  The authors have clarified a key example with a figure and answered some of the questions, so I’m reposting this:

As the U.S. makes significant progress towards enacting a cap-and-trade system to control greenhouse gas emissions, some are worried that the new Waxman-Markey bill (W-M or H.R. 2454) may enable polluting utilities to reap windfall profits.  We disagree.  The allowance allocation provisions of this bill have been thoughtfully crafted to avoid a repeat of Europe’s experience.  There certainly are issues and challenges remaining with the legislation, but windfall profits arising from allowance allocations isn’t one of them.

So begins an exclusive analysis of Waxman-Markey for Climate Progress by two of the country’s leading experts on the electric utility industry and energy economics, Peter S. Fox-Penner and Marc Chupka.  The debate over the large amount of allowances given to utilities is certainly heated (see “Greenpeace’s indefensible attack on the House clean energy bill perpetuates myths about the European carbon trading system“).  But very few are expert on the economics of regulated electric utilities — including me.  That’s why I asked for this analysis from two former colleagues from the Clinton Energy Department.  Fox-Penner is an internationally recognized authority on electric power industry issues, whose forthcoming book is The Future of Power (Island Press).  He held the position of Principal Deputy Assistant Secretary for Energy Efficiency and Renewable Energy right before I did.  Chupka is an economist with two decades of public and private sector experience analyzing the market impacts of both domestic and international energy and environmental policy.  He was Acting Assistant Secretary for Policy when I was at DOE.  This analysis examines the likely impact of the allowance allocation to utilities and includes an extended Q&A at the end.

The key to W-M’s success in this area is that it is careful to give the overwhelming majority of free utility allowances to the electric or gas retail distribution company, not the generator or the entity that sells wholesale gas or power itself.  Whether or not you have electric or gas deregulation in your state, you still receive your power or gas deliveries from a regulated distribution company.  If you are served by a rural electric co-op they are your distributor, and similarly for a government-owned utility like LADWP.  All distributors are either state-regulated, customer-owned, or government-owned.

While you may not know it, every monthly power or gas bill that customers pay separates the cost of delivering gas or power from making or buying the energy itself.  State regulators, city managers, or coop management boards — who have full access to the accounts of distributors –  set distribution charges so as to manage the profits earned by the distributor.  This is a key point.  Unlike some other parts of the utility industry, distributor profits are strictly controlled.

W-M specifies that the bulk of free allowances given to utilities can be given only to a gas or electric distributor — not to a standalone retailer or generator.  Furthermore, the law says that “the allowances distributed to an electric or gas local distribution company “¦ shall be used exclusively for the benefit of retail ratepayers of such”¦company.”  Each state regulator or manager of a coop or municipal utility must conduct a proceeding to determine how the value of allowances will be treated – for example some of the proceeds might help fund energy efficiency if the regulators decide that represented benefits to retail customers.  But, W-M does not allow the size of individual customer rebates to reflect that customer’s metered energy consumption.

With these provisions, it will be awfully hard for any utility to harvest a windfall from the free allocations — especially a shareholder-owned utility.  Yes, the free allowances given to the distribution utility will be worth a lot.  But the law is pretty clear that the benefits of receiving the free allowance go to the utility’s customers, not their shareholders.

As folks who’ve been involved in utility regulation for a long, long time, we see this as pretty straightforward and transparent.  State regulators will all know the number of allowances each utility gets and their value. [See the Q and A below for more on this] They will see the accounts books of utilities (as they do today).  To give ratepayers the value of the allowances, they will probably do one of two things:

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I have been pushing white or reflecting roofs as the lowest cost climate strategy (see “Geoengineering, adaptation and mitigation, Part 2: White roofs are the trillion-dollar solution“).  Indeed, it is almost certainly the single cheapest of the 12 to 14 wedges needed to stabilize near 2°C total warming — the equivalent to taking the world’s approximately 600 million cars off the road for 18 years, while quickly paying for itself in direct energy savings!

[100 m2 (~1000 ft2) of a white roof, replacing a dark roof, offsets the emission of 10 tonnes of CO2.]

So I was delighted when a reader sent me this amazing Agence France-Presse story from Tuesday:

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