Senate Energy Committee hearing aimed at overselling volatility threat from climate bill, which in fact will make Americans’ energy bills MORE stable

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"Senate Energy Committee hearing aimed at overselling volatility threat from climate bill, which in fact will make Americans’ energy bills MORE stable"

Fossil fuels have very volatile prices.  Solar, wind, geothermal, biomass, energy efficiency — not so much.   So the Senate Committee on Energy &  Natural Resources should be holding a hearing on how the climate and clean energy bill — which  accelerates the transition to clean energy sources that never run out and that stabilize the energy bills of American taxpayers — decreases voltality.

After all, the House bill’s huge push on energy efficiency (which is nowhere to be found in the Senate energy bill), actually keeps American energy bills flat (or declining) even as the carbon price rises (see “The triumph of energy efficiency: Waxman-Markey could save $3,900 per household” and “New EPA analysis of Waxman-Markey: Consumer electric bills 7% lower in 2020 thanks to efficiency“).

But in fact on Tuesday the committee is having a hearing “to explore potential costs and price volatility in the energy sector as a result of a greenhouse gas trading program.”  Why?  As E&E Daily (subs. req’d) explains:

Bingaman has largely kept his distance from the cap-and-trade debate. A Bingaman aide said the chairman is planning several hearings this month as Democratic leaders gear up for a floor debate later this year that entails piecing together a comprehensive energy and climate bill based on the work of six committees.

Bingaman begins tomorrow with a hearing to examine the projected costs of a cap-and-trade bill, and the potential for price volatility in the energy security. He has long advocated price controls as part of a cap-and-trade bill, including a “safety valve” that places an absolute ceiling on the price of carbon allowances. That idea often has drawn outright opposition from environmental groups who say it would not do enough to stimulate low-carbon energy technologies.

A cap-busting safety valve is not good from an environmental perspective (see “Safety Valves Won’t Make Us Safer“).  That’s why I have long opposed them (see “The history of the ‘safety valve’ debate“), especially when set at ridiculously low levels, such as $7 per metric ton of CO2-equivalent (and rising a tad above inflation annually), as the National Commission on Energy Policy proposed in 2004.

If you hate energy price volatility, the first thing you’d do is pass a strong climate and clean energy bill, to accelerate the transition away from fossil fuels, which have incredibly volatile prices.  Oil  in particular will see increasingly brutal price spikes in the future, as peak oil price hikes are followed by economic slowdown and price declines, then even higher prices followed by economic slowdown and price declines, with higher highs and lows (see World’s top energy economist warns peak oil threatens recovery, urges immediate action: “We have to leave oil before oil leaves us”).

To further minimize volatility, your climate and clean energy bill should have what I’ve called ‘price collar plus’ — a rising CO2 floor price and ceiling price, but with the ceiling not being a pure safety valve where the government simply issues unlimited emissions credits at the ceiling price but instead making use of tons set aside in a strategic reserve, as the House bill does.

Here’s where this hearing becomes much ado about no much:

Earlier this summer, Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) said she wanted to address the price volatility issue in her cap-and-trade bill. But Boxer said she would consider using a “price collar” to help control costs, and a senior aide later clarified that the idea under consideration involves a reserve fund that can address price swings without destroying the environmental integrity of the overall legislation.

Bingaman, who has no plans to write his own cap-and-trade bill this time around, responded that he thought Boxer’s idea was a good one. “I think it’s something that makes a lot of sense to look at,” he said.

Several top industry groups have also been lobbying for a “price collar” as part of the climate bill, including the Edison Electric Institute, the lead trade association for investor-owned utilities, and the Midwestern Climate Coalition, which includes MidAmerican Energy Holdings Inc., Alliant Energy Corp. and Wisconsin Energy Corp

So there is going to be a price collar, and progressives just need to work hard to make sure that their is a strategic reserve and a high ceiling price that rises 5% plus inflation a year.

The hearing itself is I fear of going to miss the point, but I certainly hope that Pew’s Eileen Claussen, and NCEP’s Jason Grumet make some of the arguments that I have above.

One final point — even if a generic cap and trade system might be subject to price volatility, the Waxman-Markey bill is unlikely to see very volatile prices through the 2020s because the targets are too easy to meet (see “(see “Game changer, Part 2: Unconventional gas makes the 2020 Waxman-Markey target so damn easy and cheap to meet“).  I expect the CO2 price will hug the auction floor price for  at least the first five years and possibly the first 10 years.  Indeed, the greatest risk of volatility is probably on the down side, to go by other carbon markets (such as the Europeans and the New England states).

So if you don’t like volatility, raise the floor price starting point from $10 to $14 (still rising 5% real per year). That is a proposal I will elaborate on in a future post.

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7 Responses to Senate Energy Committee hearing aimed at overselling volatility threat from climate bill, which in fact will make Americans’ energy bills MORE stable

  1. David B. Benson says:

    Or even a bit higher?

  2. Ken Johnson says:

    Joe – I like it. Would you trade a safety valve, e.g. at $28 (no strategic reserve), for a $14 floor price (both increasing 5% per year)?

  3. NFJM says:

    Renewable energy or energy efficiency compared to business as usual solutions achieve this reduction of market volatility.

    Let me just compare a business as usual solution to renewable energy or energy efficiency based solution:

    a)business as usual solution
    ————————-
    * Low upfront investment
    * High marginal cost (fuel costs)
    * High non accounted costs in externalities
    – price fluctuation on international markets
    – low safety of supply when sourced abroad
    – generally: negative contribution to the trade balance
    – low labor intensity
    – high market concentrations (prompt to gaming)
    => The incomes are generally difficult to predict
    => Financial (virtual) hedging is necessary to lower the financial risk using derivatives. The risk does not disappear but is ultimately paid for in the form of insurance premium.

    b)renewable energy and energy efficiency
    ————————-
    * Higher upfront investment
    * Low to close to zero marginal cost (fuel costs)
    * Lower non accounted costs in externalities and/or positive externalities
    – less impacted by fluctuation on international markets
    – high safety of supply: reduced geostrategic risk
    – generally: positive contribution to the trade balance
    – higher labor intensity
    – low market concentrations (less OILigopoles) -> better wealth distribution
    – increase in technology level
    – often: increased yield on investments with energy efficiency
    – increased availability of resources for future generations

    => The incomes are generally predictable. Such solutions are a MATERIAL HEDGING.

    … up to them to see whether they want money invested in markets with predictable returns and REAL ADDED VALUE or again into purely speculative ones (Wall Street, I am looking at you and your failure to understand investment opportunities in energy efficiency).

  4. Philibert says:

    Well conceived price collars would help countries adopt relatively more ambitious targets, and at the end improve the climate results of mitigation policies. Please see http://www.iea.org/Textbase/publications/free_new_Desc.asp?PUBS_ID=2077

  5. Peter Wood says:

    Philibert, I like your approach to modeling uncertainty in costs of mitigation.

    It would be interesting to model the results of a “modified price collar” where there is a limited amount of permits auctioned at a reserve price of something like US$40 per tonne plus 5% per year. It would also be interesting to see the effects of increasing the amount of permits in Waxman-Markey that go into the “strategic reserve”, increasing the amount of abatement if the carbon price stays below US$40 per tonne.

  6. The witnesses and most of the Senators at yesterday’s hearing seem to agree that a price collar is needed with cap/trade. But many went further to suggest that if we don’t like volatility we shouldn’t let Wall St. set carbon prices. See my report on the hearing at http://www.carbontax.org.

  7. danycates says:

    european early ongoing projections