Solutions to the Draft Waxman Bill Expose Design Flaw in U.S. ETS

The Waxman and Markey Climate Change bill has to be finalized by 25th of May on Memorial Day 2009. The House is considering climate change legislation authored by a key subcommittee chairman, Rep. Ed Markey (D-MA). President Obama has said this is, "a rare opportunity to rise above parochial concerns to enact a bill with a profound national impact".

The Waxman-Markey Discussion Draft provides for an economy wide cap & trade program: The cap reduces greenhouse gas emissions to 20 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050. Offsets, (project based reductions) are limited to 2,000 million metric tons CO2 equivalent (MtCO2e) per year or 30% per cent of U.S emission reduction, split evenly between domestic and international offsets. Domestic offsets does not include Green Buildings offsets. There are provisions for emissions reductions from reduced deforestation through allowance set-asides.

Waxman does not yet have support from House Republicans or moderate Democrats like Rep. John Dingell (D-MI) who are opposing the bill. Opposition concerns whether to give away or auction the permits to manufacturers, utilities, and other industrial sectors in a U.S Cap and Trade Emissions Trading scheme. The U.S is coming up against the same opposition from industry and parochial interests that the Europeans came up against, when they decided to give away the majority of permits in the early years of the European Emissions Trading scheme (EU-ETS). The U.S was originally highly critical of the Europeans for going down this path. Al Gore has gone on the front foot calling for unity from the Democrats on Climate Change against the resistance of some Democrats wanting to protect local industry. Similar to the results of the EU-ETS, we found with the Carbonflow carbon game emission reductions were achieved even with giving away the permits in the first period. So, whatever the House decides on auctioning versus giving away permits, that should not block the Draft bill's passage through the house.

Some believe that Speaker Pelosi will make the House vote on a version of the Markey bill with 254 House Democrats, but important House Democrats like Mr. Dingell may make a similar case as House Republicans, that the bill should be opposed because of the higher energy costs for consumers.

The approach taken by the Waxman-Markey bill does not alleviate the problem whereby household consumers will pay higher energy costs because the regulatory approach to energy efficiency and renewable energy is insufficient. Under the bill energy efficiency and renewable energy is proposed to be achieved through regulation by establishing a renewable electricity standard, a low carbon fuel standard, and energy efficiency programs and standards for buildings, lighting, appliances and additionally further standards for vehicles, stationery sources and fuels.

According to Donald Simon, an attorney for Wendel, Rosen, Black and Dean, BOMA International, The Real Estate Roundtable, U.S. Green Building Council and the California Business Properties Association, regulation does not achieve the result intended as, "Building codes typically affect only new construction, because existing buildings are "grandfathered" and new code requirements apply only to substantial renovations, which is hugely problematic. Existing buildings account for the vast majority of real estate sector GHG emissions. Government incentives are helpful but inadequate and unreliable because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years".

Simon goes on to say that, "in the world of Climate Change regulation, there are two major classifications of GHG emission sources - direct and indirect. Direct sources release GHGs directly into the air, like power plants and other smoke stack industries. Indirect sources are activities that consume what the direct sources produce, like buildings that consume electricity produced by power plants. The conventional wisdom among regulators globally is that market-based programs, like cap and trade, should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. This generally forecloses the possibility for green building projects to generate carbon credits, despite their cost-effectiveness. As a result, a valuable incentive for voluntary GHG reductions is lost, the low-hanging fruit of increasing energy efficiency in buildings goes unpicked, and industrial (direct) sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing Climate Change and make it less politically feasible to accomplish".

Not only do Cap and Trade Green Building carbon credits provide a much larger funding source that could partially finance energy efficiency improvements if buildings are allowed to participate, they also actually benefit poorer communities by upgrading the existing building stock with energy efficient and renewable energy technologies at a much more accelerated rate as the private sector is incentivised from the price of carbon to go out and do projects on a large scale, providing whole districts and building owners with clean technologies funded by the credits. Regulatory approaches just take too long to retrofit the existing building stock and leave people stranded with high energy bills.

House moderate Democrats and Republicans correctly say ordinary people will incur higher costs of energy over-time because most people will not have had their homes and small businesses upgraded with clean technologies and they know the subsidies to poorer communities for energy costs will be short-lived and once removed all Americans will be left with higher energy costs. A householder or small business faced with a doubling of energy costs from USD 100 - USD 200 a quarter would probably just pay as there is not enough incentive to go out and retrofit the house nor do they have the trades expertise to do it.

The better outcome is that Green Building Carbon Credits are allowed and business, construction companies, project developers, engineers, architects do energy efficiency and renewable energy building projects using the funds from the credits and create the Green jobs President Obama is talking about.

In short, proposed subsidies to less well off Americans waste money that should be going into making all American homes energy efficient and creating green jobs.

Policy-makers can encourage voluntary reductions by structuring carbon markets in a way that allows parties to convert their GHG reductions into carbon credits that they can sell to regulated sources to offset their emissions. Under the current plan the U.S would be in the anomalous situation of accepting international carbon offsets from energy efficiency and renewable energy but not accepting it domestically. This makes no sense. Domestic Green building offsets would allow regulated industries an alternative way to comply with regulatory obligations by letting them choose between reducing their own emissions or purchasing Green Building offsets from others who were able to reduce theirs at lower cost. This reduces the overall cost of Climate Change regulation by letting the free market exploit lowest cost GHG reductions.

Green Building carbon credits would be more transparent as they would have to be independently validated and verified, and open to public scrutiny, whereas money going to government agencies for programs may well end up being used on things other than greenhouse gas reductions projects. Even the double-counting issue can be managed as companies like Carbonflow, multi-party software designers for the carbon industry can easily retire end use building credits back to the Cap.

I believe however, if the house was not to get too hung up over auctioning or giving away permits in the first phases and secondly, to introduce Green Building Carbon Credits, it could solve all the problems that beset the Draft Waxman-Markey bill before the House on Memorial Day.