Victor Flatt on CPRBlog {Bio}
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Preemption Aside, New Climate Change Proposal Would Create Generally Similar Results as Prior Proposals (But Watch Out for Those Offsets)

While Kerry and Lieberman (and before two weeks ago, Graham) have tried to pitch the proposed new Senate climate and energy draft legislation as a “game-changer” the truth is that, aside from the stronger preemption language limiting the states, its effect is not terribly different from what has come before. Sure, there are sweeteners for the conservascenti, such as enhanced loan guarantees and permit streamlining for nuclear energy, continued support for carbon capture and sequestration, removal of a natural gas “penalty,” and ostensibly an opening up of now closed offshore oil areas. But whether this would be different than what would have happened by adoption of the ACES bill is questionable.

ACES also allowed the coal industry to continue with the help of monetary support of carbon capture and sequestration. As for increased offshore oil drilling, even with revenue sharing, opening new areas is going to be a hard sell for a long, long time.  Alaska is a possible exception here, and the Alaska offshore revenue sharing provisions are clearly designed to get the Begich and Murkoswki vote. But even if offshore oil drilling is more attractive to Alaskans, the bottom line is that Alaska always wants to drill and the only thing stopping it has been the federal environmental reviews. The Deepwater Horizon spill called the prior MMS analysis of Alaska offshore drilling into question and has spurred another lawsuit.

The Kerry-Lieberman bill creates the very peculiar “linked” fee system for the oil and gas industry as a way to pay for their carbon intensity usage. While this is a strange and overly complicated part of the proposal and may be a boondoggle to the oil and gas industry, its ultimate effect on actual greenhouse gas reductions should be minimal.

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Kerry-Lieberman Creates Some Added Certainty on Offsets

The Kerry-Lieberman bill's provisions on offsets are largely similar to those in the Waxman-Markey and Kerry-Boxer bill, but include a number of changes that make more specific policy choices in the use of offsets.

First, the proposal enumerates a specific lengthy list of eligible offset categories (whereas Waxman-Markey didn't list specific categories, instead giving instruction for a regulatory decision). This change  might assist in providing market liquidity. In terms of offset regulation, there seems to be a complex dance between the EPA and the USDA, which requires consultations between the two in most cases for offset designation and removal.  The USDA is given the primary role over agricultural and forest offset approval while the EPA has a similar role over other offsets; as I've written before, this could be potentially problematic if the USDA is not up to the regulatory task.

Environmental consideration of offsets is still present for sequestration projects, particularly to protect habitat and native species (proposed new CAA 735(h)), and general environmental considerations may even be stronger. For instance, as in both Waxman Markey and Boxer-Kerry, Kerry-Lieberman would create an advisory committee that proposes offsets and offset rules to the regulator.  But in performing this task, the advisory committee is “to avoid or minimize, to the maximum extent practicable, adverse effects on human health or the environment resulting from the implementation of offset projects under this part.” (proposed new CAA 733(a)(2)(D)).

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The Kerry-Graham-Lieberman Bill – Was it a Tax too Far?

Monday April 26 was supposed to be the day that the much anticipated Kerry-Graham-Lieberman climate change bill was to be proposed in the Senate. Hopes had gone up that there could be a legislative solution to putting a price on carbon. The carbon markets themselves had responded, pushing up the price of allocations on RGGI in the hopes that these would be allowed to qualify for the expected federal cap and trade. Then over the preceding weekend, it fell apart. Senator Graham criticized the call from Majority Leader Reid to also take up a comprehensive immigration reform bill, claiming that it was driven by Senator Reid’s own political needs to increase his chances of retaining his Nevada Senate seat.

There is no doubt that this played an important piece in the very difficult political dance that has surrounded the emergence of the KGL plan. Senator Graham has positioned himself as the leading Republican supporter of both comprehensive climate change legislation and immigration reform. It is clearly too politically difficult for him to carry both of these simultaneously.

However, it may be that the proposal for immigration reform was not the only culprit. It was anticipated that KGL would have a cap and trade system for stationary sources (phased in over time), and a "tax" on fuels that will be linked to the market clearing price of the cap and trade sector. Ostensibly this was the only price on carbon that the oil and gas industry was willing to accept.

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Tenaska Deal Signals Sea-Change in Climate Change Regulation, but Itself May be Too Good to be True

On Monday, the Environmental Defense Fund announced that it had reached a settlement with Tenaska Inc. to withdraw opposition to that company’s proposed “Trailblazer Energy Center,” a 600 megawatt coal fired power plant in West Texas. In return for dropping its objections, the EDF signed an agreement with Tenaska that the company will sequester 85% of the CO2 it produces, selling much of the gas to companies who will use it for enhanced oil recovery (EOR) in the West Texas Permian Basin oil field.

The agreement is stunning on many levels. Trailblazer is the first large-scale proposal (and presumably will be the first operational coal fired power plant) to sequester significant amounts of the CO2 it produces. It is also the first large-scale use of enhanced oil recovery as a market for captured CO2. Last, it firmly and finally illustrates the reality of the fate of new coal fired power in the United States today. Sequester or give it up. Given the EPA’s endangerment finding on CO2, no new air permits can be granted by the EPA or delegated states without “considering” the impact of CO2. So even in a fossil fuel friendly state like Texas (one of the few who were even entertaining the idea of new coal fired power), the reality is that new coal without emissions capture is on the way out (and this is without a comprehensive climate change bill).

Despite the important reality this deal represents, as an individual deal, it may leave something to be desired. The agreement is not public yet, and it is unclear what penalties or breach of contract remedies will be available if Tenaska abandons the deal in the face of say a depressed oil market. Will the sequestration continue for the life of the coal plant? What if the Permian Basin is spent in ten years? And without access to studies of the specific area where the EOR will occur, it is also not clear what level of sequestration permanence we are talking about. Last, by engaging in this capture before the imposition of a mandatory cap and trade system, Tenaska might even be able to profit by selling its sequestration as an “offset” in the voluntary or unregulated market.

Still, the longer term implication is very important.

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Tackling the Issue of "Fraud" in Carbon Trading

The concept of cap and trade took another hit recently with disclosures that hackers had been able to get into the accounts of several holders of carbon emissions allowances in Europe and steal some of the account balance. This, along with the continued snowstorm in Washington, D.C. seems to fill those opposing a federal comprehensive cap and trade plan with glee.

While the issue of record setting snows in D.C. should be addressed with basic scientific education (trends and averages are not the same as one time events; snow often results from warmer temperatures, etc…) the issue of possible fraud in carbon trading systems deserves examination to see if there is such a systemic problem with cap and trade that it is more subject to fraud and manipulation than other markets.

The short answer to this question is “no.” The fraud perpetrated on the E.U. exchange was basic garden-variety thievery. Criminals got access to an asset (carbon credits) and stole them. This could (and has) happened with many assets, and is a risk of electronic records and trading. Does this mean that we should not be concerned or aware of the risks? Absolutely not. The one way that this can be attributed as uniquely related to the carbon market is that the entire trading system is new, and new systems present more opportunities for thievery, rent-seeking, and fraud. Clearly the security protocols on some of the E.U. country registries were not sufficiently strong or that market participants were not educated enough about the protocols of the exchanges to protect their security information from “phishing.” Luckily, the amounts in play were relatively small, they were quickly discovered, and this will provide lessons for future security upgrades.

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The Future of US Elections and the Environment after Citizens United? Look at Texas and Its Politicized Agencies

The Supreme Court’s decision in Citizens United was not entirely unexpected, but it is appropriately seen as a breathtaking change in the way elections work in this country. The Supreme Court struck down federal campaign finance rules that limit corporate (and general organizational) spending on campaign finance ads to help or defeat candidates.

What can we expect now? One need look no further than Texas, which has no campaign restrictions in any statewide races. In Texas, large corporations and individuals have given millions of dollars to candidates and ads supporting them in one election cycle.

While this can be hugely influential on state legislation, at least legislation remains ostensibly open and in the public eye. Texas does have laws that may be seen as more favorable to corporations (such as low limits on medical malpractice compensation and a conservative tax structure), but all in all, the Texas legislative code doesn’t look all that different from other states. That's in part because many laws important to progressives, such as environmental laws, are mandated by the federal-state joint programs such as the Clean Air Act. But this doesn’t mean that unlimited contributions don’t affect the state of the environment.

So what's the hidden danger from Citizens United? The influence on the administrative state.

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G77 Countries May Ethically Deserve More in Copenhagen, But Chance for This Much Foreign Assistance Unlikely to Come Again Soon

As we move into the last days of climate negotiations in Copenhagen, the chances of securing a binding agreement of all countries continues to look less and less likely. The primary culprit, according to the New York Times, is the G77, a group of 130 developing countries that have negotiated as a block since arriving. But as the Times notes, since they have very different needs and incomes, the main thing they have in common is their ability to rail against the rich developed world and hold up negotiations. Indeed, it seems that the main impediment to progress (at least from the perspective of the organizers) has been the continued focus on process rather than substance.

As any progressive knows, the G77 countries certainly have a lot to rail against, in terms of unfairness in many arenas, including climate change. Unfortunately, being right doesn’t always mean getting what you want or getting what is fair.

Everyone is correct that the developed world, including the United States, should morally do more, in terms of both emission cuts and in terms of adaptation assistance. But the sad truth, of course, is that the wealthier countries have never really understood or accepted responsibility for worldwide poverty in any significant form, so perhaps it is naïve to assume that they would in the climate change circumstance. Thus, though we do have discussions of the developed world being “responsible” for historic emissions, it is unrealistic to assume that climate change will finally be the place in which the developed world completely changes its attitude on fairness in the developing world.

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Inexorable March to Carbon Markets at Copenhagen

There are two separate meetings going on here in Copenhagen, really. The one that everyone is focused on is the official negotiations between the countries to reach a new binding agreement on climate change (or extend Kyoto in some form). The other “meeting” is the interaction of the observer organizations inside and outside of the side event meetings and their informal reports to the official delegations. This second “meeting” is more amorphous, and more subject to chaos (the security clearance for credentialed observers has required more than seven hours of waiting in the cold and this morning (Wednesday) was suspended indefinitely). Nevertheless, it appears to me that there is some significant progress being made.

While here, I've focused on the intersecting issues of the carbon market, offsets and adaptation assistance to affected countries. From the official reports, it appears that little has happened in these areas. Many of the developing countries remain suspicious of CO2 trading schemes, and are at least publicly measuring success by the amount of money that they will receive for adaptation. However, the very crux of the argument points out some important facts. First, the fault line on adaptation funding is now clearly whether it will come from a tax or other proceeds from a carbon market or from direct aid. The negotiating position of the developed countries that they wish to secure adaptation funding from carbon trading is now an official position, indicating that most of the developed world is more than ever bought into the idea of using CO2 trading markets for controlling greenhouse gases. Even as the United States considers the latest legislative idea that eschews trading (the “cap and dividend” proposal from Senators Cantwell and Collins), it appears more than ever that cap and trade is what must ultimately happen in the US. The United States is a big player for sure, but even it must be affected by what goes on in the rest of the world. You can be sure that U.S. businesses will not want to be cut out of the growing international market in CO2 trading that will be in the EU and likely other countries as well. Nothing in the “cap and dividend” proposal is inconsistent with trading, and the auctioning of rights to emit is clearly borrowed from the scheme.

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Copenhagen: What Progress on Offsets and Adaptation?

Today, the 15th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) opens in Copenhagen. I will be a credentialed observer from non-governmental academic and research organizations including the Center for Progressive Reform and the Center for Law, Environment, Adaptation, and Resources (CLEAR) at the University of North Carolina School of Law.

In this space I have particularly focused on the carbon trading market and the use of offsets in the context of domestic legislation; in Copenhagen, I will continue to focus on the implications of any decisions regarding offsets and the carbon market, and whether or not this will in turn affect the U.S. debate and legislation. Because offsets raise concerns of co-harms and benefits, and because much of this harm or benefit will occur in the developed world I will be examining issues concerning adaptation as well.

The conference is a huge undertaking that is less predictable than might seem at first blush. Officials of the 192 parties to the UNFCCC (the United States is represented by the State Department, and various lawmakers will also attend) will meet in two groups: the official Conference of the Parties and an implementation group. Additionally, the credentialed side organizations, along with the countries themselves, will be holding nearly 300 official side meetings and presentations.

While the conventional wisdom is that any real progress must be made before the conference, this is not necessarily true. Though the diplomats and other negotiators would like to have all substantive decisions settled, some real progress can occur at the meeting itself. In fact, the whole point of bringing together 5,000 government agents with 15,000 experts, business persons, and environmentalists, is to allow knowledge and agreement to flow between countries and the public and private sectors to facilitate the best possible outcome.

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Boxer-Kerry an Improvement over ACES on Offsets

This post is first in a series from CPR Member Scholars examining different aspects of the Boxer-Kerry bill on climate change, which was released today.

With respect to offsets, the Boxer-Kerry bill is a distinct improvement over the ACES. It allows a relatively strong approach to offset integrity, avoiding negative social or environmental effects, and facilitating possible integration with other systems. It also addresses some issues that will be important to the functioning of a trading market, but still leaves some uncertainties that could cause problems in the market.

Probably the most important difference between the bills is that the Boxer-Kerry bill does not specify which agency would be in charge of administering and ensuring the integrity of any offset program. In the House bill, a last minute compromise switched all of the administration of biological sequestration offsets to the USDA from the EPA, a change widely criticized by environmentalists because of the belief that the USDA would not be as effective in regulation. The Boxer-Kerry bill doesn’t specify any agency, instead referring to the executive branch actor only as “the President” (which means it could be delegated to one or more different agencies). Of particular interest is that in the 801-page draft which leaked out yesterday, the program was administered by the EPA, but that this provision was dropped from the proposed bill. This might indicate that Senators Boxer and Kerry prefer the EPA as the offsets administrator, but that they are willing to have some ambiguity on the issue if it helps win farm state votes.

With respect to offset integrity, Boxer-Kerry makes accounting for offset reversals (when the anticipated amount of offsetting fails to occur) a key part of the bill; and unlike the Waxman-Markey bill, reversals are to be avoided and accounted for in all offset categories, not just biological sequestration. This is very important as it closes a huge loophole which could have destabilized the system and market. Though expanding the accounting for reversals to all offset categories, Boxer-Kerry does generally follow the lead of Waxman-Markey in dealing with offset reversals. Section 734(b) requires that the President require offset developers to either contribute offset reserve amounts to a central account registry equal to the probability of reversal times the total offset credit amount, or to hold insurance that would allow for the purchase of offset or emission allowance credits for any offset failure. The offset reserve option also features the requirement that the reserve be replenished by the project offset developer with half of the lost credits for an unintentional reversal or all of the lost offset credits if an intentional reversal. One could suppose that since unintentional reversals could be fully accounted for in the initial reserve requirements (since unintentional offsets should coincide with statistically likely failures) having a replacement of only one half of the loss would be more than sufficient to preserve the integrity of the system. The truth is that reversal probability calculations are so unknown at this time that we cannot be sure about the ratio of reserves to failures. Requiring a one-half replenishment might be more than sufficient or not enough. It is really a guess at this point, and though the statutory requirement of one-half is pretty specific, other provisions of the bill would allow the President to take actions to preserve the integrity of the required reductions.

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