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Opening Round on Climate Change Underscores Complexity, Controversy

The marathon hearings by the House Energy and Commerce Committee last week were the "opening round" of serious debate on climate change legislation, with Democrats saying that their bill would create jobs and have minimal adverse impact on energy prices, while Republicans argued otherwise. Committee Chairman Henry Waxman (D-CA) plans to begin marking up the bill this week so that it can be sent to the House floor by the Memorial Day recess. Despite the accelerated pace, some say it's unlikely that Congress will pass climate change this year.

"I think it will be a heavy lift to have a comprehensive climate change bill come out of conference this year and head to the president's desk," said Red Cavaney, senior vice president of government and public affairs for ConocoPhillips, last Thursday at the Natural Gas Roundtable in Washington, DC. "I think that we're far enough along [to realize] that it's going to take a while to put a comprehensive bill out."

But "it's not inconceivable that maybe a research investment-only kind of bill, or some variation that's relatively simplistic, could possibly happen" this year, Cavaney told energy executives and former regulators.

Climate change legislation "will come about in a longer timetable," when Capitol Hill lawmakers can put aside their partisan and regional differences to achieve "something that can get a large majority," he said. The centerpiece of the House energy panel's proposal -- the American Clean Energy and Security Act of 2009 -- is a system for capping greenhouse gas (GHG) emissions and trading emission credits as a means to reduce carbon output in the United States.

If there's a "backlash" by the public to the climate change legislation and "members of Congress are forced to retrench, my guess is it's going to be five to 10 years at least before you could come back and try and get something done. And that doesn't help anybody. So I think it's that pressure that's going to help all of us around the table," Cavaney noted.

"I think -- and [Rep.] John Dingell has mentioned this before -- if you want to have a good model of how to put together a good bill that deals with climate change...the concept of how they moved the Clean Air Act [CAA] amendment is a perfect example." It had its share of detractors, but in the end "it was supported by Republicans and Democrats. It was tough, but it did the job."

However "we're not there yet," Cavaney said. "Disappointingly yesterday [last Wednesday on Capitol Hill] there was still too much of a little bit of rough edges of partisan bickering going on" with respect to the House discussion draft on capping GHG emissions. The 648-page draft measure was proposed by Waxman and Rep. Edward Markey (D-MA), chairman of the Subcommittee on Energy and Environment (see NGI, April 6). The draft is 70-75% based on a "blueprint" developed by the U.S. Climate Action Partnership, a coalition of environmental and industry interests, Cavaney said (see NGI, Jan. 22, 2007).

Last week's four days of hearings were "the opening round of the discussion in earnest about climate change legislation," Cavaney said. He called Sen. Barbara Boxer's (D-CA) climate change bill last year a "false start."

Congress will have to take it's time with climate change policy. It "isn't going to be rammed down anybody's throat," he said. And "at the end of the day my guess is there'll be enough people crossing the aisle on both sides [in support of a bill]. If they're going go pass something comprehensive, it will take time but they will get something."

And "everybody's going to get pinched on this...Whether you want to call something a tax or a cap or anything else, the notion that you're going to be able to move off carbon only works if people understand there's a price to pay," Cavaney said, adding that climate change mitigation will take a toll on energy prices.

"So that [the] increase isn't highly volatile and doesn't a high dive board the minute you enact legislation, you need a lot of other measures and a lot of other provisions that interact with one another to help, particularly in the early stages, temper [volatility]," Cavaney noted.

For utility and industrial companies, there could be a "dash for gas...where all of a sudden you get this incredible run because you can save yourself from having to buy a lot of emission credits by converting whatever is in coal or some other form of hydrocarbon into natural gas."

Now is not a good time for the hydrocarbon industry, said Cavaney, citing Obama administration policies on oil and gas drilling and the potential regulation of hydraulic fracturing under the Safe Drinking Water Act. "I think that we're in for a tough time, those of us in the hydrocarbon world. We've been there before. We have our market challenges. We have our regulatory challenges. We have our tax challenges, and now we just added a new one [climate change].

"I think at the end of the day with passage of time people will conclude that all the new forms of energy will have their place ultimately, but [it's] not going to happen overnight. I hope we have the good sense to allow hydrocarbons to become cleaner and cleaner and more environmentally friendly over time and then eventually, decades down the road, let the consumer make their choice."

Costs Debated

Obama administration officials last Wednesday touted the House discussion draft that would cap GHG emissions, calling it a jobs-creation bill that would not have a negative impact on the economy and energy prices. However, they had little data to back up their claims.

"It will increase the price at the pump," but the impact of a cap-and-trade system on the cost of living for American people "will be as moderate as possible," said Energy Secretary Steven Chu during a joint hearing on the House discussion draft. But he did not have actual figures. Chu said he would call on the Energy Information Administration to more closely examine the bill's impact on energy prices.

Environmental Protection Agency (EPA) Administrator Lisa Jackson conceded that the agency had not done any modeling on job creation, but "common sense" says this will occur. Rep. Ed Whitfield (R-KY), however, cited a study by Spanish authorities that found that for every green job created, 2.2 jobs were lost.

As for the economic impact of the legislation, "EPA's economic modeling indicates that the investment Americans would make to implement the cap-and-trade program...would be very modest compared to the benefits," Jackson said. In an analysis released last Tuesday, the EPA estimated that the bill's average annual cost per household would range between $98 and $140.

The analysis further concluded that the price of emission allowances would be less than what was projected for a similar bill in the Senate last year, CQ Today reported. Allowance prices would be between $13 and $17 per ton of emissions in 2015, and $74 to $96 per ton in 2050, the EPA said. This compares to the projected cost of $20 to $50 per ton in 2015 and $160 to $200 per ton in 2050 in the Senate bill.

Jackson conceded that the EPA had to make "quite a few assumptions" with respect to the prices. She noted that the agency will do additional modeling when the House legislation is complete.

But Rep. Joe Barton (R-TX), the ranking member of the House energy panel, said a cap-and-trade system is going to be "very, very expensive," at least $2 trillion over an eight-year period. He acknowledged that he is a "skeptic" about cap-and-trade. Putting "some kind of blind faith in a cap-and-trade system...will deindustrialize the United States in 40 years," he said.

"With a cap-and-trade scheme like that proposed by Chairman Waxman and Markey, households can expect energy cost increases [of] up to $3,128 per year. Your electricity bill will increase by 77% to 129%. Filling up your gas tank will cost anywhere from 60% to 144% more. [And] the cost of home heating oil and natural gas will nearly double," Barton said.

Republicans on the committee continued to blast the discussion draft. "Under the Waxman-Markey draft, we are capping our economy and trading away our jobs. We are instituting a regressive energy tax on Americans already enduring high unemployment, lost 401(k)s and rampant home foreclosures. The Waxman-Markey discussion draft is a web of increased regulation that will entangle the economy into paralysis," Barton said.

In addition, the "cap-and-trade proposal...will cause millions of American jobs to be sent overseas. According to the National Association of Manufacturers, an estimated 3-4 million net jobs will be lost under a cap-and-trade scheme like the Waxman-Markey draft. According to the Heritage Foundation, between 1.8 and 5.3 million would be destroyed; and Charles Rivers Associates estimated job losses as high as 7 million," he noted.

In a letter to Waxman and Markey last Tuesday, Barton and every other Republican on the committee said the draft proposal was incomplete and that more hearings were needed. "As an initial matter, we would note that you discussion draft lacks any decision on permit allocations versus auctions. The manner in which you will address this issue is the cornerstone of the legislation. Without it, the bill is simply not finished and not ripe to be marked up or accurately discussed in the context of a hearing."

"Some say [that] true energy reform will undermine our economy. They argue that there is a fundamental conflict between economic growth and clean energy. This is a false choice," Waxman countered. Forty years ago the House energy committee passed the original CAA, which Waxman said has reduced dangerous air pollutants by 60% or more.

And 20 years ago the House energy panel passed the 1990 amendments to the CAA. "Opponents of the legislation said that stopping acid rain would bankrupt the utility industry. In fact, we cut emissions in half at a fraction of the cost the naysayers predicted," he said. "It is no longer a question of whether we will act to reduce [carbon] emissions," he noted, adding that the EPA answered that question earlier this month when it declared that GHG emissions endangered public health (see NGI, April 20).

Legislative Answer Preferred

Despite the recent action by her agency, EPA's Jackson said she believes legislation, rather than administrative action, "is the best way to address the problem of global warming and greenhouse gas emissions."

The EPA's endangerment finding "is the first step in regulating...greenhouse gases via the Clean Air Act," said Jackson, but she added that it was "more efficient to do it via new legislation, like this discussion draft envisions." She noted that the Waxman-Markey bill "does a much better job than the EPA" could do.

"I believe this committee can make history again this year," Jackson said. The "no-we-can't crowd" will spin out "doomsday" scenarios about runaway costs. But she pointed out that efforts to control acid rain, which had a number of detractors at the time, has delivered annual health and welfare benefits of more than $120 billion at an annual cost of $3 billion.

The Waxman-Markey draft language would mandate an 83% reduction in GHG emissions by 2050 and calls for greater use of renewable energy sources in the generation of electricity. "I think they're aggressive but we can meet them," Chu said. If the United States takes the lead on carbon reduction, he believes that China will follow. The two countries account for 50% of the carbon emissions in the world.

Free Emission Credits

As the hearings dragged on, news emerged that House Democrats were mulling over a plan to give electric utilities 40% of the emission allowances for free, which is equal to the sector's share of carbon dioxide emissions.

The allocation "should be to local distribution companies [LDCs]...A small percentage should go to merchant coal generators," and the "allowances should be provided for the duration of the [cap-and-trade] program," according to the recommendations by Rep. Rich Boucher (D-VA) and other centrist Democrats on the House Energy and Commerce Committee.

They also recommended "bonus allowances for CCS [carbon capture and storage] deployment program with allowances given to the first companies to install CCS."

The Waxman-Markey climate change bill calls for a reduction of 20% of greenhouse gas emissions by 2020. But Boucher and Rep. John Dingell (D-MI) are proposing a modest (6%) reduction by 2020, to be followed by a 44% reduction in 2030 and an 80% reduction by 2050.

"He [Boucher] has met with Waxman, but the details of the negotiations are not being made public," a Boucher spokeswoman said.

The Democratic plan being negotiated appears to respond to some of the concerns of electric utilities and cooperative groups, which last Thursday called for free emission allowances to protect consumers from high costs.

"The most straightforward, efficient method of minimizing higher costs to our member-consumers is to freely allocate allowances to cooperatives," said Glenn English, CEO of the National Rural Electric Cooperative Association (NRECA), which represents 930 member-owned rural electric cooperatives.

"Co-op consumers will still face higher costs resulting from efforts to reduce emissions to the cap levels, and those costs will grow over time as the emissions cap declines. However, consumers can be protected from unnecessary higher costs that would result if co-ops are required to bid on allowances against for-profit [utilities]," he said during a House Energy and Commerce subcommittee hearing on the discussion draft of the American Clean Energy and Security Act of 2009.

NRECA flat out opposes the auction of emission allowances. "The only reason to auction emission allowances is to raise revenue for the government -- the very definition of a tax. NRECA does not believe that climate change legislation should be used as a method to enhance the government's revenues."

Testifying on behalf of the National Association of Regulatory Utility Commissioners (NARUC), a Washington, DC, regulator also urged House lawmakers to consider allocating free emissions allowances to local regulated utilities as a way to keep costs down and prevent windfall profits.

While NARUC believes an eventual 100% auction of emission credits is optimal, a transition allocation of free allowances to regulated electric LDCs -- not to merchant generators -- will best protect consumers, said Richard Morgan, commissioner with the District of Columbia Public Service Commission.

He explained that LDCs are regulated by state commissions, which can ensure that any proceeds LDCs receive from the cap-and-trade market can be passed onto consumers in the form of lower rates, investments in energy efficiency and clean energy technologies, and low-income assistance programs.

Morgan believes the utility industry should receive 40% of the emission allowances under a cap-and-trade program to reduce carbon emissions.

Programmatic Measures for Gas

On the natural gas front, an official with the American Gas Association (AGA) called on the House energy panel to exempt residential and commercial gas customers from the proposed cap-and-trade system for GHG emissions in favor of "programmatic" measures, such as appliance standards, building efficiency codes and other energy efficiency initiatives.

"We believe and history proves that programmatic measures uniformly applied can accomplish what we want without the undue costs and complexities of a cap-and-trade system," said John Somerhalder, vice chair of AGA and CEO of AGL Resources.

In the alternative, "AGA supports excluding residential and commercial sectors from the scope of the cap-and-trade system until 2016, as proposed in this [House] discussion draft bill," Somerhalder said. However, AGA believes that most allowances required for residential and commercial sectors should be allocated rather than auctioned. He said allocating allowances is the best way to ensure that the price impact on these customers will be minimal.

Somerhalder also expressed concern with the proposed energy efficiency resource standard for both electric utilities and natural gas utilities. "While the end result is a laudable one, the lack of clarity in the language...causes concern. First, the legislation could have the unintended consequence of limiting carbon-driven fuel switching and could even increase the nation's dependence on foreign oil by preventing conversion to high-efficiency gas applications," and secondly could raise the cost of fuel to new and existing customers, he said.

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