Wednesday, June 10, 2009

Welcome to the Bastion where logic and debate reside. Basically I have become disheartened by the demise of debate in this world. In this place my personal motto rules: “I do not care about being right, I care about getting it right.” Feel free to comment on anything relevant, but do so backed with logic and/or valid empirical evidence. One of the few absolutes in life is that no one will be right all the time, thus one must be intelligent and flexible enough to know when one is wrong and correct that thinking. If you are too stubborn, basking in the alleged superiority of your own viewpoint and are unwilling to have your beliefs challenged or unable to change them when they are unable to survive scrutiny then do not waste your time or my time commenting.

With that said, time to get the ball rolling with what will be one of the defining issues for our species, climate legislation in effort to evade significant consequences of global warming. Although it may be a little late to the party it would be prudent to begin by commenting on the Waxman-Markey Climate Bill currently making its way through the House of Representatives.

The prospective passage of the Waxman-Markey Carbon Cap and Trade Climate Bill, otherwise known as the American Clean Energy and Security Act of 2009 (ACES)1, represents a failure by our elected leaders to respond appropriately to the looming problem of climate change. When reading the bill one is disappointed that Congress actually believes that a cap and trade system with such characteristics will have a high probability of success. Of course there is the skeptic who thinks that Congress realizes such legislation has little chance at success and is only passing it to ward off any attempts at crafting legislation that would succeed because of short-term economic stresses. Such thought is akin to an individual taking an out of court settlement from a corporation that wronged them for an amount significantly less than what would be awarded in civil court under the premise that at least this way some monetary redress is guaranteed, even though it is not nearly what was required or even deserved. So what features of the ACES create the concern for failure?

1. Grandfathering available carbon permits:

Grandfathering (a.k.a. giving away for free) carbon permits routinely creates three significant problems, although it should be noted that the way the ACES orchestrates their allocation program is rather complex, thus it is difficult at this moment to ascertain the severity of these concerns. First, grandfathering permits places an initial cost of zero dollars on the permit, maximizing the value of that permit to the holder. In turn the lack of cost associated with the permit creates a significantly higher probability of sporadic permit price volatility on the trading market, a point that most cap and trade opponents point out almost incessantly. The reason for this volatility is that with no purchase price, the market must cover a greater range of values to identify an equilibrium price whereas in auction the market price is better identified through how companies bid, almost a form of quasi-trading, trading without actually trading. This price volatility will typically make cutting emissions more expensive.

Why does volatility increase the cost of cutting emissions? The lack of a general stabilized price range undermines the benefits and advantages of innovation and investments in zero/low emission technology, especially when permit price collapses, which occurred in both phase 1 and phase 2 of the European Union’s Emissions Trading Scheme (ETS).2 In addition price volatility tends to raise the cost of investment in new technology by raising the self-imposed cost/benefit ratio driving support or opposition to an investment. Clearly it is difficult to justify an investment that will result in a loss for a long period of time. Overall it is reasonable to suggest that most companies would rather have a higher permit price as long as it was stable so investment decisions could be made with a greater prognostication of economic benefit. However, here is where some significant uncertainty enters into the equation because of how the permits are allocated to regulatory entities instead of directly to power generating entities themselves, thus it is less straightforward how the market will react to the intervention of the regulatory entities.

Suppose for now the regulatory entities do not play a significant role in trading. Due to volatility decreasing the ability to predict whether or not an investment will be successful, the relative increase in expense could be transferred to consumers in the form of higher energy prices and higher prices on energy-intensive consumer goods. The interesting issue is that permits are grandfathered largely for the express purpose of avoiding increases in energy prices under the argument that if companies do not have to pay for permits, those companies have less reason to increase energy prices in effort to recover the capital invested in those permits. However, due to the high probability of price volatility instead of investing additional capital in purchasing permits at auction, companies will have to invest additional capital used for innovation and infrastructure readjustment. There is some defense to dramatic cost increase to energy consumers due to the existence of regulatory entities, which should do a good job controlling any radical price increases, but what about small price increase which is all the industry will need to retain profit in the early stages of the legislation.

One defense tool used by the ACES against potential price volatility, most notably price collapse, is the administration of a price floor, currently slated at $10 to increase by 5% annually plus adjustment for inflation. Unfortunately the way the price floor is designed in the ACES it may not do much good dealing with any price collapses until the late 2020s.

The price floor is described in the ACES in section 791 - Auction Procedures Subsection d as the ‘minimum reserve auction price’. The problem is that the price floor is only applicable to the auction. Now a price floor will prevent the price collapse of auctioned permits because if one has to pay at least 10 dollars for a permit it is highly unlikely that the permit will be sold elsewhere for less than 10 dollars. However, if a permit is not auctioned then the price floor is completely meaningless because it is not applied. As long as a limited percentage of permits are put up for auction vs. being freely distributed a price floor will have a limited effect on price collapse prevention. Therefore, it is reasonable to suggest that with very similar permit distribution conditions, it is probable that in the early years of the ACES permit prices have a significant probability of behaving in a similar fashion to the permit prices in the first couple of phases of the ETS as illustrated in the figure below from Point Carbon.

This probable behavior means that if price collapse does indeed occur after a significant price spike then measures need to be taken immediately otherwise with such a low price all financial penalties associated with emitting carbon without a permit cease to be threatening because the those penalties are linked to the current fair market value for permits. Price collapse pretty much means that no significant emission reduction will occur over the course of the collapse.

In addition to the price floor, the ACES utilizes a ‘strategic reserve’, which here on will be referred to as a ‘safety valve’, to prevent significantly high permit prices. The idea of a safety valve is to ensure that permit prices do not experience artificial price inflation.3

There is reason to be concerned about the administration of a safety valve as it does provide for an opportunity to put more emission permits into the market, which could lead to a total emission profile that exceeds the assigned cap for a given year and even threaten to increase emissions beyond those of the previous year. The safety valve for the ACES accumulates 1% of the total emissions established for a given year from 2012 to 2019, 2% from 2020 to 2029 and 3% from 2030 to 2050 generating an initial pool of »2.718 billion permits to draw from. Drawing from the fund is structured at 5% of the emission cap from 2012 to 2016 and 10% from 2017 to 2050 equating to a total drawing power of »11.985 billion permits over the lifespan of the ACES. Minimum prices for the auction of these safety valve permits are established over three time sectors. First, in 2012 the price is twice the EPA modeled price for the average allowance. Second, in 2013 and 2014 the price is 5% more than the previous year plus the rate of inflation. Third, from 2015 to 2050 the price becomes 1.6 times the average allowance price over the last three years. Basically it is reasonable to postulate that the minimum bid price in a safety valve permit auction will be 75% to 85% of the current penalty price for emissions that lack a permit. Once the initial safety valve pool is used up, additional permits are added via a theorized 1:1 trade-off with international forestry offsets. The idea is that before the government can issue more permits global carbon emissions need to be removed in equivalency to avoid simply doing an end run around the cap. Unfortunately as will be discussed later, there is reason to question whether or not this strategy generates an actual 1:1 trade-off ratio or even something close to it.

Despite the cap-breaking potential of a safety valve, the key to the safety valve is not the fact that it exists, but what event(s) triggers access to it. This element is where one should get nervous because it appears that there is no trigger. Based on the ACES as it current stands 4 safety valve auctions are held during a calendar year each having an initial capacity of 25% the total amount of permits auctioned for the year with roll-over. The problem with this execution is that with an EPA estimated permit price of 15-20 dollars over the 1st phase of the program (2012-2020) there is very little incentive for emitters to invest in zero/low emission technology when they can just purchase permits from the safety valve pool. The reason this problem exists is because a safety valve was originally designed to neutralize large price spikes due to uncertain volatility brought on by unpredictable outside elements such as abnormally warm summers or unexpectedly strong economic growth both which would drive a greater demand for energy. However, initial modeling of permit price indicates that this price spike attribute will not been experienced in the ACES for a considerable period of time, largely due to the small range of permit price thus the economic advantage to having a safety valve is significantly reduced leaving little reason to include a safety valve at this point in time.

Too much emphasis has been placed on avoiding the generation of windfall profits for the coal industry. There are a variety of safeguards (whether or not they will work is another story) that have been inserted into the legislation to ward off such an effect. Proponents of the coal companies seem to be focused on ensuring that coal companies survive the legislation rather than profit from it.

Overall it is difficult to deduce whether or not the use of regulators as middlemen in the permit distribution process will exacerbate or alleviate the potential for price collapse, which is an important point that few parties, whether for or against the ACES seem to address. I do not know a lot about the energy regulatory industry, but I do not think that price collapse will be so easily thwarted.

Second, grandfathering permits eliminates any capital that may be acquired by the government in association with the distribution of those permits. The lack of this capital is significant because the acquired capital could be used to relieve the financial stress of energy price increases due to the cap and trade system, invested in alternative energy research and development or even used to pay down the national debt. Unfortunately under the ACES there are limited funds allocated to each of these sectors, much less than could be allocated if permits were auctioned off instead of freely distributed. The limitation of funds directed towards alternative energy technology, efficiency, improved infrastructure, etc. is a significant problem because it increases the transition time between a fossil fuel power infrastructure and a power structure more reliant on non-fossil fuel power generation, thus increasing the amount of time for meaningful emission reduction and lengthening the time of any economic stresses on the average citizen.

Third, depending on the distribution strategy grandfathering permits can create significant problems with bias in that permits do not go to those companies that value them most, but instead can easily go to those companies that the government favors the most. Currently electricity generators are slated to receive the most with the rest of the permits divided between energy-intensive manufacturers, carmakers and natural-gas distributors etc. following behind. When government gets involved with trying to pick winners and losers in what should be competitive industries things can get messy very quickly.

This reality is especially true when utilizing updating allocation, which ties the quantity of allowances receives to production. This form of allocation can act as a subsidy distorting financial decisions further increasing costs. Another reason auctioning is superior as it eliminates the possibility of updating allocation.

Some may argue that some of the permits are being allocated in such a way that it is beneficial. Most of the permits that fall under this ‘beneficial’ category are designed to protect consumers from price increases or foster energy efficiency. Overall such a plan has noble intentions, but as previously mentioned both of these goals could be achieved more efficiently by auctioning off the permits instead of freely allocating them.

2. A 17% reduction of carbon emissions using 2005 as a reference point by 2020:

Probably the most controversial problem of the ACES is the total estimated emission cap. Some believe that the cap is too stringent while others believe that the cap is not stringent enough. Realistically those that suggest the cap should be much more stringent, something closer to a reduction of 30-40% of 1990 levels by 2020 are not being realistic. Whether or not they believe that number to be necessary or not to evade severe environmental consequences, overall it is probably unrealistic to expect such a significant reduction in such a short time period without significant damage to the economic infrastructure.

Some pushing for this above emission goal seem to think that all society has to do is plop down a $200 per ton of carbon tax or something similar and then everything will be perfectly fine. The additional cost almost instantly pushes out fossil fuel energy providers and then alternative energy providers, most notably solar and wind energy, instantly step in and fill the 0.5, 1 maybe even 2 million MW-hr gap left by the removal of the fossil fuel energy providers. Forget all of the bureaucracy involved with building power plants in general, forget that currently alternative energy only provides approximately 7-8% of domestic energy supply and about 70-75% of that is hydroelectric which is not expanding anytime soon,4 forget that there are still significant technological hurdles in generating large quantities of alternative energy and forget that nuclear energy is not going to come to the rescue for at least another two decades. Overall the entire thing reminds me of the old Sidney Harris cartoon where a professor is asking his student to “be more explicit here in step two” where step two is simply the phrase “then a miracle occurs” between various mathematical equations. This energy gap issue will be addressed in much more detail at a later date.

However, with that said, a 17% reduction in the next 8 years (the emission cap does not really begin until 2012) is too small largely because it is highly probable that such a low emission reduction will be insufficient to drive the advent of the needed technologies and their respective infrastructure to create the necessary emission reductions further into the future (70-90% of 2005 levels by 2050). This bill should not be about 2020 or even 2030, but about 2050 and beyond. Making attainable caps is great, but it can be argued that it is more important to set meaningful goals that may be just out of reach to generate momentum for the future. Realistically it is unlikely to expect the United States to exceed the 17% emission reduction target, especially without any international or new domestic legislation citing an emission reduction target for the future with significant punishment for not reaching that goal.

The first 15-25% reduction in emissions will probably be the easiest due to increases in efficiency, power grid evolution and small changes in alternative energy, which will not necessarily involve any new infrastructure or technology. Such thought is referred to as picking the low hanging fruit. However, without significant momentum going into the early mid-century it is unlikely to expect a 50-70% reduction in emissions over the next 30 years, a reduction that most climatologists believe will be necessary to ward off detrimental and permanent environmental changes and something that the ACES calls for.

3. The inclusion of carbon offsets:

Interestingly the first thing that should give one pause about carbon offsets is how enthusiastic corporations are about including them in environmental legislation. For fossil-fuel intensive corporations, which typically drag their feet about almost everything regarding climate change and emission reduction, why are they so vehement about the inclusion of carbon offsets. In some respects carbon offsets act as a form of alternate carbon permit. However, these ‘permits’ have a track record for costing significantly less than actual permits or cutting actual emissions thus delaying the inevitable emission conversion infrastructure.5,6,7 Recall that the entire idea of offsets is to allow a company to reduce the costs of compliance associated with an emission cap or tax by paying for abatement in areas where such action is cheaper.

Also offsets create a problem in that if the offsets do not overlap permits then allowance of sufficient offsets can lead to emissions that will exceed an emission cap. Now it could be argued that the cap is not exceeded because the offset neutralizes supposed carbon emissions somewhere else in the world thus there is no net increase in global carbon emissions. The legitimacy of this claim is entirely dependent on what carbon offset options are offered. For example offset projects that focus on investment in alternative energy technology do nothing to reduce emissions in the present and may not result in any future reduction in emissions. To simply receive offset credits for attempting to reduce emissions is unacceptable, actual emission reduction must be identified and validated to receive offset credits.

That said it is difficult to confirm the authenticity of carbon offsets and the actual amount of carbon dioxide the particular offset prevents from entering the atmosphere. Due to this confirmation difficulty, the possibility for manipulation is very real. Also there is no time-based delineation pertaining to the polluting activity. Basically a country can construct a plant for the sole purpose of polluting, prevent that polluting and collect offsets for doing so. The most telling example highlighting flaws in offset strategy occurred in China with the ‘neutralization’ of HFC-23s resulting in the acquisition of millions of dollars of profit in offsets.8 The reason the HFC scheme was so profitable was because due to its heat trapping capacity one ton of HFC-23 generated 12,000 CO2 credits, yet preventing HFCs from entering the atmosphere is rather cheap.9 Fortunately there has been a reduction in HFC mitigation projects over the last few years, but there are still many problems with the way offsets are currently handled by the international community.

A study from Stanford University regarding the efficiency of Clean Development Mechanisms (CDMs) the offset tool provided by the Kyoto Protocol noted that10:

“Well-designed offsets markets can play a role in engaging developing countries and encouraging sound investment in low-cost strategies for controlling emissions. However, in practice, much of the current CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse.”

In addition the GAO concluded that 7

“Specifically, the CDM has provided a way for industrialized countries to meet their targets that may cost less than reducing emissions at home; however, available evidence suggests that some offset credits were awarded for projects that would have occurred even in the absence of the CDM, despite a rigorous screening process… (2) that the use of carbon offsets in a cap-and-trade system can undermine the system’s integrity, given that it is not possible to ensure that every credit represents a real, measurable, and long-term reduction in emissions; and (3) that while proposed reforms may significantly improve the CDM’s effectiveness, carbon offsets involve fundamental tradeoffs and may not be a reliable long-term approach to climate change mitigation.”

It is unlikely that in the last year, since the release of these reports, any significant changes have occurred in the evaluation and validation method for carbon offsets, those provided in the Kyoto Protocol or those provided in the ACES. In fact it is impossible to comment on any specifics for validation from ACES because the Offset Integrity Advisory Board does not exist yet, so references can only be made to the general structure of validating offsets. Therefore, it is difficult to make the argument that carbon offsets are a legitimate form of emission reduction, thus it is more probable carbon offsets simply add an additional ceiling to the existing cap.

Getting into the mathematics of the offset program in the ACES. The ACES allows for up to 2 billion in total offsets, broken down into 1 billion in domestic sources and 1 billion in international sources where international capacity can be increased by 50% at the expense of domestic capacity at the discretion of the EPA. Thus, if 100% of the total allowable offset capacity is utilized the cap can be up to 2 billion tons larger, which will more than likely significantly diminish the effectiveness of the legislation up to 2030. However, to paint such a dreary picture of zero to almost zero actual emission reduction one has to assume that all of those offsets represent offsets that actually do nothing to reduce global carbon emissions, an assumption that is rather irresponsible. Also one must assume that all of the offsets are utilized. Offsets may be a concern, but one must be careful not to assume the worst-case scenario when it is not very probable. One interesting little wrinkle is in Section 722 subsection E where the President can recommend to Congress increasing or decreasing the number of offsets, so the 2 billion capacity can be changed.

Originally a positive regarding the design of the offset program in the ACES was the use of a conversion ratio between offsets and carbon allowances of 1.25:1, which would have provided a small safety buffer to absorb some bad or false offsets, but the conversion rate was reduced back down to 1:1 for domestic offsets and international offsets between 2012 and 2017 [the first 5 years]. Such an action is unfortunate as it weakens the reliability of the offset program. A better strategy would have been to include the 1.25:1 ratio for the first five years to ensure accuracy in the validation methodology for accepting offsets and then reduce the ratio down to 1:1 if validation was proven worthwhile and costs dictated a reduction in the ratio.

Some, including Mr. Joe Romm11, believe that the total amount of offsets offered is irrelevant because companies will take advantage of clean energy solutions that he estimates will cost less than the offsets. Initially such a contention seems a little counterintuitive in that if offsets were such a bad deal from a cost perspective why push to include so many offset opportunities and such capacity? However, it cannot be assumed that all independent entities will act logically, even if it is in their best interests, thus an examination of available options is prudent.

According to the EIA coal with a carbon content of 78 percent and a heating value of 14,000 Btu per pound emits about 204.3 pounds of CO2 per million Btu when completely burned. Complete combustion of 1 short ton of this coal releases »5,720 lb of CO2 creating a ratio of 2.86 lb of CO2 per lb of coal burned and that coal produces »4.103 kW-hr per lb of coal burned, thus typical coal-based power generates about 1.435 kW-hr per lb of CO2 released.12 Factor in an efficiency of energy use »35% and one receives a value of 0.502 kW-hr per lb of CO2 released. Understand that because not all coal is completely uniform this number is not static for all coal plants, but does generate a reasonable number from which to work from.

Currently most estimates put the electricity costs of coal-based power generation at a cost of 5-8 cents per kW-hr whereas the electricity costs for solar, wind, geothermal and biomass are 20-30, 5-10 [although this number is artificially lowered due to not factoring in low capacity], 5-12 and 5-13 cents per kW-hr respectively.4,13,14,15,16,17,18 Nuclear and Hydroelectric were excluded because overall it difficult to view nuclear as a ‘low’ cost transition option due to the investment and capital costs as well the bureaucracy and time involved in completing a plant. Although nuclear power will provide a valuable energy resource in the future, rapid turnover is not its strong suit. Hydroelectric capacity has been significantly tapped and any significant increases in generation are unlikely (tidal power is far behind schedule).

Add a $10 to $20 dollar per ton of CO2 released cost to coal power generation and that increases the price per kW-hr by 1 cent to 2 cents. Therefore, it is unlikely that an energy corporation will undergo the capital and transition costs of generating more non-fossil fuel energy in favor of current fossil-fuel energy production solely due to such a merger increase in costs. In addition the high probability of price volatility in the ACES will make it even harder for energy providers to know when it is cost effective to diversify. Energy companies can recoup such a cost rather easily and the probability that they lose any customers from this increase is quite small. Under a higher permit price infrastructure changes could be better motivated, but based on the possibility of price collapse and even the EPA’s own modeling it is unlikely that a price higher than $25 will arise before 2020 and that assumes a favorable environment for permit price increase.

If permit price itself will not motivate companies to cut emissions what about any consequences levied for emitting without permits? Unfortunately it is difficult to believe that there will be any consequences with the double-layered safety net provided by the ACES. First, the offsets provide a nice pollution blanket because even if the price is what Mr. Romm assumes ($25 per ton of CO2)11 such a cost will typically be less than the capital penalty authorized by the ACES from emitting without a permit (the penalty is twice the fair market value of a carbon permit). Depending on the price offsets will either be used in their entirety or just as a cheaper stopgap. Although only a small number of CERs were issued (80-82 million for 2008),19 according to data complied by the GAO7 there are a number of CDM programs waiting for either official registration (» 2700) or distribution of CERs (» 700 [400 were recently denied]) as shown in the below figure. Therefore, despite costs, various companies seem to be eager to take advantage of offset opportunities.

Overall it will take the pipeline of approval a while to spit out all of the CDMs that are approved and those that are not approved and their associated CERs since the scheme first started issuing credits in 2005. This delay though calls into question how effective offsets are at actually stabilizing costs because if most offset programs are not officially approved or disproved until years after they are proposed and/or initiated it is difficult to postulate on whether or not other contingency strategies need to be administered. Think of it as trying to make financial decisions in 2009 while wondering if you will get a Christmas bonus in 2011.

The second element of the safety net is the aforementioned safety valve, which was discussed earlier. A quick side note in that the overall penalty for emitting carbon dioxide without a permit is a complete joke. Simply requiring a double payment will not act as a deterrent for companies when permit prices are so low, a simple price increase of 1 or 2 cents neutralizes those penalties allowing said company to emit as much as it wants. The penalty needs to be backbreaking to motivate energy companies to diversify their power generation infrastructure, i.e. invest in innovation to reduce your carbon emissions, trade for more permits or go out of business. To that end the penalty for emitting should be at least 5 times the current market value of a carbon permit. Overall I would rather a company pay for an offset than be penalized because with the purchase of an offset at least there is a greater than 0 probability that global emissions are being reduced over no chance of a reduction if the penalty is administered.

Will all that has been said about carbon offsets, a critical question in determining their effectiveness is how useful are they at actually initiating projects that reducing carbon emissions of their own accord? Looking at the results from an unscientific poll conducted by the GAO the responses of a pool of 26 experts are given in the below graph.7

If percentage values were assigned to the responses of these experts to the additionality of CDM programs a crude efficiency value can be generated. Percentage of confidence values are assigned at 0%, 34%, 67% and 100%, which generates an average additionality of 50.4%. So according to an average of experts using a somewhat crude methodology to generate a starting estimate, offsets can be validated at approximately 50% additionality (half of the offset projects would have occurred despite the availability of offsets, i.e. only half of CDM programs represent real progress towards the emission goals of a particular piece of climate legislation). Another study5 places a 60% additionality validity on CDM programs, better than the above crude estimate, but not nearly good enough as this number needs to be at least over 90% for offsets to be viewed as a legitimate means of emission reduction.

Overall the most problematic issue with offsets is all of the uncertainty surrounding their application. Not only are there questions about additionality and actual emission equivalency reduction, but there are issues with offset price and how many are actual utilized. In addition it is unlikely that offset prices will increase at a rate that will overtake the penalty price administered for emissions not covered by a permit. Also despite proposed competition it is as unlikely that the maximum allotment of international offset capacity will be unavailable for investment, however, the time frame in which these credits will actually be awarded is unknown. Therefore, it is rational to conclude that under the ACES, a significant amount of offset capacity that proves to be necessary will be utilized instead of investing in cleaner alternative energy technologies and infrastructure or reducing emissions to avoid paying the penalty. In the end it is difficult to argue that under the current methodology for the administration of offsets, that offsets represent a valuable tool in emission reduction although it may be a useful tool economically. In some respects it almost seems like people thought to include offsets because they had to, not because it was useful to do so, using the mindset, the ETS has offsets, there are all of these voluntary offset programs in the U.S. so any federal cap and trade legislation needs to include offsets too.

A quick side note, one thing that people really should not worry about with the ACES is its length. Congress tends to write legislation like Strong Bad writes research papers about batteries. “A little double space action… a little triple space action…” with 1.5 margins it inflates something that should be 300 pages quite easily to 932 pages.

4. Congressional Attitude:

However, as most have probably already realized, the biggest problem is Congress itself. For example when Representative Rich Boucher, a Democrat, is able to tell the Bluefield Daily Telegraph “…Therefore, [electric utilities] can comply with the law while continuing to burn coal.”20 such a statement is a strong indicator that this bill will not significantly impact the fossil fuel infrastructure, a critical step in averting detrimental climate change. The scary thing is that later in the interview, Mr. Boucher states that he believes the bill should be further weakened to only a 14% reduction of 2005 levels by 2020. Clearly most Republicans and some Democrats seem to have no interest in taking the necessary steps to preserve sustainable environmental conditions for the only home currently suitable for human existence instead valuing their own personal political fate over the fate of future generations. What can be said about such an attitude other than it is utterly reprehensible and completely irresponsible. Note that no one should blame President Obama for the outcome of this bill because despite what some may have deduced from the last presidential administration the executive branch of the government does not make the law, the legislative branch does. The fact is Mr. Waxman and Mr. Markey should be praised that they got anything done in the first place, but it is unfortunate that more could not have been done.

Beyond the fact that it is something, which is of course better than nothing, a major saving grace for the ACES would be if it were necessary to guarantee that countries like China and India pass emission reduction legislation as well before or soon after the international climate conference at Copenhagen. Some argue that it is economically irresponsible for the United States to bear the burden of reducing emissions prior to countries like China and India passing emission reduction legislation because unless those countries also pass climate legislation, actions taken by the United States will be moot on a global level and the United States will lose its bargaining position. Realistically this argument is rather stupid because the United States and China have been playing a high stakes game of ‘emission reduction’ chicken for over a decade now and neither side has blinked up to this point. With China as adamant as ever about the United States cutting emissions first, utilizing the valid claim that the West is responsible for the bulk of the CO2 currently in the atmosphere, what leads individuals like Martin Feldstein and Jim Manzi to believe that China will blink first at any point in the near future? Or is he content to continue the staring match while the Earth literally and figuratively burns?

Unfortunately based on all of the criticism this bill is taking, it is highly probable that the leadership in both China and India will find a way to weasel out of doing their part in passing climate legislation of their own. It would be foolish of anyone to want this bill to fail, but unfortunately the probability that it succeeds seems small with all of the albatrosses that have been slung around its proverbial neck. Since assigning a meaningless superficial grade to this bill seems all the rage, I give it a D+.

Overall expecting a perfect bill would be amazingly unrealistic and there are some good things in this legislation; however, the most disappointing aspect of this bill is that Congress refused to learn from the mistakes made by past climate legislation, especially those made in the first phase of the ETS. The European Commission did learn, enhancing permit banking, limiting offsets, more auctioning, no more grandfathering offsets to power generators, etc. all to begin during the third phase (2013) of the ETS. Unfortunately instead of looking at the third phase of the ETS, Congress looked at the first phase to architect its climate strategy and just guess how the first phase of the ETS turned out. In this instance one is reminded of the adage regarding insanity – “Insanity is doing the same thing over and over again and expecting different results.”

1. American Clean Energy and Security Act -

2. Shapiro, Robert J. “Addressing the Risks of Climate Change: The Environmental Effectiveness and Economic Efficiency of Emissions Caps and Tradable Permits, Compared to Carbon Taxes.” February 2007.

3. Congressional Budget Office. “Policy Options for Reducing CO2 Emissions.” February 2008.

4. Kharecha, Pushker, Kutscher, Charles, Hansen, James. “Energy and Climate Mini-Workshop Report Options for Near-Term Phaseout of Carbon Dioxide Emissions from Coal Burning in the U.S.” Preliminary Draft; February 2009.

5. Schneider, Lambert. “Is the CDM fulfilling its environmental and sustainable development objectives? An evaluation of the CDM and options for improvement.” Prepared for the WWF. November 2007.

6. Robinson, Hugo and O’Brien, Neil. “Europe’s dirty secret: Why the EU Emissions Trading Scheme isn’t working.” Open Europe. August 2007.

7. Government Accountability Office. “INTERNATIONAL CLIMATE CHANGE PROGRAMS: Lessons Learned from the European Union's Emissions Trading Scheme and the Kyoto Protocol's Clean Development Mechanism.” November 2008.

8. Bradsher, Keith. “Outsize Profits, and Questions, in Effort to Cut Warming Gases.” New York Times. December 21, 2006.

9. Mukerjee, Madhusree. “Is a Popular Carbon-Offset Method Just a Lot of Hot Air?” Scientific American Magazine. June 4, 2009.

10. Wara, Michael, and Victor, David. “A Realistic Policy on International Carbon Offsets.” Program on Energy and Sustainable Development: Freeman Spogli Institute for International Studies. Working Group #74. April 2008.

11. Climate Progress. “Do the 2 billion offsets allowed in Waxman-Markey gut the emissions targets? Part 1.”

12. Hong, B.D, and Slatick, E. R. “Carbon Dioxide Emission Factors for Coal.” Energy Information Administration, Quarterly Coal Report, January-April 1994 pp 1-8.

13. IEA Energy Technology Essentials. “Biomass for Power Generation and CHP.” January 2007.

14. EIA. “Electric Power Industry 2007: Year in Review.” Table 3. Electricity Net Generation From Renewable Energy by Energy Use Sector and Energy Source, 2002-2006.

15. Solarbuzz. “Solar Electricity Price Index verses US Electricity tariff Price Index.”

16. American Wind Energy Association.

17. U.S. Department of Energy – Energy Efficiency and Renewable Energy – Geothermal Energy.

18. Williams, Laurie and Zabel, Allan. “Keeping Our Eyes on the Wrong Ball
Why Acid Rain is the Wrong Template and the 1990 CFC-Tax is Closer to the Mark - and Why Cap-and-Trade Won’t Solve the Climate Crisis But Carbon Fees with 100% Rebate Can.”

19. Point Carbon. “Companies overspend on carbon allowances.” May 15, 2009.

20. Owens, Charles. “Boucher: Cap and trade deal preserves coal jobs.” Bluefield Daily Telegraph. May 16, 2009.

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