Overview by J.W. Anderson. Responses by William A. Pizer, Karen Palmer, and Dallas Burtraw.
March 21, 2006
In June 2005, the U.S. Senate declared that the time had come to put mandatory, market-based limits on American emissions of greenhouse gases. Now, two key senators are wrestling with the decisions about how to implement such limits.
| Sen. Pete Domenici (R-NM), chairman of the Energy and Natural Resources Committee, and Sen. Jeff Bingaman (D-NM), the committee’s ranking Democrat, have released a paper—“Design Elements of a Market-Based Greenhouse Gas Regulatory System”—asking for advice on the design of a mandatory greenhouse gas regulatory system. They have received more than 120 responses from a wide array of business associations, advocacy organizations, utilities, energy companies, public policy analysts, and many others. The next step will be a conference on April 4, 2006, to consider these comments. |
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The Domenici–Bingaman paper identifies four basic questions. First, it asks exactly where carbon dioxide emissions should be regulated along the chain from the initial fossil-fuel producer to the consumer who actually burns it. Many associate the point of regulation with implicit costs—but, in fact, Resources for the Future researchers emphasize that who bears the burden is independent of where emissions are regulated.
Second, should emissions allowances be auctioned or distributed freely—and if distributed freely, to whom? Emissions allowances represent an enormous economic value—tens of billions of dollars annually—that arise due to the value placed on emissions within a cap-and-trade system that previously were unregulated. The burden of the cost of emissions reductions as well as the cost of paying for the use of emission allowances form the basis of stakeholder claims to be compensated. The enormous value of the allowances makes this a high-stakes issue. The initial distribution of a portion of the valuable emission allowances for free represents a significant potential source of compensation, but it is easy for the compensation to fail to reach those who bear the burden of costs. Much of the two senators’ paper is devoted to this question, reflecting those high stakes and the expectation that the greatest political difficulties lie here.
Third, should a U.S. regulatory system be built to allow trading of emissions allowances with foreign systems like the European Union’s Emissions Trading Scheme?
Fourth, if one purpose of the U.S. system is to encourage action by other countries, how could that best be accomplished? Action by any one country, even one as large as the United States, won’t be effective unless it is matched by similar action in all of the major economies. One issue here is how to draw China and India into cooperation in cutting emissions.
Resources for the Future Senior Fellows William A. Pizer, Dallas Burtraw, and Karen Palmer contributed two responses to these questions.
“The eventual design of mandatory, market-based limits and incentives on emissions of greenhouse gases will have consequences for everyone who makes or uses energy―that is, everyone in the economy,” observed Pizer, in a series of comments covering all four of the senators’ questions. A flexible program that covers the whole economy, rather than selected sectors, he said, will provide greater efficiency and spread costs more broadly.
Burtraw and Palmer argued that efficiency favors a system of auctioning emissions allowances. Public policy will require that some parties, especially electricity generators, get free allowances, but those cases “should be carefully targeted and limited to benefit severely affected parties.” They provide a quantitative estimate of the claim for compensation in the electricity sector based on expected changes in the market value of firms.
As Domenici and Bingaman move toward emissions limits, they are getting no help from the Bush administration, which views technological developments and voluntary measures alone as sufficient to reduce emissions and protect the stability of the climate. Shortly after he took office in 2001, President George Bush pulled the United States out of the Kyoto Protocol, which would have committed the country to firm limits on emissions of carbon dioxide, the most important of the greenhouse gases generated by human activity. But since then, a succession of scientific reports of global warming and shifting climates have caused rising uneasiness among senators of both parties.
In 2003 Senators John McCain (R-AZ) and Joseph Lieberman (D-CT) pushed to a vote a bill to cap greenhouse emissions and permit trading in allowances. It was defeated by the unexpectedly narrow margin of 43 to 55 votes. In the floor fight over the administration’s energy bill in June 2005, the McCain–Lieberman bill was defeated again, this time by a somewhat wider margin.
Domenici was widely reported at the time to be inclined in favor of mandatory limits on emissions, but he ultimately decided against voting for the bill on grounds that its complexity required careful hearings. Instead, he and Bingaman joined in sponsoring the June 2005 sense-of-the-Senate resolution declaring that “Congress should enact a comprehensive and effective national program of mandatory, market-based limits and incentives on emissions of greenhouse gases that slow, stop and reverse the growth of such emission.” It passed, 53 to 44 votes.
Domenici’s committee has held two hearings, one centered on the science of climate change and a second on the economic consequences and effectiveness of proposals to reduce greenhouse gas emissions. On February 2, he and Bingaman released their paper on key remaining issues.
Four days later another prominent Republican senator, Richard Lugar (R-IN), the chairman of the Foreign Relations Committee, in an address to the Security Council of the United Nations, said, “I have urged the Bush administration and my colleagues in Congress to return to a leadership role on the issue of climate change.”
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J.W. (John) Anderson is RFF Journalist-in-Residence. William A. Pizer and Dallas Burtraw are Senior Fellows and Karen Palmer is Darius Gaskins Senior Fellow at Resources for the Future.
RFF is home to a diverse community of scholars dedicated to improving environmental policy and natural resource management through social science research. Resources for the Future provides objective and independent analysis and encourages scholars to express their individual opinions, which may differ from those of other RFF scholars, officers, and directors. |
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