Thursday, May 28, 2009

Three MGA Surprises and the Achilles Heel

A couple weeks ago the Midwestern Greenhouse Gas Reduction Accord Advisory Group wrapped up its face-to-face meetings and submitted their cap and trade final draft design recommendations to the governors.

Candidly, this wrap-up surprised me in three ways. My first surprise was that they reached an agreement at all. It was only several months ago that I blogged that I didn’t think agreement was possible…so not only was I surprised but I was wrong. The Advisory Group did reach agreement. Five things forged this agreement: 1) creative compromises; 2) papering over differences of opinions by not forcing advisory group members to vote on the package or any of its sub-issues; 3) good facilitation; 4) belief from group members that “something should or will be done” about GHGs; and 5) most importantly, nearly everyone’s explicit understanding that the recommendations were more conceptual than a concrete implementation plan since their primary purpose was to influence the ongoing federal discussions.

My second surprise is that the agreement is not nearly as bad as it could have been. In fact, it offers some useful ideas, including:
1) More realistic GHGs reduction goals and timetables;
2) 90% of credits allocated to electric generators and 95% to industrial emitters at only a modest fee, with the fee and auction percentage phased in over the next 18 years;
3) Important cost containment mechanisms such as credit banking, early action crediting, and a mechanism to address credit price extremes and volatility; and
4) Use of carbon credit offsets.

These are very significant improvements over what the group had been discussing.

The very, very poor treatment of transportation fuels is my third surprise and a major disappointment. First, the Advisory Group recommends inclusion of transportation fuels under the cap despite evidence from their own modeling results showing such inclusion will do little to reduce greenhouse gas emissions.

The Advisory Group further recommends that the point where transportation fuels will be regulated under the cap program is “where the fuels enter the market in the participating jurisdictions; generally at the terminal rack, final blender, or distributor.” The problem with using this as the point-of-regulation is that nearly all of the greenhouse gas emissions from transportation fuels occur when the fuel is combusted in the consumers’ cars and trucks, not at the terminal rack, final blender, or distributor. Thus, and perhaps more to the point, the operator of the terminal rack, final blender, or distributor has no way to reduce the fuel’s greenhouse gas emissions, other than to reduce the amount sold. This means either fuel gets rationed or the cost of buying the emissions credits is directly passed through to consumers with no reduction in emissions.

But the unkindest cut is that the Advisory Group recommends that those who it deems responsible for greenhouse gas emissions from transportation fuels must obtain emission credits for 100% of their emissions through an auction. As I just mentioned, this is very different from how the group deals with the electricity sector.

Treating transportation fuels like this is unfair, unreasonable and inappropriate and worse will not reduce greenhouse gas emissions while increasing the costs to consumers. For example, economic analysis provided to the Advisory Group by their facilitators concludes that “the price of gasoline and diesel are expected to increase by 9 and 10 cents per gallon, respectively, for each $10 per metric ton of CO2e increase in the carbon price, assuming 100 percent cost pass through.” (See page 13 of Insights from Prior Climate Policy Modeling Analyses, dated May 4, 2009.) Such cost increases for little or no gain cannot be what the Governors want and should be rejected. It is the recommendations’ Achilles heel.

The "Money" in Cap and Trade

I apologize, in advance, for being so stuck on "the money" generated by the favored solution to greenhouse gas amelioration---cap and trade. But being both a curmudgeon and having a strong intellectual proclivity against what the sheep think, climate change legislation will generate "green jobs." The problem is the majority of those jobs will be on Wall Street in the next bogus derivative market---carbon credits. Not only will this "solution" create many more public financial problems than the bogus housing finance scheme the market invented in the 1990s, but it will not reduce greenhouse gases.

If, and this is a big "IF", the House passes the Waxman-Markey cap and trade bill and the Senate passes something and they are able to reconcile their differences in conference committee, I predict that there will be so many free credits to favored industries (to get the votes), that the end result will be lots of rich investors (big corporations, a plethora of Congress-people, environmentalists, and of course, Wall Street). What a collection of characters! It inspires fear and reasons for Americans to strongly oppose cap and trade.

Did I mention that since the petroleum industry is not a favored industry, look for higher and higher gas prices at the pump! That is certain to help Minnesota families, generally, during this terrible recession and the recreation market in greater Minnesota more specifically. Have a great summer (sarcasm added)!

Carbon market doubled in 2008: World Bank
Published: 27 May 2009 10:26 CET
"The value of the carbon market doubled in 2008 to $126 billion (€86bn), the World Bank said.
The total volume of trade rose 61 percent to 4.8 billion tonnes of carbon dioxide equivalent (CO2e), compared to 3.0 billion tonnes in 2007, a report by the bank revealed today."

Tuesday, May 19, 2009

With near unanimity, United States Supreme Court strikes down government’s attempt to broaden CERCLA liability

Generally speaking, an entity who “arrange[s] for disposal” of a hazardous substance at a contaminated facility can be held liable for cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). It has long been understood that this provision clearly (a) covers an entity who enters into a transaction to solely discard a used and no longer useful hazardous substance, and (b) does not cover an entity who enters into a transaction solely to sell a new and useful hazardous substance that may later be disposed of by a third party. But in a recent case, EPA argued that Shell Oil should be subject to “arranger” liability for its sale of a hazardous chemical to a distributor because Shell had knowledge of leaking and spilling during the transaction, which EPA argued fell within the statutory definition of “disposal.”

In what seems like a rare showing of consensus these days at the Supreme Court, an 8-justice majority in Burlington Northern & Santa Fe Ry. Co. v. United States rejected this broad reading as beyond the bounds of the statutory language (the decision also addresses the named railroads were properly held to be joint and several liability; the Court ruled they were not). Specifically, the Court, applying an ordinary meaning of “arrange for,” ruled that there can be no liability as an “arrange[r] for disposal” unless it was the entity’s intent that the transaction involve, at least in part, the disposal (spilling and leaking in this case) of the substance. Thus, while Shell was aware that leaks and spills occurred when its chemicals were being transferred from the common carrier to the buyer, more was needed to impose “arranger” liability under CERCLA.

In contrast to a finding of intent, Shell encouraged the distributor to reduce spills by providing safety manuals, offering a discount for improvements in safety procedures, and requiring inspections by engineers. Although minor spills continued to incur, the Court held that such evidence showed that Shell intended to reduce spills and not intended for them to occur. Without that conscious desire that the useful substance be spilled or leaked during transport, it was beyond the common understanding of “arrange for disposal” to impose liability on Shell.

In reality, the Supreme Court’s decision is remarkable only for its common sense. The decision is based on a straightforward, ordinary understanding of what it means to arrange to dispose of a product. Of course, intent is still a subjective determination that is fact intensive. But at least we now know that if you, like Shell, take active steps to avoid spilling and leaking of a substance you are trying to sell, you are not arranging for disposal of the very chemical you are selling.

Submitted by Michael J. Mergens and Julie Nagorski

Michael J. Mergens is an attorney at Larkin Hoffman Daly & Lindgren in Minneapolis. His practice includes a broad range of real estate matters, such as environmental permitting and litigation, land use approvals and disputes, and general real estate disputes. He has devoted much of his practice to the regulation of greenhouse gas emissions, which has begun to arise in the environmental permitting processes of various state and federal regulatory bodies. He also tracks the potential for regulations under the Clean Air Act.

Julie Nagorski is an associate attorney at Larkin Hoffman and practices in the areas of real estate and land use law. In her practice, Julie combines knowledge of the related disciplines of land use and real estate with expertise in litigation, dispute resolution, and appellate advocacy.

Friday, May 15, 2009

Legislature balks on common-sense energy policy

The 2009 Legislature is poised for adjournment, and another session will likely end with another disappointment on energy policy – specifically when it comes to preparing Minnesota for future base-load electricity needs. Earlier in the session, the Minnesota Senate had voted 42-24 to remove the ban on additional nuclear power in this state; the House, however, rejected the measure 60-72. The conference committee, which finished its deliberations May 13, chose not adopt the ban in its report.

This means 102 legislators voted to repeal the gag rule that prevents regulators from talking about nuclear energy. It begs the obvious question: Why won’t the other 96 lawmakers even let us seriously consider additional nuclear power as an option? Translated, that means Minnesota's base-load energy policy is 'just say no.”

Furthermore, the conference committee report on the omnibus energy bill does nothing to make Minnesota’s electric costs more competitive, which is an important element of growing our economy in the future.

It’s disappointing that the Legislature has rejected the conclusion that a majority of Minnesota legislators, Governor Pawlenty, and most Minnesotans have reached – namely, that Minnesota should have all options on the table when it comes to meeting our future power needs.

Tuesday, May 12, 2009

Congressional Hearings on C&T Speculators

I am such a visionary. It turns out that some politicians are waking up to the fact that the much touted cap and trade solution to controlling greenhouse gases is really about the money, not the environment. Imagine that! Who, but a curmudgeon like me, would have thought that all those swell, well-meaning Al Gorites were really interested in creating an issue the solution to which made them billions. Sounds like "affordable housing" for all, the preface to the subprime debacle.

I would cordially invite you to visit my earlier blogs on these matters. The reason market capitalism is the greatest economic system the world has ever seen is that it permits people to be creative, sometimes too creative for the collective good. But maybe the collective good is human speak for what is best for "me."

Legislation & Policy Ernst and Young
Finance Committee Cap-and-Trade Hearing Focuses on Speculators

The Senate Finance Committee hearing on May 7, 2009, on "Auctioning Under Cap and Trade: Design, Participation, and Distribution of Revenues" focused heavily on the potential for speculators to manipulate the price of emissions allowances. In an opening statement, ranking Republican Charles Grassley (R-IA) said one troubling aspect of potential climate change legislation is that speculators "are foaming at the mouth to get at cap-and-trade profits," and hedge funds and private equity funds have been lobbying for a system to be put in effect. He later said Congress needs to keep in mind the public outrage over the price of gas, grains, foods, and alternative energy like biofuels, all of which have been the subject of manipulation by speculators.

"Some of us are going to be very careful about enhancing the role of speculators in this whole process of solving global warming," Grassley said. Similarly, Chairman Max Baucus (D-MT) said talk of auctioning allowances raises concerns about Wall Street wanting to manipulate prices, and asked how auctions could be monitored, what manipulation may or may not have occurred in existing auctions, and what manipulation may occur in a cap-and-trade auction.

Alan Krueger, Assistant Treasury Secretary for Economic Policy-Designate, said enforcement agencies have played a role in monitoring existing treasury auctions. Design features of an auction can have influence on its susceptibility to manipulation and there are ways of designing an auction to minimize manipulation and price volatility, he said.

Later, in response to a similar question from Sen. Bill Nelson (D-FL), Krueger said flexibility in the availability of allowances over time is one way of reducing the ability of speculators to manipulate prices. Krueger said one design issue is how long allowances can last, because a temporary shortfall could create a temporary opportunity to exploit limited supply. Allowing banking and borrowing of allowances over some period of time could limit the role of speculators, he said.

Sen. Maria Cantwell (D-WA) noted that Credit Suisse last November announced it had begun securitizing carbon deals in which bundled credits for 25 offset projects were into three tranches and sold to investors. "To me that sounds a lot like what we just did with the mortgage-backed securities that were at the heart of our meltdown," Cantwell said. She asked what lessons can be learned from the trading experience in Europe. Jos Delbeke, Deputy Director-General of the European Commission Directorate-General for the Environment, said liquidity of the market is very important, and prices in the European system have been relatively stable with normal fluctuations.

Krueger otherwise said, in response to a question from Chairman Baucus, that treasury is qualified to play a role in a cap-and-trade allowance auction because the agency has a tremendous amount of expertise and experience in auctioning and is willing to work with whatever agency is made responsible. Further, the auction theory branch of economics is quite well-developed, he said. "Treasury recognizes the critical importance of maintaining the integrity of, and ensuring investor confidence in, the market for its debt securities, including the proper dissemination of price and yield information," he said in written testimony.

Carbon Tax vs. Cap-and-Trade

The second major focus of the hearing was a carbon tax versus a cap-and-trade system. Sen. Grassley asked which provides more certainty for consumers and businesses, and which is more efficient. Krueger said a cap-and-trade system offers more certainty in curbing carbon emissions because of the certainty involved in the cap, and also offers much more flexibility. Douglas Elmendorf, Director, Congressional Budget Office, said a carbon tax is more efficient in terms of the timing of emissions reductions and because it reduces the volatility of the price of emissions, but there is less certainty in gauging the amount of emissions reduction at a given point in time.

Anne Smith, Vice President, Practice Leader of Climate & Sustainability, CRA International, said a carbon tax is more efficient than a carbon cap, though hybrid schemes to put price ceilings on top of a cap-and-trade system could move such a system closer to the efficiencies of a tax. On the subject of whether to auction emissions allowances or give them away, Smith said a cap-and-trade program with 100% auction of allowances would actually function much like any other cap-and-trade program that relies on free allocations: In the absence of any auction, if all the allowances are allocated to parties with compliance requirements, an allowance market forms naturally.

Member and witness statements from the hearing

For all of it's murk, cap and trade is about the money not greenhouse gases. Yogi was right. It is deja vu all over again.

Saturday, May 9, 2009

The Economy & Cap-and-Trade

An article in the Christian Science Monitor last week asked the question “Is a bad economy good for the environment?”

The article was prompted by the fact that the global economic downturn will likely result in a decrease in greenhouse gas emissions. Energy use and economic growth move together. A growing economy uses more energy, a contracting one less. With current technology and energy sources, greenhouse gases rise and fall accordingly.

The article cites an estimate that European emissions could be 7 percent less than predicted by 2020 due to the recession. U.S. oil consumption is down 7 percent. However, some aren’t impressed by these reductions.

“It’s not a blockbuster impact,” adds Frank O’Donnell, president of Clean Air Watch. “You would have to have a screaming downturn and no manufacturing at all to change that [worldwide greenhouse-gas emissions] in a huge, measurable way.”

If the worst economy since the Great Depression isn't making drastic enough cuts, it's frightening to imagine what it would take. While not many supporters of cap-and-trade would openly admit that they are enjoying the environmental "benefits" of the economic downturn, it appears they would happily see "no manufacturing at all" in the United States, in the name of reduced carbon emissions. There is no other explanation for their support of regulations that will simply drive manufacturing to other countries, like China, where they will do more harm to the global environment.

Ironically, while "environmentalists" tally the reductions resulting from our declining GDP, one country's GDP continues to rise, along with their carbon emissions. While the U.S. economy continues to contract, China's GDP rose at an astonishing 9% in 2008.

So in the end, will cap-and-trade simply send our jobs, emissions and wealth overseas?

To read the article, go to:

Thursday, May 7, 2009

Cap & Trade for Body Fat?

I was spinning at the gym the other day reading an article in The New York Times about a British study on body fat and climate change (see below). Obviously, my annual six-week springtime ritual to lose weight, get into better shape, and buff my beer-keg belly into six-pack abs (note to self: stop thinking in beer metaphors!) has climate implications.

As I moved to the weight machines I had an epiphany: if cap and trade is the tool of choice to reduce everyone’s global greenhouse gas emissions, why not use it to reduce everyone’s body fat? Both body fat and GHGs are rising, threatening our well-being and causing leading scientists and medical doctors to tell us to reduce them.

How would a Body Fat Cap and Trade (BFCT for short) work, I pondered during my reps of medicine ball crunches? Just like a GHGs cap-and-trade program:

• Set a scientifically established national target on aggregate body fat and then reduce the target over time, say an 80% reduction of the nation’s body fat by 2050.

• Divvy the allowable body fat credits to the various sectors of the country based on their respective share of the body fat total.

• Auction off the body fat credits so that all those possessing body fat pay money (directly or indirectly) to the government for their body fat so as to:
o Send market signals of the true societal, environmental and health costs of body fat;
o Offer incentives to reduce our body fat; and most importantly
o Raise money to fund body fat reducing programs. For example, my gym membership would be paid for…what a great result for the YMCA and me! Billions could go to body fat reducing medical research and development. Low income people with high body fat who can’t afford their body fat credits would get financial help.

• Establish a body fat trading market so those who exceed their body fat credits could get more credits from those who reduced their body fat. I’m sure a secondary market of body fat credits would develop as fitness experts and dieticians helped people reduce their body fat to get saleable credits. I certainly would stop my post-workout habit of having a Peanut Buster Parfait if I could sell my body fat credits.

• Establish body fat offset criteria so that people could get body fat credit by helping others avoid increasing their body fat.

• Establish “early loser” credits so the new program does not penalize those of us already working out.

Clearly, like in a GHGs cap-and-trade program, a body fat cap-and-trade program has to resolve a lot of difficult issues like:
1. How to deal with growth…more people means more body fat…
2. How to handle new body fat entrants?
3. How to deal with direct and indirect body fat increases?
4. What is the body fat point of regulation? Clearly it should be the individual, but that’s so direct so I bet we’d avoid that like we’re doing with GHGs from the transportation sector, so we’d have to find some ineffective, indirect body fat surrogate whose only impact would be to raise the cost of food.
5. How to fairly account for historic regional body fat differences?
6. What if a country with growing body fat doesn’t participate in the program?
7. How do we assure compliance?
8. What are the body fat enforcement mechanisms?

Certainly these are difficult issues, but if they can be resolved for a GHGs cap-and-trade program, they can be resolved for body fat.

Think about how much money the government would raise and what they could do with it? Imagine all the body fat reducing jobs that would be created; they would probably exceed the number of promised green jobs. This could unite the President’s health care reform, climate change, and budget initiatives.

Clearly, I’m not serious about this “body fat cap and trade” idea. It must stem from exercise-induced endorphins. But, the potential parallels of body fat and GHGs cap-and-trade programs are eerie. And, it was fun to think about it as I was pushing myself through the five-minute barrier on the Elliptical.

The New York Times
April 27, 2009
Green Inc. Column
Climate Research That Might Not Help

Phil Edwards, a statistician and the head of the Nutrition and Public Health Intervention Research Unit at the London School of Hygiene & Tropical Medicine, told me last week that he was receiving a lot of hate mail.

“I got a lot of nasty stuff from your side of the globe,” he said.

The reason for the opprobrium is this: “Population Adiposity and Climate Change.” That’s the title of a paper that Mr. Edwards and a colleague, Ian Roberts, published this month in the International Journal of Epidemiology.

For those unsure of the term “adiposity,” just think “body fat.”

Yes, Mr. Edwards and Mr. Roberts published a statistical model (not the first of its kind, Mr. Edwards was eager to point out) that examined the relationship between increasing rates of obesity and climate change.

“What a stupid correlation,” wrote one reader at our Green Inc. blog, where we took note of the research last Wednesday. “This study is yet another confirmation of our fat-phobic society.”

“I would like to see a fat tax,” wrote another. “I am sick of paying for these big medical bills because someone wants to eat everything in sight.”

And from a reader identified as Hentrain: “Tall people are also using up more of our precious resources than short people are, and men consume more calories than women. We should strive for an all-female society of tiny, thin vegetarians.”

To be sure, the study touched a nerve — not least, one might reckon, because so much of the Western world is getting fatter. It is no secret, for instance, that more than 30 percent of adults in the United States have a body mass index, or B.M.I., of 30 or higher — the clinical definition of obesity. In Britain, about a quarter of the population qualifies. Same for Canada.

And the burden of all this extra weight — on individual health and on the health care resources of society — is indisputable.

But in a world hard-pressed to find priorities in the battle to curb greenhouse gas emissions, a reasonable response to Mr. Roberts’s and Mr. Edwards’s mathematical exercise, however accurate, might be: so what?

It is hard, admittedly, to argue with their findings. Taking two hypothetical populations of one billion people each — one with a 3 percent obesity rate (roughly the rate in Britain during the 1970s) and the other with a 40 percent obesity rate (as Britain’s is estimated to be by 2010) — the researchers simply did some modeling.

Food production, for instance, accounts for a substantial amount of the globe’s greenhouse gases — 20 percent from animal agriculture alone (read: meat and dairy), according to the United Nation’s Food and Agriculture Organization. Using this metric, along with established formulas for calculating the food energy needed to maintain a certain B.M.I., and a typical level of daily activity (sleep, office work, driving, and so forth) the researchers reckoned that the heavier of their two populations would require 19 percent more food energy than the slimmer one.

They also crunched some transport data, including the energy-use differential between a Ford Galaxy (assigned to their larger population) and the smaller Ford Fiesta (for the trimmer folks), as well as the added energy needed to move big bodies around in general, whether walking, driving or flying.

All told, the study concluded, the increased body size of the larger population accounted for between 0.4 and 1.0 gigatons of additional carbon dioxide equivalents per year. (For scale, global greenhouse gas emissions for 2000 were estimated to be roughly 42 giga-tons of CO2 equivalent.)

Among their conclusions: “The maintenance of a healthy B.M.I. has important environmental benefits in terms of lower GHG emissions,” they wrote, referring to greenhouse gas emissions.

It is a fairly straightforward point, and one that, according to Mr. Edwards, many of his angry correspondents were taking a little too personally.

“I just think it’s important that we all realize that we’re all gaining weight, which isn’t good for us,” said Mr. Edwards, who admitted in a phone call last week that he would consider himself overweight. “And if food production is an antecedent of climate change,” he said, “then we’re also harming the planet.”

That would seem to be true as far as it goes. But Brenda Ekwurzel, a climate scientist with the Union of Concerned Scientists, an advocacy group in Washington that researches energy and climate issues, cautioned that while a global focus on carbon footprints was a good thing, “we need to keep a focus on the big stuff.”

In an e-mail message, Ms. Ekwurzel, who quibbled a bit with the methodology of Mr. Edwards’s paper, suggested that, even allowing for its conclusions, preventing obesity rates from increasing ought not be considered a priority for cutting emissions — for individuals or policy makers.

“For most Americans, the most effective way to reduce one’s carbon footprint is to drive less, use more energy-efficient appliances and less electricity and reduce the amount of fossil-fuel energy intensive food you consume,” Ms. Ekwurzel said. “At the policy level, we need to concentrate on cleaner cars, cleaner fuels, smarter growth, cleaner, more efficient electricity and preventing tropical forests from being destroyed — not people’s waistlines.”

She added that, given the potential for expanded heat waves, increased smog, migrating pathogens and other ills associated with a warming planet, “It’s more important to focus on the effects global warming has on our bodies, rather than the effects that our bodies have on global warming emissions.”

For his part, Mr. Edwards said that he and his colleague never offered their analysis as a remedy for climate change — though he suggested that, under the circumstances, every little bit helps. “I’d hope that we’re not competing for ideas or solutions,” he said.

Nor, he added, should anyone interpret the paper — an academic exercise meant to highlight an interrelationship — as assigning blame to any particular individual.

“Population fatness is an environmental problem,” Mr. Edwards said, “But someone who has a B.M.I. over 30 is not somehow more to blame for global warming.”

If that was indeed the message of the paper, not everyone received it.

Wrote a commenter at Green Inc.: “The environmentally sensitive and rather rotund Al Gore should take note.”