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.

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