Wednesday, July 29, 2009

Does Waxman-Markey Put U.S. Energy Security at Risk?

One of the arguments that proponents of a cap-and-trade program make is that we need to develop more homegrown sources of energy in order to increase our energy security. They believe a cap-and-trade program will create incentives to produce more renewable energy in the United States by increasing the price of traditional fuels.

There is no question that projected energy growth over the next 30 years will require us to develop numerous sources of energy – both traditional and alternative sources. But it appears Waxman-Markey will create incentives that could actually make us less energy secure in the near term.

The legislation makes the U.S. refining industry responsible for both their facility emissions and the emissions from the end-use of their products – vehicle combustion. Together, facility and vehicle emissions account for approximately 40 percent of total U.S. greenhouse gas emissions. However, the legislation only grants the refining industry two percent of the free emissions permits that will be distributed under the bill.

This significant gap between the emissions U.S. refiners are responsible for under the legislation and the free emissions permits they will be awarded means the refining industry will have to buy permits from other industries in order to be in compliance. Refiners from overseas will only need permits for vehicle emissions, not the emissions from their refineries. This will give them a competitive advantage.

The result is that the bill could create incentives for U.S. refiners to import more gasoline and diesel fuel from abroad and produce less here at home. As the article below points out, that could lead to idled refining capacity or the outright closure of U.S. refineries due to the cost advantage overseas refiners will have. As refining capacity is moved overseas to countries with little or no environmental standards, carbon emissions will rise causing global greenhouse gas emissions to increase.

Are our memories really this short? Just four years ago, following hurricanes Rita and Katrina, politicians were clamoring for more refining capacity to protect against supply disruptions and price volatility. Now Congress passes legislation that could result in increased reliance on imported gasoline and diesel fuel which increases the risk of – you guessed it – supply disruptions and price volatility.

This is yet another example of why a climate change policy must be crafted as part of a global agreement.

“Big Oil’s Answer to Carbon Law May Be Fuel Imports,” Bloomberg News, June 26, 2009

Tuesday, July 28, 2009

Climate & Health Care: When Solutions Become the Problems

My dad had a saying, “Don’t let today’s solutions become tomorrow’s problems.” His point: know what you’re doing and don’t do anything to make matters worse.

As Congress sputters on the President’s health care and climate initiatives, I thought about dad’s advice but concluded that to be applicable to the President’s situation there needs to be a corollary: “don’t let the solution become today’s problem.”

There are a lot of similarities between health care and climate initiatives. Both are major, “changing-life-as-we-know-it” initiatives affecting all Americans with a lot of very complicated moving pieces and competing interests.

Candidly, I agree with President Obama that America should do something to address greenhouse gas emissions (GHGs) and the rising costs of health care.

The problem is that the President’s solutions have become problems and, perhaps, even bigger problems then the problems they are designed to solve. One reason is that the President and Democratic Congressional leaders are trying to convince us that their solutions are cost-free and easy. This just doesn’t pass the laugh test. Americans are used to their political leaders stretching reality, but that stretch has to be within the realm of common sense credibility. And, it’s just not credible to say that we can reduce GHGs without increasing the cost of energy or that health care coverage can be expanded without increasing the amount of money government takes from us.

Another reason the President’s solutions have become the problem is their complexity. The President’s climate and health care initiatives are both mammoth pieces of legislation that most people haven’t read, let alone understand what they do or how they will do it. Obviously, some will lose; some will win; and some will win and lose at the same time. Americans don’t need to know everything about every piece of legislation and are used to (and willing to) make these kinds of trade-offs. But, we need to understand the broad themes and how they are likely to affect us. Unfortunately, the size and complexity of the initiatives prevent such understanding, leaving him unacceptably saying, “trust us, we’re the government, we know what we’re doing and we’re here to help.” No wonder the thinking, swing members of the Congress are balking.

The third reason his solutions have become the problem is the speed he is pushing them. Again, I turn to one of dad’s sayings: “If you don’t have time to do it right the first time, why do you think you’ll have time to fix it the second time?” It was his version of “haste makes waste.” The President wants to make major changes to three of the biggest sectors of the economy (energy, health care and financial services) in less than 12 months. That’s fast; too fast…it’s turned the solution into the problem.

For many, most, the President has won the argument that climate and health care are problems that deserve solutions. But his solutions have become problems. His best course is to slow things down, skinny the bills and focus on improving one or two high leverage elements in each topic and make sure the substance of the efforts match the low-cost rhetoric. For energy, that means focusing on promoting more renewables, enhancing our energy efficiency efforts, and growing the nuclear industry. As for climate? These first items will make a big dent in emissions. In the meantime, spend the intervening time getting an international GHGs reduction agreement and think through how to implement a cap-and-trade program and the other regulatory tools…perhaps a Blue Ribbon Task Force could be convened.

Wednesday, July 22, 2009

You want "Scientific Truth" on Biofuels?....

Many of the environmental and agricultural special interests and advocates who supported corn ethanol and the development of other annual-crop-ethanol forgot to carefully examine the externalities of their idealism and/or greed. They seem to be always invoking the veil of "scientific truth." Well here is some scientific truth for all to carefully examine. Maybe this scientific truth will set them free and teach all an important intellectual lesson. Scientific "truth" is dynamic, not static, or based upon political and/or economic expediency!

Science 17 July 2009:ol. 325. no. 5938, pp. 270 - 271DOI: 10.1126/science.1177970
Policy Forum for the full article

Energy: Abstract

Beneficial Biofuels—The Food, Energy, and Environment Trilemma
David Tilman,1,* Robert Socolow,2 Jonathan A. Foley,3 Jason Hill,3 Eric Larson,4 Lee Lynd,5 Stephen Pacala,6 John Reilly,7 Tim Searchinger,8 Chris Somerville,9 Robert Williams4
1 Department of Ecology, Evolution, and Behavior, University of Minnesota, St. Paul, MN 55108, USA.2 Mechanical and Aerospace Engineering, Princeton University, Princeton, NJ 08544, USA.3 Institute on the Environment, University of Minnesota, St. Paul, MN 55108, USA.4 Princeton Environmental Institute, Princeton University, Princeton, NJ 08544, USA.5 Thayer School of Engineering, Dartmouth College, Hanover, NH 03755, USA.6 Department of Ecology and Evolutionary Biology, Princeton University, Princeton, NJ 08544, USA.7 Center for Energy and Environmental Policy Research, MIT, Cambridge, MA 02142, USA.8 Woodrow Wilson School, Princeton University, Princeton, NJ 08544, USA.9 Energy Biosciences Institute, University of California Berkeley, Berkeley, CA 94720, USA.
* To whom correspondence should be addressed:

Recent analyses of the energy and greenhouse-gas performance of alternative biofuels have ignited a controversy that may be best resolved by applying two simple principles. In a world seeking solutions to its energy, environmental, and food challenges, society cannot afford to miss out on the global greenhouse-gas emission reductions and the local environmental and societal benefits when biofuels are done right. However, society also cannot accept the undesirable impacts of biofuels done wrong.

Biofuels done right can be produced in substantial quantities (1). However, they must be derived from feedstocks produced with much lower life-cycle greenhouse-gas emissions than traditional fossil fuels and with little or no competition with food production (see figure, below). Feedstocks in this category include, but may not be limited to, the following:

The best biofuels. The search for beneficial biofuels should focus on sustainable biomass feedstocks that neither compete with food crops nor directly or indirectly cause land-clearing and that offer advantages in reducing greenhouse-gas emissions. Perennials grown on degraded formerly agricultural land, municipal and industrial sold waste, crop and forestry residues, and double or mixed crops offer great potential. The best biofuels make good substitutes for fossil energy. A recent analysis suggests that more than 500 million tons of such feedstocks could be produced annually in the United States (1).

Sunday, July 19, 2009

Rolling Stone and Me

It isn't that often that I read Rolling Stone Magazine and even less often that I agree with any of its positions. But Matt Taibbi's recent article on Goldman Sachs made me laugh because a year or more ago, I started to see the mortgage plot being recreated with cap and trade climate change policy. Most people thought that it was a wild conspiracy theory though few said anything. But last week Goldman demonstrated, once again, its resilience announcing huge profits. So far, no one has questioned where those profits were generated---at taxpayer’s expense---in the worst recession since 1929.

Taibbi excoriates Goldman Sachs for its role in the Internet, oil and housing bubbles, and then identifies their next great scheme.

“And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.”

It is time American’s realize that it's always about the money now and forever. It is one of the great weaknesses of human nature---greed, which, when mixed with the capitalist spirit, too often leads down the same debauched road. Making matters even more amusing is how often the committed advocates are used/manipulated by the powers that be to make buckets of money while ruining the economy.

Friday, July 17, 2009

US EPA, State Agencies, and Private Attorneys Meet in Chicago, Discuss Environment

There can be little doubt that the philosophy at the US EPA has undergone a dramatic change under President Obama. To more fully understand the new priorities at the US EPA as well as the current priorities of the state environmental agencies of the Great Lakes states (aka EPA Region 5), the American Bar Association Section of Environment, Energy and Resources held a day and a half conference in Chicago: State and EPA Perspectives on Environmental Issues In Region 5.

In what could be one of the preeminent environmental conferences in the Great Lakes region (having played a significant role in the conference I might be a bit biased), the program involved exclusively government speakers, including Commissioner Paul Eger of the Minnesota Pollution Control Agency. Although the conference featured numerous panels discussing aspects of environmental law from Resource Conservations and Recovery Act (RCRA) to the Great Lakes Interstate Compact and everything in between, the two most important presentations were the keynote speech by Bharat Mather, Acting Regional Administrator US EPA Region 5, and the State Environmental Directors Roundtable.

Mather spoke briefly regarding the American Reinvestment and Recovery Act (ARRA), the state-federal environmental partnership and the goals of his new boss Lisa Jackson. Discussing ARRA, Mather noted that the EPA has obligated 72% of its ARRA funds and that the primary issues with implementing ARRA are reporting, the Buy American provision, compliance with the Davis-Bacon Act requirement, and funding of green issues. On the state-federal partnership, he stressed that EPA’s role is oversight of the state agencies and that the focus should be how the two can work together to get things done. Turning to the goals of Administrator Jackson, Mather stressed four areas: 1) science must be the backbone for EPA; 2) EPA decisions must follow the rule of law; 3) EPA actions must be transparent; and 4) environmental justice should be considered in every EPA decision.

Mather then turned to EPA priorities in Region 5. The number one concern, he said, is climate change. This certainly should come as no surprise given the public announcements from Administrator Jackson. But it does reinforce the reality that the question is not whether greenhouse gases will be regulated in the near future, but what the vehicle for regulation will be. Among the other named priorities he discussed were new source permits, reducing diesel emissions, managing overall chemical risks, hazardous waste cleanup, and water quality. He noted particular interest in Minnesota when discussing the asbestos risk in mining and managing risks from perfluorocarbons. He also noted that one of the water quality priorities is addressing water nutrient levels in the Mississippi River as it relates to Gulf of Mexico hypoxia.

Following the keynote speech, Bert Frey, Deputy Regional Counsel US EPA Region 5, hosted a roundtable discussion with the directors of all six state environmental agencies (Indiana DEM, Illinois EPA, Michigan DEQ, Minnesota PCA, Ohio EPA, and Wisconsin DNR). Almost universally, the director concerns involved addressing climate change, improving water quality/wastewater management, and finding a way to accomplish these goals in the face of an ever-shrinking budget. The truly amazing theme in the roundtable was the staggering cost that we face to update our water infrastructure and to deal with storm water management. Time and again, the state directors would note that the tens or hundreds of millions of ARRA dollars dedicated to state revolving water funds did not meet the needs for infrastructure updates (all told, the EPA received $6 billion for water infrastructure, which has been allowed to the states and US territories.

It was not lost on many of us that this was the first time there had been a Region 5 environmental conference since 1999. After listening to the government attorneys and agency personnel speak for a day and half, it is clear that the days of market self-regulation have come to an end. In Minnesota and across the nation, we can expect to see new environmental regulation and a renewed focus on enforcement of existing regulations.

Submitted by Michael J. Mergens

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.

Thursday, July 16, 2009

Cap-and-Trade Costs: Lessons from Europe

During the debate on the Waxman-Markey energy and climate legislation, the potential costs to consumers received considerable attention. Mitigating these increased costs was the main focus of the dealmaking that was done to get the bill passed. The focus on cost is not surprising. What is surprising is the range of cost estimates that emerged during the debate.

On the low end were estimates by the Environmental Protection Agency (EPA) and Congressional Budget Office (CBO). EPA estimated the cost of the legislation to be somewhere between $80 and $111 annually per household, while the CBO came in slightly higher at $175 in 2020. The new CBO estimate is much lower than an earlier estimate it did that pegged the cost of a 15% reduction in carbon dioxide at $1,600 per household. On the other end of the spectrum is an analysis by the Heritage Foundation that puts the increased cost at $2,979 per year.

The ultimate impact of a cap-and-trade system need not be hypothesized, so let’s move past the studies and look at a real world example: the European Union. The EU cap-and-trade program went into effect four years ago. Since that time they have seen significant energy price increases, while achieving minimal emission decreases. From 2004-2007, residential energy costs have increased by an average of 16% and industrial electricity rates have increased by 32%. Even in a good economy very few industries can afford a 32% increase in electricity rates. In this economy, it would spell the end for many manufacturers.

The climate bill is currently being debated in the Senate after being passed by the House of Representatives. Hopefully the Senate will have the sense to study the EU experience and reject these kinds of increased energy costs for U.S. businesses.

“Europe's Cap-And-Trade Scheme: A Cautionary Tale for the U.S.,” Investors Business Daily, June 8, 2009:

Monday, July 13, 2009

Climate Bill Uneconomic & Costly: Failing the Good Lawmaking Test, Part II. Let’s Start Over on Climate Legislation

The test of good lawmaking is whether it 1) achieves the desired goals, 2) in the most economic and cost-effective manner, 3) with the fewest unintended consequences, and 4) enlists strong bipartisan support. My last blog posting argued the Waxman-Markey climate bill failed the first element of this “good lawmaking” test because it relies on carbon credit concoctions at the expense of achieving reductions on GHGs.

This posting explains one of many reasons why the House bill fails the second uneconomic element of the good lawmaking test, and why Congress would be wise to start over rather than keep moving forward on the current path.

Economic models can make the climate bill’s cost a wash or impose a very small per person cost. And, this is without factoring the unknowable affects of a changing climate. But no-cost outcomes only happen in Washington, which isn’t very good lawmaking and seems to be disingenuous, naive, or from a flawed belief that there is no cost in massive wealth redistribution.

The underpinning of Waxman-Markey is to impose a cost for emitting GHGs into the atmosphere. Supposedly, such a cost will encourage the emitter to either stop emitting GHGs completely if they can, or reduce its GHGs to a level where the costs of further reductions exceed the costs of emitting. Or, since Waxman-Markey uses the “cap and trade” methodology, an emitter may buy offsets from someone who has reduced their GHGs emissions more than they were required to. In theory, this cap and trade approach would yield the most economic GHG reductions.

However, as mentioned in my previous posting the Democratic majority distorted the offset program. Besides undermining the potential for actual GHG reductions, these distortions make figuring out how much it will cost to comply with the bill impossible. A host of dueling economic models are trying to figure out what the macro and micro costs of the Waxman-Markey bill will be. But, given its complexity, on-the-fly amendments and competing glass half-full versus half-empty assumptions…makes accurate cost estimates impossible, even if you agreed with the models. Thus, there is no way to know what the bill will cost. Unknown costs are more costly than known costs because they create risk and uncertainty. If you can’t ascertain the risk, your only rational course is to assume the worst thereby increasing the costs and uneconomic actions.

The unknown risk from the Waxman-Markey bill is one, failing; the other comes from what I call the “uneconomic averaging” of costs and benefits. Take, for example, a person with his head in the oven and feet in the refrigerator, so his average temperature is a normal 98 degrees. Clearly, the extremes are unpleasant but if one only looks at the average, one can incorrectly assume no harm. Or, take another more realistic example: my smart daughters will soon be going off to college; they will do well, get good jobs, and become valued taxpayers. Their taxpaying value to society will soon exceed what I paid for their college. Thus, society will clearly be economically better off; they will be happy so I’ll be happy…but I won’t be economically better off, in fact, I may be worse off since the opportunity cost of that money was investment in my retirement fund.

Advocates of the Waxman-Markey bill cite climate models that say the bill will have little costs. But, I doubt it and that can only be correct if viewed from this averaging approach. From a lawmaking perspective, such results are uneconomic short-term outcomes with the costs unfairly borne by just a few. If the models looked at the entities that actually have to pay the cost of the carbon reductions, those folks won’t get their money back (despite government redistributive promises). They won’t even be the happy but impoverished father whose girls visit him in the nursing home!

Thus, because of the unknown risks and the uneconomic “averaging” of the costs at the expense of those who will have to pay them, the Waxman-Markey bill fails the second element of the good lawmaking test. And, Congress should start over and simplify the bill so the American people know the direct and indirect costs…it is this simplicity that has people supporting a carbon tax.

Monday, July 6, 2009

Waxman-Markey Won’t Achieve Goals Failing the Good Lawmaking Test, Part I: Let’s Start Over on Climate Legislation

A couple weeks ago the U.S. House of Representatives barely passed a 1,200-page bill designed to address the nation’s greenhouse gas emissions. The “golf clap” applause for the bill comes only from those who believe passing something, anything, is better than passing nothing at all.

While I am among those who believe addressing GHGs is important, I am not praising the House’s achievement. Passing an ineffective, costly bill is worse than doing nothing. In fact, what the House’s “accomplishment” offers is more an example of a failed legislating experiment than good lawmaking.

There are four criteria for good lawmaking: the law will 1) achieve the desired goals 2) in the most economic and cost-effective manner 3) with the fewest unintended consequences and 4) has strong bipartisan support.

In this and subsequent blog postings, I’ll explain why the House bill fails all four good lawmaking criteria and that starting over is the best course of action.

I believe the Waxman-Markey bill is unlikely to achieve the desired goal of reducing GHG emissions.

Many in the environmental community share this concern due to the last minute provisions added to the bill that undermine its GHG-reducing elements. These last minute provisions were designed to garner Democratic votes to pass the bill. Many dealt with the use of agricultural offsets for carbon credits designed to enlist the support of Democrats from rural agricultural districts. Terrestrial sequestration of carbon can come from changing farming practices, converting cultivated lands to prairie, planting trees, and preserving forests. I’m not so sure the environmentalists concerns are correct; but they may be. Such approaches, like all lifecycle calculations, need more analysis.

But, I have a more concrete reason to question the effectiveness of the bill: it turns GHG reductions into a carbon credit accounting board game, sort of like Monopoly. Who can get the credits? How do they get them? How can we make the credits cheaper? What can be done with the credits? etc. This emphasis on the credits instead of GHG reductions creates a disconnect that assures that actual GHG reductions are unlikely to occur and certainly not to the levels desired by the bill’s authors and supporters.

Notice how the compromises made on behalf of agricultural interests took the form of allocating carbon credits for offsets? And, that is just one industry sector where “credits for offset” political trade-offs were made to curry favor or to allegedly lower economic costs of the bill. I fear that by focusing on credits instead of actual GHGs reductions no reductions will occur, leaving the worst of all worlds: higher energy costs, a fool’s gold carbon market created and increasing atmospheric concentrations of GHGs. How does that achieve the bill’s goals? It doesn’t; failing the first test of good lawmaking.

Accordingly, Congress should start over. The legislation should focus on getting actual reductions, even if they are small at first. That would put them on the good lawmaking path.