Andy Stevenson's Blog: U.S. Law and Policy

The Clean Air Act's Investment Returns Rival Warren Buffett's

2010-02-11T06:06:14Z

What if I were to tell you that we are all shareholders in an investment vehicle that has produced better returns than Warren Buffett's Berkshire Hathaway over the past forty years. Strange as it seems it's true. Stranger yet, that investment vehicle is called the Clean Air Act.

According to the EPA study of the cost and benefits of the Clean Air Act, compliance costs totaled $500 billion from 1970 to 1990. While these investments in cleaner air, water and reduced death are indeed significant, they pale in comparison to the $22.1 trillion in benefits gained by its shareholders, the American people, over this time frame from lower mortality, fewer cases of chronic illness, and less frequent trips to the hospital (see table below):

During this period, emissions of sulfur dioxide (SOx), nitrogen oxide (NOx), volatile organic compounds (VOCs), and carbon monoxide (CO) were reduced by 30-50% while primary particulates fell 75% and lead (Lb) emissions fell 99%. These reductions were achieved while the population grew 23% and the economy grew 70% and clearly demonstrate how good environmental policy can produce exceptional economic results.

In fact, the returns on these investments in our health and welfare are so dramatic that they rival the performance of Warren Buffett's Berkshire Hathaway during its heyday. On an annualized basis, the Clean Air Act returned only 1% less than Mr. Buffett during the period from 1970 to 1990 (21% vs 22% on an inflation adjusted annualized basis).

Furthermore, the EPA's cost-benefit estimates for the 1990 Clean Air Act Amendments, which focused on reducing acid rain, ozone destruction, and other hazardous air pollutants are forecast to be equally successful as investments for us, the shareholders in America's future. In constant 1990 dollars, these additional programs are estimated to cost $210 billion from 1990 through 2010 and yield $1,200 billion in benefits.

This six-fold return on investment, combined with the returns from the program during the period from 1970-1990 put the Clean Air Act ahead of Warren Buffett's Berkshire Hathaway on an annualized basis during this forty year period. In fact, using the EPA's estimates, investments made to comply with the Clear Air Act actually outperformed Mr. Buffett by nearly 20% on a total return basis during this time frame (see graph below):

And while this comparison is far from exact given the difficulties in valuing death, sickness, and quality of life, it seems fair to say that these shareholder returns, which total nearly $37 trillion in current dollars, put the Clean Air Act in very good company indeed.

Putting America First in the Clean Energy Jobs Race

2010-02-04T17:01:34Z

The United States Senate is considering policy that has the power to reinvigorate the economy, create millions of American jobs, increase our energy security and open up vast new exports markets for American-made products. That policy is comprehensive energy and climate legislation. We need the Senate to unite behind this legislation to put America first in the clean energy jobs race.

The Next Great Global Industry

The clean energy industry offers significant growth opportunities for American businesses. Under a global policy aimed at keeping carbon concentrations below 450ppm, clean energy investments are forecast to exceed $13 trillion over the next two decades. This represents an eighty-five fold increase in clean energy investment relative to today and five-fold increase over business as usual forecasts though 2030 - investments that pay for themselves in lower energy costs and are expected to directly benefit US manufacturers of cleaner cars, cleaner fuels, and cleaner power (see table below) and companies involved in improving industrial, power plant, and building efficiency.

The industries listed above represent enormous opportunities for energy investors in the twenty-first century. The U.S. has the technology edge in these markets if we act now.

For example, the increase in demand for cleaner cars offers a multi-trillion dollar opportunity for American auto manufacturers. Under policies aimed at cutting emissions for the global car fleet in half, US manufacturers of hybrids, plug-in hybrids, and electric cars are expected to see their markets grow substantially over the next two decades as global demand for these vehicles reaches nearly 800 million units. This is a far better outcome for domestic manufacturers than under business as usual where internal combustion engines remain dominant and production continues to flow to the lowest cost producer countries.

Jobs for Americans - But Time is of the Essence

We have an opportunity to create 1.9 million new clean energy jobs in America by 2020 under a comprehensive clean energy and climate bill, but only if we act now. According to Bloomberg New Energy Finance, China is currently ranked number one in clean energy asset investment and last year outspent the US nearly three to one on new build renewable energy projects (see graph below):

If we continue to delay our own commitment to the clean energy economy, U.S. will lose our competitive position in global markets for products that were originally developed here with U.S. research dollars. Instead of leading the clean energy market, we will be reduced to dependence on foreign alternative energy products.

Jobs that Enhance our Energy Security

Passing clean energy and climate legislation is not just smart business policy but smart energy security policy as well. For instance, under the House-passed climate bill, the US could cut its consumption of foreign oil by 30% over the next two decades causing trillions of dollars to be reinvested in the American economy that would otherwise be sent overseas to buy oil.

This would be accomplished by using incentives under the bill to 1) re-tool US facilities to build cleaner cars and 2) capture CO2 at power plants that can then be used to increase domestic production of stranded oil (using a well established recovery technique known as enhanced oil recovery with CO2). A combination of policies to both reduce domestic oil demand and increase domestic oil supply that is expected to lower our oil import bills by $1.8 trillion through 2030 (see graph below):

Furthermore, the increase in oil production is expected to generate over $300 billion in additional oil royalty revenues for states and the federal government over this time frame, more than enough to pay for these incentives.

An Energy Bill is Not Enough

Investing in energy efficiency and clean energy deployment, as well as requiring utilities to obtain a percentage of their electricity from renewable sources, are important policies for the Senate to adopt; however passing energy-only legislation is short-term thinking that will only deliver short-term results. The U.S. will not reap the full benefits of these policies unless they are complemented by a cap on carbon emissions. Only comprehensive clean energy and climate legislation can create both the sustained incentives and long-term price signal necessary to maximize energy efficiency and commercialize innovations in renewable technologies.

A Road to Recovery and Profitability

In sum, passing energy and climate legislation pays back with jobs, enhanced energy independence, and competitiveness gains that cannot be found in a business as usual scenario. We must commit to a new energy economy. We look to the Senate for leadership in crafting and passing a comprehensive climate and clean energy bill in the coming weeks. For the sake of our country’s economic future, we cannot wait.

The blog post was co-written by Nicole Lederer, Co-Founder, Environmental Entrepreneurs

Three Reasons for the President to Highlight Energy and Climate Legislation in the State of the Union Address

2010-01-20T06:01:57Z

Here are three reasons energy and climate should be a top legislative priority for President Obama and Congress this spring:

1. Jobs

Ask employers what’s going to convince them to hire more people and they will all tell you the same thing - we need more demand. Demand is what drives growth. Demand is what leads bankers and others to free up the capital employers need to invest in new technologies, new production facilities, and new workers.

An energy and climate bill that promotes energy efficiency and clean energy sources, cuts foreign oil dependence, and sets firm limits on carbon pollution will generate trillions of dollars of new demand for low carbon technologies and hundreds of billions of dollars in incentives to take advantage of these business opportunities. Opportunities that will help create 1.9 million new jobs by 2020 by; 1) improving the energy efficiency of homes and offices (employing electricians, plumbers, construction workers, and engineers), 2) finding and developing alternative sources of energy, 3) building cleaner cars, 4) repairing our crumbling infrastructure, 5) training and educating workers, and 6) transitioning our major polluting industries into low carbon providers of energy services. This means building carbon, capture and storage into coal plants and improving the efficiency rates of domestic oil production through enhanced oil recovery, both huge jobs creators in their own right.

This also means enhanced job security in sectors like automotive manufacturing where the bill provides access to nearly $50 billion in re-tooling incentives and government guarantees to produce cleaner cars. Cleaner cars that the American consumer wants to buy, built with technology that will keep our workers competitive.

2. National Security

Retired Generals and Admirals have recently argued that "America's current energy posture constitutes a serious and urgent threat to national security"- a fact made clear by two fairly shocking conclusions drawn from a recent International Energy Agency (IEA) report.

The first is that oil demand from China and India is expected to double over the next two decades. A rise in demand that is particularly unnerving when you consider that two-thirds of existing fields will have shut down production by this time (see graph below):

The second shocking conclusion drawn from the report is that the winner inevitably will be neither the US nor China but the OPEC nations, which are expected to see their oil-export revenues increase five-fold to nearly $28 trillion over the two decades (see graph below):

The economic threat from this massive transfer of wealth, driven in large part by US import demand, adds to other so-called “threat multipliers” the US military must face under climate change - threats that the Military Advisory Board expects to directly challenge the effectiveness of our military, such as; 1) more extreme weather-related events, 2) greater demands on naval operations due to the opening of the Arctic Ocean, 3) threats to US naval bases due to rising seas levels, 4) more humanitarian relief challenges for US forces, and 5) heightened regional tensions due to a rising number of "failed" states.

Indeed, if we truly want to reduce our dependence on foreign oil, passing comprehensive energy and climate legislation is the way to get us there. Under the House-passed climate and energy bill, NRDC forecasts that the US could cut its oil dependence in half compared to business as usual. This would be accomplished by a combination of cleaner cars and incentives for using CO2 capture at coal plants to recover oil stranded in existing domestic oilfields, using a well-established technique known as enhanced oil recovery with CO2. This is a recipe for a double benefit that would dramatically reduce our demand for foreign oil (see graph below) and generate more than $800 billion in additional oil royalty revenues over the next four decades for states and the federal government through increased domestic production.

3. Competitiveness

As Thomas Friedman has noted, clean tech is “the next great global industry” and we can either decide to take the lead and “clean the world’s clock in clean-tech”, or fall behind and let others reap the benefits. Trillion dollar opportunities exist for American businesses focused on the global building efficiency, industrial efficiency, renewables, and advanced vehicle markets (see table below). Areas of investment which pay for themselves in lower energy costs and will help re-power the American economy over the long term.

In sum, passing energy and climate legislation pays back with jobs, enhanced energy independence, and competitiveness gains that are difficult to beat and while the Senate is expected to chart its own course and offer its own set of energy and climate solutions, it is imperative - for our economic health and security - that the President and our legislators roll up their sleeves and pass a bill through the Senate this spring and the full Congress this year.

Climate Bill to Help Unlock a $10trln Opportunity for American Businesses

2010-01-05T20:18:20Z

The best US investment in 2010 won’t be made on the floor of a stock exchange. It will be made on the floor of the US Senate with the passage of a bill to cap our carbon emissions. A bill that will help unlock a $10trln investment opportunity for American businesses and launch what Thomas Friedman describes as the world’s next great global industry.

The following is a list of five trillion dollar business opportunities created by both passing a climate bill in the US and adopting a global agreement that, together, would limit greenhouse gas concentrations to 450ppm. This list includes over $3trln of profitable domestic opportunities for American companies. Investments that will help dramatically lower of dependence on foreign oil, pay for themselves in fuel savings, and make our products more globally competitive. In addition, this list also includes over $8trln in new export market opportunities for America's leading manufacturers that will help re-power the American economy over the long-term by growing millions of new clean energy jobs.

1) Advanced Vehicles - Economic Opportunity $4.75trln

The IEA estimates that an additional $4.75trln needs to be invested in the development of advanced vehicles if we are to cut the CO2 intensity of the global car fleet by half over the next two decades. Roughly 70% of this investment ($3.35trln) needs to be made to build more efficient passenger cars, creating signficant growth opportunities for makers of electric vehicles, hybrids, and plug-in hybrids relative to business as usual (see graph below):

These investments should present solid business opportunities for domestic auto manufacturers, especially as the House-passed climate bill contains over $25bln for re-tooling and $25bln in low interest loans to develop these advanced vehicle technologies.

Another $1.35trln in incremental investment will also need to go into cleaner planes ($700bln) and heavy trucks ($650bln) during this time frame according to the IEA's analysis, areas where US companies already play a substantial role.

In total, these global investments in cleaner cars are also expected to pay for themselves in fuel savings, reduce global oil demand by 14% (cutting OPEC revenues by $4trln) and lower global oil prices by 22% over the next two decades. Energy and national security benefits which are both good for America and good for the planet.

2) Building Efficiency - Economic Opportunity $2.55trln

Reducing heating, lighting, and cooling costs in buildings and reducing the energy intensity of the building materials themselves is expected to require an additional $2.55trln in incremental investment under the IEA's 450ppm Scenario. $683bln of this amount is expected to go into renewable power investments (see graph below):

Retrofitting buildings to reduce energy consumption and developing more efficient appliances and office equipment are expected to make up the rest of the opportunity set in the buildings space. Efficiency investments that are expected to save global consumers $1.2trln on their fuel bills by 2030 and a total of $5trln over their useful lives.

3) Low-carbon Power Generation - Economic Opportunity $1.75trln

Investment in renewable-based electricity production is expected to total $4.7trln over the next two decades under the IEA's 450ppm Scenario. This represents just over 60% of total global power generation investments ($7.95trln) and a $1.75trln increase in renewables deployment relative to the reference case. Wind is expected to be the biggest beneficiary (investments increasing by $800bln relative to the base case) with all renewable sector investments more than doubling over this time frame as production costs continue to fall, making these technologies more competitive with their fossil fuel competitors (see graph below):

4) Industrial Efficiency - Economic Opportunity $1.05trln

Globally, industry will need to invest an additional $1.05trln on more efficient technologies in order to keep greenhouse gas concentrations below 450ppm. This increase in demand for efficiency investments creates a significant business opportunity for companies involved in waste heat recycling, process engineering, sensor equipment manufacturing, and the production of various other efficiency technologies for the industrial market. More than half of these investments are needed outside the OECD with the highest concentration of opportunities for new business seen in the energy-intensive industries such as iron and steel, cement, chemicals and petrochemicals and paper and pulp (see graph below):

5) CO2 Enhanced Oil Recovery - Economic Opportunity $1.1trln

According to a recent study conducted by NRDC, the House-passed Waxman-Markey climate bill is expected to help increase production of domestic oil by 10bln barrels by 2030. An increase in domestic supply of oil large enough to cut our dependence on foreign oil by 30%, employ tens of thousands of workers, and generate over $1.1trln in additional domestic oil revenue.

This is expected to be accomplished through incentives in the bill designed to help capture CO2 at coal-fired power plants which can then be used to recover an additional 20% of the "stranded" oil remaining in existing domestic fields using a common oil recovery technique known as CO2-enhanced oil recovery (CO2-EOR).

Working with Advanced Resources International, a specialist in enhanced oil recovery (CO2-EOR), NRDC forecasts that there would be more than enough additional carbon dioxide available from power plants alone under the Waxman-Markey climate bill to help recover 37bln barrels of this stranded oil from existing oil fields. Enough of an increase in domestic oil output to lower imports as a percentage of total demand to less than 50% by 2023 and to roughly 25% by 2050 (see graph below):

In total, these investment opportunities present a truly unique opportunity for American businesses and the American worker. Congress holds the key to unlocking $10trln in new global markets for American companies through the passage of climate legislation and the sooner they do so the sooner we can get to work "cleaning the world's clock in clean-tech."

Paul Krugman's Affordable Truth Sees Climate Bill Helping Revive the Economy

2009-12-07T16:56:22Z

Today's op-ed column by Paul Krugman, "An Affordable Truth" supports a view that a cap and trade bill designed to dramatically cut our greenhouse gas emissions is “affordable, essential”, and can help our economy recover faster.

The article describes how financial incentives under climate legislation will work to meet our environmental goals. Under a cap and trade program, businesses will be given a free market signal that tells them they will “be able to increase their profits if they can burn less carbon.” A market based approach to addressing climate change which Mr. Krugman argues should be welcomed by “conservatives that claim that the magic of the markets can deal with any problem”.

Mr. Krugman also reviews the cost projections of the House-passed cap and trade bill and finds that “emissions limits would slow the economy’s annual growth over the next 40 years by around one-twentieth of a percentage point — from 2.37 percent to 2.32 percent”. Hardly the doom and gloom projections you hear from conservatives and an amount that likely overstates the actual costs given our history with other cap and trade programs.

Further, “cap and trade” is expected to create the jobs and investment opportunities needed to help our economy recover sooner. Indeed, Mr. Krugman argues that now is an especially good time to start a project like this as “the prospect of climate-change legislation could spur more investment spending” which “is exactly what the economy needs”.

To support this, Mr. Krugman describes how the opportunity under cap and trade to retrofit buildings, when construction costs are low, can help put people back to work and make existing buildings more valuable as demand for more energy efficient buildings increases over time.

These incentive based investments are not just limited to the building sector. Mr. Krugman could have included how cleaner cars, more efficient motors, carbon trapping power plants, and cutting edge wind and solar power technologies, all incentivized under the climate bill, can help re-power the country as well. Efforts that not only make good business sense as they improve the energy productivity of our manufacturing base, but also make good energy security sense as they help drive down our dependence on foreign oil.

Lastly, Mr. Krugman concludes that he is feeling optimistic about the climate talks beginning in Copenhagen this week. That President Obama’s attendance is sending a strong signal that he expects “real progress” on this issue and that we all need to be part of the solution. A solution that “would save the planet at a price we can easily afford.”

The Dollars and Sense in Trading Carbon

2009-12-03T18:57:42Z

The "trade" portion of the cap and trade bill is getting a lot of heat from the left and the right as being just another way for the banks to get rich and leave us with the bill. These concerns are certainly understandable given the fact that the American consumer is still holding the bucket as the government mops up Wall Street's last great idea for a new market. Indeed, the idea of creating a new market for anything would seem completely absurd were it not for the fact that solving global warming is a multi-trillion dollar challenge that cannot simply be met by taxing people into submission.

According to IEA estimates, the world needs to invest an additional $10.5trln in low carbon technologies over the next two decades alone to keep greenhouse gas concentrations limited to 450ppm. In the US, banks are needed to lend over $2trln to cash starved companies from 2010-2030 to help them improve their energy efficiency, develop cutting edge renewable technology, and build the cleaner cars needed to achieve these targets. Investments that will need to be financed by banks and best facilitated through a cap and trade program like the one being put forward in Congress.

The following is a short Q&A about how carbon trading is being set up under the cap and trade bill and why it will be successful in achieving our environmental goals:

Q: Okay, maybe we need the banks to lend, but do banks really need to be involved in the trading side as well? Why can't we just limit trading activity to emitters only?

A: On the face of it calls for an "emitters only" market for carbon trading certainly sounds appealing. Emitters could buy allowances from the government and trade them amongst themselves, allowing us to spend less time on "trading" carbon allowances and more time on "capping" our carbon emissions.

Unfortunately, this system is expected to prove a more expensive option for the consumer and the planet. In an "emitter only" market, trading costs would be high as it would be no ones job to make markets in carbon and all of the participants will have identical needs. Furthermore, if banks are excluded from an "emitter only" market they would be less likely to lend money (as they will be unable to hedge these capital investments), making our reductions targets even harder to achieve.

Q: Fine, but how are we going to stop Wall Street from turning this into a massive profit center?

A: Under the House-passed Waxman-Markey bill, over-the-counter (OTC) trading for carbon emission allowances is banned full stop and all trading is expected to take place on exchanges. This means the banks are not going to be making money from OTC trading in the carbon markets (a cash cow business for them in oil and the other commodities markets). As a result, the banks will be limited primarily to broking on exchanges and income from lending. Sensible, "day job" businesses that will keep the banks from turning the carbon markets into a casino.

Q: But how are we going to keep speculators from driving prices up and down like a roller coaster?

A: I can answer that question in three words, "regulation, regulation, regulation". Congress is drafting the rules for the carbon markets in a way that will help make them the best regulated markets in the country. This means strong position limits, strict oversight, reporting requirements, and the ability to enforce the rules with fines or jail time or both. Rules that will keep speculators in check and help ensure that carbon trading is conducted in a way that is in keeping with the cap and trade program's long-term objectives.

In addition, the "market stability reserve" introduced under the Kerry-Boxer bill will help keep volatility down by injecting additional allowances into the market above a certain price threshold. In a given year, the "market stability reserve will be allowed to auction up to 25% of a year's total cap into the market at this minimum reserve price. This represents four times as many allowances needed to meet the largest percentage increase in carbon emissions since 1990 (adjusted to reflect a 3% declining cap). A wall of additional allowances that can be used to keep speculators in line and keep price spikes from hurting consumers pocketbooks.

In sum, fighting global warming is not just an environmental challenge it is also a massive financial challenge. A $10trln challenge that requires allowances to "trade" on an exchange as a way to best facilitate the loans and investments needed to meet our climate goals. Lastly, Congress is not relying on the bank's word that they will do better next time when it comes to the carbon markets. The rules are being established to keep speculators in check and give the regulator the oversight authority needed to keep this exchange based new market viable over the long term.

Fighting Tomorrow's Battles Today with Climate Policy

2009-12-01T23:48:26Z

"America's current energy posture constitutes a serious and urgent threat to national security"

— Retired Vice Admiral Dennis McGinn, member of the Military Advisory Board

Our dependence on foreign oil poses a threat to our national security that will only intensify as China and India's thirst for oil doubles over the next two decades. A rise in demand that is particularly unnerving when you consider that two-thirds of existing fields are forecast to be no longer producing oil by this time (see graph below):

This combination of rising demand and the need to replace a significant amount of existing oil fields with new finds is expected to accelerate the resource grab we are starting to see take shape around the world. A battle that will inevitably be won by neither the US nor China but by the OPEC nations as they increase output by 11 mpbd and raise their oil-export revenues by a factor of five to $28trln over the next two decades (see graph below):

What is more, these energy and economic risks to our national security do not even take into account the threat posed by increasing global output of CO2 by 40% over the next two decades under business as usual forecasts. Threats that the Military Advisory Board expects to directly impact the effectiveness of our military as 1) weather-related events increase, 2) the scope of naval operations expands due to the opening of the Arctic, 3) US naval bases are potentially abandoned due to rising seas levels, 4) US forces are asked to engage in more humanitarian relief efforts, and 5) a rising number of "failed" states around the world heighten regional tensions.

Reducing our dependence on foreign oil

The best way to address these "serious and urgent threats" to our national energy security is through the passage of energy and climate legislation like the House-passed bill which is expected to dramatically reduce our greenhouse gas emissions and our dependence on foreign oil over the next several decades.

According to a recent studyconducted by NRDC, the House-passed Waxman-Markey climate bill is expected to cut our dependence on foreign oil by 30% by the year 2030 (see graph below):

This is expected to be accomplished through subsidies in the bill to help deploy two important low carbon technologies to scale in the US. The first is the potential to use CO2 captured at coal-fired power plants to recover an additional 20% of the "stranded" oil remaining in existing domestic fields using a common oil recovery technique known as CO2-enhanced oil recovery (CO2-EOR).

Working with Advanced Resources International, a specialist in enhanced oil recovery (CO2-EOR), NRDC forecasts that there would be enough additional carbon dioxide available from power plants alone under the Waxman-Markey climate bill to help recover 37 barrels of this stranded oil from existing oil fields. Enough of an increase in domestic oil output to lower imports as a percentage of total demand to roughly 25% by 2050 (see graph below):

The second way the Waxman-Markey bill is expected to lower our demand for foreign oil is through the accelerated production of cleaner carsin the United States. The Waxman-Markey bill contains over $20bln in re-tooling incentives and $25bln in loan guarantees that can be used to help accelerate clean car deployment and reduce the number of times we need to stop for gas. Under the EIA's Accelerated CAFE modeling of the bill, cleaner cars are forecast to lower oil demand by 0.6 mbpd by the year 2030. A savings that is even expected to drive our gas bills below what they would be without a climate policy (see graph below):

In total, these two programs alone can be expected to lower US demand for imported oil by over 13 bln barrels over the next two decades and put us on a path to 1) cut our demand for foreign oil by 55%, 2) create tens of thousands of new jobs, 3) generate $800bln in oil royalties for states and the federal government, and 4) put the US automotive industry back on track by building the cleaner cars Americans want to drive.

Taking our National Security concerns global

The passage of a climate bill in the US is also expected to set the stage for the passage of a global agreement on climate. As part of the World Energy Outlook, the IEA estimates that establishing a global carbon target of 450 ppm could accelerate the deployment of cleaner cars by enough to reduce global oil demand by 16 mbpd by the year 2030. A decline in global consumption this large would lower oil prices by 22%, cut CO2 emissions by over a billion tons, and reduce petrol dollar flows into OPEC's coffers by around $4trln.

In sum, the global thirst for oil is expected to dramatically increase pressure on global resources over the next several decades. This is bad news for the US energy, economic, and military security and is best addressed through the passage of climate legislation. Climate legislation like the House-passed bill which will lower our dependence on foreign oil and help us address tomorrow's national security threats today.

Cleaner Cars to Drive Down our Gas Bills by 10% under Climate Bill

2009-11-15T18:13:41Z

While the oil lobby continues its gas attack on climate legislation, a recent government study suggests that accelerating CAFE standards under the Waxman-Markey climate bill would actually lower our gas bills by more than 10% over the next two decades (see graph below):

Under the EIA's Accelerated CAFE Case analysis of the Waxman-Markey bill, the average fuel economy of a car on the road is expected to improve by roughly 0.6 mpg over the next two decades. While this may not seem like a lot, the EIA calculates that by the year 2030 these improvements will save over 91 billion gallons of gasoline (see graph below):

In fact, the EIA forecasts that this reduction in oil demand is large enough to reduce imports by 10%, cut our CO2 emissions by over 900mln tons, and actually lower global oil prices by around 3.5% (see graph below):

These benefits from building and driving cleaner cars are expected to allow our gas bills to continue to fall even as oil prices and carbon prices continue to rise. Furthermore, by making fewer trips to the gas station (a benefit in its own right in my opinion), consumers are even forecast to see their gas bills fall below what they would have been without a climate policy in place.

This is not something you are likely to hear from the oil lobby. The oil lobby only wants us to focus our attention on the costs associated with capping our greenhouse gas emissions and does not discuss any of the benefits we are expected to gain from driving more efficient vehicles. If we separate out the carbon costs in a gallon of gasoline from the clean car savings in a gallon of gasoline (using the EIA's data), we find that they largely offset one another and in fact the clean car savings starts to outpace the carbon costs by the year 2026 (see graph below):

Climate Policy will Help Accelerate Deployment of Cleaner Cars

According to EPA estimates, domestic automakers will need to make $56bln in incremental technology investments between the years 2012 and 2016 to meet President Obama's 35.5 mpg CAFE target. A funding requirement that is expected to be recovered through the sale of these more efficient cars and light trucks.

While some of these investments are already in place, the Waxman-Markey climate bil is expected to provide the temporary assistance needed to fully make this transition. Under the bill, the auto companies with have access to over $20bln in re-tooling incentives and $25bln in loan guarantees. Enough investment capital to achieve President Obama's CAFE targets, dramatically improve the competitiveness of domestically produced automobiles, and create thousands of new clean car jobs.

In sum, the EIA's modeling of the Waxman-Markey climate bill shows that investments in cleaner cars can help drive down our gas bills by over 10% under climate legislation. Investments that will help us achieve President Obama's accelerated CAFE targets, cut our CO2 emissions output, reduce our dependence on foreign oil, lower global oil prices, and help create thousands of good paying manufacturing jobs for America's workers. Benefits that will make passing climate policy a clean energy bargain for the American consumer.

Americans are Dying to Support our Fossil Fuel Habit

2009-10-26T06:12:42Z

A new report from the National Research Council of the National Academy of Sciences (NAS) reveals that our energy bills are $120bln higher than they appear due to the "hidden costs" associated with the air pollution created by burning fossil fuels. The NAS report, which was commissioned by the US Treasury on behalf of Congress, estimates that over 90% of these hidden costs are due to premature death, implying that at least 18,000 Americans die each year to support our fossil fuel addiction (see table below):

The report concludes that these estimates are conservative as they do not include any costs related to climate change, national security, other pollutants, or the impacts of mountain top coal mining and that if these other costs were included they would raise the hidden cost of fossil fuels far higher than the $878 per household estimated using the assumptions underlying the NAS report.

Paying for our Fossil Fuel Addiction with Our Lives

According to the analysis, over half of these hidden costs come from the burning of coal to generate electric power. We currently burn over a billion tons of coal each year, releasing millions of tons of dangerous pollutants into the air in the process. The NAS report estimates that the "hidden" costs of these emissions at $62bln per year or around $530 per family on average. For people who live east of the Mississippi River, along the Ohio River Valley, in the Middle Atlantic and the South, however, these "hidden" costs are significantly higher as are the risks that these costs may be "paid" for by a loved one.

The report does note that these hidden costs from burning coal are actually expected to fall somewhat to around $38bln per year by 2030 as cleaner plants come on line. While this is a significant improvement given that coal consumption is expected to rise by 20% in 2030 under business as usual, it still means that over 165,000 Americans are expected to die prematurely due to the production of coal-fired power. It must also be remembered that this trillion dollar "hidden" cost is additional to the effects of producing over 50 billion tons of CO2 pollution from these facilities during this timeframe. Costs that are expected to accelerate the impacts of climate change around the world.

Under climate legislation, however, these hidden costs are expected to decline as coal-fired power is steadily replaced by cleaner alternatives. Indeed, under the government modeling of the ACES climate bill, coal consumption is expected to fall by 50% when compared to business as usual forecasts. This reduction in coal consumption is expected to not only help reduce the number of lives lost from breathing dirty air by the thousands but also lower our cumulative CO2 output from coal plants by around 25% between now and 2030.

The other large source of hidden costs comes from the combustion of transportation fuels. According to the study, air pollution from vehicles costs us $56bln per year ($36bln from light-duty and $20bln from heavy-duty vehicles). This works out to about 29 cents a gallon or roughly $330 per household per year. What is more, tailpipe pollution is not expected to improve over the next two decades according to the NAS report. This means that by the year 2030, the cumulative air pollution damages from burning transportation fuels and coal are expected to exceed $2trln. An extremely high cost of our addiction to fossil fuels given the 340,000 premature deaths this figure represents (see graph below):

Natural gas is the final fossil fuel source of air pollution included in the study with externalized heath costs of around $2.14bln per year ($741mln from electric power and around $1.4bln from heating our homes, offices, and powering our industrial output). This roughly translates into an additional 0.16 cents per KWh of natural gas power if it were included into our fuel bills, adding around $18 per year to household energy costs. While this is a relatively small hidden cost, the overall hidden costs of natural gas with respect to global warming are still significant. Indeed, under climate legislation natural gas is expected to replace coal as our second largest source of CO2 emissions (after transportation fuels) by the year 2030 (see graph below):

In sum, Americans are literally dying by the thousands to support our addiction to fossil fuels. In fact, you and I have a better chance of dying from air pollution than we do from homicide. What is more, while the "hidden" costs highlighted in the NAS study are only a small portion of the overall hidden costs associated with our current energy economy, they present an immediate threat to our friends and family that cannot easily be ignored. Costs that should make us even more vigilant in our efforts to pass strong climate change policy and help create a cleaner energy future.

Senate’s Climate Bill Puts Green Collar on Carbon

2009-10-05T17:48:07Z

Senators John Kerry and Barbara Boxer have introduced a "green" price collar on carbon under their draft climate bill that should be applauded by emitters and environmentalists alike. A green price collar that will; 1) maintain the integrity of the carbon cap, 2) lower price volatility, 3) put a limit on emitter costs, 4) better ensure the program's long term viability, and 5) help to tighten the carbon cap. Best of all, the Kerry-Boxer bill is able to do this by putting market participants to work defending the price collar rather than fighting it.

The Market Stabilization Reserve (Sec. 726 of The Clean Energy Jobs and American Power Act ) would amend the strategic reserve language used under the ACES bill in the following three ways:

First, the Market Stabilization Reserve replaces the ACES price trigger formula with a pre-determined ceiling price that starts at $28/ton in 2012 and rises by an inflation adjusted 5-7% annually. Using this fixed ceiling price in combination with the ACES fixed floor price (which starts at $10/ton in 2012 and rising 5% per year thereafter), the Kerry-Boxer bill looks to create a trading band or "price collar" on carbon allowances values over the life of the program (see graph below):

Second, the Market Stabilization Reserve nearly doubles the number of allowances available to defend the price collar. While the ACES bill limited the strategic reserve to providing an additional 10-15% of allowances established under the cap in a given year to fight price spikes, the Kerry-Boxer bill would increase this amount to 15-25% of the total number of allowances established. An amount of allowances large enough to create a high degree of certainty that the carbon prices will remained contained within the price collar band (see graph below):

And finally, unlike under the ACES bill, the Market Stabilization Reserve may purchase domestic and international offsets to supplement the number of allowances available in the reserve pool. These changes in the strategic reserve language under the Kerry-Boxer bill are expected to lower carbon price volatility and give emitters greater assurance that their carbon costs will be contained within the price collar band.

Furthermore, the Kerry-Boxer bill creates a market based mechanism that encourages market participants to actually work to defend the price collar. A dynamic that is expected to make the Kerry-Boxer price collar truly "green" as this would enable a higher percentage of allowances from the Market Stabilization Reserve to be retired from the program instead of used to fight price spikes.

To illustrate, let's suppose carbon prices in the year 2020 were trading at a price of $43.75, just 5 cents below the $43.80 collar price ceiling. From a market participants point of view, these market conditions create a strong incentive to not only stop buying allowances but actually begin to sell them in the hope that they will be able to buy them back later at lower prices (once market speculators have been driven out of the market).

The reason for this is that at a carbon price of $43.75, a market participant knows two things; 1) that the risk/reward of buying allowances is lousy given the amount of allowances on offer under the Market Stabilization Reserve to defend the $43.80 level* , and 2) the risk/reward of selling carbon allowances is quite good, as market participants also know that the allowances they sell to help reverse the supply/demand imbalance in the market can be covered with minimal cost in the Market Stabilization Reserve auction.

As a result, a market participant is likely to act in a way that protects the price collar from being triggered, creating not only a programmatic benefit by keeping the Market Stabilization Reserve largely in tact, but an environmental benefit as well as more of these allowances can eventually be retired from the program over time.

In sum, the Kerry-Boxer draft climate bill should not only be commended for moving up our target on emissions reductions from 17% to 20% by the year 2020, but for also creating a "green" collar on carbon. A green price collar that will create better cost and program certainty for emitters, while still maintaining the program's long-term environmental integrity under the cap.

* The 1.2 billion allowances available to defend the price collar in this case (the equivalent of 25% of the 4.8 billion allowances established in 2020) is roughly the equivalent of six times the largest annual change in our emissions output over the past two decades. The average change has been around 70 million tons or around 6% of allowances on offer in the Market Stabilization Reserve.

Climate Bill Could Dramatically Increase US Energy Security

2009-09-18T13:11:28Z

One of the key findings from a new NRDC climate policy study is that policies to support CO2 capture and sequestration at power plants and industrial facilities could also help recover almost 37 billion barrels of stranded domestic oil by 2050. This increase in annual oil production using the CO2 from power and industrial facilities could cut crude oil imports by over 55%, create tens of thousands of new jobs, and generate up to $800bln in royalties for states and the federal government. In addition, this increase in domestic oil production could also prevent or delay dirtier fuels from coming to market and help to lower global oil prices as well.

The underlying reason for this potential is that over 60 percent of the oil discovered in the United States, according to Department of Energy (DOE) estimates, is considered "stranded" in the ground and uneconomical to recover using conventional methods. Using a common oil recovery technique known as CO2-enhanced oil recovery (CO2-EOR) however, it is estimated that up to 20 percent more of the original oil in place can be dry cleaned out of existing fields, extending the productive life of these fields by 20 to 30 years. This technique has been used by oil field operators in western Texas, Mississippi, Wyoming and elsewhere for more than 35 years and even though CO2-EOR is constrained by the limited CO2 supply, it is currently responsible for 5% of our domestic oil production. My colleague John Steelman describes this in more detail in his post.

Yet this is just a fraction of the potential of oil that could be recovered with CO2; the DOE estimates that with ample supplies of CO2, there could be as much as 64 billion barrels of domestic oil that could be economically recoverable using this CO2-EOR technique at a price of $70/barrel. Indeed, as Wayne Leonard, CEO of New Orleans-based utility, Entergy, said in a recent BusinessWeek article, demand is so high for CO2 for enhanced oil recovery that "we have people knocking on our doors" looking for more sources of carbon dioxide.

Anyone know where to find some CO2?

Using two well-established national energy models (MARKAL and NEMS) and working with Advanced Resources International, a specialist in enhanced oil recovery (CO2-EOR), NRDC forecasts that there would be enough additional carbon dioxide available from power plants alone under the Waxman-Markey climate bill to increase CO2 EOR production to 2.6 mpbd in the year 2030.

The primary reason for this dramatic rise in domestic CO2 EOR production over the next several decades comes from the impact the climate bill is expected to have on the availability of captured CO2 for sequestration in deep geologic formations, such as depleted oil and gas fields.

In NRDC’s analysis, as well as those by EIA and EPA, much more CO2 will be captured under climate policy than would be needed to develop the full economic potential for CO2-enhanced oil recovery in the U.S. NRDC integrated this CO2-EOR potential into its MARKAL model, which forecasts more than 37 billion barrels of oil to be produced with the CO2 captured as a result of the incentives in Waxman-Markey bill. Without climate policy that drives carbon capture and storage at power plants and industrial facilities this potential could be delayed by as much as 20 years and keep America heavily reliant on imported oil well into the future.

Instead, this double benefit of capturing CO2 at power plants and using it help recover stranded oil under climate policy could provide an important national security benefit as NRDC projects that CO2 EOR would help domestic oil supplies displace imports as our largest source of oil as early as 2023 (see graph below):

Assuming an average price of $70/barrel for the oil recovered, this $2.6trln of additional oil production is expected not only to provide a significant boost to US GDP and provide tens of thousands of new jobs for the oil industry, it would also generate up to $800bln (30% of wellhead value) in oil royalties desperately needed by states and the federal government. In total, CO2 EOR is expected to create a multi-trillion dollar benefit to the American economy over the life of the cap and trade program.

From an environmental standpoint, this additional oil production from existing fields should also be welcome as it will effectively keep dirtier fuels like tar sands, oil shale, and liquid coal from coming to market sooner if at all. For example, industry executives estimate that CO2 EOR is six times cheaper at producing fuel than liquid coal at even current CO2 prices for EOR, which are about $20/ton. This gives oil produced with CO2 from power plants a significant economic advantage over liquid coal and could potentially keep liquid coal technology on the shelf indefinitely.

A final economic advantage to passing a climate bill like Waxman-Markey would be how this increase in domestic oil output could potentially lower global oil prices. Using a conservative price elasticity of demand for oil derived by Gately and Huntington, this increase in domestic CO2 EOR production could reduce the global price for oil by up to 6% in the year 2030 (see graph below), enough to save American's over $315bln at the pump over the next two decades alone*.

In sum, NRDC's modeling results conclude that passing climate legislation is not only good economic, energy, and climate policy but it is good oil security policy as well. Domestic oil produced using CO2-EOR techniques could rise ten fold under policies that increase the supply of available CO2 from power plants and industrial sources. If this were to happen, CO2 EOR would ultimately displace imports as our largest source of oil and help domestic production rise to 73% of our total consumption by the year 2050.

Further, the 37 billion barrels of recoverable oil forecast in the model under Waxman-Markey would produce a multiple of the amount of oil that Newt and his buddies expect to be gained from drilling in the Arctic National Wildlife Refuge and other protected offshore sources, and does it in a way that would help us achieve true energy independence.

* Using EIA estimates for oil consumption in the AEO 2009 Stimulus Case forecast

This blog post was co-written with my colleague John Steelman.

Strong Regulation to Keep Carbon Markets Program Viable

2009-09-15T05:22:28Z

In a recent WSJ article entitled "Cap and Trade: Recipe for Disaster", Louisiana State University economist Joseph Mason outlines his concerns that special interests have already taken control of the European carbon markets and that the US carbon markets are unlikely to fair any better. That given the poor performance of Federal Reserve in preventing blow ups like Enron and AIG, even a Fed-like regulator for the carbon markets will not be enough to keep a cap and trade program viable over the long term. Instead, he recommends in a recent paper that Congress abandon the idea of a cap and trade program in favor of a more “elegant” carbon tax.

Putting aside the challenges of creating a carbon tax, Professor Mason’s concerns that a carbon market would be too difficult to oversee is worthy of further discussion.

Professor Mason is correct in arguing that without strong regulations in place, the carbon markets would be prone to the same kind of wild price fluctuations seen in other markets today. However, he fails to see how creating a new market from scratch gives us the ability to avoid these market excesses. For example, under the Senate’s carbon market oversight proposal, the carbon regulator would create an exchange based market where speculators are required to adhere to strict position limits and reporting requirements. These requirements are expected to effectively ban the "dark" or unreported trading practices that have plagued the other derivatives markets and lower carbon price volatility over the long term. The ACES climate bill would pass similar measures for the energy commodities, driving down price volatility in these markets as well.

Further Professor Mason’s assertion that “special interest have already succeeded in “capturing” the European carbon markets program” also lacks merit. While the EU carbon markets have been subject to two crashes over the past five years, both of them were one-time experiences that won’t be repeated here. The first price crash was caused by an over-estimation of emissions by market participants. This won’t happen in the US because we will have the emissions data ready at the get-go. The second price crash was caused by the fact that the allowances in their trial period became worthless at the end of the trial. This also won’t happen in the US because all allowances will be bankable for use in future compliance periods.

Although Professor Mason also refers to the recent price volatility in the European carbon markets as "extreme", if anything these markets are demonstrating that they aren't being pushed around by market speculators. Currently, 80-90% of trades are either cleared through or take place on registered exchanges. The remaining trades are non-reported OTC trades which are small in scale, tailored to meet specific emitter needs, and do not have a large influence on day to day market prices. Further, the European carbon markets themselves are behaving as we would expect them to behave, rising when economic growth is running above trend, and falling when economic growth is running below trend (see graph below). This counter-cyclical behavior compares favorably to a carbon tax which would not be nearly as flexible in meeting the challenges of the business cycle.

In sum, while Professor Mason is right to highlight the urgency of assuring the carbon markets, his arguments don't support his conclusion that a carbon regulator would not be effective in supporting the cap and trade program. A Fed-like carbon oversight committee, like the one envisioned in the Senate climate bill, creates regulations that can protect the carbon markets from excessive speculation and allow us to meet our long term environmental goals.

Sage Words on Climate: Buffett and the Butterfly Effect

2009-08-23T20:46:16Z

In an NYT op-ed column this past week titled "The Greenback Effect," Warren Buffett voiced his concern that unchecked government spending by Congress is "spewing a potentially damaging substance into our economy" known as "greenback emissions". According to Mr. Buffett these so-called "greenback emissions", which presumably rise out of the smokestack of the US Treasury, are dangerous to the financial integrity of the economy as they can create "butterfly effects" similiar in their unpredictabiilty to carbon emissions. Butterfly effects that could one day "melt" the value of our currency in the same way that "unchecked carbon emissions are likely to melt the icebergs".

While Mr. Buffett was clearly talking about carbon emissions as a way to illustrate how rising budget deficits can carry unintended, unpredictable consequences, the parallels he draws between our fiscal deficit and our carbon deficit are worthy of a more detailed discussion.

Like our national deficit, our carbon deficit is rising at a pace that is unsustainable over even the short run. As Mr. Buffett notes, our budget deficit is currently rising at a pace of 185% of tax receipts. A level of increase that must be reigned as soon as possible before it creates an undue burden on future generations.

This same case can also be made for our carbon deficit, which is growing at an even more alarming rate. At the current pace of emissions, we are expected to be committing the planet to a 2 degree Celsius rise in surface temperatures as early as the year 2035*. Such a rapid temperature increase is expected to create profound financial as well as strategic challenges for the US. From food and water shortages to rising seas levels to a sharp increase in the number of "failed" states around the world, climate change carries both economic and military security risks that are extemely hard to quantify, even for the Pentagon.

Another parallel between these twin deficits is that they both can be addressed by following progressively tighter targets over time. In the case of our budget deficit, Mr. Buffett recommends that Congress rein in spending and increase tax revenues as a way to tighten our belts. In terms of our carbon deficit, Congress is looking to set a declining cap on the cumulative amount carbon we can emit into the atmosphere from now until the year 2050. This declining carbon budget is expected to drive down our carbon deficit, and would also make Mr. Buffett happy by reducing our balance of payments deficit through enhanced energy independence.

A final parallel is the role the Chinese play in both these debates. If we wish China to become more active in our debt markets, Mr. Buffett insists that we need to avoid the temptation of the printing press and begin to demonstrate that we are committed to taking responsibility for our budget deficit. This same approach also applies to our carbon deficit. If we wish China to become more active in solving global warming, we need to demonstrate that we are committed to passing climate legislation sooner rather than later.

In sum, Mr. Buffett's article draws an interesting parallel between the uncertain costs or "butterfly effects" of climate change and that of our rising national debt. While Mr. Buffett has argued that Congress must show the political will to cut our "greenback emissions" in order to save the dollar, it seems the same arguments can be made to get Congress to cut our carbon emissions through climate legislation in order to save the planet.

* Assuming a 1.5% average annual increase in global emissions, concentrations of greenhouse gases are expected to reach 550 ppm CO2e by the year 2035 and commit us to a minimum rise in surface temperatures of 2 degrees Celsius (Stern Report pages 193-202).

Energy Reforms Critical for Assuring Carbon Markets

2009-08-12T22:51:51Z

A new report to be released later this month by the U.S. Commodity Futures Trading Commission (CFTC) is expected to reveal that contrary to their previous findings, speculators were in fact to blame for generating a "significant" amount of the price volatility in the oil markets last summer. In response to these new findings, the CFTC's new Chairman Gary Gensler has concluded that the CFTC needs to institute a series of reforms designed to reign in this kind of speculative activity. While Mr. Gensler's solution of creating position limits for exchange traded energy futures looks like a step in the right direction, the CFTC needs the authority to go farther.

Indeed, Congress needs to pass legislation that would allow the CFTC to expand its authority by setting position limits and reporting requirements for all trading that takes place in the energy markets. Oversight provisions that would effectively ban the "dark" or non-reported trading practices that have allowed speculators to ply their trade from the shadows without detection for far too long.

Congress could accomplish this by passing the ACES climate bill, which already includes a series of energy market reforms that would allow the CFTC to set strict position limits and requires all "dark" trading to come into the light. Reforms that would also help provide lower price volatility in the carbon markets and provide the kind of long-term market assurances needed to keep a cap and trade program viable over the long term.

The following is a check list for Congress to consider in creating meaningful position limits for the energy markets:

1. Position Limits need to be Inclusive

The CFTC's proposal to create position limits in the energy markets need to include trades that take place in both the exchanged traded as well as over-the-counter (OTC) traded markets. Creating position limits only for exchange based trades would only encourage more trading to take place in the "dark" markets and leave the regulator more in the dark themselves as to what's going on.

By requiring position limits to be inclusive of both OTC and exchange trading markets, participants would be forced to comply with aggregate position limits rather than simply switching their trading to the OTC swap market to avoid compliance like the U.S. Natural Gas Fund did earlier this year.

2. Position Limits need to be Enforceable

Even if the CFTC agrees to create aggregate position limit for the energy markets, it does not have the authority to enforce them. OTC trades in the energy market are exempted from regulatory oversight and these exemptions would need to be repealed if the CFTC is going to be able to require that trades are reported into the regulator to help them track aggregate position limits.

Congress can help the CFTC fight "dark trading" in the energy markets by passing legislation similar to the energy reforms suggested in the ACES climate bill. These provisions would set strict reporting requirements for all participants in the energy markets and provide a number of other regulatory reforms that would help put speculators on notice that their days of running rough shod over the energy markets through "dark trading" are numbered.

3. Position Limits need to be set at an Appropriate Level

Another important requirement to be considered is the level of the position limit itself. As a rule, position limits should reflect the amount of time needed to unwind a given position without becoming disruptive to the markets. Under normal market assumptions (which of course are rare), a position size of say 5% would generally require 10 days to unwind without becoming disruptive to the markets - a position size of 10% would require roughly three to four weeks and a position size of 15% or more would require one to two months and would not be able to be unwound without having a material impact on market prices.

It is in this context that a relatively low position limit is favored for the energy markets. The CFTC already has experience setting low position limits for the agricultural commodities and similar limits are encouraged to be developed for the energy markets as well. The carbon markets under the ACES bill for example would carry the same speculative position limit as an agricultural commodity like wheat, which has a speculative limit of roughly 2% of the markets open interest.

4. Strict Reporting Requirements Would Ban "Dark Trading"/ Reduce Credit Risks

By creating strict reporting requirements for all energy transactions, Congress would effectively be banning "dark trading" as it is currently being conducted today. Speculators would no longer be able to rely on the anonymity of the OTC markets to disguise their trades, making their games less effective in pushing around prices in these markets.

These requirements could be enhanced by requiring all transactions to be cleared through a registered exchange. In this way, the CFTC would be able to almost eliminate credit risk from energy trading and lower price volatility in these markets even further.

In sum, the US consumer has paid a high enough penalty for poor market oversight in the energy markets. The CFTC has acknowledged that more needs to be done to reign in speculation but their suggestion of position limits should only be considered a half-measure as it is currently proposed. Position limits need to be inclusive, enforceable, and appropriate to the markets and Congress can ensure that these requirements are met and that "dark" trading is banned by passing energy market reform provisions similar to what are already included as part of the ACES climate bill.

A Price Collar Won't Protect the Carbon Cap

2009-07-28T22:02:19Z

A brief Politico article last week titled "Time for a Price Collar on Carbon" argued that a price ceiling should be included in the Senate version of climate legislation as a way to better ensure the bill's passage. While the authors of the article believe a price ceiling is necessary to get the bill over the finish line, they fail to weigh the costs a price ceiling would impose on 1) the cap's integrity; 2) low carbon investments; 3) the price of carbon allowances in later years; and 4) our ability to negotiate a binding global agreement on emissions reductions over time.

Simply put, the cap and trade program is designed to limit our cumulative emissions over the period from now to 2050 through a declining cap. If a cap and trade program were to allow emitters to ignore the cap, and buy an unlimited number of carbon allowances at a ceiling price, we would be forced into making one of two bad choices. Either we would have to abandon our emissions budget, leading to more dangerous climate change, or we would have make much steeper emission reductions in the future, causing the program to be much more expensive than necessary.

While the authors argue that the cost containment provisions used under the ACES bill are "merely moving stringency from one year to another without actually limiting the overall cost" of the program, they are not taking into account the cost savings generated by accelerating low carbon investment under a market based approach. Lower carbon prices under a price ceiling may save emitters money in the short run, but they would be doing this by sending a false price signal to the market, delaying the low carbon investments needed to grow clean jobs and keep carbon prices low over the long term.

Lastly, creating a price ceiling in the US would also make securing a global agreement on carbon emissions more difficult as the rest of the world would demand that they be allowed to abandon their emissions budgets as well.

In sum, putting a price collar on carbon emissions would serve to limit the integrity of the cap, reduce investment, make securing a global agreement more problematic, and leave us with expensive carbon debt that could only be paid back by raising carbon prices over the long term and should be avoided under cap and trade legislation.