The much anticipated energy and climate bill from Senators Graham (R-SC), Kerry (D-MA) and Lieberman (I-CT) appears close to a public unveiling. So far there is an 8-page outline of the legislation that was reportedly provided to captains of industry such as the US Chamber of Commerce in a recent closed-door meeting, but this document has not as of yet been made public. A bill should be released to the public within days. There are a wide variety of issues that will make or break this bill in terms of achieving enough votes to pass the Senate. Here are 3 key issues to watch while assessing political feasibility:
1. A Cap Here, A Tax There
All reports indicate that the bill will take a sector-by-sector approach to the energy and climate challenge. The sector approach is a departure from the House bill passed last year that set an economy-wide cap on emissions. Electric utilities and the manufacturing sectors will undoubtedly still fall under some revised version carbon emissions limits. The political challenge will be ensuring that the emission caps are indeed hard caps while providing ample incentives to ensure industry buy-in. Other sectors will face different strategies to reduce emissions. Recognizing complaints from oil & gas constituents with a cap and trade approach, a carbon tax on transportation fuels is the likely alternative for this greenhouse gas intensive sector. A key political challenge will be finding the right approach for setting the price of such a tax based on factors including price of carbon in other sectors and carbon content of fuel. It is safe to say that a sector approach may bring on more votes. However, the corresponding environmental integrity of the US approach to reducing carbon emissions will be under close watch.
2. Avoiding Fears of “The Big Short”
The cap and trade approach found in the Waxman-Markey bill allowed for limited but generally unfettered trading of carbon allowances and offsets in the capital markets. Given the current economic crisis precipitated in large part by unregulated Wall Street derivatives trading, there is angst in the Senate with unwieldy carbon markets. At the same time, the flexible carbon market approach would allow regulated entities an efficient cost-containment strategy. It will be a challenge to thread this needle in a manner that meets both concerns and maintains environmental integrity. It is anticipated that limited carbon market trading will be part of the bill but that elements of the “cap and dividend” model put forward by Senators Cantwell (D-WA) and Collins (R-ME) will also be incorporated. Under “cap and dividend,” only regulated entities (not Wall Street traders or speculators) are allowed to participate in the auctioning of allowances, and a certain percentage of the auction revenue goes directly to consumers in the form or rebates.
3. Clean Energy: Eye of the Beholder
There will be separate sections/titles in the bill that advance an energy security agenda for the United States. These sections will include coal, renewable energy, nuclear energy, offshore and onshore oil & gas drilling, agriculture and oil refining. Some of the real tough political challenges will fall into this part of the bill. Vastly increasing offshore oil drilling may bring on board some Senators, but will certainly alienate others with environmental constituents. Likewise setting renewable energy targets might set the United States on a lower carbon path, but if the bill avoids adequate complementary incentives for natural gas, nuclear and carbon capture & storage, it will undoubtedly face regional opposition from Southeast and the Midwest Senators. As an example, Senator Graham has floated a “Clean Energy Standard” in place of a national “Renewable Energy Standard,” but it remains to be seen where the trio of Senators land on this issue.