Cap and Trade: What’s the Deal?by Jeff Burkhart

Jeff@BurkhartAndBurkhart.com

July 8, 2009

Liberty Lecture Series #1Walla Walla Tea Party Patriots presents

Topics• Introduction• Assumptions• What is it? How does it work?• Highlights of the Waxman-Markey bill• Possible effects• Alternatives• Q&A

Introduction

• About Jeff and Andrea Burkhart

Jeff@BurkhartAndBurkhart.com

(509) 529-0630

6½ N. 2nd Avenue, Suite 200Walla Walla, WA 99362

Jeff Burkhart•Business / Commercial•Estate Planning•Torts / Insurance•Elder Law

Andrea Burkhart•Water Law•Real Estate•Construction•Estate Planning

Introduction

• About Jeff and Andrea Burkhart• About the Walla Walla Tea Party Patriots

• Kudos to leadership• Education• Legislative activism• Values

AssumptionsFor today’s Liberty Lecture

Assumptions

• Global warming is real.• It is bad.• It is caused by the greenhouse

effect.

Source: http://en.wikipedia.org/wiki/File:Greenhouse_Effect.svgData source: http://www.geocraft.com/WVFossils/greenhouse_data.html

Assumptions• Global warming is real.• It is bad.• It is caused by the greenhouse

effect.• Man-made greenhouse gases are

a major culprit of global warming.

Data source: http://www.geocraft.com/WVFossils/greenhouse_data.html

Assumptions

• Global warming is real.• It is bad.• It is caused by the greenhouse

effect.• Man-made greenhouse gases are

a major culprit of global warming.• Reducing man-made greenhouse

gases will reduce global warming.

Why make these assumptions?

Why make these assumptions?

The Goracle has spoken!

Image source: http://www.politicalforum.com/current-events/83429-cei-releases-global-warming-study-censored-epa.html

Cap and Trade What the heck is it?

Cap• Government establishes a limit, or

cap, on the amount of a pollutant that can be released into the atmosphere.

• Companies receive credits that allow them to release a certain amount.

Credits for CO2 are issued in units of metric tons• 2204 pounds• A volume of 25 by 10 by 2 meters

– about an Olympic-sized swimming pool

Trade• Companies that reduce their

emissions will have excess credits.• They can then sell these credits to

other companies that can’t or won’t reduce their own emissions.

Over time, the government gradually reduces the “cap” thereby reducing the total amount of the pollutant released into the atmosphere.

Cap and Trade in Pictures

Let’s say the government allocates 5 credits to a given industry.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Cap and Trade in Pictures

Company A buys (or is given) 3 credits, and Company B buys (or is given) 2.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Cap and Trade in Pictures

Later, the government lowers emissions standards, so only 4 credits are available.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Cap and Trade in Pictures

Company B has reduced its emissions, so it has an excess credit.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Cap and Trade in Pictures

Company A has not reduced its emissions. Due to the lower cap for the industry, it needs another credit.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Cap and Trade in Pictures

Company A can buy Company B’s excess credit. Through a credit exchange marketplace.

Image source: http://www.bravenewleaf.com/environment/2008/02/cap-and-trade-p.html

Alternatively, Company A could mitigate or purchase offsets.

MitigationDo something good to make up for

doing something bad.• Plant trees• Plant winter crops• Change tillage practices (to reduce

fertilizer)• Sequester carbon

OffsetsCredits purchased that represent

funding of mitigation and emission reductions• Purchase an non-covered person’s

reduction• Invest money in a trust to buy more

forest land• Most offsets rules TBD by the EPA• Will include international options

Anybody wanna buy some forest in Nairobi?

It’s not new• Kyoto Protocol – international treaty (U.S. is not a member)

– member states voluntarily adopt a cap-and-trade program for CO2– Kyoto will expire in 2012.

• Something will replace it….more on that later.• European Union Emissions Trading System

– Mandatory for members– Regulates carbon emissions

• Regional carbon cap-and-trade programs in U.S.– Regional Greenhouse Gas Initiative – several Northeastern states and Canadian

provinces signed a compact to establish a cap and trade program.– Western Climate Initiative – Washington, Oregon, California, Arizona, New

Mexico, and two Canadian provinces signed a compact to establish a cap and trade program.

– *Note: Waxman-Markey would expressly supersede any state or regional cap and trade program.

It’s not new• 1990 Clean Air Act

– Established a cap and trade program for sulfur dioxide and nitrogen oxide, pollutants that cause acid rain.

– Sulfur dioxide emissions are down 41% since the 1990’s– The program is generally considered quite successful– The actual cost of reduction amounted to ¼ of the predicted cost.

Highlightsof the

Waxman-Markey climate bill

Who are Waxman and Markey?

Congressman Edward Markey (D), representing the Seventh Congressional District of Massachusetts

Congressman Henry Waxman(D), representing the Thirtieh Congressional District of California

What it’s called

Waxman-Markey• aka H.R. 2454• aka American Clean Energy and Security Act• aka ACES

Highlights

• Sets cap on greenhouse gas emissions– Baseline: 2005 levels– 3% reduction by 2012; – 83% reduction by 2050

• Establishes emission allowances– 29% auctioned first year; – 17% auctioned in 2019; – up to 70% auctioned in 2031; – rest given away

Other Provisions

Requires utilities to have a portfolio of 20% renewable energy sources and energy efficiency by 2020– 6% by 2012– Washington gets 72% of its electricity from

hydropower and 2% from other renewable• Hydropower only qualifies as renewable if fish passage and

other environmental factors are met– U.S. portfolio now: 50% coal, 20% nuclear, 15%

natural gas, 6% hydropower, 6% petroleum, 2% renewable

Source: http://apps1.eere.energy.gov/states/electricity.cfm/state=WA#fuel

Other Provisions

• Mandates new energy efficiency standards for homes and appliances

• Establishes Carbon Storage Research Corporation– Created by referendum submitted to utilities– Non-governmental corporation established for

research and development of carbon sequestration– Funded by mandatory assessments on utilities

• Anticipated budget of $1 billion per year

Other Provisions

• Gives tax credits and/or rebates to low-income electricity consumers

• “Cash for clunkers” provision• Expanded government programs in EPA, DOE,

Commodity Futures Trading Commission

Who voted for it?

Which WA Congressmen voted for this? More like which didn’t: Doc Hastings and Cathy McMorris Rodgers.

All the folks on the west side voted for it.

Possible Effects

Economy and Environmenton the

Effects on the Economy

• Increased energy costs, especially over time– Cost of purchasing allowances– Cost of meeting 20% non-carbon

energy mandate by 2020

Effects on the Economy

• Widely varying estimates of impact – from $80 per household to over $3,000 per household, per year

• Congressional Budget Office has previously estimated that a cap and trade program for carbon would cost each household $1,600 per year

Effects on the Economy

• However, it is assumed Waxman-Markey will have less impact because– Less cost increase due to ability to

purchase offsets– Revenues will be redistributed to

energy consumers– Mandate: Utility providers who get

free allowances must pass on the savings to consumers

Effects on the Economy

• It is critical to recognize that increased energy costs are the point of cap and trade legislation.– “Price increases would be essential to the

success of a cap-and-trade program because they would be the most important mechanism through which businesses and households would be encouraged to make investments and behavioral changes that reduced CO2 emissions.”

Terry Dinan, Congressional Budget Office, testifying before Congress on March 12, 2009.

Effects on the Economy

• It is critical to recognize that increased energy costs are the point of cap and trade legislation.

Electricity prices would necessarily skyrocket.

Electricity prices would necessarily skyrocket.

Barack Obama, San Francisco Chronicle interview, January 2008.

Increased energy costs are the point.

Effects on the Economy

• Impacts to manufacturing– Goods will cost more to produce– Job loss– Efficiency costs

• Accounting• Reporting

Effects on the Economy

• Cost benefit analysis appears poor– One analyst has calculated that

Waxman-Markey will cost ten times more than the environmental benefits.

Source: http://theamericanscene.com/2009/05/20/waxman-markey-cost-benefit-analysis

Effects on the Environment

Agricultural exemption problematic from environmental perspective– Agriculture responsible for approximately ¼ of

nation’s GHG emissions

Effects on the Environment

Offsets as a reduction strategy is problematic environmentally and economically– Emitters don’t have to change their behavior if they invest

in carbon reduction strategies– Unlimited banking

• buy cheap carbon allowances now, save them for later

– Availability of offsets will make carbon allowances less valuable – therefore, they will generate less revenue for government

– Offsets may not result in true emissions reductions

Effects on the Environment

Geologic sequestration– Potentially hazardous

• Groundwater contamination• Asphyxiation

– Waxman-Markey’s emphasis on geologic sequestration could actually encourage coal energy

• Because “clean coal” will be heavily subsidized by the government

Effects on the Environment

Geologic sequestration– “The goal of carbon sequestration is to permanently

store the carbon dioxide, permanent meaning very, very long-term, geological time periods.''

- Sally Benson, Professor, Department of Energy Resources Engineering, Stanford University.

Sounds like…

Yucca Mountain!

But, will it work?

• Analyst using MAGICC (U.S. Government climate modeling program) predicts that the effect of Waxman-Markey in 100 years will be … - 0.1º Celsius.

• This may explain why …

Even Greenpeace opposed Waxman-Markey.

Source: http://www.greenpeace.org/usa/press-center/releases2/greenpeace-opposes-waxman-mark

Winners and

Losers

Winners

Credit Exchanges– Existing trading enterprises from Europe (Kyoto

signatories)– Gore’s company– Wall Street

Waxman-Markey is just first step into joining into an international cap and trade credit exchange market under the Kyoto protocol.

• Kyoto will expire in 2012• New global agreements will come out of Copenhagen in December 2009.

Winners

Enviromental funds and groups will get money from companies buying offsets.

Companies doing alternative energy technologies, like wind and solar

“Green jobs”But, every “green job” created with government money in Spain over the last eight years came at the cost of 2.2 regular jobs, and only one in 10 of the newly created green jobs became a permanent job.

Source: http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf

Winners

Federal GovernmentEPA

Winners

Agriculture– Even though U.S. agriculture is huge CO2 source

– N2O (fertilizers)– Methane (livestock )

– Gets a free pass, allowed unlimited GHG emissions• Regulations, if any, will come from the USDA

– AND, plant mass is counted as a valuable “mitigator”

• Forest and farm land values will rise

Winners

Americorp– Huge grants to study green energy jobs will

probably go there.

And, oh yeah…

Winners

$25 Billion more for car companies

Losers

Losers

Coal CompaniesNuclear power industry

–Waxman-Markey specifically defines Nuclear power as not renewable

Tech –2% of U.S. electricity is used by data

centers

Losers

All consumers of electricity–Prices will go up, only questions are

how much, and how fast

Alternatives to Cap and Trade

Nuclear power Carbon taxGasoline tax

http://blogs.forbes.com/digitalrules/2009/06/waxmanmarkey-flunks-math.html

Or…

Do Nothing.

Cap and Trade: What’s the Deal?by Jeff Burkhart

Jeff@BurkhartAndBurkhart.com

Liberty Lecture Series #1Walla Walla Tea Party Patriots

Cap and Trade: What’s the Deal?by Jeff Burkhart

Jeff@BurkhartAndBurkhart.com

Liberty Lecture Series #1Walla Walla Tea Party Patriots