TCS Daily

Money for Nothing,
Chits for Free

By Marlo Lewis - December 5, 2002 12:00 AM

Today and tomorrow, in Chicago, the U.S. Department of Energy (DOE) will hold its second public meeting on President Bush's plan to award "transferable credits" to companies that reduce emissions of greenhouse gases. If this workshop is anything like the Nov. 18-19 event in Washington, D.C., the sponsors will have no satisfactory answers to such key questions as:

  • Won't companies who receive regulatory credits for greenhouse gas (GHG) reductions have a profit motive to lobby for compulsory controls like those contemplated by the Kyoto Protocol? If the Administration opposes Kyoto, then why is it building a pro-Kyoto business clientele?

  • What specific provision of law allows the Administration to use the Voluntary Reporting of Greenhouse Gases Program, established under section 1605(b) of the 1992 Energy Policy Act, to award regulatory credits for GHG reductions? Shouldn't federal officials first clearly demonstrate they have the legal authority to do something before inviting the public to help them do it?

  • Aren't most corporations who back this plan seeking windfall profits for "anyway tons" - monetary rewards for reducing (or "avoiding") emissions they would reduce (or "avoid") anyway? Which companies will make out like bandits under a crediting program, and which will get fleeced?

Journalists and others who raise such questions at the Chicago workshop will be doing a public service, because the federal government cannot award credits for GHG reductions without corrupting the politics of U.S. energy policy.

Growing the Greenhouse Lobby

GHG credits attain full market value only under a mandatory, Kyoto-style emissions "cap" or reduction target. In effect, GHG credits are Kyoto stock - assets that mature and bear dividends only if the U.S. government ratifies Kyoto or enacts a comparable regulatory regime. Thus, if implemented, the Administration's plan will expand and mobilize corporate lobbying for Kyoto and kindred energy rationing schemes. Yet the Administration professes to oppose Kyoto. Moreover, any form of energy rationing is contrary to the President's National Energy Policy goal of securing new supplies of affordable energy for the American people. What's going on here?

At the Nov. 18-19 Washington, D.C. workshop, Administration officials gave a "we'll cross that bridge when we come to it" response when challenged about their legal authority to award credits. One DOE official argued that confronting the legal question now would be "putting the cart before the horse," because the Administration can't know what additional legal authorities might be needed until the crediting system is built. This is exactly backwards. The Administration has invited everybody and his brother in the energy, manufacturing, and transportation sectors to help them devise a crediting system. The Administration has no business encouraging U.S. companies to spend time and resources on a project before it convincingly demonstrates its legal authority to complete the project.

It is astonishing that anyone familiar with these matters would even suggest that section 1605(b) of the 1992 Energy Policy Act, or any other provision of law, authorizes the Administration to award regulatory credits for emission reductions. Section 1605(b) is less than one and a half pages long. Anyone who reads it can see for himself that it makes no reference, or even allusion, to transferable credits.

When House and Senate conferees adopted the final version of the 1992 Energy Policy Act, they considered and rejected House-passed language that would have established a crediting system under section 1605. Proponents might retort that 1605(b) as enacted does not expressly prohibit DOE from awarding credits. But as the Supreme Court has emphasized, "Few principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language it has earlier discarded in favor of other language."

During the 105th and 106th Congresses, Senators John Chafee (R-R.I.) and Joseph Lieberman (D-Conn.) introduced legislation to transform the 1605(b) reporting program into a "credit for early reductions" program. The Chafee-Lieberman legislation was intensely controversial, and never mustered anything approaching majority support. Chafee-Lieberman gained only 12 co-sponsors on its second go-round. Representative Rick Lazio's (R-N.Y.) House companion bill attracted just 15 co-sponsors. Neither bill ever came to a vote in committee, much less on the House or Senate floor. The notion that Congress implicitly enacted the substance of those bills seven years earlier, when it adopted section 1605(b) of the 1992 Energy Policy Act, is preposterous.

If, as the Administration seems to believe, section 1605(b) already provides authority for transferable credits, then why did Senator Lieberman champion credit for early reductions legislation in the 105th and 106th Congresses? Indeed, since President Clinton and Vice President Gore also advocated credit for early reductions, why didn't Clinton and Gore institute a crediting system via administrative action? How come Senator Lieberman never called upon the Clinton-Gore Administration to award credits under existing 1605(b) authority?

There is only one reasonable answer to those questions - neither Senator Lieberman, nor Messrs. Clinton and Gore construed section 1605(b) in the loosey-goosey way the Bush Administration seems to interpret it.

Windfall Profits for "Anyway Tons"

So why is the Bush Administration pushing this pro-Kyoto, legally dubious initiative? Corporate lobbying is certainly a factor. Several major companies expect to reap windfall profits for "anyway tons." For example, the Nuclear Energy Institute (NEI) argues that nuclear power plants "avoid" carbon dioxide (CO2) emissions that would otherwise occur if the electric utility sector tried to meet public demand solely through fossil fuel-fired generation. "In 2000, the last year for which data exists, U.S. nuclear power plants avoided the emissions of 174.4 million metric tons of carbon," NEI claims.

Let's consider how NEI member companies might profit from a crediting scheme. The U.S. average annual reduction target under the Kyoto Protocol is 558 million metric tons carbon equivalent. If the Administration decides to count "avoided" emissions as reductions, and if NEI member companies continue to "avoid" 174.4 million metric tons carbon equivalent per year, then NEI members will be entitled to hold 31 percent of total U.S. emission allowances under the Kyoto Protocol. Clearly, a credit scheme has the potential to transfer billions of dollars from non-nuclear generators and other industry sectors to NEI member companies. And all because NEI members split atoms for a living!

A review of industry comments submitted to DOE on the crediting plan shows a pervasive pattern: Companies seek windfall profits for doing (or not doing) what they would do (or not do) anyway.

  • Aluminum companies want credits because they recycle aluminum for a living (recycling "avoids" emissions because it is less energy intensive - and also cheaper - than using virgin metal). These companies also want the government to credit them (not automakers or auto buyers) for the emissions "avoided" when cars built with aluminum rather than heavier steel components get more miles to the gallon.

  • Waste-to-energy (WTE) companies want credits because they burn trash for a living (trash combustion "avoids" methane emissions from decomposing landfills). One such company, Covanta, believes WTE companies should get credits for burning trash as far back as 1974, i.e., before global warming was even a gleam in Al Gore's eye.

  • ISG Resources, Inc. wants credits because it sells coal combustion products for a living (when fly ash is used to make concrete, it can substitute for cement and, thus, "displace" CO2 emissions that might otherwise be produced by cement makers).

  • Forest and paper companies want credits because they grow trees and burn wood for a living (trees "sequester" carbon and using wood as bio-fuel reduces the company's demand for electricity generated from more carbon-intensive fuels like coal).

In all of these cases, a company or industry group seeks to corner a valuable commodity (an emissions credit, after all, is an authorization to use energy) for actions that are economically motivated and have little or nothing to do with any environmental concern. Worse, the companies want credit not for reducing emissions but for "avoiding" or "displacing" emissions that would occur only under a hypothetical set of conditions that does not exist.

Consider Ref-Fuel, a waste-to-energy company. Ref-Fuel admits that it cannot identify either "the specific landfill that is not built to receive the waste," nor "the fossil fuel capacity that is not built due to decreased demand." Nonetheless, Ref-Fuel still believes it is entitled to credits for "avoided" emissions. However, waste-to-energy production is not the only way to avoid methane emissions from landfills. Landfill methane gas can be captured and either (a) "flared" or (b) burned to generate electric power. To make good its claim to deserve credits, Ref-Fuel must not only identify the specific landfill or coal-fired capacity that is not built. It must also identify the methane recovery or landfill generation facility that would not be built even if Ref-Fuel quit burning trash.

In a few cases, identifying avoided emissions is less problematic, as when a manufacturer installs a combined heat and power (CHP) plant and, thus, reduces its demand for electricity from the local coal-fired power plant. However, utilities are leading the charge for a credit program, and some of the biggest (American Electric Power, Cinergy, Detroit Edison) want a "default rule" that awards the credit to them when a manufacturer reduces their emissions by installing a CHP plant. They are willing to let the manufacturer "contract around" the default rule - but guess which firms will hold the whip hand in such negotiations?

Incidentally, Cinergy believes that reporting of creditable emission reductions "should not be subjected to independent third party review." How convenient for a utility that considers it appropriate for utilities to take credit for other companies' energy efficiency investments.

It is not hard to understand why some companies want a money-for-nothing, chits-for-free climate initiative. But why on earth should the Bush Administration promote this recipe for corporate rent seeking and pro-Kyoto regulation, especially when it doesn't have a legal leg to stand on?

Marlo Lewis is a Senior Fellow at the Competitive Enterprise Institute

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