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Questions and Answers About the Climate Stewardship Act


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  1. How would the Climate Stewardship Act limit global warming pollution?
  2. What pollutants and what entities would be covered?
  3. How would the bill's "cap and trade" system work?
  4. How would allowances be allocated under the Climate Stewardship Act?
  5. How would a covered entity obtain allowances?
  6. Why give allowances to the Credit Corporation? Why not give all of them to covered entities?
  7. Why should the Climate Change Credit Corporation give some allowances to encourage energy efficiency, renewables, and cleaner power?
  8. Why give allowances for transition assistance?
  9. Why use allowances to encourage coal gasification and underground carbon storage and to encourage renewable energy and carbon sequestration on America's farms?

1. How would the Climate Stewardship Act limit global warming pollution?

The Climate Stewardship Act would create a comprehensive market-based program to cut heat-trapping pollution from U.S. sources. It would set a cap on emissions of greenhouse gases from covered entities in the electric power, industrial, commercial and transportation fuel sectors -- which together account for more than three-quarters of U.S. global warming pollution. Emissions would be limited to 2000 levels starting in 2010. An MIT economic analysis finds that meeting the Climate Stewardship Act emission limits would affect household purchasing power by less than one-tenth of one percent.

The bill also allows firms to exceed the 2000 level by 15 percent using inexpensive offsets (e.g., credits for storing carbon in forests and on farms). Since emissions are expected to grow by about that same percentage between 2000 and 2010, the net result of the phase 1 bill would be to freeze emissions in 2010 at their 2010 level. Thus it requires only a modest effort and would not be expensive.

2. What pollutants and what entities would be covered by the CSA?

The bill covers carbon dioxide (CO2) and five other global warming pollutants (methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexaflouride). Each of the other pollutants has a "global warming potential" (GWP) -- a measure of its potency in relation to CO2. For example, methane has a GWP of 22, meaning that a ton of methane is considered equivalent to 22 tons of CO2. Trading between the pollutants would allow substantial flexibility to find the lowest cost way to comply.

The Climate Stewardship Act defines a "covered entity" as a firm or other institution that owns or controls sources that, together, emit at least 10,000 tons per year of carbon dioxide, or an equivalent amount of other pollutants.

Oil refiners or importers would be covered entities if they sell oil-derived transportation fuels that release at least 10,000 tons of CO2 per year when used in vehicles. Likewise, producers of the latter three compounds (HFCs, PFCs, or SF6) would be covered on the basis of the amounts they produce and sell to downstream users.

3. How would the bill's "cap and trade" system work?

Each covered entity would be required to report its emissions of greenhouse gases each year, and would turn in one "emissions allowance" for each ton of its emissions.

Each firm would be able to use offset credits to cover up to 15 percent of its emissions. Offset credits could come from qualifying reductions made in sectors that are not covered (e.g., agriculture) or purchased from a cap and trade system in another country.

A market would develop for emissions allowances and offset credits. Entities would have broad flexibility to comply by changing their own technology or operations in order to curb emissions, and or by entering the market to buy or sell extra allowances. Firms would have strong incentives to innovate and to adopt new emission reduction technologies whenever they cost less than the market price of allowances.

4. How would allowances be allocated under the Climate Stewardship Act?

The number of allowances available each year would be equal to the cap -- i.e., the number of tons of global warming pollution (in CO2-equivalent) emitted by the covered sectors in 2000.

The bill divides the allowances into two portions. The first portion is allocated to covered entities without charge. The second portion is allocated to the "Climate Change Credit Corporation," a non-profit institution created by the bill. The Secretary of Commerce is directed to decide what percentages of the allowances go to entities and to the Credit Corporation taking into account a number of factors, including the relative economic burden falling on covered entities versus consumers.

The Credit Corporation is directed to use the allowances, or the proceeds from their sale, for a number of specific purposes, including protecting consumers from adverse economic impacts, promoting energy efficiency and clean energy resources, and providing transition assistance to adversely affected workers and communities. Allowance sales by the Credit Corporation would take place via auctions.

5. How would a covered entity obtain allowances?

As noted above, covered entities would receive some allowances without charge. Entities that reduce their emissions to 1990 levels before 2010 would be entitled to bonus allowance awards. Other entities could earn additional allowances by investing in IGCC plants and underground carbon storage, or in farm-based carbon renewables (like biofuels and wind power) or carbon sequestration.

After taking steps to reduce emissions, many entities may need to enter the market to purchase additional allowances to meet their compliance needs. They could obtain these allowances by purchasing them from other entities or from the Credit Corporation.

Brokers and exchanges would facilitate these transactions just as under current emissions trading programs.

6. Why give allowances to the Credit Corporation? Why not give all of them to covered entities?

Numerous studies -- by Resources for the Future and others -- show that free allocation of only a percentage of carbon allowances is required to offset any losses in the asset or share value of covered entities. Conversely, free allocation of all of the allowances to covered entities would greatly enrich them at the expense of downstream consumers. Here is why:

Most analyses of global warming legislation show that in competitive markets, companies are able to raise prices to pass on to consumers most of the cost of complying with a cap on global warming emissions. Only a minority of the compliance cost is borne by the company and its shareholders.

This pass-on to consumers holds true both when companies are required to purchase allowances needed for compliance, and when companies are given those allowances for free. In competitive markets, companies will raise product prices to reflect most of the market value of allowances even if the allowances were given for free. The reason is that each allowance has a market value even if received for free -- the company always has the opportunity to sell it for its market value. This "opportunity cost" will be reflected in product prices equally whether allowances are auctioned or given for free.

The result is that if some allowances are allocated to entities without charge, owners and shareholders can be "held harmless." But if all allowances are allocated to entities without charge, owners and shareholders will be unfairly enriched at consumer expense.

What fraction of the allowances does it take to hold shareholders harmless, without enriching them at consumer expense? The answer depends on a number of factors. Resources for the Future (RFF) has analyzed this question for programs covering the electric sector and for programs with the multi-sector scope of the Climate Stewardship Act.

  • An RFF study of an electric sector program concluded that "it would be sufficient for the government to allocate at zero cost only 7.5 percent of the emissions allowances to completely offset the losses within the electric sector."1 RFF found that electric generators would reap large windfall profits -- nearly 13 times the impact on their firms -- if they were given all emissions allowances free of charge.

  • Another RFF study of an economy-wide program found that less than 15 percent of the allowances would be required to fully offset the decline in asset values for covered entities in all covered sectors.2

7. Why should the Climate Change Credit Corporation give some allowances to encourage energy efficiency, renewables and cleaner power?

The Climate Stewardship Act would direct the Credit Corporation to use some of its allowances, or the proceeds from their sale, to encourage energy efficiency and energy production from renewables and cleaner fossil sources. These incentives would help realize multibillion dollar costs savings for consumers and for the economy as a whole, as demonstrated in the Department of Energy's Scenarios for a Clean Energy Future.3

For example, the Clean Energy Future study shows that energy efficiency and renewable power could meet 60 percent of the need for new power plants projected in the Bush administration's 2001 energy plan:

  • Energy efficiency measures could avoid the need for building approximately 610 new power plants forecast in the administration's energy plan.

  • Renewable power capacity (wind, geothermal, biomass and others) could expand by the equivalent of about 180 plants.

  • Another 570 new high-efficiency, natural gas-fired plants are projected, mostly to replace older, dirtier and less efficient plants.

According to the Clean Energy Future study, this energy path would save Americans more than $30 billion per year on their electric bills. Power plant emissions that cause smog and dangerous fine particles could be cut by more than half from current levels. Power plant emissions of carbon dioxide could be cut by a third.

8. Why give allowances for transition assistance?

The Climate Stewardship Act recognizes that while Americans as a whole would benefit from curbing global warming pollution, some employees and communities could bear more than their fair share of the cost in the transition from old ways to new ones.

From a sense of basic fairness, the Climate Stewardship Act directs the Credit Corporation to provide transition assistance to these groups. Through this provision, billions of dollars in transition assistance can be provided where needed in the initial years of the program.

9. Why use allowances to encourage coal gasification and underground carbon storage and to encourage renewable energy and carbon sequestration on America's farms?

The Climate Stewardship Act recognizes the value of speeding development and deployment of technology that holds the promise of using coal while releasing only a tiny fraction of current CO2 emissions. Likewise, it recognizes the benefits of promoting more rapid development of biofuels, wind energy, and soil carbon sequestration on America's farms. Both objectives can be served by allocating the proceeds from a share of the allowances to firms, coops, and farmers who invest in and operate these technologies and practices.



Notes

1. Burtraw, D. et al., The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances, Resources for the Future (Mar. 2002) p.13, http://www.rff.org/rff/Documents/RFF-DP-02-15.pdf.

2. Goulder, L., Confronting the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost? Resources for the Future (Sept. 2000), http://www.rff.org/rff/Documents/RFF-CCIB-23.pdf.

3. Department of Energy, Scenarios for a Clean Energy Future (Nov. 2000), www.ornl.gov/ORNL/Energy_Eff/CEF.htm.

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