Why Cap and Trade is a Bad Idea
Less than three months ago, the U.S. House of Representatives passed the American Clean Energy and Security Act. If signed into law, the bill would implement a cap-and-trade program in the United States intended to reduce emissions of greenhouse gases responsible for global warming. I agree that addressing climate change is the most serious environmental challenge of our time, but this bill is fatally flawed. A cap-and-trade program works by setting pollution limits (the “cap”) and distributing allowances to regulated entities that can be bought and sold in a market to meet emission targets (the “trade”). Theoretically, emissions would be reduced as the number of available allowances is ratcheted down over time. A cap-and-trade program has been in place in Europe since 2005 and has largely been a failure. In 2007, the last year for which numbers are available, greenhouse gas emissions in Europe rose 1.1 percent; that is three consecutive years of higher emissions in Europe under a cap-and-trade program. Why has the European cap-and-trade system failed? I see at least three reasons. First, Europe deregulated its carbon market and allowed unregulated entities to buy, trade and sell allowances. As a result, the European carbon market has been prone to market manipulation, speculation and profiteering that have brought higher costs to consumers without benefits. Second, Europe gave away allowances to industry for free based on historical emission levels. In some cases, this allowed industry to generate windfall profits to the tune of $10 billion by selling unused allowances. Third, Europe allowed regulated entities to use international offsets to meet their emission targets. Offsets allow industry, governments and private business to invest in promised pollution reduction projects—such as overseas forestry projects—to meet emission targets. These projects can be highly questionable and forestall meaningful emission reductions. Unfortunately, when the House of Representatives passed the Clean Energy and Security bill in June 2009, it incorporated the fatal flaws of Europe’s cap-and-trade program. Like Europe, a cap-and-trade program in the United States would create a carbon market open to speculators. Wall Street will have enormous opportunities to game the system with new exotic financial products, new derivative markets and volatile prices for allowances. The bill gives away most allowances to industry free of charge. Total giveaways to industry are estimated to be $821 billion over the first seven years of the cap-and-trade program alone. A fairer approach would have been to charge regulated entities for their allowances, generating billions in federal revenues that could have been used to rebuild our economy, invest in cleaner technology and assist consumers with rising energy costs. Finally, but perhaps most fatally, the bill relies on questionable international offsets to meet emission targets. International offsets are one of the keys to my opposition to the bill in its current form. Given the complexity of offsets, it may be helpful to consider the following specific example. Plantar SA is a pig-iron company in Brazil that makes millions of dollars every year by generating offsets for European polluters. It does this by clear-cutting the Amazon Rainforest and planting nonnative eucalyptus trees in an industrial plantation model with the sole purpose of burning the trees to make charcoal for the company’s pig-iron operations. How does such an operation qualify for offsets? Working with the World Bank, Plantar SA convinced the United Nations offset approval board that its preferred energy source to run the company’s pig-iron operations was coal. Plantar SA then showed that the company could reduce business-as-usual emission levels by using a less carbon-intensive energy source than coal: charcoal generated by burning eucalyptus trees. Plantar SA receives credit for the carbon savings (or “additionality”) of its operations, in this case the difference between burning coal versus charcoal. The company receives cash for the carbon savings; the World Bank gets a small handling fee for turning the carbon savings into an official offset; and European polluters can buy the offset and continue polluting at current levels. Astonishingly, Plantar SA never used coal to run its pig-iron operations. Rather, the company claimed that it merely could use coal and should be eligible for carbon savings because of its choice to use a “cleaner” energy source. Of course, nonnative tree plantations managed exclusively for the production of charcoal have decimated the rainforest. The clear-cutting and burning of the native forest produced large amounts of carbon. In addition, Plantar SA’s activities have dispossessed many people of their land, destroyed jobs and livelihoods, degraded the region’s environment and water supply, and threatened the health of the local people. Approved international offsets like the forestry projects in Brazil often do not provide the carbon reductions they promise and can create further environmental and social problems. The Plantar SA project is only one example and is neither unique nor uncommon. Alarmingly, a recent report by David Victor, the head of Stanford University’s Energy and Sustainable Development Program, found that “between a third and two-thirds of offsets do not represent actual emission cuts.” This is hardly reassuring considering the Clean Energy and Security bill would allow polluters in the United States to use as much as 1.5 billion metric tons of international offsets to meet emission targets every year. International offsets—especially forestry projects—also present enormous monitoring challenges. Even more benign forestry-related offsets would be prone to illegal cutting, natural disturbances, fire and disease that could impact not only the ecosystem, but the legitimacy of the offset product. Given the enormous challenges in providing accountability and transparency of overseas forestry projects, I have become seriously concerned about the practice of investment banks packaging forestry offsets into complex financial instruments such as derivatives, collateralized debt obligations and tranches. These are the same risky financial instruments made famous by the subprime mortgage crisis. But because forestry offset projects offer potential benefits now and in the future, they will be an important component of a carbon derivatives market and a carbon default swaps market as investors hedge future risks and seek insurance for their uncertain investments. A better approach would be to limit the use of offset projects in the bill to domestic offsets only. This would allow our experts at the U.S. Forest Service, Bureau of Land Management, U.S. Environmental Protection Agency and other environmental agencies to review, authorize and provide continuing oversight of offset projects. Limiting the bill to domestic offsets would not eliminate all abuse. But I have more confidence in the expertise of our federal agencies than in the governments of China, Indonesia, Brazil and others who would approve these projects. Domestic offsets would also prioritize investments in the Pacific Northwest given its competitive advantage in potential carbon sinks. According to researchers at Oregon State University, Pacific Northwest forests have a high potential for carbon storage, even at very old ages. The wet forests west of the Cascade Range are also less likely to be lost to fire, and thus provide comparatively safe, long-term carbon storage. The Pacific Northwest also has enormous potential in biomass utilization. Forest thinning projects designed to reduce fuel loads and improve forest health on federal lands generate thousands of tons of slash and brush every year. Current practice is to pile this woody biomass and burn it in the open air. A better approach would be to transport this material from federal lands to local facilities to produce local, renewable energy. Using biomass to produce energy in a controlled environment at a facility that complies with the Clean Air Act makes more sense than burning it in the open. I was pleased to be able to secure a provision in the Clean Energy and Security bill that would qualify biomass from federal lands for a renewable energy standard. This common sense provision is an improvement over current forest practices, a step in the right direction towards renewable energy and reducing our carbon footprint, and helpful in stimulating the economies of rural communities by creating jobs. There is no question that Congress must act quickly and decisively to address climate change. We must continue to explore ways to responsibly and creatively manage our forests to mitigate and adapt to climate change while simultaneously meeting the needs of society. However, we do not need a cap-and-trade program, Wall Street or speculation to accomplish these goals. The EPA already has the authority to regulate greenhouse gasses under the Clean Air Act. The Obama administration has made clear it intends to pursue this responsibility. It should. Meanwhile, Congress should continue its work on a comprehensive energy bill that does not include a cap-and-trade program or a provision that strips the EPA of its authority to regulate carbon. Congress should focus on legislation to move America towards cleaner energy sources and provide our federal agencies with the tools necessary to manage our natural resources for climate change mitigation and adaptation purposes. This approach wouldn’t require a speculative, complex new market on Wall Street; it would require political will. Peter DeFazio has represented Oregon’s Fourth Congressional District since 1984. He serves on the House Natural Resources Committee, among others. |
