The Kerry-Lieberman Climate Bill: Ch-Ch-Changes and Lots of Loose Change

by Bill Chameides | May 13th, 2010
posted by Erica Rowell (Editor)

Permalink | 10 comments

The new bill is not your economist’s version of cap and trade.

First, Some Cap-and-Trade Basics

In its purest form, cap and trade is supposed to be a simple, market-based mechanism to cap emissions of a pollutant and use the marketplace and the profit motive to get emitters not only to cut emissions but to innovate. The government stays largely in the background, establishing the cap and letting the rest happen on its own.

The “rest” is:

  • the distribution of emission allowances to the emitters (whose total adds up to the emissions cap) and
  • the trade of those allowances as the emitters individually (and collectively, at least theoretically) find the most efficient, least expensive paths to meeting the cap. (For more details, see my series on cap and trade.)

A Big Deal: How to Treat Allowances

A major issue is how the allowances are distributed. One approach is to simply give the allowances to emitters free of charge (for example, based on their historical emissions). But many folks, typically from the liberal side of the aisle, object to this as rewarding emitters for their legacy of pollution. An alternate is to auction the allowances to the highest bidders.

If you follow the auction path, the question that naturally follows is: what happens to the proceeds of the auction? It’s not a trivial issue — based on Obama’s initial budget offering, the estimates add up to nearly $79 billion from a climate cap and trade on carbon dioxide (CO2) in 2012, climbing to a total of $645.7 billion by 2019.

A simple approach is to just let the government keep all those billions. But that proposal has been met with howls from conservative parties such as the Wall Street Journal which derides it as “cap and tax” — a phantom attempt by big government to collect revenue for its own, so-called in their lexicon, “socialist agenda.”

Some of the anti-giveaway liberal-types have countered with a so-called cap-and-dividend proposal. In this version, the allowances are auctioned, but the government returns all of the income from the auction back to consumers in some egalitarian way — for example on a per capita basis. Since such a program is revenue-neutral, it is argued, it is clearly not a tax.

Horse-trading on KL’s Version of Cap-and-Trading

But of course, once you get legislators together, things tend to get ever more complicated. To get anything passed in our Congress, there’s gotta be a whole lotta horse-trading. Horse-trading on a climate bill? Some might call that a euphemism for giving critical interest groups cash for their support. The cash hand-off is done discretely, for example in the form of subsidies, tax breaks, and loan guarantees, but $s are definitely involved.

Which brings us to the Kerry-Lieberman bill, formerly known as the Kerry-Graham-Lieberman bill. In the first place, despite what you might have thought, this bill is a far cry from cap and trade. With its separate treatments of the power and petroleum sectors and its price collar, it has a high chance of turning into a de facto tax.

But call it a tax or a cap and trade or whatever, who would profit from the revenues? Would it be a windfall for the feds, something that could possibly even close the federal budget? Or would it be a windfall for special interests? Or both.

Hard to say at this point. But here’s an early thumbnail sketch of some of who’s getting what in the Kerry-Lieberman (and perhaps Graham) bill.

Federal Income:

  • Major emitters — utilities (2013) and industry (2016) — will buy an as-of-yet-to-be-determined percent of allowances that will gradually phase to a 100 percent auction by 2030. All details to be filled in.
  • Petroleum refiners to pay a fee pegged to the allowance auction price. Auction price has a strict range of $12-25 per ton beginning in 2013 that will be tied to inflation in subsequent years.

Federal Giveaways:

The “dividend” part

  • Two-thirds of all revenues to go to consumers, primarily to assist those disproportionately impacted by increased energy prices. This grows to 75 percent in the form of a universal rebate in 2026.

The “giveaway” part

  • Major emitters are given some percent of allowances that will gradually phase into a 100 percent auction by 2030.
  • Energy-intensive, trade-exposed industries to net 15 percent of allowances for free during transition period, as well as a border adjustment for carbon-intensive imports beginning in 2025.
  • The clean-energy manufacturing tax credit is expanded by $5 billion.
  • States that pursue offshore drilling to receive 37.5 percent of federal revenues.
  • Nuclear loan guarantees to grow by $36 billion (to bring total to $54 billion) with $500 million per reactor for up to 12 reactors in case of regulatory delays (in addition to other financial incentives).
  • About $6 billion a year to go to transportation, including both highways and mass transit.
  • $2 billion per year for 10 years for R&D for “effective” carbon capture and sequestration (CCS) as well as “significant incentives” for commercial deployment of 72 gigawatts of CCS.
  • Up to two billion tons annually for offsets primarily benefiting farmers; international offsets begin in 2018.

Of course, all this money is flowing in various directions for a specific purpose: to cut U.S. greenhouse gas emission by 17 percent by 2020 and 83 percent by 2050.

The $trillion question: Will the bill succeed? To do so, it will have to pass two formidable hurdles:

  1. It will have to somehow tunnel though, run around, or jump over the political roadblocks in the Senate; and
  2. In the unlikely event that it gets past #1, it will have to actually work.

Further Reading on the Kerry-Lieberman Climate Bill

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  1. Sam Pardo
    May 17, 2010

    I’m wondering what Dr. Chameides take is on the potential for emissions reduction in the proposed Kerry-Lieberman Bill versus the present alternative, the EPA Clean Air Act, or even strict state laws like those in California. And as a quick response to Mr. Towe: the United States is the #2 emitter of carbon as well as the greatest per capita emitter. I think it’s fair to say we set the tone for the rest of the world. Here’s a fun little google app I just found with per capita emissions data provided by the World Bank. I’ve gone ahead and pre-selected a few nations: Why can’t climate change be our new manifest destiny? Whatever happened to America’s technological and manufacturing innovation?

    • Ken Towe
      May 20, 2010

      Sam…. The World Bank emission numbers are, as you noted, per capita. Try putting in Qatar, Kuwait and the USA. But for a different and more sobering perspective go here to see what the actual total emissions are… You ask: “Why can’t climate change be our new manifest destiny? Whatever happened to America’s technological and manufacturing innovation?” Why call it climate change or global warming? Why don’t we simply clean up our environment w/o creating economic havoc or scaring people to death with movies and computer models simulating climate doom using inputs that are arguable. CO2 can be a helpful “pollutant” as it was in the geological past when lush environments, even polar ice sheets, coexisted with elevated values… values much higher than forecast for 2050. Recall that doom was also forecast in the 70s when temperatures had dropped steadily for 30 years from historic highs back to near normal. At least 25 innovative ways to offset this drop were put on the table. Some would have been irreversible. Fortunately, none was implemented. We should still be wary.

      • Sam Pardo
        May 20, 2010

        I think Mr. Towe and I are on two completely different wavelengths so I’ll keep this short. I don’t see economic havoc as a result of regulating carbon. In fact, I see just the opposite, that’s what I meant by technological and manufacturing innovation. As Dr. Chameides notes above, recent history suggests that cap and trade is an effective regulatory mechanism and that economic costs tend to be over predicted because of the exponential gains realized with market forces and innovation. Personally, I think there is a moral test at play as well. When I look at the per capita numbers I can understand why China doesn’t want to play ball. Although, pretty soon most solar panels will have “made in china” stamped on them… Thanks for the debate Ken, I enjoy learning about different perspectives than mine.

        • Ken Towe
          May 21, 2010

          Sam… Understand your optimistic point of view. You should read Newell & Marcus (1987)… Norman Newell was NAS member; Marcus a professor of statistics. Take a look at their Figure 1 which is a plot of Mauna Loa CO2 against global population from 1959-1983. It has a stunning almost perfect correlation of 0.9985. An extrapolated projection of their data to 2008 shows that their prediction was right “on the money”. Given a growing global population it will be extremely difficult, if not impossible, to lower atmospheric CO2 significantly without, as they note, major changes to our standard of living and disruptions to global economies. They also observed that solar and nuclear energy sources can supplement fossil fuels in such uses as transportation but are not likely to replace them. A quandary?

          • Bill Chameides
            Jun 7, 2010

            Ken: Actually it’s a little worse than that. Between 1980 and 2006, CO2 emissions per person averaged over the globe have increased from 4 to about 4.5 metric tons per person as the share of emissions from the less-efficient developing countries increased. Turning that trend around is a “quandary,” but since so much of the increase will occur in the less-efficient developing countries, there are opportunities to make significant inroads with existing technology.

      • Bill Chameides
        Jun 7, 2010

        Ken, Appreciate your comments but your characterization of doom forecasting in the ‘70s is just not accurate.

        • Ken Towe
          Jun 7, 2010

          I challenge anyone to read Lowell Ponte’s 1976 book THE COOLING and accept that there was not very serious consideration given to climate modification in order to offset 30 years of 0.5°C cooling from 1945 to 1975. Dam the Bering Straits, cloud-seed the trade winds, dam the Labrador current, put an atomic reactor near Hudson Bay etc. Supporting dust cover reviews of Ponte’s book were written by Senator Claiborne Pell and by Dr. Stephen Schneider, Deputy Head Climate Project, NCAR. Climatologist Reid Bryson wrote in the preface: “There is certainly no agreement about what the climate will do in the next century, though there is a majority opinion that it will change, more or less, one way or the other. Of that majority, a majority believe that the longer trend will be downward.”

    • Bill Chameides
      Jun 7, 2010

      Each provides a different avenue to get to a similar point. It is not so much which is better at this point, but which if any will actually be implemented.

  2. erica
    May 17, 2010

    I guess you have to believe in markets and capitalism to accept that cap and trade works. And it does — consider for example the cap and trade that was used to cut acid rain emissions at about one-third of the projected costs.

  3. Ken Towe
    May 13, 2010

    How does Cap–and-Trade avoid a “merry-go-round” of inflationary processes? When major emitters, utilities and industries (suppliers), have to pay additional “fees” these added expenses are eventually passed on to the consumers (users) so that prices tend to creep up across the board. Witness the increases in the per-pound cost of breakfast cereals that are related, in part, to the increased use of biofuels. Higher consumer prices are increased further by the percentage increase in their sales taxes and other add-ons. Details to be filled in? What are the odds on the innovate-our-way-out concept? Toss a coin? Mandate some sort of alchemy? Realistically, there is no way that an ever increasing world population can lower atmospheric CO2 “pollution” back to whatever level has been calculated by model simulations (using questionable inputs?) and deemed to be an acceptable “pollution”. Cut 83% of PRESENT emissions by 2050… and the US only? The global population is now almost 7 billion and will grow to at least 9 billion in 2050. North America is only 5% of the global population. At the present rate of global growth CO2 will be about 490 ppmv in 2050. This whole Cap-and-Trade thing is quixotic… but with potentially severe consequences…adjusted for inflation of course.

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