How to Make CLEAR (Cantwell-Collins Cap and Dividend Climate Bill) A Good First Step?

Following the disastrous House-passed Waxman-Markey bill, the Senate proposed Boxer-Kerry bill, (both are cap and trade bills that would do more harm to the environment than doing nothing at all, in the words of prominent climate scientist Dr. James Hansen), and now the Kerry-Graham-Lieberman bill still being concocted but already promising to be even worse, many people are understandably thrilled to hear about the Cantwell-Collins bill (acronym CLEAR) that purportedly removes many of the key problems in the Waxman-Markey cap and trade bill.

Of all the major advantages claimed by CLEAR’s proponents, only one, namely, that 100% of permits from the cap are auctioned instead of most of it given to polluters for free, is clearly uncontested. Another reasonable claim is that the carbon market is more closely regulated and restricted under CLEAR, but there are some who worry that the carbon derivatives market can still have significant destabilizing effects, especially once the carbon price has significantly risen after the initial years.

CLEAR also has clearly made a positive contribution to the national debate by putting the option of ‘consumer rebate” of carbon revenues officially on the table. It also points public attention to the huge problems of “carbon offsets” in the Waxman-Markey and the Kerry bills.

Unfortunately, some advantages of CLEAR that are claimed by its proponents are much less clear-cut or even incorrect, such as claims that it “does not rely on offsets”, or “75% of revenue returned to consumers”, or “targets can be relatively easily strengthened later given the good architecture”. I will explain each of these below.

It is my hope that activists and citizens alike contact Senators Maria Cantwell’s (202-224-3441) and Susan Collins’ (202-224-2523) offices, and urge that the problems (some very serious) below be addressed, if the bill is truly to have a reasonable architecture, and is to be a good first step that could be improved upon in the future.

CLEAR is a cap and dividend bill, or more accurately, a cap and trade and dividend bill. Let me first list its basic features:

  • An upstream emissions cap is established to reduce fossil carbon entry into the US economy at gradually accelerating rate (the rate of reduction increases 0.25% each year over the previous year, starting 2015), such that emissions are 5% below 2012 levels by 2020.
  • 100% of the permits under the cap are auctioned off, none is given to polluters for free.
  • Only regulated entities who are producers or importers of fossil carbon (about 3,000) are eligible to participate in the auctions and subsequent trading of emissions permits.
  • Secondary carbon market is allowed, but regulated entities (called “first sellers”) are not allowed to participate in the secondary market.
  • Regulated entities can not buy (cheap) offset credits in lieu of emissions permits for every ton of their emissions, unlike in the Waxman-Markey or the Kerry bills.
  • 75% of regular auctions revenue is directly returned to consumers in equal dividends, 25% goes into the CERT fund (Clean Energy Reinvestment Trust Fund).
  • The CERT fund is used for a list of 16 goals/functions, including worker training/transition help, energy-intensive industries export compensation, mitigation and adaptation research, etc., as well as programs and initiatives to further reduce emissions, but no specifics are given regarding how much each type of program will get funded (- that is to be decided by the annual Congressional appropriations process), except for mandating that the entire program is supposed to not add to budget deficits.
  • Many of the CERT programs aimed at reducing emissions are the same types of projects that would have generated “offset credits” under Waxman-Markey and Boxer-Kerry.
  • With the CERT funded emission reduction programs providing the main stake, and the emissions “cap” being the supplemental, CLEAR claims an overall target of 20% emission reduction below 2005 levels by 2020, 42% by 2030, and 80% by 2050. These targets are only slightly better than the cap and trade bills, and when compared to 1990 emissions, correspond to about 7-8% reduction by 2020, while the IPCC concluded 3 years ago that 25-40% reduction from 1990 levels by 2020 would be required just to have a 50-50 odds of staying below 2oC catastrophic warming (and now it is becoming increasingly clear that even 1oC is unacceptable warming that could trigger many dangerous and potentially irreversible feedback processes).
  • Price volatility of the primary carbon market is controlled by a price “collar”, comprised of a price ceiling and a price floor, both of which rise very slowly every year. If the ceiling price is reached in the course of any auction, all bids will be satisfied at that price, thus overshooting the “cap”. Revenue from the sale of these extra permits above the “cap” is to go 100% into funding CERT programs that aim to reduce emissions.
  • The president is given the authority to propose changes to the emissions cap (but not the carbon price collar, see below), in response to new scientific understanding, or technological changes (“clean coal” availability), US industry competitiveness, etc. Such changes only require a simple majority approval (no filibuster allowed) in both Houses to pass the Congress.

Why the “No Offsets” Claim Is Incompatible with CLEAR’s Claim of Emission Targets

A key problem is that, when relying on the CERT funded projects to achieve the majority of reductions claimed by the national target, the nature of the offset-like projects funded by CERT means that they will still have the same problems of having to rely on a counter-factual, imaginary future emissions baseline (as in ‘I would have wanted to convert those forests into agri land if you don’t give me that funding’) and the associated (non)-additionality, as well as non-permanence, and grossly unreliable measurability (agri and forestry projects are prime examples), etc. These problems don’t go away simply by having the government administer the program instead of some third party certifiers.

In fact, by shifting most of the emission reduction targets out of the cap, and put them under the CERT funding, it can effectively be said that it is the US GOVERNMENT who will be using many offsets to achieve most of its committed reduction targets, even though individual polluters are not allowed to, nor do they need to given the weak cap, purchase offset credits to satisfy their permit requirements under the cap.

This, combined with the fact that the CERT fund, consisting only of 25% of the auction revenue, is expected to achieve far more reductions than the cap that generated 100% of the revenue was able to achieve in the first place, and that the fund is also charged with achieving a litany of other goals, and the fact that the entire program is mandated to remain deficit neutral, and the fact that since the fund is subject to the appropriations process, funding for these emission reduction projects may not even actually materialize, means that the amount of emission reductions achievable through the CERT fund can not be relied upon. Therefore, if the bill is to claim “no offsets”, then only the cap should be claimed as the target (and even that is ignoring the overshoot problem), with the rest being “potential, additional emission reductions”. But, that’s not how the bill is currently presented and promoted – see examples.[1,2]

It is very misleading to claim the bill allows “no offsets” and achieves “20% reduction by 2020″ at the same time. It also forgoes the only way we could turn the tide against the current international “norm” of counting offsets towards a country’s reduction targets, which completely undermines true global reduction targets.

Why the “Revenue Returned to Consumers” Principle Is Currently Undermined In This Bill

As mentioned above, when the ceiling price is reached in the course of any auction, all bids will be satisfied at that price, thus overshooting the “cap”. Revenue from the sale of these extra permits above the “cap” is to go 100% into funding CERT programs that aim to reduce emissions. Depending on how often the price ceiling will be hit, (and especially often if the cap is later to be strengthened, see below), this could constitute a real burden to consumers since that portion of the revenue is not returned to them as dividends.

Using the overshoot revenue this way, the price ceiling essentially serves as a cost containment mechanism for polluters at the expense of consumers, especially the low income population.

Why Targets Can NOT Be Strengthened Under the Bill As Currently Written

The price collar currently seems to be hardwired into the bill, and only the emissions cap seems to be adjustable by the president (subject to approval by Congress). The price collar, not the cap itself, determines how much reductions will actually result from the cap. The floor and ceiling price starts at $7 and$21/ton CO2-eq, respectively, in 2012. They then increase by the inflation rate plus capital investment return rate plus 0.5%, or minus 0.5%, respectively. The rate of increase is very comfortable for polluters whose investments rise at the capital investment return rate anyway, and completely inadequate for any meaningful climate protection.

A hardwired price collar means that if the president later wishes to tighten the cap significantly without the ability to increase the price collar, the reduced availability of permits will lead to higher permit prices, so the price ceiling is virtually guaranteed to be hit all the time, which then triggers the release of as many permits as the market demands at that price, therefore leaving the cap unable to actually become any tighter than the price ceiling dictates.

Worse, since all revenue from permits auctioned after overshooting the cap will go 100% into CERT funded emission reduction projects, no dividends will be returned from that portion of revenue to consumers, therefore there will be strong opposition from the public (and strongly agitated by polluters no doubt) to such proposed tightening of the cap to begin with. So, that makes any argument for “pass now, strengthen it later” a pie-in-the-sky. Additionally, it makes the “strengthening of the cap” rely mostly on CERT funded projects, many of them are offset-like, instead of on reliable reductions directly from the smokestacks and tailpipes, where stronger reductions are needed.

In Addition, FREE Permits OUTSIDE OF THE CAP Are REWARDED to the Following:

  • Carbon capture and storage (CCS) facilities, as long as the carbon is “verifiably sequestered”. The bill has not a word on safety or permanence (Geological carbon storage is known to be prone to leakage over time, not only undoing any “sequestration”, but also causing soil and ground water contamination, even endangering people. See Greenpeace report “False Hope”. Deep ocean storage is even more moronic, as it dramatically worsens ocean acidification problem, dissolving the shells and skeletons of marine organisms, while it is also not permanent). What’s more, even if the carbon is truly, permanently and safely sequestered (magically), rewarding extra permits that aren’t even from within the cap to these entities simply allows the equivalent quantity of extra carbon to be emitted, completely undoing any positive effect the sequestration might have caused in the first place, preventing such sequestration from helping to speed up emission reduction by tightening the cap, even though public funds were invested into the development of such expensive technology.
  • Oil or gas reinjection projects, where compressed CO2 is routinely injected into the oil or gas well to extract the last drops of oil and gas. This not only results in MORE fossil fuel being brought out of the ground, the injected CO2 is also likely to eventually leak out of the many holes drilled into these fields. Again, regardless of leakage, they get extra permits, so they could emit an equal amount back out.
  • “manufacturer that embeds fossil carbon in the products produced by the manufacturer in a manner that prevents the emission of the fossil carbon into the atmosphere for a period of time that is sufficient to prevent any negative impact on the climate”. I am not sure which kinds of products in practice are classified as “embedding” the fossil carbon for a “sufficiently long time”, but it strikes me that the entire process of extracting fossil fuel out of the ground, then making it into things like plastic consumer goods (disposable or not), and other materials (many of them containing toxic chemicals that could leach into the environment) that nature does not know how to degrade so they can linger around forever, could simply end up being considered net carbon neutral as far as this bill is concerned, and some of the nasty end products that should be phased out will instead get rewarded for “embedding carbon” and have no incentive to be phased quickly out of production which would have potentially reduced demand for the fossil fuel raw material input.

What Changes Are Necessary To Make This Bill A Step In The Right Direction?

The first six of these changes I believe are essential to make CLEAR a good first step.

1. The price collar should be made adjustable by the president (subject to approval by Congress), just like the emissions cap.

2. When the bill is presented and promoted, as long as “no offsets” is claimed, only the emission reductions expected from the cap should be claimed (5% below 2012 by 2020), with the rest of the reductions hoped to be achieved by the CERT funded projects described only as “potential additional reductions”, but not lumped together as CLEAR’s emissions target, as it currently is frequent presented and promoted, both by advocates and by Sen. Cantwell’s website.[1,2]

3. Revenues from permits sold after overshooting the cap should not go 100% into CERT funded emission reduction projects as is currently set up, but instead still partitioned 75%:25% as the rest of auction revenues. The overshoot of the cap should instead be compensated for by correspondingly reducing the following year’s cap by the same amount, and the bill should build in an automatic mechanism (i.e., not needing presidential request and Congressional approval) to adjust the price collar according to the overshoot amount. This mechanism is only used to keep on track with the intended trajectory of the gradually decreasing cap, not used for strengthening the cap, therefore it should not need the additional authorizations from the president and Congress.

4. The National Academy of Sciences (NAS) should be charged with advising the president and the EPA on the adequacy of the targets US is achieving through this bill and other measures, as compared to the physical reality according to the latest climate science. Such evaluation should be done at least biannually, with the EPA being responsible for adjusting the carbon price collar annually to ensure that the actual emissions keep within the target that NAS set out in the most recent evaluation.

5. CCS as well as oil or gas reinjection projects should not be rewarded any free permits at all, unless permanence and safety of the sequestration can truly be demonstrated (which they can’t!). Even if they can, the free permits should only come from within the cap, meaning that the total permits that will be auctioned off will be reduced by the numbers given out for free to these projects. Otherwise these “sequestrations” don’t help with reducing emissions at all, even though the cap as currently proposed is already extremely, suicidally weak due to the (weak) argument that we HAVE TO rely on these coal fired power plants for some time, and they cannot reduce their emissions quickly enough. In other words, the current cap is as weak as it is based on the assumption that sequestration is not available, so if sequestration did become available, the cap of course should be tightened by the corresponding amount. As to products that “embed” fossil carbon, whether incentives are justified will have to depend on which products, but in any case, no free permits should be given since that simply leads to free emissions elsewhere. Instead, other policy instruments could be used to provide incentives (tax break, etc), or, the CERT fund could provide some financial incentives to these manufacturers.

6. Burning biomass/biofuel for energy generation has been mistakenly codified as “carbon neutral” in Kyoto Protocol, and propagated into the EU’s Emissions Trading Scheme, as well as having found its way into the Waxman-Markey bill, the Kerry bills and state legislations. This “critical accounting error” has been identified by many prominent scientists, and there is little doubt among the scientific community, over the need for immediate correction, before too much of the world’s precious forests and other ecosystems fall victim to this insidious error. Therefore, it is important in a bill that places a cap on fossil fuel carbon entry into the US economy, that carbon emissions from the burning of biomass/biofuel also be capped or otherwise regulated to a comparable degree, in order to prevent strong leakage from fossil fuel combustion to biomass/biofuel combustion.

7. Currently the bill will give each legal resident regardless of age the same amount of carbon dividends. This will provide a strong incentive for having more children, which is counter productive to reducing overall consumptions and emissions. Given that a child generally needs less carbon emissions than an adult person, it would be more reasonable to make a child’s dividend a portion of that of an adult person (e.g., half).

8. Offset-like projects are far more difficult to verify when they are abroad than when they are domestic (even though domestic projects can be hard enough or sometimes even impossible to verify due to

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the future baseline problem, measurability, permanence, etc.). Therefore, the bill should just restrict offset-like projects to the ones in the United States. However, the vast majority of the US national emission reduction targets should be achieved by the cap itself in conjunction with direct rules and regulations, instead of relying on the offset-like projects as those are unreliable.

9. There is no built-in mechanism to address the very real situation (as we have witnessed in the European Trading Scheme) of what happens when there is a recession, after the implementation of CLEAR. Instead of allowing emission reductions due to the recession to add to the reductions required by the cap, currently the cap will follow its preset trajectory, possibly leading to no additional reduction beyond the recession, unless the President tries to change it (but we have no guarantee that he/she will). Instead, I believe it is important to build in an automatic adjustment to strengthen the cap by the amount of emission reductions estimated to result from slowed economic activity alone.

10. Shares purchased other than at ceiling price above the # of shares scheduled by the cap, will be valid for 10 years before expiring. That is too long and must be shortened, especially considering that a first seller is allowed to accumulate as many shares as they are anticipated to consume for the duration in which the permits can be redeemed, even though the shares purchased in any given year may not significantly exceed anticipated quantity needed by the first seller. Such “anticipation” is not only problematic when there is a recession, but also may provide some perverse incentive for increased emissions in the short term in order to gain the right to accumulate large quantities of initially very cheap carbon permits for later use.

11. When carbon shares are trading below the reserve (floor) price that would have been required in an auction, the bill should require that the administrator purchase back as many shares from the market as necessary to bring the market price up to the floor price, and then retire those shares purchased back. This would be symmetrical to the release of unlimited number of permits when the price ceiling is reached, and is desirable since our overall goal is to reduce emissions as quickly as possible. This will to some degree mitigate the problem of low price induced demand for the permits, that could arise due to a variety of reasons such as recession, the availability of new technological innovation that reduce emissions, emission reductions due to rule-based regulations, and voluntary reductions by some entities or individuals of the society. The reason why this only partially mitigates the problem is because the price collar is quite wide, meaning that the trading price has to go rather low to hit the floor price for this mechanism to kick in.

12. That brings me to my last point, which is, why allow trading and market fluctuation to begin with? Price uncertainty has been found to inhibit investment in renewable energy and in efficiency projects. A collar width of 0 would correspond to a simple carbon fee/tax, doing away with the need to create a carbon market at all, and all the operating and oversight mechanisms required for it, while ensuring a stable carbon price for the year (and predictably rising every year), which can then be adjusted from year to year based on whether the amount of reductions (excluding from offset-like projects) is meeting the planned trajectory of the cap. It also completely eliminates the problem of additional demand induced by a lowered carbon permit price due to any external reason.

I advocate a “cap with fee and dividend”, or “cap with fee-based-dividend”, or “cap and dividend from fees”, We could completely do away with the carbon market and trading of permits, yet keep the dividend return feature to protect the majority of consumers except for the very rich (to whom the cost from carbon fee wouldn’t matter to their quality of life anyway), and having a real cap by adjusting the following year’s carbon fee by the amount of overshoot each year (could do a two year cycle if logistically easier…). Besides pricing carbon, direct, rule-based regulations must also be used in conjunction, to achieve rapid, reliable results. A price signal alone has limited effects, especially at the low prices of starting years, judging from experiences in Europe and the oil price hike of recent memory. Direct rule making emphasizing conservation, degrowth, protection and restoration of ecosystems and natural resources/sinks, as well as energy efficiency standards, renewable energy requirements (but only truly clean, renewable energy, not biomass/biofuel, not nuclear), and especially, rules that shift agricultural production away from the current, chemical and fossil fuel-intensive and soil-damaging industrial agriculture, and towards organic, sustainable agriculture, are extremely important, and we should not rely only on the “deficit neutral” CERT funding to achieve some of these goals, in a matter of life and death such as climate change.

Finally, I’ll repeat that it is my hope that activists and citizens alike contact Senators Maria Cantwell (202-224-3441) and Susan Collins (202-224-2523) offices, and urge that the problems (some very serious) discussed above be addressed, if the bill is truly to have a reasonable architecture, and is to be a good first step that could be improved upon in the future.

If they tell you that the political reality on the Senate floor doesn’t allow further improvements, please ask them to change that political landscape by talking on national media (especially mainstream TV and newspapers) about the real and devastating consequences of climate change – not just some droughts and floods here and there, but sea levels inexorably rising and claiming our coastal cities (and washing all their toxic chemicals into the ocean), permanent droughts and crop failures, massive ecosystem/nature die-offs, tropical diseases, global wars and conflicts which America cannot escape from, etc. Ask them to speak up about the methane release confirmed recently by the NSF, the positive feedback loops, and how we are approaching (and we could only pray we have not yet gone beyond) the point of no-return. These irreversible, non-linear changes are what American people need to understand, and that understanding is what will create the political feasibility of a stronger bill. A politician who truly wants to pass as strong of a climate bill as possible must tell the American public about the truth – it is part of their duty as public servants. Please tell the same to President Obama, Senator Kerry, Rep Markey and Waxman, and your own Congress persons.


[1] Here is an excerpt from the Q&A page on Cantwell’s website (emphasis mine): http://cantwell.senate.gov/issues/Frequently%20Asked%20Questions.pdf (downloaded Mar 14, 2010)
What are the near, medium and long-term greenhouse gas emission caps?
The greenhouse gas emissions reduction standards required by the CLEAR Act are to reduce (from 2005 levels):
20 percent by 2020·
30 percent by 2025·
42 percent by 2030·
80 percent by 2050·

[2] Also, here is an excerpt from page 3 of an overview doc for CLEAR:
http://cantwell.senate.gov/issues/CLEAR%20Act%20Overview%20Memo.pdf (downloaded Mar 14, 2010)
“The CLEAR Act also achieves real and durable emissions reductions by relying strictly on the market incentives provided by the upstream cap, auction mechanisms, and a clear, stable price signal. The use of questionable international offsets, which feature prominently in cap-and-trade legislation such as the House-passed ACES Act, is prohibited in the CLEAR Act, which relies on actual emissions reductions within the United States to spur real transformation of the energy system (see Figure 2). Relative to 2005 greenhouse gas emission levels, the CLEAR Act will achieve a 20 percent reduction in CO2 equivalent emissions by 2020, 30 percent reduction in CO2 equivalent emissions by 2025, 42 percent reduction in CO2 equivalent emissions by 2030, and 83 percent reduction in CO2 equivalent emissions by 2050.”

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