Parsing the Bingaman Climate Bill Draft

Earlier this afternoon, several media outlets posted a discussion draft of a utility-only cap-and-trade bill that Senator Jeff Bingaman is apparently working on. It’s not a finished product (provisions for offsets, for example, remain to be added) and apparently is a slightly out-of-date iteration (dating roughly to April). But it provides some signs of what a utility-only bill might look like,  and what some of the associated issues might be. Three things stand out to me as particularly interesting.

First, the bill aims to cut utility-sector emissions by 17% from 2005 levels by 2020. This means that it effectively imposes a weaker requirement, even on the utility sector, than Kerry-Lieberman would. Achieving an economy-wide cut of 17% in 2020 by combining this target with separate measures aimed at reducing oil consumption would be extremely costly at best, and more than likely impossible.

There is one potential caveat. The bill has a price floor that starts at $10/tCO₂ in 2012. (It rises by at least 3%, in real terms, each year.) The nominal target is weak enough that there’s a reasonable chance that the floor price would kick in. The result would be an actual emissions cut that is greater than the advertised 17%. That said, I strongly doubt that the resulting cut would match the one projected for Kerry-Lieberman, since the carbon prices predicted under that bill exceed the floor price here.

The second interesting element of the bill is a potential provision to allow manufacturers to opt in to the cap-and-trade system. Given the gaps in the draft that is circulating, it is impossible to know what impact this would have. Manufacturers’ decisions to opt in would depend on the value of free allowances that they expected to obtain. (Provisions for those allocations are blank in the discussion draft.) Those who expected to obtain allowances whose value exceeded the costs of complying with the cap-and-trade system would join; those who foresaw a net cost would not. That would inevitably take money from the rest of the system – which someone (whoever is losing that money) will undoubtedly resist. Such a system would also probably provide a net subsidy to participating manufacturers, which would cause some trade frictions, depending on the details of the design.

I say "probably", though, for an important reason.  Many manufacturers will incur significant nreimbursed costs even from a utility-only system, because of increased electricity prices. An opt-in system could be structured so that the free allowances awarded to those who opt in more than cover the additional resulting costs (which incentivizes them opt in) without covering their total costs from cap-and-trade (i.e. costs including those from higher electricity prices).

The last interesting piece is a provision that allows the President to extend the cap-and-trade system to manufacturers if he determines that the top five developing-country trading partners of the United States are taking comparable action on their emissions. (There would be a five year delay from the determination to the extension of the system.) This would have a very weird impact in practice. In 2009, for example, that list would have been China (including Taiwan), Brazil, Singapore, India, and Venezuela, and probably Mexico. Does anyone really think that U.S. action on China should be contingent on what Singapore Venezuela does? Or take 2008: the top four are China (including Taiwan), Saudi Arabia, Venezuela, and Brazil, and again, probably Mexico. (Saudi jumps up in 2008 because of high oil prices. I don’t have easy access to #5, but my guess is that it’s Nigeria.) If we wait for Saudi Arabia whatever the #5 country turns out to be (I’m pretty sure it’s Nigeria) to take aggressive steps to deal with climate change, we’ll be waiting a long time.