The Obama Agenda: Who will bear the brunt of cost for cap-and-trade?
As President Barack Obama's administration continues to its push for healthcare reform and a new affordable insurance, carbon emissions and the race to save the environment are increasingly seen as the next hot-button issues to be addressed by the White House.
Even as Obama started his trip to Copenhagen, Denmark to attend the U.N. Summit on climate change, the Environmental Protection Agency issued a new report, declaring the release of greenhouse gases from fuel combustion poses an extreme threat to public health and welfare.
In response to mounting pressures from the Democrats to enact carbon emission restrictions, and criticisms from Republicans asserting clean air technology legislation would cost tens of thousands of jobs, the administration has affirmed a slow, but gradual commitment to a new federal emissions trading system, more commonly referred to as cap-and-trade. In its simplest architecture, cap-and-trade regulates carbon pollution in the air by charging a specific amount per ton carbon emitted to the business emitting such gases. As one organization approaches the limit of its carbon emissions, it will either have to cease operation or reduce its carbon dioxide production through improved technology – the administration's intended goal – or can purchase credits at the discretion of another polluter under the cap or willing to part with its allowances.
Obama's projections indicate an overall reduction in greenhouse gas emissions by 17 percent by 2020. In fact, the first allotment of carbon offsets available from the American Clean Energy and Security Act of 2009 is estimated at two billion tons of carbon – roughly 28 percent of the country's total annual greenhouse gas emissions.
Various workers groups, petroleum producers, coal-burners and other industry titans have opposed the bill, however, bringing their own estimates of American jobs lost, increased energy prices and total reductions to the nation's gross domestic product. (GDP)
Indeed, Congressional Budget Office (CBO) Director Douglas W. Elmendorf spoke before the Senate energy committee in October, citing a CBO report that indicated a massive shift from traditional production-line jobs to newer, alternative energy jobs which would result in a temporary, but substantial decrease in employment over the next ten years. He added the GDP would decrease between 0.25 to 0.75 of its worth in 2020 due to high cost implementation of new clean energy technologies.
Where the CBO and other organizations both differ, but simultaneously flounder in resolute predictions, however, is the effects on low-income and middle-class families across the country. Most organizations and think tanks do predict energy bills will increase after cap-and-trade allowances take effect, but some believe the policies will be regressive, whereby energy conglomerates will pass on the added costs to poorer families. Others believe the policy to be progressive, eventually adding millions of jobs and decreasing energy bills for low-income families through tax credits, but the burden then lies with the middle class.
In one of the nation's largest energy producing and consuming states, New York, one company produces both a set of answers and unresolved questions when applying a cap-and-trade scheme to the modern practices of a carbon dioxide-producing energy giant – Consolidated Edison, or Con Ed.
The investor-owned energy company provides gas, steam and predominantly electricity throughout the state and more importantly, to New York City, which consumes seven percent of the country's total energy output, but produces only five percent of its greenhouse gas emissions.
Con Ed's share of household electricity consumers has shrunk over the past twelve years, largely due to the emergence of smaller, independent energy utilities that bought many former Con Ed generating plants. As the years progressed, Con Ed's leadership saw the potential in natural gas combustion for its electric plants, and used more of its structural budget to create the world's largest steam district. And while it only accounts for six percent of the company's annual sales, steam power is the number one source for heating and cooling systems in most of Con Ed's Manhattan apartment and office buildings.
Thus, while a New York State energy profile produced by the Energy Information Administration (EIA) in 2007, the latest year for which the data was available, indicates large electric utilities like Con Ed only comprise 31 percent of the state's total energy share, competition has not forced electricity prices to go down. According to the latest report from the New York State Energy Research and Development Authority, (NYSERDA) New York State electricity consumers paid 19.1 cents per Kilowatt-hour monthly while the average for the country was just over 10 cents.
Similarly, 2005 estimates from EIA and the New York Affordable Reliable Electricity Alliance placed the state at double the national average for annual carbon dioxide emissions that year, with New York
producing 210.9 million metric tons, or approximately four percent of the country's 5,974.3 million metric tons of carbon dioxide produced. (Electricity generation nationwide in 2005 was responsible for 2,396.8 million metric tons of carbon pollution)
Con Ed has proven to be ahead of the curve, however, reducing its carbon emissions over the past five years by a total of 29 percent, earning the number one ranking among energy utilities by the Carbon Disclosure Report in September. It reduced its production of sulfur-hexafluoride gas emissions from electricity distribution, used more natural gas in its steam generator plants and created new cogeneration systems to double work efficiency, reducing carbon dioxide emissions.
It is of little surprise then, that Con Ed's employees political action committee contributed $1,000 to Congressman Henry Waxman's 2010 re-election campaign. Waxman, the main proponent of the current climate legislation, and chairman of the House Energy and Commerce committee, was also one of the original authors of the 1990 Clean Air Act.
In July, Con Ed Chief Executive Officer Kevin Burke was interviewed by Jim Cramer on CNBC's Mad Money. During the conversation, even Cramer remarked on the fear of expensive rollovers to customers and elimination of middle class tax cuts. Nevertheless, he affirmed Burke's extolled virtues of an emissions trading system, which the Con Ed honcho praised and welcomed.
“I don't think the CEO would be arguing for cap-and-trade if it would seriously endanger his company,” Cramer said. “Why is the rest of the industry so wrong to be afraid?”
In responding to Cramer's query, Burke touched on another aspect of New York's preparedness for the impending cap-and-trade system: the Regional Greenhouse Gas Initiative. (RGGI)
Proposed in 2003 by then-New York State Governor George Pataki, RGGI was setup as an alliance among Northeastern states to combat global climate changes through stricter carbon emissions laws. Since then, ten states have entered into membership of RGGI, including New York, and starting this year, all member states began the first three-year compliance period, during which they would buy and sell current and projected 2012 carbon emission allowances. The latest sale in June saw more than 30 million allowances sold for $3.23 per ton of carbon dioxide for the current period, an increase of 16 cents per credit since the first offering in September 2008; 2.2 million 2012 allowances sold for $2.06 per ton, a massive decrease of 99 cents from the previous 2012 tally in March. Hence, a cap-and-trade system regionally can already be seen as motivating current mobilization of clean air technology to prevent future emissions and future costs.
“We are a proud member of the RGGI program and will continue to do our part in increasing steam usage and reinventing electric production and distribution facilities,” said Robert McGee, a spokesman for Con Ed.
“Greenhouse gases are a particular concern for not only our company, but all national energy providers,” he said. “So we support all efforts on a national, legislative approach.”
While RGGI auctions in New York state – approximately 97 percent of its total emissions distributed through 64 million carbon allowances – is fairly popular among regional energy distributors, some are angered by the over-reliance on increased competition between their own companies.
Indeck Energy Services, a 128 megawatt power plant in Saratoga County, is a small independent company that contracts its own supply through Con Ed. Since the RGGI implemented though, Indeck has had difficulties keeping expenses in line. And since it has a standing fixed-price agreement with its customers and Con Ed since 1989, it cannot raise consumer rates. When Indeck insisted Con Ed foot its $1.6 million bill – and was rebuffed – it took part in a joint lawsuit with more than ten other small companies asking New York State to force bigger conglomerates to pick up a larger share of the carbon taxes.
Thus, when it comes to the question of the progressive or regressive nature of cap-and-trade, it seems the policy is indiscriminate: someone will have to pay more, and it will likely be the consumers. Further evidence of this can be found in the cap-structuring meetings RGGI officials had in New York last fall, when it was agreed the first two three-year trade periods would each end on a 2.5 percent cap reduction to reduce overall emissions. The following April, New York Senators and Governor David Paterson – already unpopular with state environmentalists because of his proposal to increase cap allowances – said Con Ed could increase totals charged by $721 million, or an average of 6.1 percent across the New York electrical system.
Additionally, Con Ed is currently pushing state legislators to allow another raise for its gas customers, which would increase the average customer's bill by $16. Escalating energy rates should be expected in a cap-and-trade system, according to David Bomke, executive director of the New York Energy Consumers Council.
“Invariably, cap-and-trade systems like RGGI or the Obama proposed model will have to raise energy costs,” Bomke said. “These systems are predicated on discouraging energy consumption, so if less people want to use that much energy, mission accomplished.”
In the current economic downturn, Bomke suggested increased prices may eventually help protect the environment, and he insisted he, as well as the many constituents he represents – one of which is Con Ed – support cap-and-trade, raised prices might have an adverse effect, particularly in such a unique, large city as New York.
“We already have the greatest city in the world emitting far less greenhouse gases than other comparable cities, because so many people here use mass transit,” he said. “But suppose those individuals who are on the brink of bankruptcy, foreclosure and so on decide it's too expensive here and move, what happens?”
“Density decreases, more people find more ways to drive around, use more electricity, consume more energy, and rates continue to go up,” he said.
He also noted within the first year of operation, RGGI had made New York State between $200 and $300 million in carbon allowance sales. But due to Paterson's cost-cutting methods, most energy companies – which planned to use those funds to improve and increase efficiencies in their distribution and generation facilities – have not seen that money so far.
“New York State has moved towards a system that allows for a competitive market,” Burke told Cramer on Mad Money. Despite his confidence and interests in RGGI and a federal cap-and-trade system, New York electricity consumers have their own doubts about maintaining fair energy rates.
Sasanto Basu, 72, is a private accountant from Flushing, Queens. He planned to retire several years ago, but has kept working to support his wife, a homemaker, and son, who attends college while living at home with his parents.
“My bills have gone up every year for as long as I can remember,” Basu said. “Everyone is hurting now, and with all these expenses going up, I don't know how companies or government can expect people to lift themselves up when there is nothing supporting them.”
Even New York City Mayor Michael Bloomberg is skeptical about a cap-and-trade emissions system. During a 2007 summit on climate change in Seattle, Bloomberg called cap-and-trade and “easier sell because the costs are hidden,” favorably comparing a carbon tax.
“The costs will be the same under either plan, and if anything, they will be higher under cap-and-trade because middlemen will be making money off the trades,” he said.
It is the unpredictable nature of market regulation of carbon allowances that angered Bloomberg, and led to the European Union's major regrets over “subprime” carbon trading, according to Janet Redman, co-director of the Sustainable Energy and Economy Network at the Institute for Policy Studies.
Describing carbon allowances as investment assets, Redman says the European Union initially gave away carbon allowances to energy conserves, who were expected to report on their own their progress on reducing carbon emissions. The European system, called the EU Emission Trading Scheme (EU ETS) has since come under scrutiny because the allowances were given away while the cap was also set too high, thus emission restrictions were not necessary. More to the point, European energy companies were still charging more for electricity, gas and steam despite reduced demand for the allowances, leading to speculation of massive profiteering by the leaders in Europe's energy market.
According to Redman, the same type of unpredictable behavior in accepting allowances and passing on costs will lead to unnecessary rate increases and relatively unchanged emissions rates.
“We think that cap-and-trade is not the right answer,” Redman said. “As seen in the EU ETS, it has been five years and consumers still see higher prices every year, with emissions having risen too.”
“This is just another way big energy companies and certain legislators can outsource the responsibility to a market system that will produce more volatile prices, with less energy supplied,” she said.
Redman said under the current legislation, 85 percent of the carbon allowances would be distributed among polluting companies for free.
“Unfortunately, political bickering allows bad policy like cap-and-trade to sneak by, while support for more rewarding energy solutions like solar and wind power dwindles,” she said.
From the opposite end of the spectrum, Sean Pool, special assistant for the energy policy team at the Center for American Progress, calls the “grandfathering” of carbon allowances an “appropriate” way to divvy up credits to heavy polluters looking for ways to improve their technology without disturbing the many customers they supply with energy.
Pool too, has examined the CBO's reports on cap-and-trade and said the office indicates cap-and-trade revenues could net anywhere between $50 and $300 billion annually, which he then said could easily be used to offset costs to disturbed companies and low- and middle-income families whose rates are subsequently increased.
“If we approach this from a historical point of view, the companies seen with a longer tradition of heavy pollution will benefit from low-cost and free carbon allowances,” Pool said.
“Attaining more allowances, from the government or through low-cost negotiation with other companies will allow bigger polluters more time to manage their transition to cleaner, more efficient technology, as well as moderate smaller rate increases to lessen the burden on consumers.”
Even the slightest burden on Con Ed consumers might be too much to handle. According to NYSERDA, the impact of a federal cap-and-trade program will cost New York electric customers one more cent per kilowatt hour, roughly translating to an addition of $45-70 in annual bills. It could be difficult to pay off those types of increases, considering 330,000 low-income consumers in New York State were cut off from their services in 2008 alone for non-payment.
Looking ahead, Con Ed and other companies might be able to look at carbon-reduction experiments like the carbon capture process being investigated by MIT postdoctoral associate Thomas Adams and chemical engineering professor Paul Barton.
Using a chemical synthesis reaction with solid-oxide fuel cells, Adams and Barton can produce just as much energy as a regular gas plant with natural gas, but without burning the fuel, thus almost completely eliminating the need for emissions.
Accordingly, because they used natural gas in the process, their byproduct would actually be a physical stream of carbon dioxide which they could capture and contain, and which could also produce potable drinking water.
The only drawback to their system is due to its extremely high rate of carbon consumption, it would need federal cap-and-trade legislation to start carbon allowances at a relatively higher rate of sell, at least $15 or more per ton of carbon emitted.
“Essentially, we are too efficient,” Adams said. “Our plant model would work to completely eradicate greenhouse gas production, so you would want to work with our model regardless of cap-and-trade, but in the real world, a system that starts off selling cap allowances at $15 or more would be reasonable.”
Overall, what does all this information mean for Con Ed consumers? Will prices go up?
The CBO did present findings before congress in May that said average household energy costs would increase $1,600. However, those findings were based on a figures the office collected nine years ago. Most recently, the CBO found average household energy costs would increase $175 annually, with the lowest-income group actually receiving $40 in tax relief, the second-lowest tier paying an additional $40, the middle class paying a staggering additional amount of $235 and the upper classes paying an additional $340.
It would appear, by proportion, the middle class seems to suffer the greatest brunt of cap-and-trade trickle down costs from energy companies. According to Bomke, that should be expected.
“Most of us use a great deal more energy that we are aware of,” he said. “And unless we want consumer technologies to stop advancing, government to stop providing schools and hospitals with electricity, street lamps with light and all the other things we take for granted, we have to face facts that we are entering a new age of energy consumption, and we have to pay for it.”
