In November and December 2002, the U.S. Department of Energy held a series of workshops in Washington, DC, Chicago, San Francisco, and Houston to collect information about how the department’s Voluntary Greenhouse Gas Reporting System should be modified to implement directives issued by President George W. Bush.
Participants in the Chicago workshop, held December 5-6, were decidedly leery of the DOE’s desire to make the reporting program more attractive.
Background
On February 14, 2002 President George W. Bush proposed a climate change initiative focused on sequestration and reducing greenhouse gas intensity (emissions per dollar of GDP) in energy production and consumption. (See “Bush Announces Kyoto Alternative,” Environment & Climate News, April 2002.)
The President’s proposal departed from the approach taken by the Kyoto Protocol, where the objective is to reduce greenhouse gas emissions to 7 percent below the base year of 1990. By contrast, the President’s objective is to encourage energy efficiency and voluntary greenhouse gas reductions.
Toward that end, the Department of Energy was directed to improve the present greenhouse gas reporting system established under Section 1605(b) of the Energy Policy Act of 1992. The President says he wants to ensure that firms registering emission reductions will not be “penalized under a future climate policy.” Moreover, “transferable credits [will be given] to companies that can show real emissions reductions.”
As the Chicago workshop showed, there is some tension between the President’s stated objectives and the requirements for creating a system of transferable credits for greenhouse gas reductions.
Identifying Sources
A greenhouse gas emissions trading system would require the identification of emission sources, and for each the establishment of baseline emissions for some year, like 1990. This is not as easy as it sounds. The range of possible emission sources is much wider with respect to greenhouse gases than, say, sulfur dioxide. Moreover, there are six primary greenhouse gases, and it is not clear how the trading of these gases might exchange with one another.
Not only must a greenhouse gas trading scheme allow for the trading of multiple greenhouse gases, it must also recognize corporate entities often have more than one source of emissions. There are theoretical gains to be achieved simply from averaging sources within an entity. Achieving such gains does not require a full-blown emissions trading market with all of the attendant transaction costs. It is instructive to note that throughout its history (since 1995), the much simpler Title IV trading of sulfur dioxide has mainly involved each electric utility trading with itself.
Participants in the DOE’s Chicago workshop discussed at length the form of the emissions to be measured. Emissions might be measured as absolute levels; as estimates derived from energy fuel consumption; on the basis of intensity (emissions per unit of economic output, perhaps per dollar of GDP), as is mentioned in the Presidential initiative; as project-specific emissions; or entity-wide. The number of measurement options available makes it more difficult to set baselines and measure subsequent compliance.
Verifying Emissions
Participants in the Chicago workshop discussed the challenges posed by the need to develop credible baseline data and verify emission reductions on an ongoing basis. The ubiquitous nature of carbon dioxide makes it very difficult to associate emissions with any specific source.
The verification problem is especially difficult with sequestration projects. The effect of growing plants and trees to absorb CO2 is theoretical at best. Moreover, it is difficult to estimate what the CO2 levels would have been in the absence of sequestration projects. That difficulty also presents itself for other projects that involve emission reductions, like car pools for employees and other energy conservation efforts.
Because of the inherent difficulty in arranging a data reporting system for emission reduction projects, it would not be surprising to see such projects disappear from any trading program once it is established. Such has been the case for the Title IV and RECLAIM systems.
Ensuring Quality Data
Questions arose about how the emission reports submitted by entities participating in a trading scheme would be verified. Participants at the Chicago workshop thought a signed statement from the entity’s technical manager would suffice, but it is not clear such an arrangement would satisfy government officials. Nor is it obvious what alternatives to self-reporting would be acceptable … but Arthur Anderson and vote counters in Florida are definitely not on the list.
Breaking the Promise
Although President Bush has directed the Secretary of Energy to reform the greenhouse gas reporting system to make it more attractive to greenhouse gas emitters, the directive brings with it no guarantees. It can be superceded at any time, by a subsequent directive from Bush himself or by a new President. Congress also has the authority to substantially change rules established by the administration.
The record of governments that currently supervise emission trading schemes is not encouraging in this respect. Indeed, the Clean Air Act Amendments of 1990, which established a sulfur dioxide emissions trading scheme, and the RECLAIM trading system adopted by the South Coast Air Quality Management District in California have explicit provisions allowing subsequent changes or outright elimination of emissions trading.
An allowance allocated under this title is a limited authorization to emit sulfur dioxide in accordance with the provisions of this title. Such allowance does not constitute a property right. Nothing in this title or in any other provision of law shall be construed to limit the authority of the United States to terminate or limit such authorization. [Clean Air Act Amendments of 1990, 405(f)]
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RTCs [RECLAIM Trading Credits] are not property within the meaning of the state and federal constitutions. The [South Coast Air Quality Management] District reserves the right to limit, suspend or terminate any RTCs, or the authorization to emit … [Regional Clean Air Incentives Market, Volume I, October 1993, page 3-19]
Since the allowances and credits are not property, reducing their value by changing the rules is not a “takings” under the Fifth Amendment of the Constitution. Thus, the governments are not required to offer compensation to the injured parties.
It was later discovered that these provisions were not idle threats. In April 2002, a change in the rules for trading sulfur dioxide allowances in Philadelphia–where 80 percent of the modest trading was taking place–all but dried up the market. During the electricity crisis of 2000 and 2001, the South Coast Air Quality Management District suspended the trading of RECLAIM credits among electric utilities and replaced trading with monetary penalties for emissions.
What Is a Company to Do?
The Chicago workshop made clear the many flaws associated with a system of voluntarily reporting greenhouse gas emissions. It has all the dangers of self-incrimination: providing the government [not to mention competitors and environmental groups] with information that could be used to reward allies and punish adversaries. In the present anticapitalist environment, where private-sector firms are viewed with considerable hostility, political rewards and punishments are very real possibilities. It is obviously tempting for emitting entities to avoid participation in such a program.
On the other hand, being absent from the political arena leaves firms vulnerable to disadvantages built into the trading regime by competitors, as was done when the federal government and several states mounted an antitrust suit against Microsoft. Moreover, firms that refuse to participate may lose a public relations advantage available to those who voluntarily decrease emissions.
For a firm facing such dangers from government-funded designs for reducing greenhouse gases, it would be prudent to support financial analysts and free-market institutions not committed to government solutions. It would be prudent as well to promote more scientific inquiry into global warming theory. Contrary to the claims of the political establishment, the science is far from settled.
Jim Johnston is an economist retired from Amoco and a policy advisor to The Heartland Institute.
For more information …
on the DOE’s 1605(b) workshops–including participant lists, audio recordings, and lengthy PDF files offering the complete record for each of the four hearings–point your Web browser to http://www.pi.energy.gov/enhancingGHGregistry/workshopsInfo.html
December 18, 1935 – January 21, 2022
