It Passed... Now What?

Ricardo Bayon on June 30, 2009 Comment

So the Waxman-Markey bill on energy and climate change (officially known as H.R. 2454 or the American Climate and Energy Security Act of 2009) squeeked by in a nail-biting vote this past Friday. The official tally was 219 votes in favor to 212 against, which is one vote more than was legally necessary to pass the bill (of note is that the uber-liberal Presidential candidate, Dennis Kucinich is reported to have voted against the bill... what would have happened if it failed by one vote? would he have become the Ralph Nader of 2009?). So it was a close one. But it passed. Now what?

Officially, the bill now goes to the Senate, where its fate is anything but certain. A NY Times story (from Greenwire) quotes people in the Senate saying that the bill as it stands will have a difficult time making it through. And if the close vote in the House is any indication, they are probably right.

Regardless of what happens in the next few months, there are a few things that can already be said. One is that the fact that a bill like this --which was vigorously opposed in many parts of the US and by high-profile Republicans and moderate Democrats-- is already a sea-change. In about 5 years we have gone from a country where large sectors of the population were doubting the existence of climate change, to one where a cap-and-trade program to address climate change passes in the US House of Representatives. Listening to the debate in the House, however, one realizes that not everyone has come along for the ride. There are still many who believe there is no problem, that any change to the American way of life is just too costly, and that we should just go on partying like it is 1999.

Still, there can be no doubt that this is landmark legislation. The US looks about to engage in the climate change battle at another scale than it has in the last decade. It is --as Churchill might of said-- the end of the beginning.

Also, not to be "mis-underestimated" is the amount of politicking, lobbying, and strong-arming that happened around this bill. Reports from DC are that the switchboards and cell-phone lines were abuzz with people (from the White House, from lobbying groups, from interest groups, and coalitions) calling representatives from both sides of the aisle trying to convince them to vote one way or another. The mind-blowingly boring greek tragedy that could be watched on C-SPAN as both sides either praised or railed against the bill was only the visible tip of the iceberg. The real ferment had been clogging up DC cell-phone towers for over a week.

So, on the pro side, we have a solid version of climate change legislation in the US. This is a real victory and --while the legislation may not be perfect-- it is more than many would have believed just 2 short years ago. We can build around this rough framework, make the pieces better, and this could become a real transformative piece of legislation for the US --and as a result, the world.

On the con side, the law is far from perfect and it does have some very worrying aspects which I will get into below. What is worse, the law was passed by only the slimmest of margins and as it goes into the Senate and the rest of the DC sausage-making machinery, it could quite likely get weaker, more watered down, and just generally worse. We can hope that this won't happen, but the pessimists (or is it realists) among us would say that more concessions to interests groups are not just possible, they are likely in the months to come.

So where does the current bill go wrong? Many environmentalists have argued that one of the biggest problems with the law is that (in a last minute concession to agricultural interests) it cedes responsibility over agricultural and forestry offsets to the US Department of Agriculture (USDA) instead of the Environmental Protection Agency (EPA) as was originally envisaged. They argue that the EPA is mandated with protecting the environment whereas the USDA is mandated with protecting agricultural interests. They say this is a conflict of interests.

I actually don't think this is a big deal. I think the current USDA has some excellent people, people who understand the science and the economics behind climate change, who know how offsets work, and who are just as qualified (and a likely) to design a working offsets program as are people at EPA. I think that once we see what happens in the Senate and beyond, the real challenge (regardless of whether it rests on the shoulders of the EPA or the USDA) will be to write and promulgate solid standards and methodologies that tell us what is and what isn't an offset. This will require clear definitions of how we establish baselines in offset projects, how we know that a project is "additional", and how we ensure that a credit is real, verifiable, and permanent.

We are not starting from scratch here. There are some good, and some excellent methodologies out there, in the form of the protocols to the California Climate Action Reserve, methodologies for the UN's Clean Development Mechanism, and emerging principles and methodologies for the Voluntary Carbon Standard. If the question is how to design methodologies for forestry projects, or methane capture projects, there is much to go on.

If, on the other hand, the question is how to design offset methodologies and protocols for the agricultural sector, there is less to go on. Globally, only two existing systems have agricultural methodologies in operation: the voluntary Chicago Climate Exchange, and the offset trading system in the Canadian province of Alberta. There is much that could be learned from both (both bad and good), but in truth there is much more to be done in this regard. (More on this in a future post).

So to my mind, the issue is less one of whether USDA or EPA should manage the offset system, but rather that whoever manages it does so in a way that makes --first and foremost-- environmental sense, and secondly, financial and market sense. In practice, this probably means that the USDA and EPA will end up having to work together.

On international offsets, there is a similar issue at play (though arguably it is even more complicated). The bill gives some responsibilities in this regard to USAID, to the State Department, and presumably to the EPA and USDA as well. Getting to government agencies to work well together can at times be difficult. Getting four to do so is exponentially more difficult. So we will see where this one ends up. See a good story on this in the Ecosystem Marketplace.

Beyond the issue of who manages the offsets (which should really be one of HOW the offsets are managed), the question that most concerns me about the latest version of the bill has to do with the crediting period for offsets from biological sequestration. The latest version of the bill added language which basically said that credits would be valid for up to 5 years for agricultural sequestration, up to 20 years for forestry sequestration, and up to 10 years for "other" practices. This is worrisome because credits from biological sequestration are, by their very nature, not permanent. In other words, if you sequester carbon in a tree trunk, and that tree burns down, the sequestered carbon is now released into the atmosphere. The same goes for carbon sequestration in agricultural soils. Different sections of the final Waxman-Markey bill acknowledge this fact and direct the relevant agencies to deal with this issue of "credit permanence". However, by establishing a system for temporary crediting (without addressing permanence), they are potentially undermining all this work.

Allow me to elaborate: If you sequester carbon in the soil by, say, agricultural practice A, and you get credit for that, but that credit is only good for 5 years, what is to stop you from reversing agricultural practice A on year 6, re-emitting the carbon that you got paid for, then in year 7 re-sequestering it and charging for it once again? To me this could lead to perverse incentives and to the generation of a slew of not very credible carbon offsets. If this loophole isn't closed, I fear that it could (like the proverbial bad apple) spoil the entire offset crediting system that the bill spends hundreds of pages outlining.

Likewise, the world has already seen the failure of one temporary carbon crediting system: the Temporary Certified Emissions Reduction (or T-CER) credit established as part of the UN's Clean Development Mechanism (CDM). These were created by the CDM to address the issue of permanence in forestry projects and they proved an abject failure. And these credits failed not because they were technically suspect or infeasible, but because buyers (and, truth be told, regulators) didn't really want them. The problem is simple. A temporary credit is akin to a rental of carbon. Like with cars, once the rental period is over, if you still need a car (or the carbon), you then have to either go out and buy a permanent credit or rent once again. And, like with cars, people were not willing to pay the same amount of money for a rented credit than they would for a permanent credits. So at times when CERs were trading at around $10-15 a ton, T-CERs (when they could be found, which was rare) were trading at less than half that.

From the regulator's perspective, the temporary credits also generate substantial headaches and transaction costs since regulators (and the registries they create) then have to monitor expiration dates and make sure that when temporary credits expire, those that have used them for compliance provide and produce replacements. So, from a variety of perspectives, temporary crediting can be tricky and need to be handled with extreme care.

I imagine that those that advocated for temporary crediting did so because they did not want to be held to long-term carbon contracts, particularly when the activities being undertaken are done so on a yearly basis and could be easily reversed (i.e. tillage practices). But in reality, temporary crediting leads to a very different type of commodity in the eyes of buyers, one that is more complicated, riskier, and worth less than a more permanent credit. So, while those who want to see temporary crediting put in place may think that it is making their life easier, in truth it will simply be devaluing their credits. The road to hell --in the carbon markets as in life-- is well and truly paved with good intentions.

Again, the passage of the ACES by the House of Representatives should be seen as little more than the opening salvo in what will likely prove to be a very long and bloody battle. But as far as opening salvos go, it is a good one, and --to the extent that it sets the tone marginally in favor of climate legislation and a cap-and-trade program in the US-- it could even be a historic one... But let's wait to see what happens when the smoke clears and the dust settles.