Nick Snow
OGJ Washington Editor
WASHINGTON, DC, Oct. 21 -- Congress should continue to make a carbon cap-and-trade system its top global climate-change legislative priority because it would be the most efficient and economically attractive approach, three experts agreed on Oct. 20.
The alternative would be to let the US Environmental Protection Agency develop regulations under the Clean Air Act that create a command-and-control regime imposing more costs on industries with significantly fewer economic benefits, the experts said at a Deloitte Center for Energy Solutions forum.
“If carbon dioxide become subject to regulation under the Clean Air Act, every new plant or plant making major modifications has to look at the best available technology for controlling CO2 before it can get a permit. There also would be significant litigation,” said Kenneth Berlin, a partner in Skadden, Arps, Slate, Meagher & Florn LLP’s Washington office and head of its environmental and climate change practices.
A cap-and-trade system, on the other hand, would create incentives for companies to develop technologies because it would establish a cost for carbon emissions, according to Martin Gitlin, managing director of US carbon credits at Noble Carbon Credits, a division of Hong Kong commodities merchant Noble Group Ltd.
“Imposing a price on carbon is going to cost money. Right now, greenhouse gases are being emitted for free,” Gitlin said, adding, “The idea is to use the market to solve the climate change problem. Regulation by EPA may not be the most effective or economic approach.”
Properly structured
Red Cavaney, vice-president for government affairs at ConocoPhillips, said the third-largest major US oil company also believes a cap-and-trade program would be the better way to address global climate change domestically, but only if it’s structured properly. It would need to give transportation adequate allowances, be transparent, include federal preemption, and contain a major role for natural gas, he said.
The bill that the US House approved on June 26 meets none of these conditions, Cavaney said, while legislation introduced in the Senate comes closer but still falls short. A key problem is that much of the public and its elected federal lawmakers underestimate the scale and scope of existing energy industries and how long it would take to replace them, he said.
“Oil and gas will play a major role in US energy for several more decades. Trying to retire the industry prematurely would put the United States at a significant economic disadvantage,” Cavaney explained.
“There isn’t any reason to not go forward with a national climate framework, but it has to be more comprehensive,” Cavaney said, adding, “It’s going to be a challenge to get consumers to accept the idea of paying a bit more, but they won’t accept the entire burden. We need to do this intelligently.”
Acid rain program
Gitlin said the US actually invented the use of commodities to address environmental problems when it established markets to control sulfur dioxide and nitrous oxide emissions contributing to acid rain in the 1990s. “They’re working. You don’t hear much about SOx and NOx in the Northeast these days,” he said. The program provides both positive and negative lessons in developing a domestic carbon cap-and-trade program, he added.
One such lesson was that it cost much less than expected too deal with SOx and NOx, Berlin noted. “I don’t want to sound overconfident, but business has shown that it can develop technologies to meet new challenges,” he said.
Europe took the initiative after the administration of former President George W. Bush began and eventually instituted its own carbon cap-and-trade program in 20 countries, Gitlin said. He said that perceptions that Europe’s program failed are unfair because measured carbon emissions fell from 2007 to 2008, well before the worldwide recession began last fall.
Although the European Union did not include motor vehicles in the first phase of its cap-and-trade program, gasoline and diesel fuel costs already were high enough that it didn’t matter as much, Gitlin said. “In Europe, carbon prices closely follow energy, particularly coal. When it gets cheap relative to gas, carbon prices go up because companies buy more coal,” he said. Several US lawmakers are looking closely at price signals and potential volatility, he noted.
The discovery of significant US gas resources in tight shale formations, primarily on private land, could improve the situation by making domestic gas prices much less volatile, Cavaney said. “Power generators have been reluctant to embrace gas more fully because of prices,” he said.
Action needed
Participants agreed that action is needed to address global climate change. “Over the next 40 years, we’ll have to change how we generate energy and move away from fossil fuels,” said Berlin. “New technologies may be inherently more expensive. Cars will have to use less energy. The big international debate will be how to fund CO2 reductions in the developing world going forward. The developed world will have to play a major part.”
Cavaney listed three major challenges: Managing the transition, because “it’s not clear which companies would be the low-carbon successors at the scale we’ll need.” Availability of capital, and how it is allocated, because “policy drives where capital goes.” And establishing regulatory systems with enough flexibility so that mistakes can be corrected quickly.
In remarks concluding the discussion, the panel’s moderator, Rebecca Ramich, director of Deloitte Consulting LLP’s federal energy and resources practice, said that the situation is complicated, but that the US and its energy businesses have successfully faced complicated situations before.
“We spawned a new generation of oil and gas exploration and production technologies following the 1973 Arab oil embargo. We came together, admittedly with fits and starts and zigs and zags, to address a major challenge,” Ramich said.
Contact Nick Snow at [email protected].