While Republican senators deserve applause for demanding to know what climate-change legislation would cost before voting on it, the illumination they seek has large shadows. Cost projections have no way to account for a crucial and largely unheeded disadvantage of the cap-and-trade approach to moderation of greenhouse gas emissions.
Cost studies, of course, are essential to political deliberation. And in this case they're alarming. Whether the Environmental Protection Agency captures all hazards in the study Republican senators want to see is anyone's guess. But it still will be a study. It can't see all costs.
Pattern of uncertainty
Recent studies now raising alarm among US refiners contain an illuminating pattern that shows why this is so. The latest of them comes from Energy Policy Research Foundation Inc., Washington, DC. and will be covered in an article in the Nov. 23 issue of Oil & Gas Journal. The study predicts that US refining capacity losses resulting from stationary emission costs alone would be 750,000-2.25 million b/d in 2015-30 if the price of emission allowances were $15/tonne of carbon dioxide equivalent (CO2e). If the price were twice that level, capacity losses would rise to 2.1-6.3 million b/d. Further capacity losses would result from the inability to pass through the new costs, again depending greatly on the allowance price.
An earlier study by EnSys Energy for the American Petroleum Institute also sees capacity losses: as much as 4.4 million b/d by 2030 if allowances cost $65/tonne, the high end of its range of assumptions (OGJ, Sept. 7, 2009, p. 26). Yet another study, by Alan Gelder of Wood Mackenzie, asserts an allowance price of $50/tonne and estimates the cost disadvantage of US refiners relative to imported product at $18/bbl.
These costs arise because the House and Senate bills would squeeze refining more than other affected industries. They would assign refiners caps covering emissions not only from their facilities but also from combustion of their products. At the same time, it would shortchange them, relative to other industries, in the distribution of allocated allowances and wouldn't hit overseas refiners nearly as hard.
Under either cap-and-trade bill, then, US refiners would have to become extra-heavy buyers of emission allowances. The assumed price of allowances thus affects their industry more than it does others. It's extremely important, however, to any business covered by the legislation and unable to meet emission caps after allocated allowances run out.
So what would the allowance price be? It's obvious from the range of assumed prices in studies cited here that no one knows. Indeed, an August study of the House bill by the Energy Information Administration examined a range of cases producing a range of allowance prices in 2030 of $41-191/tonne of CO2e.
With so much apparent uncertainty, all study authors can do is to assume a value for allowance prices or a trajectory of values over time, consider other variables, and model results. Although helpful, that's not reality.
The largely ignored disadvantage of cap-and-trade schemes results from what is supposed to be the main appeal: specificity of the declining targets for emission reductions, manifest in the cap. The specificity would keep the market for emission allowances from working freely. A crucial dimension, supply, would be fixed by the cap. As demand for emission allowances varied in response to innumerable forces, beginning with economic activity and weather, allowance prices would fluctuate by amounts exaggerated by the imposed inflexibility of supply.
Certain volatility
A certain characteristic of the market for emission allowances thus would be price volatility. The volatility would aggravate energy consumers and make investments more difficult than they otherwise would be to plan. It would benefit only traders of emission allowances. And the efficiency cap-and-trade planners thought they were giving the effort to cut emissions of greenhouse gases would become massive inefficiency, and consequent cost, in the broader economy.
Studies can't predict these effects. But lawmakers can consider them before supporting an overhaul of energy markets that would have little meaningful effect on the climate. At least they should.
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