Water Pollution in China (Photo by Bert van Dijk)

It has taken a long time in China, but official policies finally aim to achieve a sustainable balance between environmental protection and economic growth in significant ways. Developments over the last several weeks and months include a draft proposal for new rules on fines for pollution, discussions of an environmental tax and increased environmental spending, new environmental standards on copper scrap imports, and the release last March of China’s 12^th Five-Year-Plan, which puts environmental concerns front and center, and seeks to slow down the astronomic growth so damaging to the country in the last two decades.

The question, however, is whether these policies will achieve that balance. Together, they present a mixed view: on one hand, the 12^th Five-Year-Plan clearly shows environmental protection and renewable technology development have become high strategic goals, which will attract more funding and attention. At the same time, they remain couched within China’s myriad institutional challenges – most of which these policies are unlikely to solve.

New Environmental Standards and the Challenge of Legal Enforcement

Many rules on environmental standards currently exist in China, but not nearly as many are adequately enforced. The copper rules require certificates to indicate they are not hazardous. Since they were established in August, they have been piling up in ports as Chinese customs cracks down. Imports at specific locations, however, are much easier to address than widespread environmental non-compliance.

Enforcement of pollution in China is challenging for a variety of reasons, most of them institutional: data and monitoring challenges, budget constraints, weaknesses in the legal system, and endemic corruption at the local level. Wide geographical disparities, including differences in funding between urban and rural areas, present additional challenges.

The draft rules, if implemented, would end a longstanding weakness in Chinese environmental legislation regarding pollution time limits by introducing daily fines. Currently, time limits on pollution are undefined (or arbitrarily chosen by the central government), and the fine remains at a fixed rate rather than marginally increasing, as it does under the U.S. Clean Air Act, where fines can be issued of up to $25,000 per day for a maximum of 30 days. This can result in massive overall fines, a significant pollution deterrent.

The draft rules also seeks to address two other weaknesses in Chinese environmental law: a lack of transparency, and a lack of public participation and public interest litigation. Without the ability for the public to litigate against pollution, there is no incentive for state-owned enterprises to comply with the law, and without procedural rights, the text of a law – no matter how strong – has little meaning. Currently in China, with lawsuits rarely accepted and with environmental law a relatively new field, only a handful of all cases in the country are environmentally related. Without a strong legal system, however, even an official endorsement can only go so far.

These rules, combined with increased environmental spending, including increases in annual budgets, might be significant, depending on precisely what China plans to spend the money on. While what those plans are is not yet clear, the 12^th Five-Year Plan offers some guidance in this respect.

The 12^th Five-Year-Plan Emphasizes the Environment, but Implementation is Uncertain

China’s 12^th Five-Year-Plan contains much more emphasis on environmental policies than previous plans. It promises to invest massively in plug-in hybrid electric and pure electric vehicles; develop increased wind, hydro, nuclear, solar, biomass and geothermal energy, to the point where alternative energies reach 11.4% of total energy consumption by 2015, up from 8.3% in 2010; decrease water consumption by 30%; and increase forest cover by 1.3%. Many of these indicators, including its plan to reduce energy consumption and emissions per unit of GDP, it views as binding (as opposed to merely expected). Also notable is its plan to implement  cap and trade pilot programs, as well as its attention to the implementation of the 2008 Circular Economy Promotion Law, which defines the “circular economy” as “a generic term for the reducing, reusing and recycling activities conducted in the process of production, circulation and consumption.” Its goals are ambitious: to promote recycling at all levels, including the recycling of industrial waste, as well as to encourage low carbon and even zero emissions models.

Some of these policies, particularly in the investments into renewable energies, would be global game-changers if implemented successfully. Some researchers, however, note that even if China succeeds only halfway, the changes to global clean energy technology would be significant, with the country becoming  a price setter.

Implementation, however, remains uncertain. Research since March indicates significant challenges to both its lofty environmental and general policy goals, with one researcher pointing out that pollution targets are not enough without more emphasis on data collection. As is generally the case with China’s five year plans, implementation details are not addressed. Rather, those are found in more detailed policy documents drafted in between these plans, and are left to a large degree for local authorities. Yet local environmental protection bureaus face many challenges, not least being surrounded by (and often involved in) corruption within local enterprises and governments. For this and other reasons that are too lengthy to describe here, vague intentions to “strengthen the supervisions of law enforcement,” and other similar statements, remain an open question.

In addition, China’s central government has historically treated environmental policy with as much of a heavy hand as it treats its economy: for example, by its use of short-term campaigns that may close thousands of local polluting companies, but ultimately fail to address systemic institutional challenges; or by its clampdowns on protesters and arrests of high profile environmental activists. Most recently, it imposed electricity brown-outs in late 2010 in its push to meet energy intensity targets.

Without a doubt, China is clearly focused on a sustainable direction. It may well be that that focus will lead the world, as in the case of renewable energy. Without addressing structural challenges, however, sustainability is not guaranteed.

Commodities Futures (Image by: Lars Plougmann)

As already discussed on Climatico, using REDD+ as a private sector offsetting mechanism runs the risk of creating perverse incentives, exposing land to market price volatility and causing supply-induced price suppression. However, for the purposes of a deeper exploration into the market-related issues of REDD+, let’s assume these problems are solved and that forest carbon can, in theory, be commoditised and traded. This begs the question of whether forest carbon can be treated and traded like any other commodity.

A report by the Munden Project earlier this year attempts to answer this question. The authors’ conclusion was that forest carbon is not suitable for commodity trading. In response, trade association the Carbon Markets and Investors Association (CMIA) this month issued a response to the report.

Don’t commoditise forest carbon

Turning initially to the findings of the original report, first, the report highlights the risk of creating a monopsony structure, largely due to the limited number of organisations capable of verifying carbon measurements to IPCC standards. This results in the homogenisation of prices offered by the credit buyer to a project developer. More importantly, it also diverts the benefits of REDD+ away from communities and towards the middle men, in contrast to REDD+’s stated developmental objectives, whilst increasing the costs of REDD+.

Second, the high level of complexity and uncertainty surrounding forest carbon greatly increases the delivery risk for buyers. In short: there is no universally agreed process for carbon accounting; the costliness of an accounting method influences its use and consequently the mass of carbon that’s measured; and baselines can be manipulated. This affects the volume of credits that can be used to meet contractual obligations, whilst also leaving traders somewhat befuddled on the exact nature of the underlying physical asset.

Third, the uncertainty arising from the issues highlighted above, combined with the unavoidably high margin of error inherent in carbon measurements, is unacceptably high for commodity trading. If forest carbon transactions are executed on an exchange, they will be cleared by a clearing house, the latter of which takes on the counterparty risk. A clearing house will ensure that it can cover 99% of potential losses on a single day. However, the margin of error in carbon measurements is an order of magnitude higher than the uncertainty tolerated by a clearing house. Therefore, forest carbon will either not be exchange traded or a sub-standard commodity will be created instead.

Do commoditise forest carbon

Turning now to the CMIA’s responses, the CMIA first argue that primary market prices will not be homogeneous since the demand for credits is determined by the size and design of a compliance regime that permits offsetting via REDD+. And since any compliance regime has more than one compliant entity, there will always be more than one buyer. There is ample evidence from existing carbon markets to support this contention.

The Munden report is correct, however, to point out that there are only a limited number of organisations capable of verification to IPCC standards. This will almost certainly lead to higher costs and price manipulation by a limited number of organisations, subsequently diverting money away from communities and inflating the total cost of REDD+.

In response to the Munden report’s conclusion that uncertainty and complexity in verification causes problems meeting contractual obligations, the CMIA stresses this can – and currently is, in existing carbon markets – mitigated by the prices and volumes stipulated in the contract. This is true, but mitigation to the level of accuracy that a clearing house demands, this is unlikely. However, the assumption by the Munden report authors that primary market transactions need to be cleared via a clearing house is incorrect.

Copycatting the CDM

It is far more likely that primary market transactions will be executed in the same way as those in the CDM. This means that the delivery risk will be taken on by the two parties that drew up the contract, and that the transaction is very unlikely to be executed on an exchange and cleared through a clearing house. Meeting the high level of accuracy demanded by a clearing house is therefore immaterial.

This leaves a somewhat more familiar landscape. A compliance market will create demand from multiple buyers and result in price differentiation. The high level of uncertainty regarding the potential volume of issuable credits will be accounted for in the unique structure of each contract, and the transaction will be cleared bilaterally. The secondary markets can then trade a commodity that, crucially, already exists – since it has been issued and contains no delivery risk – on an exchange, using a clearing house.

It seems that the Munden report is correct in highlighting the risk of inflated costs caused by there being only a narrow group of capable verifiers, and the consequent diversion of benefits away from communities and the increased costs of fighting deforestation. It fails, however, to properly appreciate the primary-secondary market distinction that currently exists in the carbon markets, and how this is likely to be replicated in a private sector compliance market for REDD+, should one ever exist.

As the mid-term elections approach, Californians will not only be faced with a choice for a new governor, but also new energy legislation that will have ripple effects throughout the country. Proposition 23 would suspend the existing Global Warming Solutions Act of 2006, which aimed to lower carbon emissions 25% by 2020, until the state’s unemployment rate falls below 5.5%. If enacted, the measure will further delay progress in Washington on climate legislation and lead to a very long wait for a regional carbon market.

California has been hit with some of the worst unemployment rates in the country. According to the US Bureau of Labor Statistics 12.4% of the state’s population were unemployed in September 2010, 2.8% higher than the national average. When Governor Arnold Schwarzenegger signed the Act in 2006, unemployment was at 4.6% but that was also during a very different economic climate throughout the country.

Both California gubernatorial candidates Republican Meg Whitman and Democrat Jerry Brown say they oppose Prop 23. However, this is not only a state issue. The outcome of Prop 23 will reflect the path of climate legislation on a national level. Even though the candidates in California are united on this issue, Washington is divided, where Republicans and Democrats are at odds on the passage of comprehensive climate legislation that would enable a national cap-and-trade market and legally reduce emissions.

If Prop 23 passes, its effects will be felt in Washington. This can give lawmakers further fuel to negate any type of national carbon cap. The Global Warming Solutions Act was also prepared to establish a regional cap and trade market, one of the few initiatives in the country. If Prop 23 is enacted, that situation will not only put a carbon market on the backburner for California, but it will also hinder any type of national carbon market. A potential positive note is that if it is passed, the Global Warming Solutions Act will only be suspended until unemployment drops below 5.5%, giving hope that it can be resumed in the near future. However, unemployment rates in California have dropped below 5.5% levels only three times in the past 40 years. California and Washington will be in for a very long wait.

On the other hand, if Prop 23 fails, that may give politicians in Washington the leverage they need to pass national legalisation. They can argue that the American people, especially those in California, want state and perhaps national regulation of carbon emissions. They can use the failure of Prop 23 with the gubernatorial winner to gather support. It can also be used to promote an increase in the investment in renewable energy sources. California can set an example and become a national leader in the development of clean energy technology.

In 2009, only 36% of Americans believe climate change is man-made, according to a study byPew Research Center. This figure has reflected failed climate legislation in Washington. If Prop 23 fails, it may be an indication of a change in public perception that can provide tools for the Senate to pass national legislation.

On April 1, Tokyo’s Metropolitan Government (TMG) started a cap and trade system, which was the first attempt by a metropolitan area in the world. Further, at the national level, the current administration, led by a coalition composed by the Democratic Party of Japan, the People’s New Party and the Social Democratic Party, proposes a cap and trade system in its bill on the basic law for prevention of global warming (Ondanka Taisaku Kihon Hoan) and the Diet started deliberating the bill on April 20. Though a cap and trade system is going to be carried out at the national level, its structure has not been clear, and METI and businesses very actively seek to make the structure of a Japanese cap and trade system preferable or acceptable for them. As environmental NGOs propose different ideas concerning a Japanese cap and trade system from those of METI, the battle between green NGOs and METI over significant aspects of a cap and trade system has been fiercely happening. Especially, whether a Japanese cap and trade system should adopt an absolute target or an intensity target is one of the most controversial issues.

While METI strongly insists on the adoption of an intensive target, environmental NGOs are strongly pushing for the adoption of an intensity target. Environmental NGOs favour an absolute target mainly because an intensity target is supposed to promote increase in production for targeted industries. Indeed, because it is supposed that an absolute target is superior to an intensity target for CO2 reductions, TMG’s cap and trade system uses an absolute target. However, METI in its report, ‘Haishutsuryo Torihikiseido ni Tsuite’ (Concerning a cap and trade system), published on April 7, eloquently proposes an intensity target and justifies its adoption in the basic law.

Concerning the argument that an intensity target would promote increase in production, METI in its report suggests that increase in production is good for the Japanese economy and especially development of stable companies which achieve highest energy efficiency is beneficial for the whole nation and should be supported. Further, METI proposes that an intensity target would encourage businesses to achieve highest energy efficiency in the world. It is, according to METI, also possible to consider separately various adjustment mechanisms in order not to increase total CO2 emissions where a company achieves an intensity target but increase emissions because of increasing production.

In order to justify these arguments,  the report cites comments of Professor Gwyn Prins at London School of Economics in an article of Montel Powernews, “Japanese industry has shown real efficiency gains, reduced emissions and increased profits at the same time.” However, it is difficult to say that METI’s arguments can be justified by the comments. Indeed, in his two main articles as well as the article mentioned above, How to Get Climate Policy Back on Course and The Wrong Trousers: Radically Thinking Climate Policy, Professor Prins does not suggest that production should be increased. Either, he does not propose the adoption of an intensity target in a cap and trade system though he strongly emphasizes the necessity for reduction of the carbon intensity of an economy through increasing energy efficiency and deploying low-carbon technologies. Although he points out some deficiencies in the current cap and trade system and proposes its improvements in the latter article, he does not specify the adoption of an intensity target as its improvements at all.

In the very near future, it will be determined whether Japan’s cap and trade will adopt an absolute target or an intensity target. It is actually very difficult to determine which target should be adopted because both targets have pros and cons. As discussed above, however, it is inappropriate to adopt an intensity target because of the METI’s report as Professor Prins proposes neither an intensity target nor an increase in production and METI’s arguments are not supported by him, that is the report is misleading.

Australia’s cap and trade system, the Carbon Pollution Reduction Scheme (CPRS), is being reintroduced into Parliament this week, after two rejections in 2009 (see here and here). However, it is almost certain that it will fail again, following decreasing public support for the policy after the Copenhagen conference and Tony Abbott’s ascension to the opposition leadership.

To start with, public support for Prime minister Kevin Rudd’s flagship policy has dived 10 points from 66 to 56 per cent according to the latest Herald/Nielsen poll, while opposition to the trading scheme has risen 4 points from 25 to 29 per cent. While there has always been a high level of confusion in the electorate about climate change policy, and in particular about the CPRS, the failure of the Copenhagen conference shifted to a certain extent the public sentiment about climate change. In particular, extensive media coverage of a series of ‘scandals’ linked to the IPCC’s work has opened new windows for the numerous Australian and international climate sceptics (see for example Lord Monckton).

However the biggest challenge faced today by the government is without doubt the unexpected come back of the opposition (the Liberals) in the climate debate. The previous opposition leader, Malcolm Turnbull, is a supporter of the scheme, which had greatly divided his party over the climate issue, to the benefit of the government. Yet Turnbull has recently been ousted by Tony Abbott, a strong opponent of cap and trade and climate policy in general, not to say a climate sceptic. The change here is that Abbott has come forward with an alternative to the governmental policy. The Coalition’s (Liberals+Nationals) “Direct action plan on the environment and climate change” would create an AUS$2.5bn fund to provide incentives for industry and farmers to reduce emissions through measures such as storing carbon in soil. The plan also includes the planting of 20 million trees by 2020 and would provide $1000 rebates to home owners for solar cells. The plan has immediately been slashed by environmentalists, Greens and the Labour Party as been unable to lead the country to a minimum 5 per cent cut in emissions by 2020 compared to 2005 levels, as Australia pledged in Copenhagen. While Kevin Rudd has ridiculed the direct-action plan as “a climate con job”, most business groups have backed the plan, agreeing with the opposition Leader’s assertion it is “cheaper, simpler and more cost-effective” than Labour’s proposed carbon emissions trading scheme.

With a now clear opposition to the scheme, the government’s CPRS is very likely to be rejected by the Senate this week. The government would then again have the possibility to trigger an early election, though it would be very unlikely since the next general election will take place this year. In the most optimistic scenario, a cap and trade system would therefore not be voted for another year. Kevin Rudd’s approval rating is still way ahead from his potential challenger, though Abbott’s popularity is rising. But it is surprising that Rudd is not working to rally public opinion: he has not made a speech about climate change in the past weeks and is, instead, trying to change the subject. It is time now for Prime minister Rudd to start campaigning for his cap and trade scheme and explain to people why Australia should be moving when things look bleak internationally.

Last week the US state department approved an oil pipeline which will carry tar sands oil from Alberta across Canada down to Wisconsin. The move follows long term plans between the US and Canada over energy deals, with tar sands already a key part of the US’s current oil provider. For environmentalists the move is a major setback, with tar sands, considered the dirtiest of all oils permanently and visibility crossing the boundary of the two countries.

Environmentalists both sides of the border and around the world can only greet this with disappointment. It had been thought during the Obama campaign that his rhetoric of “dirty oil” would restrict the development of tar sands to its most likely consumer, the US. However, what now appears likely is that the US has given tacit International approval to the oil sands by creating a permanent pipeline.

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Following on from Derek Piper’s article on Canada’s proposed Cap and Trade system for this fall, environmentalists and policy makers will be left to wonder at whether Prime Minister Harper’s effort is part of a more serious effort to tackle green house gas emissions or simply keeping up with Jones’.

Some of the most far-reaching efforts have been initiated in Canada’s provinces: from British Columbia’s carbon tax to Ontario’s Premier McGuinty’s push for a transformation of domestic energy suppliers as renewable base. These efforts on the one hand, provide an idea on Canada’s potential to act as leader in climate change issues and, in stark contrast on the other hand, show the lack of leadership at federal level. The efforts of provincial leaders mean that the vast majority of Canada’s population and a majority of its economy are located in areas that face significant climate legislation. In addition, the British Columbia election, has shown that environmental legislation can endure beyond an electoral term. To put it plainly, Harper need only coordinate provincial efforts to turn Canada into a global leader for Climate Change policies.

Harper’s efforts however, have always been to manouvre Canada to around the middle of the developed countries pack. Harper has two rationales and if nothing else he has always been consistent with regards to climate change policy. His first rationale is that Canadian economic development is his primary aim and climate change targets will only be implemented where they don’t conflict with existing industries; particularly the EITE group industries “(energy intensive, trade exposed) which includes aluminium, cement, chemicals, iron & steel, lime, gas transmission, base metal smelting, iron ore pelletizing, pulp & paper, and potash companies”. The EITE industries are core areas of the Canadian export economy, and as might be expected have concomitant environmental impacts.

The sum of Harper’s latest move as Derek highlights, is keeping up appearances, with the US having passed the Waxman-Markey bill, (although probably not voting on it now until late Autumn and possibly watered down) and in the face of upcoming talks with the US and in Copenhagen in December. Canada will have little clout to influence the direction of global talks with its current policy widely derided as insufficient. The current proposal of Cap and Trade with plenty of opt outs allows for a generous fig leaf cover when going into negotiations. Harper has aided the undermining of Obama’s climate leadership from both stiff resistance from industrial lobbyists in the US and Republican opposition in Congress.

Where does this leave us? Harper’s efforts should not be taken entirely negatively; an actual Cap and Trade is still an improvement on the intensity based targets, although it will still fall short of the requirement that Canada cut its emissions by far more than 20% on 2006, the current emissions targets for 2020. Going into Copenhagen, Harper has left Canada positioned to be neither praised nor censured, perfect positioning for Harper, but woefully short of what a country of Canada’s wealth and status is capable of.

Canada dropping intensity targets?

The Canadian Government is adjusting its climate plans to more closely resemble those proposed in the US.  This summer Environment Canada is conducting a series of consultations with respect to its greenhouse gas emissions policies for heavy polluting industries and an announcement is expected in the fall outlining the new regulations. 

Climatico has learned from confidential sources that changes are likely to include a turn-around on ‘intensity targets’ which the Conservative Government has been promoting since 2007 in its widely-panned ‘Turning the Corner’ climate plan.  This reflects the US direction towards ‘cap and trade’ plans envisioned by the Waxman-Markey Bill  and now being discussed separately in the US Senate.

According to the leaked information provided to Climatico, changes in the Canadian plan are likely to include hard emissions caps for the power and oil & gas sector (a change from previously announced intensity targets, levels not yet determined).   Hard emissions caps also being discussed for the utility & electricity sector as well as the ‘EITE’ group (energy intensive, trade exposed) which includes aluminum, cement, chemicals, iron & steel, lime, gas transmission, base metal smelting, iron ore pelletizing, pulp & paper, and potash companies.

While hard emissions caps represents a welcome shift in policy away from intensity targets, what still remains unclear is how the Government will allocate pollution permits under the proposed system, and what the actual cap will be.  Information leaked to Climatico indicates that EITE industries will likely receive their permits free instead of through an auction therefore weakening the incentives to reduce emissions.   

Critically, changes to the Canadian plan will not include an adjustment of the overall ambition of emissions reductions.  Canada’s 2020 target will remain 20% reductions from 2006 levels – a target that has received substantial criticism for not reflecting the levels suggested by scientists of the IPCC for developed countries.

Furthermore, sources indicate that the proposed changes are likely to include plenty of loopholes allowing industry to weaken the climate-impact of the measures.  For example, compliance with the emissions cap could be achieved through payment into a ‘technology fund’ instead of implementing emissions reduction measures.  The level of inter-firm trading, as well as domestic and international offsets that would be allowed has also not been determined and the government is seeking input from industry on these matters.  It also remains unclear who else, aside from those being regulated will be consulted regarding these proposed changes.

With multiple meetings scheduled between Prime Minister and President Obama in the fall, the renewed discussion of a possible fall election, and the pivotal UN climate meeting in Copenhagen this December it appears the Canadian Government is trying to get its house in order on the climate front. The proposed changes to the ‘Turning the Corner’ plan start to fill the void in Canadian climate policy, but they still have a long way to go.

As highlighted by Reuters, Canada’s “dirty secret” is making a comeback, amidst predictions of rising oil prices, as the global recession appears to be bottoming out. This is a classic two sides of the coin issue for those in the environmental movement. The global downturn meant a contraction in emissions but also an excuse for political inaction, the upturn could finally see renewable investment get back on track but could also see the rise of oil sands.

The maths is quite simple: oil sands are not cheap or accessible sources of energy. Quite the opposite, defined as “extra-heavy” the oil is difficult to extract requiring large quantities of energy and a pre-processing stage, before the substance can be sent to a refinery to be converted into petrol. Unsurprising, this process makes oil sands very expensive to produce and they require a large amount of upfront investment before they can begin to yield the profits. The effects are slightly paradoxical; many environmentalists are hopeful of a return to rising oil prices in the hope that it will stimulate demand for fuel efficiency, cleaner vehicles and renewable energy as oil is increasingly seen as a volatile fuel that economies depend upon at their own risk. That scenario is still the most likely, as McKinsey’s report outlines, however it’s not simply that oil prices could dramatically begin to rise by the beginning or end of 2010 (depending on the pace of economic recovery) but that their prices will be volatile, an investors nightmare. This is all well and good for environmental causes, however in the interim, the market will be even keener for stable oil suppliers, making Canada’s oil sands an ever more viable solution.

Green Inc, New York Times blog on green business, recently commented that although the recession has set the oil sands industry back from the steep growth forecasts predicted in 2007, the industry instead consolidated into a steady “sustainable” growth pattern. Most worryingly, is the lack of any political pressure from the main parties to halt the oil sands or force it into a  much more environmentally friendly industry. Liberal Leader Michael Ignatieff, as keen a supporter as Conservative Prime Minister Stephen Harper, sees the oil sands as a tragain a more equal status with the US. Ignatieff has made remarks that the oil sands need to be cleaned up, but unless there is very serious movement with regards to public opinion on acceptable pollution levels, no Government is likely to consider forcing the oil sands industry into reducing their environmental impact.

As Green Inc notes however, there could be one flaw  to oil sands unstoppable growth, a regional Cap and Trade. As it stands, this appears unlikely. When Obama visited Canada earlier this year, Climatico analyst, Derek noted how one of the critical negotiating issues was ensuring the US market remained open to Canada’s oil sands, despite campaign rhetoric from the Obama camp on restricting “dirty oil imports”. Problematically, Obama described the dual problems, America’s coal industry and Canada’s oil sands. Given the US is now likely to pursue clean coal, this is probably assurance enough that the oil sands, possibly with some restrictions will be given the green light as well.

Is there a silver-lining? Actually there could be, as seems to be the case with North American politics, to solely follow federal decisions is misleading. In April, I covered, a move by California to regulate the type of fuels allowed to be used, that bill passed and in theory would prohibit the use of oil sand fuel in California. There are two problems, firstly California is the biggest automobile user in the US and secondly, it often causes a domino effect in other states.

How quickly Climate Change debate moves could be the key. At worst, the oil-sands will have to undergo cleaning adjustments to reduce their pollution use, a compromise for entry, at best California is a bell-weather for future policy and oil sands may never make the major leap and become only a moderately developed source of energy.

The American Clean Energy and Security Act of 2009, commonly referred to as the Waxman-Markey Bill, is moving through the U.S. House of Representatives, after passing a vote in the House Energy and Commerce Committee 33 to 25 in late May. 

It must pass through a series of difficult legislative hurdles before a final vote in the House—approval here will enable the bill to move forward to the Senate, which may prove to be an even more challenging feat.

But if this first “victory” is to be any indication of what is to come, it might be fair to speculate that the Waxman-Markey Bill will clear its hurdles by incrementally lowering the bar.  Early review of the most recent version of the bill reveal the compromises made to move the bill forward: a diluted midterm reductions target, from a 20% reduction from 2005 levels by 2020 to a 17% reduction; an altered distribution of allowances, initially proposed by the White House to be fully auctioned, now moved to 85% allocation.  Furthermore, the role of offsets has been significantly increased.  Waxman-Markey includes provisions for offsets of 2 billion tons of CO2/yr, of which up to 1.5 billion may come from international sources.  A proposed 1.25:1 offsets to allowances ratio has been softened to a 1:1 ratio until 2017.  This decreases the maximum number of international credits that the use could absorb from 1.875bn to 1.650bn tCO2/y.  Although this sounds small, when you consider that there have only been 289m credits issued under the CDM to date, the cut of 225m comes into perspective. Defining the criteria for which offset programs will be considered appropriate also appears to have been broadened.

In an interview on Monday, Steven Chu acknowledged the draft legislation fell short of White House aspirations, but went on to recognize the role of the climate change bill as a positive step in the right direction.  As reported by Reuters, “This is the really the arc of what really can be done,” Chu said. “I personally believe strongly that we have to get started and so a comprehensive energy and climate change change bill, which has to recognize certain compromises, is really the issue.”

One might consider Chu’s remarks and the revision to the bill thus far in the context of an axiom of political compromise—to not let the perfect be the enemy of the good.  But the nature of climate change and climate change policy means that there are limits to this conventional political wisdom, for two important reasons: without sufficiently robust targets, the effectiveness of the legislation in resulting in emissions reductions is severely compromised, and, perhaps of more immediate relevance, so too is the ability of the United States to play a strategic role in international negotiations on climate change.  A watered down U.S. domestic policy will dramatically constrain the U.S. position in both Bonn and Copenhagen, to the potential outcome of lowering the bar at the international level as well.  The EU has promised to commit to a 30% in reductions by 2020 from 1990 levels, rather than a guaranteed 20%, provided other key players play ball.  Comparing like for like, US reductions of 17% by 2020 from 2005 levels equate to merely a 3% reduction from 1990 levels. A question remains as to how the EU will respond to such levels.

The Waxman-Markey Bill, diluted at present, will surely be subject to further compromise as it makes its arduous journey through the U.S. Congress.  Will the (hopeful) resulting legislation suffice as evidence to the EU that the U.S. is indeed playing ball?  Will it signal to non-Annex 1 emitters, such as China and India, that they will need to consider significant reductions in emissions?  While it is true that the U.S. indeed must act quickly to rectify the delay in legislation on climate change of the past 8 years, it must do so with the understanding that the outcome of this legislation stands to shape the trajectory for climate change action at the international scale as well.  In doing so, the U.S. should calibrate the height of this bar very, very carefully. 

Simon Billett also contributed to this post.