Rimba Raya Project in Rapid Decline (Source: Timothy G. Laman, National Geographic)

Indonesia’s flagship Rimba Raya REDD project was registered this year under one of the Voluntary Carbon Standard’s REDD methodologies, aiming to preserve “91,215 hectares of tropical peat swamp forest,” equivalent to an emissions reduction of 104,886,254 tonnes of CO₂e over the crediting period of 30 years, according to the registration documents.

The project has long been an exemplar of early action on REDD, hoping to bring the field in to the carbon markets. Indeed many expected it to be the first to issue REDD based carbon credits in the voluntary markets, but this title was taken by the Kenya Kasigau Corridor Project earlier this year. Despite the early success, a recent report by Reuters outlines how hopes for the Rimba Raya project have declined rapidly over the course of the past year.

Back-pedalling and contradictions

At the heart of the controversy is a decision by the Indonesian Ministry of Forestry to cut the project area in just over half, and grant development rights to a palm oil company for some, if not all, of the newly available land, resulting in the economic viability of the project  now coming under review.

The reason for the decision is, unsurprisingly, unclear, but interviews by Reuters suggest that land ownership and competing potential uses of land were root causes for the sudden reversal. Indeed Reuters reports that the decree allocating the project’s land area to the REDD project developers was never formally signed by a Minister, allowing the original claimants – PT Best, a palm oil company – the development rights of the land that was originally allocated to them.

Most of those involved seem to be genuinely startled by the sudden turnaround of the government, particularly given the decision’s seeming opposition to the government’s purported stance. It appears to highlight deep divisions between the national government and the civil service, or perhaps even amongst ministers themselves, on the level of action needed to stop deforestation.

It all comes down to price

More importantly, however, it draws attention to the magnitude of the political risk faced by those investing in a new, politically unstable market, and demonstrates with painstaking lucidity the potential losses facing an investor, should a project either not sit well with the government or should there be more profitable, competing uses of the land. And herein lies the fundamental problem: the existence of more profitable uses for land often result in REDD offset credits being unable to compete with the alternative uses of land, since profits are dependent on a low carbon price.

The number of participants, presence of willing buyers and the involvement of Gazprom all seem to suggest that, over the 30 year crediting period, the project is likely to be profitable. But the Ministry of Forestry seems to disagree, exemplified by the Secretary-General of the Ministry of Forestry, asking “who will pay for the dream of Rimba Raya? Who will pay? Nobody, sir!” Although a legitimate question to ask, this apparent rationale does beg the question of how the government expects the project to pay for itself if it is slashed in half.

Nevertheless, it seems that the Rimba Raya project may have fallen victim to the whims of political infighting. Irrespective of the reason, the presence of an economic case that argues against the implementation of a REDD project will never sit well with governments handing out permits. Perhaps more importantly, it allows any number of potentially illegitimate reasons for derailing the halt of deforestation to mask behind this inconvenient – albeit legitimate – concern.

Finally, turning back to the price, it is worth reiterating an obvious but important point: if the carbon price were at a level that demonstrates clear economic viability for REDD projects over and above alternative environmentally destructive uses of the land, these kind of problems would be far less likely to arise in the first place.

What about the market? (Source: Financial Times)

As part of the latest budget the UK government announced its intention to introduce a price floor for the emissions market. It is hoped that this move will encourage low carbon investment by disincentivising regulated entities from emitting at current levels.

How this proposed unilateral measure will interact with the EU ETS remains to be seen. The purpose of emissions trading is to give polluters the discretion to decide whether to buy more EU emissions allowances (EUAs) in the market or invest in greener technologies, depending on which avenue is more cost-efficient. Having to pay a pre-set price for EUAs effectively removes this choice and distorts the emissions market as the cost-benefit calculation has already been performed by the regulator.

A tax by any other name…

The effect of the carbon price floor would be akin to that of a tax on emissions, since it would guarantee a minimum price level which UK polluters would have to pay to the government irrespective of the real market price of EUAs. It has not yet been clarified how this would operate in conjunction with trading under the EU ETS; one option would be to require polluters to make up the difference between the market price and the minimum set price. This would provide the UK with a hybrid tax-trade approach to emissions reductions, whilst the other EU Member States remain wedded to the EU ETS only.

A key advantage of a carbon tax over a trading system is the guarantee that the revenues from the former accrue to the national government rather than to polluters. This makes it more likely (at least in theory) that the money will be spent on low carbon initiatives rather than simply being reinvested in the polluters’ business or helping to boost their profits. The flipside is that regulated entities do not enjoy the cost-balancing flexibility associated with emissions trading. A proposed EU-level carbon tax was in fact rejected by industry in the 1990s.

Design issues

A cap-and-tax system could work well to reduce emissions if appropriately designed. Specifically, the price would have to be set at a level which is neither excessively high (so as not to seriously stall productivity) nor woefully low (which would be of little help in motivating polluters to reduce their emissions).

Of course, the price level would also have to take into account the fluctuations in the emissions market and would thus have to be crafted in a way which allows for any requisite adjustments.

What hope is there left for the market?

The proposed hybrid system makes the regulator’s job easier as it removes the uncertainty associated with fluctuations in the market price of CO2, which has recently fallen to around €12/tonne. This has been caused by overallocation of EUAs to polluters and decreased levels of productivity due to the difficult economic climate.

On the other hand, the whole point of having a market in emissions is that the price level is left to be freely valued by supply and demand, as with conventional markets. A cap-and-tax system would enable the UK government to artificially manipulate the price of EUAs and thus unilaterally interfere in the EU-wide emissions market as national environmental policy dictates. This is concerning as it undermines the very notion of market freedom on which the EU ETS is premised.

Either one or the other

Paradoxical as it may seem, if the EU emissions market is to function effectively, some level of price volatility is in fact desirable in order to incentivise entities engaged in emissions trading for investment rather than compliance purposes to take part. Tying the EU-wide price of carbon to Member State national environmental policy sends out the wrong signals as it strongly suggests that the market may not be genuinely free.

The UK government may be rightly concerned about the adequacy of the market price for carbon as a tool of environmental policy aimed at achieving emissions reductions. However, it cannot have it both ways without significantly diverging from the uniformity of the EU ETS.

Are these emissions real? (Source: Pavel Ahmed)

Emissions trading continues to court controversy following recent events which have seen Romania, an EU ETS country, suspended from trading its Kyoto Protocol emissions units by the UN. The knock-on effect has been to exclude Romania from the spot market in EU ETS allowances (EUAs) for a predicted period of six months.

This incident highlights the ease with which EUAs can be fashioned out of unverified emissions. In Romania’s case, a substantial surplus of Kyoto units (which can translate into EUAs) was created on the basis of inadequately reported emissions. It is therefore understandable that the UN has stepped in to prevent flooding the market with these “tainted” instruments. However, the actual existence of the units in the first place raises questions as to the verifiability of what feeds into the EU ETS.

Emissions reporting failures

The UN’s Kyoto Protocol enforcement branch found that Romania’s standards for monitoring and verifying projects which generated emissions units fell short of the UN-mandated requirements. Estimating emissions from forest management was identified as a particularly serious issue as they formed the bulk of the country’s greenhouse gas emissions.

As previously discussed on Climatico, the EU ETS has already experienced a host of problems generated by Member States’ shortcomings in adequately administering the trading of EUAs. However, the problem goes even deeper: the very emissions on which the EUAs are based are not always properly monitored. This means that EUAs do not necessarily guarantee the existence of corresponding efforts to cut down the release of greenhouse gases in the atmosphere. On the basis of figures not backed by properly verified and transparent reporting, Romania would have been able to use some of its allocated Kyoto units for compliance with the EU ETS. This could have had serious negative consequences for the scheme’s emissions reduction credentials.

Damage to the EU emissions market

The failures in verification have a potentially wider impact on the EU emissions market. The UN’s suspension of Kyoto units trading translates into Romania’s exclusion from spot trading of EUAs under the EU ETS. This may turn out to have grave effects on the EU emissions market as it causes uncertainty (since the date for lifting the suspension has not yet been firmly set) and could undermine general investor confidence in the market, according to the Joint Implementation Action Group. Since the viability of the EU ETS is premised on a liquid and functioning emissions market, this could deal another serious blow to its environmental goals.

More specifically, the suspension also hurts Romanian firms which are regulated by the EU ETS. This regime aims to incentivise polluters to reduce their emissions by allowing them to do so at the lowest cost. In theory at least, regulated firms can choose to cut emissions either by installing greener technologies or by trading EUAs in the market in order to cover their greenhouse gas output. Since a substantial part of the Kyoto units would have been allocated to Romanian firms for use within the EU ETS, the suspension has the effect of temporarily excluding these firms from the emissions market and thus damaging their reputation as market participants. This is another way to damage the EU emissions market as a whole by depriving it of valuable and much needed volumes of trade.

What is the alternative?

The UN’s apparently drastic response can be justified in view of the blow that would have been dealt to the Kyoto Protocol if unverified (and potentially ungrounded) emissions units would have been allowed into the market. On the other hand, credible arguments have been made that the damaging effects of this decision on the international market in emissions and the EU ETS far outweigh the risk of affecting the Protocol’s environmental integrity. Each path comes with its own caveats. It must not be underestimated how difficult it is to achieve a generally acceptable trade-off between successful environmental protection and a viable emissions market.

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.

Support without supervision? (Source: Ian Chou)

Emissions trading sceptics will feel that they have been proven right in the wake of the latest news on the emissions market; the UK Financial Services Authority (FSA) has recently issued an official warning on carbon scams. The warning follows an increasing number of complaints from people who have been approached with potentially fraudulent emissions trading schemes.

In reality, there is little that the FSA can do, unless the investments offered fall within the (relatively restricted) list of instruments covered by the UK and EU financial regulation regimes. Letting most of EU emissions trading fall through the regulatory net could seriously distort this market at a time when environmental regulators are working hard to incentivise firms to invest in the EU ETS. Without investor confidence, the EU ETS cannot function to pursue its environmental goals.

The emissions market

Emissions allowances can be bought and sold by anyone, not just EU ETS regulated polluters; this is called the emissions spot market. Spot trading does not fall within the EU financial regulation regime as emissions allowances themselves are not considered financial instruments. It is only if the allowances traded take the form of instruments such as futures that EU financial supervision is triggered, as the activity may be a regulated investment service and would also be covered by market abuse legislation.

It follows that large swathes of the emissions market remain untouched by financial regulation, despite the potential for fraud against investors that the FSA warning has highlighted. The risk of unsavoury behaviour such as insider trading and market manipulation is therefore rife.

Does it matter?

This loophole has not gone unnoticed. In France, legislation was passed in late 2010 which would cover the emissions spot market in the same way as the market in emissions-based financial instruments, following recommendations in a government-commissioned report. Unfortunately, to date this has not been extended to other Member States or the EU in general.

Problems have already been experienced in the emissions spot market where fraudsters have managed to avail themselves of the lack of financial regulation. 2009 saw a number of widespread and very serious instances of VAT fraud which temporarily brought the Parisian carbon exchange BlueNext to a halt. The exchange experienced an inexplicable increase in trades which led to the exchange being closed and the French authorities declaring emissions allowances exempt from VAT. This measure caused trades to drop significantly, which may indicate the extent to which VAT fraud was driving a substantial number of them.

The effects of this uncertainty on the EU ETS could be considerable. Without investor confidence in the quality of the emissions market, the EU ETS, premised as it is on the continued ability to trade valuable allowances which are genuine and verifiable, would not work.

EU-level action

These occurrences may justify the classification of emissions allowances as financial instruments under EU financial regulation, which would mean that traders in the spot markets would be subject to considerably more stringent regulatory requirements. This means more compliance costs for firms and more supervisory costs for regulators. However, this would arguably be a small price to pay to safeguard the integrity of the emissions market and thereby ensure the continued success of the EU ETS.

It is encouraging that the EU Commission has recognised the gravity of the incidents and has been running a consultation process to identify ways to improve market oversight. It remains to be seen what improvements will materialise.

Grounded? (Source: David Jones)

The EU’s commitment to taking serious action on aviation emissions has been courting controversy of late due to its proposed inclusion of the international transport sector in the EU ETS. From 2012 all arriving and departing flights in the EU will have to be covered by corresponding emissions allowances (EUAs).

Regulating flight operators will be entrusted to individual Member States. This raises the issue of effective enforcement by countries who have a less than satisfactory track record in preventing fraud in the emissions market. Added to this is the problem of increased administration costs as levels of EUA allocations will have to be decided for a substantial number of airlines. International operators have been left feeling alienated and sceptical of the EU’s ability to direct resulting funds towards pursuing environmental goals.

Monitoring and enforcement

Each of the 27 Member States will be responsible for administering the application of the EU ETS to a number of designated operators. Once the EU Commission has decided how many EUAs will be allocated to each country, the Member States will be charged with calculating and allocating the appropriate levels of allowances to the airlines.

The number of operators within each Member State’s jurisdiction is significantly higher now that international operators are also included. While some countries have a good history of administering the allocation and trading of EUAs, in the past others have been hit by incidents of theft of EUAs from national registries and large-scale VAT fraud. The emissions market was brought to a standstill following attacks in early 2011. Competent registration and monitoring of EUAs is therefore paramount if the EU ETS is to work in its extended format.

Only time will tell if we can trust the Member States to live up to their task. The introduction of a new, centralised emissions registry at EU level from 2012 will hopefully address this concern, as managing the emissions market will no longer be within the ambit of individual Member States. However, this in turn may create its own problems of increased bureaucracy. The EU Commission could be in danger of spreading itself too thin in an attempt to regulate an overly challenging number of aviation operators.

Increased administration costs

Since Member States will have to decide on the levels of allocation to each operator, they will need to expend significant resources on analysing large amounts of unfamiliar emissions data from operators. This information is likely to be in a non-standardised format which may well differ between airlines and thus increase the administrative burden. To what extent the Member States will have the capacity to verify the accuracy of the data is also something that remains unclear.

How to achieve real results?

International operators have been complaining about the lack of transparency prevalent in the EU regarding the destination of the income raised from auctioning allowances. They are particularly worried that the revenues raised will simply be absorbed by individual Member States rather than spent on green technology R&D or emissions reductions. This is in addition to general opposition to the application of the EU ETS in a way which is perceived as illegal in its disregard for non-EU states’ sovereignty.

The combination of mistrust on the part of operators and the questionable capacity of the EU mechanisms to adequately police the extension of the EU ETS outside its territorial remit is a potentially toxic one. In reality, is it really likely that the EU will apply the ultimate sanction of excluding non-compliant operators from its airspace? Without the possibility of effective enforcement, the expansion of the EU ETS may only serve to antagonise instead of achieving environmental results.

Polluting away (Source: Alex E. Proimos)

A recent report by Sandbag, a leading emissions trading think tank, has revealed that under the EU ETS leading industrial firms have amassed a surplus of 240m emissions allowances (EUAs) between them during the 2008-2010 period. The surplus is estimated to be worth €4.1bn in the market, and is due to the combined effects of over-allocation and the economic downturn.

The crux of the EU ETS is the tradability of EUAs; firms can supplement or divest of their initial allocation in the market. The risk is that they can profit from over-allocation without making any real efforts to cut emissions. If the EU wants to act fast to reduce the surplus, it may have to cancel already allocated EUAs, something which is not addressed by the EU ETS legal framework.

The goal of the EU ETS

The purpose of the EU ETS is to allow firms whose levels of emissions fall below the number of allocated EUAs to sell spare ones in the market. However, the EU ETS envisages that this reduction in emissions levels would occur as installations develop greener, more innovative technologies of production which would pave the way towards low carbon economies in the Member States.

It is questionable whether selling surplus EUAs on a large scale complies with the environmental goals and spirit of the EU ETS. The long-term goal of emissions trading is not limited to trying to achieve reductions wherever possible without a concerted strategy and in reliance upon incidental decreases in industrial production. A recent report by the UK Committee on Climate Change highlighted the risk that reduced production caused by the economic recession would reduce the price of EUAs. This may disincentivise investment in green technologies by making it more attractive to continue purchasing EUAs without any effort to improve the environmental credentials of production.

Effects of the surplus on the emissions market

The EU emissions market has grown from $7.9bn in 2005 to $119.8bn in 2010 and now makes up over 80% of the worldwide carbon market value. Selling the considerable EUA surplus on the open market would increase the supply of EUAs and potentially drive down the market price without corresponding improvements in technology. Without a viable market, the very premise of the EU ETS, the entire regime would collapse.

What can the EU do?

The EU is faced with increased pressure to reform the EU ETS and remove at least some of the excess EUAs from the market. However, the EU Parliament has recently voted against an increased level of reductions from 20% to 30% from 1990 levels by 2020.

The EU ETS Directive is silent on whether EUAs, once allocated, can be cancelled despite their validity. It may well be that the EU wishes to retain the discretion to cancel EUAs if environmental policy so dictates. This is concerning for those firms that have been stockpiling EUAs which they are not using to cover their emissions. Cancelling valid EUAs at will could effectively amount to setting more stringent emissions targets through the back door. The effects of this uncertainty on the workability of the emissions market remain yet to be seen.

Does it matter how emissions reductions are attained, so long as they are attained? Arguably, yes. The danger posed by the EU ETS as it currently stands is that it may be disincentivising polluters from self-scrutiny and technological innovation in favour of taking the easy way out. Absent genuine emissions reductions through the development of green technologies, the effectiveness of the EU’s environmental policy in the fight against climate change could be seriously called into doubt.

Under the Bush administration, greenhouse-gas emission legislation was considered excessive regulation that could prove harmful to U.S. businesses. The U.S. Environmental Protection Agency, under Bush, denied a request under the Clean Air Act to establish tail-pipe emission standards – claiming that such regulations were not within their authority. In Massachusetts v. EPA in 2007, the U.S. Supreme Court scolded the Bush EPA for providing what seemed a “laundry list of reasons not to regulate” greenhouse emissions rather than basing their arguments on science. However, following his first 100 days in office as the President of the United States, Barack Obama’s policies have proven to be in stark contrast to those of George W. Bush. Within his first week in office, Obama announced the closure of Guantanamo Bay prison in Cuba, reversed aid restriction policies for organizations that provide abortions, limited lobbyist influence within the administration, and held an interview with al-Arabiya where Obama offered a hand of friendship to Muslims and demonstrated his desire to work diplomatically with the Middle East. Now fourteen weeks in, Obama’s sharp departure from his predecessor continues – including the appearance of a notable shift in the United States’ stance on climate change.

Marking Obama’s first 100 days in office, the following is a summary of United States climate change policy under the direction of the Obama administration:

Days 1-25 (Jan 20-Feb 13): In an effort to reverse former President Bush’s policy on climate change and take the United States in a new, greener, direction, Obama follows up on the request under the Clean Air Act. Only one week into office, Obama asks the Environmental Protection Agency to reconsider its ruling and review whether states should be allowed to set more stringent emission standards than is currently federally mandated. Additionally, Obama directs American automakers to develop more fuel efficient cars and trucks for models with release dates starting in 2011.

Days 26-50 (Feb 14-Mar 10): Obama and the Democratic-controlled Congress pass the American Recovery and Reinvestment Act totaling nearly $800 billion. Included within this massive bill are substantial investments in clean and renewable energy, infrastructure, and scientific research including $7.22 billion for programs administered by the EPA. The administration’s states that their rationale for the funding was not only to help in the economic recovery in the United States but also to increase the number of green jobs, promote technological innovation, reduce U.S. dependency on foreign oil and ensure a healthier environment. In addition, Secretary of State Hillary Clinton visits China and invites China to join the U.S. in curbing greenhouse gas emissions.

Days 51-75 (Mar 11-April 4): On March 23rd, Obama announces to the White House that $129 billion of his $3 trillion budget proposal for the year is allocated for environmental plans – such as renewable energy, solar power and hybrid cars – and is off limits to bartering by Congress. This pledge by Obama comes as the EPA makes another large announcement: following years of resistance under the Bush administration, the EPA tells the White House that global warming is, in fact, a danger to public health. On March 31st, the House Energy and Commerce Committee, along with the Environment Sub-Committee, announce the draft of the “American Clean Energy and Security Act 2009″. This draft is potentially a landmark step toward ushering in a clean energy economy through carbon emission tracking and regulation by the United States. A few days later, Obama attends the G20 Summit in London where he holds a bilateral meeting with Indian Prime Minister Manmohan Singh. Obama and Singh touch on the issue of “energy and how important it is for the United States to lead by example in reducing our carbon footprint so that we can help to forge agreements with countries like China and India…for our efforts to control climate change.”

Days 76-100 (April 5-29): On April 17th, the EPA makes their announcement official: scientific studies show that CO2 and other greenhouse gases “endanger” the health and well-being of humans. The formal recognition by the EPA marks an important step under the Clean Air Act toward the establishment of national emission standards for large emitters. A week later, in recognition of Earth Day on April 22nd, Obama signs a proclamation which affirms the importance of protecting the environment and addressing global warming. In addition, amidst Earth Day celebrations, the House Energy and Commerce Committee spend the week holding hearings on the draft of legislation of the “American Clean Energy and Security Act 2009“. These hearings include testimonies by over 60 witnesses including Energy Secretary Steven Chu, former Vice President and Nobel laureate Al Gore, former Speaker of the House Newt Gingrich, and representatives from manufacturing, energy, and environmental groups. Negotiations continue and the bill will likely go before the House of Representatives by Memorial Day on May 25th.

It has only been 100 days into President Barack Obama’s administration and, so far, the United States has made great strides toward greening America’s image. The next 100 days may prove more difficult, however, as details of the “American Clean Energy and Security Act 2009″ are worked out between Republicans and Democrats in Congress. Furthermore, announcements and gestures are more easily accomplished than finding funding or implementing projects, particularly when unexpected bailouts or emergencies such as Swine Flu arise. Therefore, it is important to look beyond the first 100 days of a presidency to determine the true direction of a policy. While the success of the new policies are yet to be determined, if there is anything certain from observing the first 100 days of Obama’s term in office it is that Barack Obama is definitely not anything like George W. Bush.

On 10 April, the Government and the ruling parties, the Liberal Democratic Party (LDP) and New Komeito, officially compiled the nation’s largest-ever economic package, worth 56.8 trillion yen in total, including 15 trillion yen in fiscal spending. In the new package, they proposed the introduction of the ‘eco-point’ (or eco action point) scheme.

 Then, on 21 April, the Ministry of the Environment (MoE), the Ministry of Economy, Trade and Industry (METI) and the Ministry of International Affairs and Communications (MIC), announced that they would commence, from 15 May, the eco-point scheme, in which those who buy products designated in the scheme can gain eco-points, on condition that the supplementary budget for the fiscal year 2009 is to be approved. In the scheme, they seek to stimulate economy as well as promoting energy-saving products to reduce CO2 emissions. 

 The Products in the scheme includes refrigerators, air conditioners and TVs, which have been given four stars or five stars in the evaluation system for products which displays energy-saving performances of products from one star to five stars. Those who buy these eco-products can obtain eco-points: 5% of the purchasing prices for refrigerators and air conditioners and 13% of the purchasing prices for TVs for digital terrestrial television, at maximum. Then, they can use the obtained eco-points when they purchase ‘eco’ electric home appliances afterwards.       

 Although it was supposed that eco-points can be used when ‘eco’ electric home appliances are purchased afterwards, Fuji Sankei Business Eye reported that the Government is now considering the extension of the range of products that can be purchased by eco-points. The scheme originally sought to urge consumers to replace their less energy-saving electric home appliances by buying new energy-saving ones.  It has been however complained within the Government and the ruling parties that if eco-points can be used only for eco electric home appliances, eco-points cannot be used easily and the scheme would not stimulate consumption. Consequently, METI, MoE and MIC has started to consider the extension of products that can be purchased by eco-points. The electric home appliances industry strongly welcomes the extension and a managing staff of a major electric home appliances company said, ‘the range of products that can be purchased by eco-points had better be as extended as possible.’ 

Possibly, in order just to stimulate consumption, the range of the products should be as extended as possible as the industry suggests. However, the environmental effects of the eco-point scheme would dramatically diminish if it were extended to products that are not environmentally friendly. It may be however acceptable if eco-points can be used for services such as baby-sitting and day-care for children and continuing education because they are socially welcomed and environmentally harmless. It might be necessary that eco-points can be easily used and its range should be extended in order to stimulate consumption. However, it should be vital that eco-points must not result in the increase in CO2 emissions if the word, ‘eco’, is used in the scheme.

During the past week, the House Energy and Commerce Committee held hearings on the draft legislation of ‘American Clean Energy and Security Act 2009′. Over 60 witnesses testified, including Energy Secretary Steven Chu, former House Speaker Newt Gingrich and Nobel laureate Al Gore, as well as representatives of environmental groups, electricity producers, auto manufacturers and renewable energy companies.

Prior to the hearings, Rep. Henry Waxman, chairman of the Committee and co-sponsor of the bill, promised that he will stick to his proposed 20% reduction in GHGs emissions in the next decade and that it was Congress, rather than the EPA who should determine how to regulate these emissions (referring to the EPA’s endangerment finding released on the previous Friday).

Here is a brief description of the proceedings and some of the highlights.

Tuesday:

The first day consisted of opening statements only, but the action surrounding the hearings kick-started with a letter from the 23 Republican members of the House Energy and Commerce Committee to the Committee’s Democratic leaders saying that the draft bill is not ready to be discussed, as a major element – how the permits will be distributed – is missing. They also called for a hearing dedicated to the EPA’s recent endangerment finding.

This was seen more as a delaying tactic, as Edward Markey, the other co-sponsor of the bill, said in the opening session – “The time for delay, denial and inaction has come to an end”.

Wednesday:

In the second day the committee heard from representatives of the administration (Secretary Chu, EPA Administrator Lisa Jackson and Transportation Secretary Ray LaHood), the United States Climate Action Partnership (USCAP) and others, such as the CEO of American Wind Energy Association, President of the Union of Concerned Scientists and a Senior Economist from the Stockholm Environment Institute.

The administration’s representatives responded to the concerns of Republicans as well as some Democrats and explained that the benefits of a cap-and-trade system will outweigh the costs, stressing that such a bill will create jobs and a stable investment environment, as well as ultimately reducing costs to consumers. Both Chu and Jackson though said they are still studying the details of the draft bill and that the administration had not given its blessings to it.

Secretary LaHood, in response to a question from Democrat John Dingell, assured the committee that the administration is committed to helping the automobile industry.

Companies belonging to USCAP generally stated their support of a cap-and-trade system. For example the representative from Alcoa, an aluminium producer, mentioned that increasing energy efficiency has already helped them reduce costs, and that aluminium is expected to be used in future energy efficient vehicles and buildings. However, both she and others (Duke Energy and NRG Energy, to name two) said they will drop their support for the bill if they did get free permits.

Thursday:

Day three saw testimonies from utility companies, think tanks and research institutions, consumer organisations, renewable energy companies and more. The panels dealt with issues of allocation policies, ensuring US competitiveness and the more technical issues of low-carbon electricity, CCS, renewables and grid-modernization. 

The utility companies stressed that they will need time to adapt and urged a gradual transition to a full auction system, also requesting allocation of free permits at first. It is encouraging to note though, that the American Public Power Association, which represents more than 2,000 community-owned electric utilities, supports auctioning no more than 5 percent of total allowances from the onset of the programme.

In response to that and to opposition from Republican members of the committee, as well as concerns raised by Democrats, Markey told reporters that “There are going to be some free allocations of allowances.”

Advocates of renewable energy called on Congress to set a renewable-energy standard requiring all states to get part of their energy from renewable sources.

Friday:

The main focus of the day was on the “star” witnesses – former vice-president Al Gore, former Republican Senator John Warner, and Former House Speaker Newt Gingrich, which was apparently added by the Republicans as a last minute addition to balance out Gore and Warner’s favourable testimonies.

Former Sen. Warner was one of the few Republicans in the last Congress who supported strong action on climate change (and joined with Dem. Joe Leiberman in a bipartisan attempt to pass a climate change bill). He attacked the “clean coal” mantra, saying that “we know clean coal is not around the corner” and argued that climate change is a national security issue which must be addressed.

There were no surprises in Al Gore’s testimony, who equated the bill under discussion to the civil rights legislation of the 1960s and the Marshal Plan of the 1940s. He urged the House panel to make sure the bill includes provisions to protect people who would face hardships as a result of the expected changes. In response to Rep. Dingell’s concern that US jobs will suffer after all, as countries such as China won’t face the same burdens, Gore drew on his experience with the international negotiations when he said that “If the United States leads, China will follow”.

What Next?

The bill will have to go through other House panels, but Waxman planned a tight schedule and hopes to have it ready for discussion in front of the full House by Memorial Day (May 25).

In the meantime, there are apparently negotiations going on behind the scenes to find a compromise that will build a winning coalition in favour of the bill.