prospective law jumbles up huge near-term subsidies for the energy industry with strict long-term exhortations for them to change

TO BE NOTED: From the FT:

"Obama’s cap and trade troubles

By Edward Luce in Washington

Published: June 2 2009 19:09 | Last updated: June 2 2009 19:09

Some time over the next few weeks, the US House of Representatives is likely to vote on what Barack Obama and others have described as an historic bill that would sharply reduce American carbon emissions. The headline looks good. The reality is not so flattering.

On the surface, its objectives are impressive. The bill, brokered by Henry Waxman, the hard-working Democrat from California and chairman of the House energy committee, would be the first concrete step by the world’s largest polluter to wean itself off hydrocarbons.

Praised by the likes of Al Gore, America’s patron saint of green energy, the bill would cut US carbon emissions to 83 per cent of their 2005 levels by 2020 and thereafter impose progressively steeper cuts on the emitters. It would also mandate power companies to draw a fifth of their electricity from renewable sources, such as wind and solar, by 2020.

Mindful of the need to get something in place if the US is to take leadership of the all-important global warming summit in Copenhagen in December, most environmental groups have praised the bill. So too have surprisingly large chunks of industry. But therein lies the problem.

Much like the Danish fairy tale about the emperor with no clothes, everyone in Washington has an interest in praising Mr Waxman’s efforts. Few – barring Greenpeace and Friends of the Earth on the left, and groups such as the National Association of Manufacturers on the right – have come out in opposition.

But the closer one looks, the less viable it appears. The 946-page bill would surely rank as the most complex effort so far to regulate greenhouse gases. The result of painful compromise between the relatively green bi-coastal Democrats and their “brown-dog” (pro-energy sector) colleagues from the mid-west and the south, the prospective law jumbles up huge near-term subsidies for the energy industry with strict long-term exhortations for them to change.

The history of US legislation tells us that where complexity reigns, lobby groups are usually the beneficiaries. Contrary to Mr Obama’s election promise that 100 per cent of carbon trading permits would be auctioned off in the carbon market, the bill gives away 85 per cent of the allowances to different parts of the energy sector.

Local electricity distribution companies receive the largest single giveaway, at 35 per cent of all permits. Regulators will then be told to ensure the distributors pass on all of the value of the allowances to consumers. This defeats two key objects of any global warming legislation: the polluter will not pay, and consumers will have no incentive to change their behaviour.

In addition to dispensing with the key tool of altering consumer behaviour – the price signal – it also muddies the waters on how greenhouse gas reductions will be measured. The bill would allow polluters to purchase up to 2bn tonnes a year in carbon “offsets” – measures such as tree planting – that would let them continue polluting.

This 2bn-tonne annual offset allowance exceeds all the carbon reductions envisaged between now and 2040. Furthermore, many of those offsets could be purchased overseas but counted against reductions at home, which would make a nonsense of the aim of reducing US domestic emissions. In other words, the US could hypothetically achieve its target without closing a single coal-fired plant.

Likewise, the target of generating 20 per cent of all US electricity from renewable sources by 2020 is highly fungible. Once various loopholes are added in, such as the provision that would allow power companies to count efficiency savings as part of their renewable energy target, then that number falls to nearer 10 per cent.

Defenders of the bill say it would be a huge feat for the US to pass anything in the midst of the “Great Recession”. That may well be true. But if the noises coming from centrist Democrats in the Senate are any guide, in its current form this bill is unlikely to pass through the upper chamber.

But even if the Senate agreed to this heavily watered down and loophole-ridden bill, it would be unlikely to impress America’s partners in Copenhagen. While Washingtonians praise each other’s dress sense, foreigners like nothing more than to cry “Naked!”

Copyright The Financial Times Limited 2009"