A New Approach in the Senate To Putting a Price on Carbon

As climate and energy legislation continues to founder in Washington, Senator Maria Cantwell says it’s time for a new strategy. In an interview with Yale Environment 360, Cantwell explains why her bill can avoid the pitfalls of cap-and-trade and win the support of the public.

Is carbon cap-and-trade legislation alive or dead in the U.S. Congress? Does the energy bill being proposed by senators John Kerry, Joseph Lieberman, and Lindsey Graham — or for that matter any climate and energy legislation — stand a chance of passing the U.S. Senate before this November’s midterm elections?

No one seems to be able to answer these questions at this point. In the meantime, the Carbon Limits and Energy for America’s Renewal Act, or CLEAR — sponsored by Senator Maria Cantwell, Democrat of Washington, and Susan Collins, Republican of Maine — has been getting a surprising amount of attention. Instead of a cap-and-trade system, the bill would institute what its sponsors call “cap-and-refund.” Under the bill, the president would, beginning in 2012, set an overall cap on fossil-fuel emissions.

Maria Cantwell

That cap would remain in place until 2015, after which it would start declining by a quarter of a percent a year. So-called “upstream” emitters — mainly sellers or importers of coal, oil, and natural gas — would then have to buy permits from the federal government at a monthly auction. Three-quarters of the proceeds would be returned to U.S. citizens in the form of a monthly check. (Cantwell’s office has estimated that, for a family of four, the “refund” would be about $1,000 a year.) The other quarter would go into a Clean Energy Reinvestment Trust Fund to research and develop renewable sources of energy.

Many people have praised the CLEAR Act for its straightforwardness. “Ms. Cantwell’s bill is refreshingly simple,” the Economist opined. Writing in The New Republic, Bill McKibben called it “the kind of legislation you could actually campaign around.” But others have criticized the bill for being too sketchy and for not setting sufficiently ambitious targets. “It’s simple and short because it fails to flesh out crucial details and simply neglects a great many important issues,” Grist’s David Roberts commented. An analysis by the World Resources Institute found that the bill would reduce emissions only 1 percent below 2005 levels by 2020. (Although the bill ostensibly sets the goal of reducing emissions by 20 percent by 2020, most of that reduction would require additional Congressional action.)

In an interview with Yale Environment 360, conducted by New Yorker staff writer Elizabeth Kolbert, Senator Cantwell recently spoke about her proposal.

Yale Environment 360: Could you just briefly run through what you consider to be the major elements of the legislation?

Maria Cantwell: Well, you want something, first of all, that the American people can understand. They know intuitively that we need to get off of carbon and onto clean energy. That’s what you see in all sorts of surveys of the American people. And they intuitively know that it will create green jobs. What they want to know is, what does the transition look like? And how do you minimize the economic impact?

e360: Could you just a talk a little about what exactly the bill will do?

Cantwell: We try to achieve that transition period with the least impact to the economy as possible and keep consumers whole. So it’s simple, in the sense that it says, let’s start with a gradual reduction of carbon at 0.25 percent a year, and have a gradual increase in that level of reduction every year — but a very predictable level. But do so by having something that doesn’t rely on trading platforms and allowances and giveaways that have been the downturn or the implosion of the U.S. economy of late. But instead have those who are responsible for putting carbon into the atmosphere actually have to come and purchase a permit to continue to do so, knowing that they are going to have to meet these reductions. So it sets a process of getting off of carbon by meeting these goals and [protects] consumers with a rebate check from the auction.

e360: So we auction at the first moment where you have a carbon emitter?

Cantwell: About 2,000 or 3,000 [sources that] are putting fossil fuels into the economy. It’s very upstream. A lot of the proposals have been downstream, impacting lots of different industries, impacting lots of different people. And I think that’s what we have seen Europe do, and we can learn from Europe. We don’t have to replicate the mistakes they’ve already made.

e360: So, I take a shipment of coal or a shipment of oil, and I’m the entity that needs to get a permit?

Cantwell: Yes.

e360: And then we have an auction monthly, right?

Cantwell: Generally, yes.

e360: So that’s the cap?

Cantwell: The legislation gives the president the authority to set the initial target. And then a formula is laid out in how you would make the reduction. The 0.25 percent reduction that is gradually increased is the formula.

e360: So annually that cap ratchets down?

Cantwell: It basically says, let’s have a 0.25 percent reduction in the first year, and in the second year a 0.5 [reduction]. The best way to say it is that it gradually reduces the amount of carbon that can be put into the atmosphere every year.

e360: Let’s talk about the second part, which is the refund part. We take the proceeds from the auction and we-

Cantwell: Give them a consumer energy rebate. Consumers know energy costs are too high now. And they know that they could be impacted by the price in the future. But, by giving a rebate directly to them during this period of transition, we know that they can be made whole. That is, that they won’t be paying any more in energy costs. That’s a very attractive aspect of the proposal and one of the reasons AARP [the American Association of Retired Persons] and other people have endorsed it. Because keeping consumers whole during the process is important to buying faith that we can make this transition in a reasonable way. And if you compare that to the volatility that consumers are going to face in oil markets if we do nothing, it’s an attractive proposition for people.

It takes some time to turn the ship toward an idea that is different.

e360: And this would be on a per capita basis?

Cantwell: Yes.

e360: You alluded to this a little bit before, but what are the advantages of cap-and-refund over cap-and-trade?

Cantwell: Predictability. Predictability. Predictability. I’m a big proponent of doing this because I, like a majority of American people, want to make this transition to a healthier economy that is going to be based on these new technologies. And you’ll ultimately get there, maybe in 30 or 40 years, but there will be a lot of pain in doing so in this fluctuation of high energy costs in the meantime. Even the Saudi Arabian government last month said that they wanted to diversify off of what they were calling peak or near-peak oil. If they are diversifying their economy, I guarantee we can diversify our economy.

When oil gets back to $150 a barrel, my colleagues are going to be looking for solutions.

How would we do that? Well, we could wait until we run out of oil. You can live through 30 years of tight oil markets, or you can say, “let’s start moving now for that clear market signal that will move investment to green technology.” And it’s a superior idea to saying, “Well, let’s try to get there by instituting some sort of signal, but let’s have that signal be influenced by trading and allowances and various ways in which that true market signal can be distorted.” If you look at what’s happened in Europe, they’ve certainly found things like carbon futures cut up into tranches, just like credit default swaps. And you’ve had allowances go to things where people have questioned whether we have actually made the [CO2] reductions succeed.

So as opposed to doing nothing, and as opposed to doing a trading platform, we think that the CLEAR Act — a limited auction on those who are putting carbon in the marketplace — is the way to easily have that reduction in carbon and help our economy with the most predictable signal we could possibly do.

e360: What about your colleagues who actually have to vote on it? How are they responding? And how about the administration? Have you gotten any response from them?

Cantwell: Well, this is originally I think what President Obama was articulating during the campaign. So I think he thinks of it as more of an elegant solution.

e360: Has he said that to you?

Cantwell: He said it was “elegant.” That was in a conversation many, many months ago. I am not saying he is choosing anything over anything, I am just reporting what his quote was. But I think my colleagues have been so wrapped up in the cap-and-trade debate for many, many years now.

It takes some time to turn the ship toward an idea that is different. But I can’t think of any better time, when the SEC [Securities and Exchange Commission] is deciding that it needs to go after Wall Street for credit default swaps, to make the point that you don’t want to make the same kind of mistake here.

This is about the ability to ignite a huge technology revolution for the U.S. economy.

And while that has been clearer to me and some of my colleagues, it’s not been clear to everybody. By that I just mean, in the West we had a lot of stuff with Enron that got me paying attention to how manipulative markets can wreak havoc with energy costs. That got me paying attention to this many years ago. The testimony that we got before the [Senate] Finance Committee this past year from observers of the European [carbon] markets was reporting these kinds of issues. But I think it takes awhile for all of that information to be absorbed and for people to understand.

e360: What about the argument that I’ve read or heard that, look, simple bills don’t pass the Senate? There’s got to be a special break for various special interests, that’s the whole log-rolling process.

Cantwell: I don’t buy into that argument. Because I think there are two outside factors that are going to drive my colleagues to pay attention to this. One is the fact that oil is going to go back over a hundred dollars a barrel. And I guarantee you when it gets back to $150 a barrel, all my colleagues are going to be looking for solutions. Secondly, I think the EPA [Environmental Protection Agency] at some point in time will act on a broader basis.

And I also think my colleagues would prefer — and their constituencies would prefer — to have something more clearly outlined in statute than just having the EPA make decisions. I think a legislative approach that can advocate that much predictability is better than a federal agency that may act on any given day on policy. So I think it will be the devil they know.
Then I think you will have the investor community who will be saying, “This is what we need to flip the switch…”

It is far more predictable to say that you are going to have a process every year with the revenue from the auction and make decisions in a transparent process about what is the best mitigation, transformation, R&D, job training that we should be doing. And when you talk to some of those [legislators], they understand that. But they now have to get their constituencies, they have to get people in their state, to understand.

e360: That brings me to the next question. We all live on one planet, we all are subject to the same geophysical forces, and yet climate change seems to have become almost a completely partisan issue. You have a GOP co-sponsor. But I’m wondering if you can talk about how this has become such a partisan issue and how we can overcome that?

Cantwell: Well, I don’t underestimate what it took to get GOP sponsorship. It’s very hard to get anybody in advance signed up on a bill. So I really appreciate Senator [Susan] Collins’ focus and foresight on this.

We can wait 30 years and find that Europe and Asia control the markets on these products.

I come from a state where we care very much about the environment. And I’ve been involved in a lot of environmental policy. But I am not doing this for that purpose. This is about the ability to make this economic transition and ignite what is a huge technology revolution for the U.S. economy. This is a $6 trillion market opportunity. It’s as big as going from mainframe computers to a computer on every desk. It is going from big [sources] of supply to having power generated from lots of different sources and being able to [plug] into the grid in lots of different places and using it smartly and getting huge savings. And it’s an opportunity for the United States to be the world leader in energy technology. A lot of the R&D we do, but we don’t end up on the manufacturing side.

I don’t want to be left behind. Now, do I think it has huge benefits for the planet? Yes. Do I think it’s good in general to get off of CO2 because it’s costing our economy in hidden ways that we don’t even realize? Yes. But, you know, to me, this is about whether we want to ride the volatility of oil prices for the next 30 years and then end up in the same place, seeing that we have to get off of CO2. Or whether we want to do something that enables us to catch the economic opportunity of clean energy.

e360: We have been talking about this practically since I was born, how we need to get off fossil fuels. We’ve recognized this is a finite resource since the [1970s] oil crisis. And every president has subsequently talked about some kind of energy plan that’s going to wean us from these limited sources of fuel. And yet we seem incapable of actually taking that step. I guess the ultimate question is, how do we break that logjam and take the steps we need to take?

Cantwell: I think that we’re at a little bit of an inflection point. If you go back to the 1970s, you remember that the oil embargo drove a huge switch off of home heating oil to natural gas. Why? Because the economics of that. I think it was definitely a double digit, like 30 to 40 percent shift. That kind of transition happened because of the fear and anxiety of being held hostage.

And so what we have now, I think, that fear and anxiety is looming out there and the American people understand it. What I think is going for us now, [and] what wasn’t going for us, say, 10 years ago, is that there is enough demonstration of the technology that’s out there. People have a taste of it. So when you ask in a survey whether the American people think that we can do this or should do this, it is like 80 of people [say] “Yes.”

So the unanswered question has been, how do you make the transition without greatly impacting the economy in a negative way? And I think the CLEAR Act answers how you can do that by a predictable, slow but steady decrease in CO2, [and] keeping consumers whole.

e360: Is there anything else you want to add?

Cantwell: One of the challenges that is facing us is how do you make that transition from the technology side? You’re talking about capacity building or scaling. And if you don’t have a clear market signal, you won’t get that level of investment. So, again, we can wait 30 years when we’re really, really, really impacted, live through lots of ups and downs [in oil prices] , and then find that Europe or Asia controls the market on these products. Or we can say, “No, no, no. We want to stimulate that investment now.”

e360: We’re going into an election season now, [and] this is the kind of issue that gets put off until after elections. Do you see hope for some kind of an energy bill this session?

Cantwell: I’m a big supporter of moving ahead. And I think as summer fuel prices hit, people will be back to the same questions we ask every summer: “What were we doing?”