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Blogging ACES – Cap and Trade

By Terrence Murray
July 16, 2009
File under: Carbon Emission Reduction, Environmental Policy, Public Health


In a close vote — 219-212 — the U.S. House of Representatives approved the American Clean Energy and Security Act (ACES). Many Democrats broke party rank and voted against the legislation.

The debate now moves to the Senate, where the fate of the bill remains uncertain.

If fully enacted into law, ACES, also known as the Waxman – Markey bill, after its co-authors — Representatives Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) — could impact every corner of the American economy by deploying billions of dollars to prop up clean energy solutions.

The electric grid would be modernized and funds would be provided to make homes and offices more energy efficient. ACES, a 1,200 page document, leaves no stone unturned.

For ecomii readers, I dove right into the bill, slimmed down its wonkish language to pull out its major provisions, explain how they work and most importantly, how they could impact us.

The bill’s major points are: cap-and-trade; energy efficiency; and a renewable energy standard.

Each of these provisions fuel debates of their own, pitting environmentalists and scientists who argue that it’s time for the U.S. to start reducing its carbon emissions, against large, energy-dependent industries that fear the bill’s provisions – concerned such things as cap-and-trade will kill jobs and hurt their bottom line.


At the heart of the climate change debate are two letters and a single number: CO2 – or carbon dioxide. C02 is a natural gas, an integral part of our eco-system.

The deniers of climate change will claim that it does not exist because the earth’s temperature have always fluctuated. That talking point has been largely been discredited. The reality is that climate change exist, and is largely caused by our own, man made carbon emissions.

So, do we get rid of CO2 altogether? No. Despite greater awareness about climate change issues, we are, for the foreseeable future, going to live in a carbon-dependent world. And so, while unrealistic to get rid of all CO2 emissions, it’s certainly possible to drastically reduce such emissions.

One way to do that is through an incentive-based system that makes it financially viable for large CO2 producers to cut their emissions. That’s what a cap-and-trade system does.

Critics deride cap-and-trade as a “hidden tax”.  Supporters say it’s a “market-friendly”, profit-making, carbon-cutting tool. What critics omit to say in arguing against cap-and-trade is that unlike a cold tax, cap-and-trade, actually creates a  market that is regulated by capitalist rules of supply and demand.

For participating companies a cap-and-trade system could foster new revenue streams, which is a good way to motivate energy-dependent industries to actively participate in our fight to stop global warming.

How does cap-and-trade work?

The cap:  In a cap-and-trade system, a large CO2 emitter — let’s say an oil refinery –  will have a limit or “cap” on the amount of CO2 and other green house gases that it can emit in a given year. Over time, these limits are tightened, ensuring a cut in CO2 emissions.

The trade:  Some companies will be able to cut their CO2 emissions below their allocated levels quickly, which will leave them with lots of unused C02 permits. These permits can be sold to companies that are finding it more difficult to cut their emissions. This system, based on the law of supply and demand, rewards efficient companies and motivates polluting companies to cut their emissions.

Initially, Waxman-Markey expected to raise an initial $640 billion via the sale of carbon emission permits. However,  in the give-and-take game that is Washington, these goals fell by the wayside. Instead, a greater portion of the permits have been grand-fathered in, handed out for free, mostly to large emitters like electric utilities and oil and gas companies.

Supporters of the grandfather approach argue that given their large loads of C02, these energy-dependent companies will eventually have to return to the market for more permits.

The large numbers of compromise Waxman agreed too, to ensure passage of ACES is disappointing.  As the bill moves to the Senate, it could be further watered down to become a climate change law with no clout.

But let’s be realistic, with a formidable climate change opposition – backed by deep-pocketed industrial interests –  it going to be impossible to get the «perfect» climate change bill. And so while not perfect, ACES and its cap-and-trade provision secures crucial cuts in man-made CO2. Let’s enact these targets in the future once ACES becomes law of the land, then we can improve it.

By 2020, Waxman – Markey seeks to cut emissions by roughly 17 percent below 2005 levels, which is about equivalent to 4 percent below 1990 levels, and then by roughly 80 percent by mid-century.

A lot of these reductions will be achieved through the cap-and-trade program. In its original draft, the bill pushed for a 20 percent reduction but, under pressure from coal producing states, those goals were shelved in favor of a more modest 17 percent reduction.

Terrence writes about clean tech investments and policies on the the recently launched business blog.

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