The past two days I have been in Houston at the Environmental Markets Association (EMA) fall conference.  If you are not familiar with the EMA, it is an organization that supports the use of market-based solutions to environmental issues.  The members are largely made up of consultants, traders of environmental credits and project developers. 

Many of the members were on the ground floor when the first cap and trade programs were implemented in the 90’s regarding acid rain.  The also participated in the two cap and trade programs on utilities that followed acid rain- NOx SIP call and CAIR. 

Finally, there is also expertise in the burgeoning carbon markets.  Whether that involves the "voluntary markets" in the U.S., state mandatory programs like RGGI in the east, or the international cap and trade program in the European Union.

Bottom line, these folks have the expertise in trading various environmental credits under a wide range of programs.  They have seen what has worked (acid rain) and what hasn’t worked (collapse of the CAIR program). 

The big topic of course is the Waxman-Markey and Kerry-Boxer bills pending in Congress.  There was a lot of discussion regarding the various elements of these bills.  From the various perspectives offered over the last few days I draw the following perspectives regarding the drive for a federal CO2 cap and trade program in the U.S.:

  • Complexity– Many expressed concern that the Waxman-Markey Bill is overly complex.  That instead of focusing on setting up a core program- namely putting a price on carbon-the bill tries to dictate the minutia around the program.  The more complex the program the more difficult it is to operate.
  • Offsets– Many concentrated on the debate over the domestic and international offset programs.  There appeared to be consensus that an offset program was absolutely key to bringing down the cost of compliance.  The concern expressed was that both Waxman-Markey and Boxer-Kerry put too many conditions on the offset program.  These include limiting how many offsets each company can use for compliance.  What types of offsets will qualify.  How quickly EPA can certify the verification procedures for creating offsets. 
  • Stabenow-Baucus Offsets Bill– This bill is seen as a mechanism to clean up what is wrong with the offset programs established in the other bills.  A lot of hope was being placed on this being the vehicle to correct the problems.
  • EPA Preclusion-  While not receiving a lot of attention, a huge difference between the House and Senate bills is whether EPA is precluded from regulating greenhouse gases under the Clean Air Act.  House says EPA is precluded, Senate does not.  As I have discussed on in prior posts, this is a huge issue.  In fact, one of the main reasons to set up a cap and trade program is to pre-empt EPA from establishing an unworkable command and control program under the Clean Air Act.
  • Stability Reserve-  This is the concept of trying to address carbon prices getting to high after the program is established.  Rather than simply placing a cap on prices, both bills create the concept of a reserve of allowances that could be released if prices get to high.  This is not a cap, if the trigger is met it allows future allowances to be auctioned off.   EPA is supposed to take the proceeds from the auctions and purchase offsets to make the impact of releasing more allowance neutral.  The concern on the stability reserves were: 1) the triggers to tap into the reserve and whether it really can control prices from getting too high; and 2)  what happens if not enough offsets are available for EPA to purchase because all the limitations placed on which types of offset qualify.
  • Verification Procedures for Offsets-  The Senate would require notice and comment on every offset project which was seen as overly cumbersome.  The House allows pre-compliance offset credits to qualify for only 2009-2012. Also, projects must meet either a state verification procedure or one deemed by EPA as stringent as a state verification procedure.  The short duration of pre-compliance offset projects was concerning because it may severely limit available offset credits after 2012.  The limitations on verification procedures could disqualify many projects that went through non-state certified verification procedures. 

Many more observations and comments were made.  I certainly learned a lot from the experts who work have been working in environmental markets since the 1990’s.  Their expertise certainly should carry a lot of weight with Congress.  Otherwise, we risk have politicians set up a program that is doomed to failure from the start.