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Climate Consensus Obscures Obama, McCain Differences

Monday, 25 Aug 2008 | 2:32 PM ET

Both presidential candidates support the need to curb greenhouse gases believed to cause global warming, but there are key differences in how they would implement what will eventually be a significant overhaul of the country’s energy infrastructure.

White House
AP
White House

First and foremost, the candidates agree on a market-based cap-and-trade program that will establish a price for carbon dioxide emissions that tightens over time, providing an incentive for businesses to develop cleaner energy technology.

The similarity, however, pretty much ends there, as Senators John McCain, the presumptive GOP nominee, and Barack Obama, the soon-to-be nominated Democratic candidate at the party's convention this week, differ on how aggressively to pursue this environmental goal and on exactly how to fund the transition.

More specifically, they differ on whether to make businesses pay for carbon pollution permits over a certain limit — some of which they would get back in government support to adopt cleaner technology — or give them a free ride initially, with sanctions pushed into the future.

“Between the two candidates, the devil's in the details,” notes Tufts economist Gilbert Metcalf. “Obama wants to auction all the permits and use the revenue for energy efficiency, R&D and other purposes [while] McCain wants to give the bulk of the permits away initially — this is the $100 billion difference between the candidates.”

Environmentalists are concerned that, without the pressure of real costs, businesses will not move fast enough to reach critical emissions targets — 80 percent reduction by 2050 — while business complains it will be hit with a double-whammy of paying for pollution and curbing emissions.

But Vicki Arroyo, director of policy analysis at the nonpartisan Pew Center on Global Climate Change, calls this a “paper difference” that exaggerates what McCain and Obama are likely to actually try to implement.

“I don’t think anyone really thinks that 100 percent auction is politically viable,” she says, adding that the Obama campaign has accepted this reality because of strong business opposition and general economic concerns.

She says the new Congress' full agenda will prevent climate change legislation from being passed “until 2010 at the earliest.” Even that might come in smaller pieces, targeting specific sectors, such as utilities, which account for some 40 percent of carbon emissions. In either case, opposition from some quarters will be significant.

Biggest Impact on Utilities Industry

Within the power sector, companies most dependent on coal — the dirtiest fossil fuel — will be hit hardest, particularly if they are forced to buy permits for future emissions.

“This is an abysmal policy, this is a killer for coal states,” says John Stowell of Duke Energy, one of the country’s largest utilities, about plans to make utilities pay for permission for future carbon emissions.

Obama has insisted all allowances to emit carbon be auctioned off, while McCain seems to favor giving away at least a portion of them.

The leading draft legislation on this issue, the Lieberman-Warner bill ( (S.2191 America's Climate Security Act 2008, co-sponsored by Senators John Warner and Joe Lieberman, which evolved from a tougher, earlier bill co-sponsored by McCain) calls for auctioning 25 percent of the permits.

That bill calls for reducing carbon emissions 50 percent by 2050, even though a large body of scientists say an 80-percent reduction will be needed to avoid the most catastrophic impacts of climate change.

As a regulated utility, Duke would pass on these costs to customers. Indiana, for instance, would see electricity prices rise 65 percent within five years, the company estimates. A study by the National Association of Manufacturersand the American Council of Capital Formation offer a state-by-state economic impact analysis of the Senate bill.

The new cost to carbon could force utilities to switch to natural gas, which emits half the carbon coal does, but this could force up electricity prices.

Economy-Wide Impacts Projected For Decades

Economy-Wide Impacts Projected For Decades

There is also a debate on the general economic impact these policies could have.

“In the short-run we are embarking on a fairly modest experiment that gets us the easy reductions in carbon emissions at pretty low cost; in the long run, we are looking at a complete transformation of our energy economy,” says Metcalf, who co-authored a widely-cited MIT study of the Warner-Liberman bill, which many expect could provide the core of any future legislation.

But this and others studies are built on a set of assumptions that may produce widely different outcomes over several decades.

The MIT study, for one, predicts a GDP reduction of 0.5 percent to 1.0 percent of GDP in 2015, three years after the law would go into effect.

“That’s not negligible, but it’s not a lot,” argues Metcalf, adding that the US economy will have grown to $17 trillion by that time. “The bottom line is that the costs of climate mitigation can easily be handled by our robust and diversified economy.”

Other studies predict more dire consequences. According to one by consultancy CRA International, the measures will slash 1.9 percent from the GDP in 2015.

The trouble is that there are many uncertainties that could affect the evolution of any cap-and-trade program. For that reason, the Environmental Protection Agency study of the Senate bill analyzed 10 different scenarios to evaluate a range of assumptions and key parameters.

The uncertainties are reflected in the EPA's GDP-reduction estimates that range from 0.9 percent to 3.8 percent in 2030 and between 2.4 percent and 6.9 percent in 2050.

A critical uncertainty is the development and adoption of new technology — including next generation nuclear plants, which are strongly favored by McCain — and how quickly large emitters, like China and India, join reduction efforts.

Ultimate Price Tag

This is where auction revenues could help, to boost the government's basic R&D expenditures for clean technologies — now about $3.5 billion — which could then be shared worldwide.

The MIT study envisions raising $85 billion in the first year of a full auction — at $10 a ton. But prices are forecasted to rise from $50 per ton in 2015 to $200 per ton by 2050.

That's a lot of money for the government and many are concerned the funds could get diverted to plug other deficits.

Obama has laid out ambitious programs about how this money would be spent, including committing $150 billion over 10 years to develop and deploy clean technologies.

"The amount of money that is going be needed for new technology — because most of that is not developed — is really fairly high, I mean we are in the trillions, not the billions,” says William Kovacs, vice president of environment, technology, and regulatory affairs at the US Chamber of Commerce.

Obama also envisions earmarking funds to help low-income customers absorb higher energy prices and to retrain workers for a new 'green' economy.

"By 2050, if we stick to our guns with the kind of cap-and-trade bill that we are talking about, nothing will be untouched by this," Metcalf says.

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