Carbon Markey

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In Houston last week for CERAWeek, Rep. Ed Markey — chair of the Energy/Environment Subcommittee and the Global Warming & Energy Independence Select Committee — gave an interview to the Houston Chronicle.

He had this to say on the tax vs. trade question:

Q: A cap-and-trade system is widely assumed to be the form the climate change bill will take, but economists and many others say a carbon tax would be a simpler, more efficient method to reach the same goals. Is the door completely closed on a carbon tax?

A: I think it’s much more likely that a cap-and-trade system will be used. They’ve already reached a consensus in Europe, that 400-million-person continent, that that’s the way to go, and it’s the overwhelming way we’re going with. I understand economists, and how they want to have a debate over what’s more efficient, but in the end we can construct it as a cap-and-invest bill that is imposed in a fair, predictable way and will create incentives for innovation. What I use as an analogy is the 1996 Telecommunications Act. Up until then not one single home had broadband access. My goal in that act was to create the incentives for the deployment of broadband that could then lead—because of that huge additional capacity that was constructed—to the creation of thousands of other companies that could use that broadband capacity. I didn’t know the names of the companies would be Google, eBay, Amazon, YouTube and thousands of others that created 3 to 5 million new jobs in America. But 10 years later people look back at the black rotary phone era as ancient history, but it’s not that long ago. And I think we can do that same thing here. We have the opportunity to create 3 to 5 million new jobs in the energy sector if we unleash a technological revolution, because we have created through a cap-and-trade system a set of incentives that provides that opportunity. And I’m very confident that the same thing will happen. That’s been my experience as chairman over telecommunications, chairman over regulation of the financial marketplace: the incentives have to be put in place in a predictable way that creates the incentives for the change that the country needs.

As to the fear of financial speculators, he had this to say:

Q: Some of these emissions traders will be the same folks trading oil futures last summer who were accused by many in Congress of driving up prices through speculation. Is that something that concerns you?

A: On my Web site is the legislation I introduced last year, called ICAP, and it’s my first take at what the regulatory framework should look like. I included an entire title in the bill entitled “Carbon Market Oversight,” to allow FERC (the Federal Energy Regulatory Commission) to regulate the allowance or credit market to ensure its fairness and integrity and liquidity. That title draws on many of the things I learned while I was chairman over the securities marketplace for eight years. Those lessons are the need for transparent markets, the need for strong anti-fraud, anti-manipulation standards, and the need for good oversight and enforcement. So, they’re all Enron lessons, they’re also lessons from this derivative marketplace and subprime market crisis. Both of those areas are pretty much unregulated. If you allow a marketplace to remain fundamentally unsupervised for a long period of time, unfortunately as we saw with Enron and now with this subprime-plus-derivatives financial crisis that we’re now living through, you have an economic catastrophe on your hands. I helped design the law for the government securities marketplace in response to the late 1980s economic crisis with the program trading act of 1990. I’m the author of the insider trading act by which all these people got prosecuted. I’m the author of the penny stock act which regulates all the penny stocks in America.

And when I was chairman of the telecommunications committee in 1993 I moved over 200 megahertz of spectrum to create the third, fourth, fifth and sixth wireless phone company in each market of the United States. But the way it was designed was to ensure the two incumbents, who were still analog, could not bid for the third, fourth, fifth and sixth markets. They were both analog and they were charging 50 cents per minute. By 1996, in just a two or three year period, all of those new companies went digital, they dropped the price to under 10 cents a minute, the first two incumbents moved to digital and dropped their price to under 10 cents per minute, and we had an incredible revolution that today results in people having in their pocket a device that can pull up CNN or Google or make a phone call or text. In the future maybe even put together little movies and send it around the world and start charging admission to it. It’s a revolution that only took place because we got the auction right.

And here (for emission credits)there will be an auction. But there will also be a financial market that will need to be regulated correctly. I have been fortunate in being the chair of those two committees and that really provides me with some insight on how that should be designed, and it’s coupled with my now 33 years on energy, the natural resources committee and the chair of the select committee. So I have a pretty fair idea of the magnitude of the problem. But the principles are fairly obvious that have to be built into this law. If they’re not put in, or not enforced, then we’ll have problems. But as long as they’re in and they’re enforced, the marketplace can be extremely productive in creating the change that we’re looking for.

As you look back the 1990 Clean Air Act resulted in a technological solution that largely solved the acid rain problem. The speed at which companies created the technology to solve the problems once there was an economic stake in it shocked economists who had predicted just the opposite. I think that’s illustrative of what will happen if we design cap and trade systems to deal with CO2. I think our country can be a beneficiary of the job creation. I’m going to Houston to hear from the people who are at this conference who are going to be affected by these laws. That can be extremely helpful to me to make sure we fine-tune this legislation properly.

ble commodity representing a positive step in improving the environment — carbon offsets and RECs differ slightly. Carbon offsets are measured in metric tons of greenhouse gas emissions, while RECs are measured in kilowatt hours. RECs focus solely on power generated from renewable sources of energy, such as solar and wind, while carbon offsets represent the emissions displaced through any number of methods, from renewable energy generation to carbon sequestration.

But the process by which they function as tradable commodities is similar. For example, let’s take a hypothetical wind farm that expects to generate 100 million kilowatt hours of power per year. Each kilowatt hour represents one REC. That wind farm, either on its own or combined with other regional wind farms, offers its RECs through a private broker, such as Worcester-based World Energy Solutions Inc.’s World GreenExchange.

Interested buyers would place bids on the RECs, looking to buy them voluntarily in a quest for a more green company, or to keep their own greenhouse gas emissions under a certain limit if they fall in an industry under mandate to do so. When a company buys an REC, it is essentially buying the energy it would have bought anyway, but paying a premium price to ensure that power is generated from alternative energy sources.

For Lockheed Martin Corp., which last week bought 147,000 RECs through a reverse auction with World Energy, the premium (Lockheed Martin paid about two or three percent over what it would have normally paid) is an attractive position, said Todd Martin, a spokesperson for the company.

“We believe it is worth it,” he said.  “Not just from an environmental point of view, but from a business point of view because the investment goes into the development of new energy sources, and let’s face it, we are a large company and we are always going to use energy.”

Even though Lockheed Martin is buying the credits, they are drawing their energy from the existing grid, while the alternative energy output goes into the same general grid.
According to officials at World Energy, REC auctions are not just for large companies with many facilities or high emissions output. The company has conducted auctions for as few as 1,000 RECs and as large as 1.5 million RECs, for amounts ranging from thousands of dollars to millions.

On the carbon offset side, the Chicago Climate Exchange (CCX) was established in 2003 as a public, voluntary trading exchange for greenhouse gas emissions and has since built an impressive portfolio of participating organizations, including Amtrak, Bank of America, Eastman-Kodak and IBM Corp., as well as local entries such as Tufts University, KLD Research & Analytics of Boston, engineering firm Vanasse Hangen Brustlin Inc. in Watertown and waste resource management firm CommonWealth Resource Management Corp. of Boston.

At the moment, there are no over-arching regulatory entities, such as the U.S. Securities and Exchange Commission, for dealing with financial vehicles when it comes to regulating RECs. The system is in its earliest stages. Other methods of curbing emissions as well as generating revenue for new projects are also being considered, including a straight carbon tax on greenhouse gas emissions.

According to attorney Elise Zoli, chair of the energy practice at Goodwin Procter LLP, both systems have their merits and drawbacks. A carbon tax would be much simpler and less volatile than a cap-and-trade system, yet would not support the community of businesses, including World Energy Solutions and Groom Energy, that is popping up to help companies navigate the cap-and-trade system.

In the end, however, it may not matter.

“At the end of the day, it is probably less about what the system is, exactly, and more about the fact that it gets done,” said Zoli. “Money needs to be funneled into innovation and no matter what system it is, it has to have the end goal of reducing carbon emissions in mind.”