Last May we gave a talk at a UBS-sponsored conference on climate change.  In the talk we illustrated some ways in which mitigation of and adaptation to climate change should be considered investment issues.  We identified some market inefficiencies and opportunities that we saw on the horizon and noted that companies that start thinking about adaptation issues now stand to gain first-mover advantage over their competitors.

Today ClimateWire ran a story on the Pew Center’s new report Adapting to Climate Change: A Business Approach.  A conclusion out of the ClimateWire story that mirrors the message we gave at the UBS conference:

The report … says that many companies must “challenge their embedded routines for dealing with weather” because many of the historic measures of risk they are relying upon may be outdated.

We would go further by pointing out that weather and climate risk is only the most obvious issue for businesses.  The climate system is a non-linear system, with so many complexities and interdependencies that we cannot even begin to accurately model the potential outcomes.  Companies face risks throughout their supply chains, from seed to final sale.  The smart ones are thinking about no regrets choices now, realizing that simply reacting to government regulation and taking no further action is a very weak position.

The Congressional Budget Office has released its EPW-requested analysis of S.2191, the Lieberman-Warner Climate Security Act. The analyses cover S.2191 as passed out of committee and as proposed to be amended. CQ covers the release here.

The good news for those who want to see S.2191 pass the full Senate is that the CBO analysis expects the bill to be essentially revenue-neutral. This removes a parliamentary hurdle, as any Senator could have raised a budgetary Point of Order against the bill during floor debate had it substantially raised government spending. The bad news is that the CBO analysis projects that the bill will cost the private sector $90 billion each year from 2012-2016. This number will likely change the floor politics and will cause not a few key fence-sitters to cringe. Whether the Senate even has 60 votes to pass a filibuster check is still unclear and the $90 billion/year number casts further doubt.

Last week Senator Lieberman told a conference that he thinks a climate bill has a 50-50 chance of passage this year. Considering that the House has yet to float even draft language on their bill (a lot of proposals and a white paper from Rep. Dingell’s committee, but nothing remotely firm), and considering that the final House bill will be markedly different than the final Senate bill, we think the chance of a climate bill passing Congress this year are somewhere in the 1%-5% area. It is possible that the Senate will pass S.2191 when it comes to the floor in June, but not likely that a bill will pass through Conference Committee before this session is over. We think the new CBO estimate will make it politically harder than it already was going to be.

CQ is reporting today that Senator Boxer (Chair of Environment and Public Works, the  Senate committee of jurisdiction on climate change) has gotten Majority Leader Reid to agree to call up S.2191 in early June.  The article also notes that Boxer is vowing to kill the bill if any amendments significantly weakening it pass during floor debate.

It will be fairly difficult for this bill to pass a 60-vote threshold once the floor process is done, but even before it gets to that point some observers have wondered whether the Senate can get 60 votes to prevent a filibuster blocking the bill’s consideration.  With Boxer vowing to wait until the 111th Session in January 2009 if anything less than a solid bill makes it through the floor process, we doubt this bill is going anywhere this year.  Although there are many fence-sitters up for reelection in November who might consider moving on this bill, few are going to see a climate change package as make-or-break on their reelections.

If S.2191 does survive the floor process and is passed by the full Senate, the chances are nil that the House will pass a similar bill and a Conference Committee will be set before the end of this year.

Our previous post gave a bit of news about yesterday’s House hearing on, among other things, climate policy and international trade. U.S. Trade Representative (thus employed by the Administration) Susan Schwab did an encore today in front of Senate Finance. We haven’t seen how the full hearing went, but we were emailed Senator Bingaman’s quotes. (Sen. Bingaman chairs Energy and Natural Resources.) The press release from Bingaman’s office:

Sen. Bingaman today told U.S. Trade Representative Susan Schwab that Senate legislation to reduce greenhouse gas emissions by establishing a cap-and-trade system must not disadvantage American businesses — and that, contrary to Schwab’s allegations, legitimate environmental regulations are in no way saber-rattling or a backdoor imposition of trade restrictions.

Schwab testified before the Finance Committee today. In her testimony, she said: “Attempting to force others to act on climate change through trade saber-rattling carries enormous risks. These threats to the global trading system cannot be ignored or glossed over.”

Bingaman pointed out, however, that a provision in both the Bingaman-Specter and Lieberman-Warner climate change bills would subject imported goods to the same cap-and-trade standards as domestically-produced goods.

“This is certainly not saber-rattling. This legislation addresses legitimate concerns on the part of U.S. industry, that they would be at a competitive disadvantage if the United States put a cap-and-trade system in place and did nothing to encourage others to follow suit,” Bingaman said.

Bingaman pointed out to Schwab that the Senate has worked for some time in crafting legislation and that it is a little late in the process to be raising such issues.

“I am frustrated that after we’ve gotten this far down the road, the only thing we hear from the administration is that we should stop saber-rattling,” Bingaman said. “That is not a constructive way to engage Congress.”

We have argued elsewhere that a public opinion tipping point on climate action was reached sometime in Fall 2006. A real tipping point in public opinion — the kind that will drive major policy changes — is impossible to pin down, visible only in hindsight, and perhaps only to be determined by a future academic historian. But strong evidence that we are on the other side of that we’re-going-to-do-something-about-climate tipping point came as the confluence of two events over the past two days. The events draw a startling contrast with each other.

The first event was really a non-event. The last vestiges of a climate denier camp tried to play up doubt on climate and was greeted by one huge, collective yawn. (See this post for intelligent insight on climate tit-for-tat.) Such an event would have meant something two years ago. It means nothing now. Climate skeptics were once viewed with something between appreciation and respect by interested bystanders genuinely curious about this global warming thing they’d been hearing about. Climate skeptics are now increasingly viewed as crackpots, curmudgeons, or agenda-wielding cause advocates who are clothing their political interests in the name of climate science.

The Heartland Institute denier meeting came together on Monday. By Wednesday we saw just exactly why skeptic influence is over. The Energy and Air Quality subcommittee of the House Energy and Commerce Committee met to discuss climate policy in a four hour hearing. Gone from the agenda was the question that occupied previous sessions: is this really happening? On the agenda was a single question: what are we going to do about it? And deeper than just questions about the nature of a climate plan (cap and trade or carbon tax?), the hearing went into fine detail about trade considerations, tax incentives, how WTO mechanisms might interact with U.S. climate policy, and how to force China and India to play with us on climate.

Is this what a skeptic-influenced policy regime looks like? Or is this what it looks like when the collective decision has been made to do something about our climate risk, and the only question remaining is how we’re going to herd the cats and fight our way out of this paper bag?

As we wrote previously, FutureGen’s demise has been greatly exaggerated. We expected that Congress would not allow FutureGen to be effectively killed or otherwise radically altered without a skirmish, and today the skirmish went border war during a Senate Energy and Water Approps hearing. A highish-level DoE staffer (deputy assistant secretary in the Office of Fossil Energy – OFE) was raked over the coals by Senators Dorgan, Bond and Domenici.What was curious about today’s hearing was trying to decipher what Congress is actually thinking about FutureGen. Sen. Bond went as far as to say

that DOE’s decision to restructure because of the escalating costs of the program “ring hollow” and calls into question the veracity and judgment of the department.

DOE “left FutureGen at the altar choosing three younger, cheaper women,” Bond said.

Of the three Senators quoted in the recaps we saw of the hearing, Domenici has by far the most experience with energy, having been Chairman of both the Committee on Energy and Natural Resources and the Energy and Water Approps subcommittee (which is a ridiculous amount of power to hold on a single issue, but we digress). Sen. Domenici said:

Ranking member Pete Domenici (R-N.M.) said he wants more answers from DOE on how the funds are being split between cleaning up the coal and capturing carbon dioxide emissions.

“We have been funding clean coal research, about $2 to $3 billion over the last five to seven years,” Domenici said in an interview after the hearing. “Carbon capture and storage can’t knock out basic research … for ambient air purposes.”

Domenici said he wanted results from DOE whether it was clean coal, reprocessing capabilities for spent nuclear fuel, or other DOE programs.

“Next year get something done, beyond study,” he told DOE officials. “Put some of these programs into action.”

Our read is that Congress isn’t exactly sure what it wants. DoE has expressed interest in deemphasizing a huge, sure-to-become-a-boondoggle project that tries to do everything at once by going after IGCC, hydrogen production, and CCS in one not-so-neat package. In its place DoE wants to do commercial-ready systems that focus on real-world viable CCS efforts. This seems entirely reasonable to us, and probably is the proper play here.

So why is Congress balking? The most likely answer, at least today, is that Congress is balking because they weren’t consulted enough before the decision was made by DoE to switch emphasis. The usual explanation — that the decision to go away from a boondoggle means less pork for a few constituents — doesn’t hold water considering who was speaking at today’s hearing. As it was slated to be built in Illinois, the states of North Dakota, New Mexico and Missouri had little interest in FutureGen. They should have much more interest in smaller-scale IGCC/CCS plants coming to their states.

If, despite Sen. Bond’s questioning of DoE’s “veracity and judgment,” we can take DoE OFE at their word that they think FutureGen money is better spent deemphasizing hydrogen and emphasizing getting CCS commercially viable ASAP, then kudos to DoE for waking up and smelling the future.

Senate and House Dems have made it a centerpiece of their energy policy since regaining both chambers in 2006: remove/reduce tax incentives and subsidies for oil and gas and create new tax credits and incentives for renewable energy. Their problem thus far has been finding filibuster-proof margins in the Senate to get their packages passed. Now they’re turning to the budget resolution reconciliation process as a filibuster-proof vehicle.

This is potentially good news for renewable energy, but even if this package ($18B at last check) makes it through reconciliation and passes Conference Committee, the Bush White House has repeatedly said they will veto any bill that raises taxes on oil and gas.

Most observers of U.S. policy and politics would say yes. The usual insight given is that Americans are so tax-phobic that anything that remotely smells of a ‘tax’ won’t pass. Even though cap-and-trade will be a tax on energy for all intents and purposes, it is considered more politically palatable simply because of the name. This is really a framing question, though. Stakeholders who play in transportation policy alternately call the 18.4¢/gal federal fuel tariff a “gas tax” or a “user fee.” Use “gas tax” if you think gas shouldn’t be taxed no matter what the reason. Say “user fee” if you think it good policy that the federal fuel tax pays for the entire federal interstate highway system and a good deal of state and local roads, bridges, railroad crossings, bike paths, buses and bus lanes, and other goodies. If carbon tax proponents (and there are legions) had any sense, they’d be devoting most of their time and energy to figuring out how to address this framing issue.

The debate might be over simply because every state that has started to move toward GHG regulation has moved in the cap-and-trade direction (RGGI, WCI, etc.), and the only bill in Congress to see movement so far is the Lieberman-Warner cap-and-trade bill (S.2191). But not so fast. Despite being a member of the Western Climate Initiative, the government of British Columbia just passed a comprehensive carbon tax. And the heavyweights in U.S. policy that favor a carbon tax is long. Carbon tax and cap-and-trade are not mutually exclusive, and in fact best policy would institute both for different sectors.

Perhaps the most compelling reason we will have a cap-and-trade system instead of a carbon tax is a combination to two factors: money and inertia. Once one regime is in place, adding the other to address other sectors is unlikely. So which regime comes first? That’s where money comes in. Wall Street stands to make big, big money pushing electrons through wires. How much? Well, New Carbon Finance just released an estimate that if Lieberman-Warner passes as is, the carbon trading market will be $1 trillion by 2020. That’s trillion. With a T. Now does anybody want to bet which regulatory regime we will be seeing?

EPA Administrator Johnson threw another blazing bowling pin in the air today as he finalized his finding that California has no “compelling reason” to regulate greenhouse gases under a Clean Air Act waiver. Johnson’s work continues (un)official White House policy to delay any movement on addressing climate policy until the G.W. Bush Administration is safely out of office. Despite being essentially ordered by the U.S. Supreme Court to address in some way carbon dioxide emissions, the EPA has found another way to stall such movement. Apparently the official decision directly quotes language from the Alliance of Automobile Manufacturers, which is sure to rile the already comical faux-aghast reaction from regulation proponents.

Our take is that while continued criticism of the White House on its eight-year climate stonewalling campaign is well-deserved, the EPA and the Clean Air Act are not the appropriate vehicles to address GHG regulation policy. Considering that GHG regulation will be felt economy- and nationwide and will represent a serious change to business as usual in the U.S. economic engine, the only proper authority to deal with the initial planning on GHG regulation is the U.S. Congress. Congress is the only leg of the three-legged Federal stool that broadly represents all of the diverse interests (geographic and otherwise) of the United States. Climate policy should not be initially set by a group of nine judges residing in Washington D.C. or a lame duck White House that is responsible to no broad set of stakeholders. Until Congress steps up to its responsibilities and gets serious about addressing climate policy, let’s not distract ourselves by using EPA as a scapegoat for inaction.

It’s still unclear exactly why the Department of Energy is trying to back out of FutureGen, but the most likely explanation is that they are trying to back themselves out of another billion-dollar boondoggle (they’ve had quite a few). FutureGen is a collaboration between DoE (fronting 75% of the CAPEX) and a consortium of oil and coal companies under the FutureGen Industrial Alliance umbrella. Siting of the plant has been contentious, but recently was awarded to a site in eastern Illinois.

Despite media coverage claiming that DoE “scrapped” FutureGen, the future of the project is likely good. Even in a carbon-constrained world, coal-fired electricity generation is not going away. The solution is to bring down the OPEX of integrated gasification combined cycle (IGCC) technology and carbon capture and storage (CCS). If you’re looking more than ten to twenty years in the future, whatever FutureGen costs is worth it. Without FutureGen or something like it, we’ll continue to stumble forward on carbon-free coal.

There are two routes forward: A- The Illinois Congressional delegation successfully adds language to the Energy Appropriations bill that forbids DoE from backing out of the project. B- The businesses in the Alliance go forward without DoE. Our guess is that (A) is more likely, as Illinois’ senior Senator (Durbin) is the #2 to Senate Majority Leader Harry Reid, and at this point in time Barack Obama has a decent chance of gaining the White House.