Copy from my Column from Sustainable Industries July 2009

The American Clean Energy and Security Act, known as the Waxman-Markey bill, is “a rare opportunity to rise above parochial concerns to enact a bill with a profound national impact,”according to President Barack Obama. Republican critics are attacking Democrats as pro-business and anti-consumer and small business, which is ironic as the GOP is the “The Party of ExxonMobil (NYSE: XOM) and Peabody coal. “Using this tactic, the GOP wants to hold the line against the climate change bill, even though Duke Energy (NYSE: DUK), Johnson & Johnson (NYSE:NJN) and Shell Corp., along with other businesses and environmental organizations, are backing the bill. “I find it extremely amusing that suddenly the Democrats are being attacked for being too friendly to business creation,” Senator Barbara Boxer (D-Calif.), chairwoman of the Senate Environment and Public Works Committee, has said. The GOP argues that the Waxman-Markey bill would create higher energy costs for small business and consumers.

The real issue is the bill does not go far enough. It needs to create an “energy-efficiency and renewable energy set aside”-or green building carbon offset program-which rises above the regulatory approaches to energy efficiency. The Waxman-Markey bill provides for an economy-wide cap-and-trade program. The cap reduces greenhouse gas (GHG) emissions to 17% below 2005 levels by 2020, and 83% below by 2050. Offsets (project-based reductions) are limited to 2,000 million metric tons CO2 equivalent per year, or 30% of U.S. emission reductions, split evenly between domestic and international offsets. Domestic offsets do not include offsets from green buildings.

However, federal regulators are closely watching California, which is holding public hearings about AB32 implementation [see "California gives legs to AB32, Sustainable Industries, December 2007]. Members of the San Francisco Carbon Collaborative, including Carbonflow, have made significant progress with the regulators on getting an “energy efficiency set aside” into the discussion for possible inclusion in AB 32. This is an important first step, as California is known as a global leader in energy related legislation.

Simultaneously, at the recent CarbonExpo in Barcelona, many expressed interest in a Global International Protocol on Energy Efficiency and Renewable Energy set asides. Under the Waxman-Markey bill, energy efficiency would be achieved through a renewable electricity standard, a low-carbon fuel standard, and energy efficiency programs and standards for buildings, lighting, appliances, as well as vehicles and stationery sources and fuels.

These are all good initiatives. But according to Anne-Marie Warris, author of the Voluntary Carbon Standard, “the problem is that it relies on energy efficiency measures to be applied as the natural turnover of building stock takes place,which is estimated to take anything from 500 to a 1,000 years….which is time we simply do not have to prevent climate change,” Warris says.

Indirect sources of emissions

The Waxman-Markey bill relies on capping direct sources of emissions such as power plants and other smokestack industries. The bill’s definition of domestic offsets includes agriculture,landfill, waste-to-energy projects and biomass. But, it does not include green building offsets. The conventional wisdom is that cap-and trade should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. The bill follows the reliance on reductions from direct sources and forecloses on the possibility to achieve reductions from indirect sources, such as buildings that consume electricity despite their cost effectiveness.

“As a result, a valuable incentive for voluntary GHG reductions is lost, the low-hanging fruit of increasing energy efficiency in buildings goes unpicked, and industrial sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing climate change and makes it less politically feasible to accomplish,” says Donald Simon, an attorney for Wendel, Rosen, Black and Dean.

Huge potential with existing buildings

Existing regulation leading to emissions reductions through “green” construction techniques usually comes in the form of building codes that reach only new construction and substantial renovations. Yet the majority of GHG in the built environment come from existing buildings. Current government incentives “are helpful but inadequate because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years,” Simon says. Domestic green building offsets would allow regulated industries to choose between reducing their own emissions or purchasing offsets from others who are able to reduce theirs at lower cost.

This would reduce the overall cost of climate change regulation for consumers because the market would exploit the lowest cost GHG reductions. Green building carbon credits would provide a large funding source that partially finances energy efficiency improvements. Poorer communities would benefit, as credits would fund energy efficient and renewable energy upgrades to existing building stock at a more accelerated rate than building codes currently create.

Making energy upgrades affordable

Moderate House Democrats and Republicans say that under a cap-and-trade program, ordinary people would incur higher energy costs over time because most have not upgraded their homes and small  businesses with energy-efficient technologies.

However, by allowing green building offsets into the federal cap-and-trade system, subsidies to poorer communities for increased energy costs would not be necessary. Their buildings would be retrofitted by the private sector using the dollars from green building offsets. Ultimately, these people would consume up to 50 percent less energy, with no net energy cost increase. Green building offsets would allow construction companies, project developers, engineers and architects to initiate energy efficiency and renewable energy building projects. And, revenue from the sale of the credits would fund projects and create new “green” jobs. Without this small inclusion to the Waxman-Markey bill, the Democrats may miss a chance to pass sweeping climate change legislation in 2009.

I have been away and attended a conference Carbon Expo, the Global Carbon Market, Fair and Conference, May 27th-29th 2009 in Barcelona, the most important conference in the Carbon Calendar and under new market initiatives in the Voluntary and Regulatory market there is now a “Cities & Carbon Finance Stream Workshop”. This shows the force of Cities gearing up to participate in the Post 2012 Climate Change Agreement.  This is unusual as Nation States participate in International Treaties not city states. Climate Change is impacting on global governance issues as all levels of government are involved in Climate Change emissions, reductions, impacts and mitigation. Even a few years ago the role of Cities and local government at international meetings was questioned. Mayor’s of the world are responding spontaneously such that City states are now involved with the lead up meetings like Carbon Expo to Copenhagen for the Post 2012 Agreement. For example in the U.S, I have recently heard that Governor Schwarzenegger of California state may well be present along with Global Presidents and Prime Ministers in Copenhagen.    Eventually organizations on behalf of cities will have to be represented at these Global meetings, as the numbers and levels of government simply become unwieldy.

According to the Carbon Expo program, there is “increased awareness and growing commitment of city decision makers to city climate strategies and implementation of GHG mitigation in policies and measures in both developed and developing country cities. However, currently there is limited access to information, knowledge on technologies and innovative financial solutions are some of the barriers preventing local leaders, entrepreneurs and business groups from seizing an overabundance of low carbon win-win options in urban centers. Hence the Cities stream aimed to facilitate and promote dialogue, knowledge sharing, networking and business communication within relevant stakeholder groups to be a part of an essential measure to foster a transition to low-carbon city development. The streams covered:
- Beyond Carbon Trading - Policies & Measures at the local level for financing low carbon development in cities
- Carbon finance in cities post-2012- Scaling up GHG reductions and enhance urban development co-benefits
- CDM/JI in Cities - What has worked and what has not
- Creating Urban Carbon Assets: From Concepts to action
- Leveraging Greater Energy Efficiency in Buildings with Carbon Finance - How can we make it happen?
- The Role of Carbon Finance in the transport sector in urban areas

U.S Cities are moving fast to catch up with European initiatives and are closer to taking over - they are well  organized and spear-heading major initiatives around GHG reduction at the city level. The San Francisco Carbon Collaborative is part of a broader groundswell of spontaneous activity by the World’s Mayors.The City of San Francisco Urban EcoMap, an Internet-based tool that enables cities around the world to provide smarter climate change information for their citizens. Urban EcoMap provides information on carbon emissions from transportation, energy and waste among neighborhoods, organized by ZIP/ Post codes.

On PBS March 23rd 2009, it was announced that the U.S Conference of Mayor’s established 4 years ago by Seattle Mayor Greg Nickels reached the 900-mayor milestone. The 900 mayors represent 80 million Americans, and they illustrate the increasingly prominent role that cities and towns are playing in combating climate change.

According to Seattle Mayor, Greg Nickels, “cities cover less than one percent of the earth’s surface, but hold half its population and produce about 80 percent of greenhouse gasses. And cities will have to deal with the effects of climate change, from sea level rise in coastal cities to heat waves, strong storms and other extreme weather”.

Seattle has  aims to reduce its carbon emissions by 30 percent below 1990 levels by 2024 and 80 percent below 1990 levels by 2050. The plan includes transportation goals — such as building a light rail system, improving bicycling infrastructure and using more “clean vehicles” in the city’s fleet — and improvements in building energy efficiency.

Mayor Michael R. Bloomberg and Council Speaker Christine C. Quinn on April 26th 2009 announced the world’s most comprehensive package of legislation to reduce greenhouse gas emissions from existing government, commercial, and residential buildings. According to the PlaNYC inventory of greenhouse gas emissions, almost 80 percent of New York City’s carbon footprint comes from buildings’ energy use.

A six-point plan, when enacted as part of PlanNYC, will dramatically reduce the City’s energy usage and save consumers money, while simultaneously creating thousands of well-paying jobs and significantly reducing New York City’s carbon footprint. The six-point plan consists of four pieces of new legislation and two PlaNYC programs that will achieve carbon reductions, train workers for the estimated 19,000 construction jobs that will be created, and help finance energy-saving improvements using $16 million available from the American Recovery and Reinvestment Act. The plan will also result in cleaner air, since emissions from boilers, furnaces, and local power plants will also be reduced.

“Today we’re introducing the greener, greater buildings plan, a far-reaching package of new local laws that will dramatically improve New York’s energy efficiency and reduce energy costs by some three-quarters of a billion dollars a year,” said Mayor Bloomberg. “This will significantly improve our economic competitiveness, put thousands of New Yorkers to work in green jobs, and do more to shrink our own direct impact on global warming than any other actions imaginable.”

According to the PlaNYC inventory of greenhouse gas emissions, almost 80 percent of New York City’s carbon footprint comes from buildings’ energy use. Once implemented, the legislation announced today will reduce citywide emissions by 5 percent….

The reductions will be achieved through the six point green buildings plan unveiled today:
* Legislation that creates a New York City Energy Code that existing buildings will have to meet whenever they make renovations;
* Legislation that requires buildings of 50,000 square feet or more to conduct an energy audit once every ten years and make any improvements that pay for themselves within five years;
* Legislation that requires commercial buildings of 50,000 square feet or more to upgrade their lighting to more energy-efficient systems that pay for themselves through energy savings;
* Legislation that requires buildings of 50,000 square feet or more to make an annual benchmark analysis of energy consumption so building owners can better understand what steps they can take to increase efficiency;
* A jobs program that will work with the real estate and construction industries to train the workforce that will fill the estimated 19,000 construction jobs the legislation will create; and
* An innovative financing program that uses Federal stimulus money to provide loans for property owners to pay the upfront costs for the efficiency upgrades that eventually pay for themselves.

The Waxman and Markey Climate Change bill has to be finalized by 25^th of May on Memorial day 2009. The House is considering climate change legislation authored by a key subcommittee chairman, Rep. Ed Markey (D-MA). President Obama has said this is, “a rare opportunity to rise above parochial concerns to enact a bill with a profound national impact”.

The Waxman-Markey Discussion Draft provides for an economy wide cap & trade program: The cap reduces greenhouse gas emissions to 20 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050. Offsets, (project based reductions) are limited to 2,000 million metric tons CO2 equivalent (MtCO2e) per year or 30% per cent of U.S emission reduction, split evenly between domestic and international offsets. Domestic offsets does not include Green Buildings offsets. There are provision for emissions reductions from reduced deforestation through allowance set-asides.

Waxman does not yet have support from House Republicans or moderate Democrats like Rep. John Dingell (D-MI) who are opposing the bill. Opposition concerns whether to give away or auction the permits to manufacturers, utilities, and other industrial sectors in a U.S Cap and Trade Emissions Trading scheme. The U.S is coming up against the same opposition from industry and parochial interests that the Europeans came up against, when they decided to give away the majority of permits in the early years of the European Emissions Trading scheme (EU-ETS). The U.S was originally highly critical of the Europeans for going down this path.   Al Gore has gone on the front foot calling for unity from the democrats on Climate Change against the resistance of some democrats wanting to protect local industry. Similar to the results of the EU-ETS, we found with the Carbonflow carbon game emission reductions were achieved even with giving away the permits in the first period. So, whatever the House decides on auctioning versus giving away permits that should not block the Draft bill’s passage through the house.

Some believe that Speaker Pelosi will make the House vote on a version of the Markey bill with 254 House Democrats, but important House Democrats like Mr. Dingell may make a similar case as House Republicans, that the bill should be opposed because of the higher energy costs for consumers.

The approach taken by the Waxman-Markey bill does not alleviate the problem whereby household consumers will pay higher energy costs because the regulatory approach to energy efficiency and renewable energy is insufficient. Under the bill energy efficiency and renewable energy is proposed to be achieved through regulation by establishing a renewable electricity standard, a low carbon fuel standard, and energy efficiency programs and standards for buildings, lighting, appliances and additionally further standards for vehicles, stationery sources and fuels.

According to  Donald Simon, an attorney for Wendel, Rosen, Black and Dean, BOMA International, The Real Estate Roundtable, U.S. Green Building Council and the California Business Properties Association, regulation does not achieve the result intended as, “Building codes typically affect only new construction, because existing buildings are “grandfathered” and new code requirements apply only to substantial renovations, which is  hugely problematic. Existing buildings account for the vast majority of real estate sector GHG emissions. Government incentives are helpful but inadequate and unreliable because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years”.

Simon goes on to say that, “in the world of Climate Change regulation, there are two major classifications of GHG emission sources - direct and indirect. Direct sources release GHGs directly into the air, like power plants and other smoke stack industries. Indirect sources are activities that consume what the direct sources produce, like buildings that consume electricity produced by power plants. The conventional wisdom among regulators globally is that market-based programs, like cap and trade, should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. This generally forecloses the possibility for green building projects to generate carbon credits, despite their cost-effectiveness. As a result, a valuable incentive for voluntary GHG reductions is lost, the low-hanging fruit of increasing energy efficiency in buildings goes unpicked, and industrial (direct) sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing Climate Change and make it less politically feasible to accomplish”.

Not only do, Cap and Trade Green Building carbon credits provide a much larger funding source that could partially finance energy efficiency improvements if buildings are allowed to participate, they also actually benefit poorer communities by upgrading the existing building stock with energy efficient and renewable energy technologies at a much more accelerated rate as the private sector is incentivised from the price of carbon to go out and do projects on a large scale, providing whole districts and building owners with clean technologies funded by the credits. Regulatory approaches just take too long to retrofit the existing building stock and leave people stranded with high energy bills.

House moderate Democrats and Republicans correctly say ordinary people will incur higher costs of energy over-time because most people will not have had their homes and small businesses upgraded with clean technologies and they know the subsidies to poorer communities for energy costs will be short-lived and once removed all Americans will be left with higher energy costs. A householder or small business faced with a doubling of energy costs from USD 100 - USD 200 a quarter would probably just pay as there is not enough incentive to go out and retrofit the house nor do they have the trades expertise to do it.

The better outcome is that Green Building Carbon Credits are allowed and business, construction companies, project developers, engineers, architects do energy efficiency and renewable energy building projects using the funds from the credits and create the Green jobs President Obama is talking about.

In short proposed subsidies to less well off Americans waste money that should be going into making all American homes energy efficient and creating green jobs.

Policy-makers can encourage voluntary reductions by structuring carbon markets in a way that allows parties to convert their GHG reductions into carbon credits that they can sell to regulated sources to offset their emissions. Under the current plan the U.S would be in the anomolous situation of accepting international carbon offsets from energy efficiency and renewable energy but not accepting it domestically. This makes no sense. Domestio Green building offsets would allow regulated industries an alternative way to comply with regulatory obligations by letting them choose between reducing their own emissions or purchasing Green Building offsets from others who were able to reduce theirs at lower cost. This reduces the overall cost of Climate Change regulation by letting the free market exploit lowest cost GHG reductions.

Green Building carbon credits would be more transparent as they would have to be independently validated and verified, and open to public scrutiny, whereas money going to government agencies for programs may well end up being used on things other than greenhouse gas reductions projects. Even the double-counting issue can be managed as companies like Carbonflow, multi-party software designers for the carbon industry can easily retire end use building credits back to the Cap.

I believe however, if the house was not to get too hung up over auctioning or giving away permits in the first phases and secondly, to introduce Green Building Carbon Credits, it could solve all the problems that beset the Draft Waxman-Markey bill before the House on Memorial Day.