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Carbon Trading: High Hopes for Lieberman-Warner

Date
15 April 2008

The °Climate Group recently held its first North American members meeting with attendance from over 50 leading businesses, states and cities. The conversation was centered on action from the US on climate change. It was a far-ranging and optimistic conversation with a striking focus on the need for leadership and a robust carbon market.

Many were of the view that although climate change is not on the average American's voting agenda, a new President will provide the opportunity needed to change the rhetoric and open the door for positive discussions to set a carbon emissions reduction target as part of the post-Kyoto process. The reason for this belief is that foundations to support robust commitments on carbon reduction are already being built.

Lieberman-Warner double bill

America's Climate Security Act of 2007, better known as the Lieberman-Warner bill, is one of those foundations. It proposes to establish an economy-wide cap and trade programme to reduce greenhouse gas (GHG) emissions in the United States - it is probably no surprise that an economy- based mechanism is the one that offers the most hope in a capitalist economy. It is the first climate change bill to be approved by a Congressional committee, passing through the US Senate Environment and Public Works Committee by a vote of 11 to eight.

As the bill moves to the Senate floor for debate, it is likely to serve as a focal point for any future climate legislation in the US. The bill will establish a yearly cap on GHG emissions from the electric power, heavy industry and transportation fuel sectors. In the electric power and industry sectors, the programme regulates facilities (downstream regulation) that emit more than 10,000 tonnes of {CO2}e per year. In the transportation fuel sector, the programme regulates emissions from refineries (upstream regulation) whose fuel will emit more than 10,000 tonnes of {CO2}e per year.

The regulated sectors account for between 75 per cent and 86 per cent of total US emissions. The total cap would begin at 2005 levels in 2012 and tighten gradually each year, reaching 70 per cent below 2005 levels by 2050.

Election boost

Debate about Lieberman-Warner, and other climate change bills including the Bingaman-Specter bill, is expected to continue in earnest through 20081. Bingaman-Specter similarly calls for an economy-wide cap on emissions, auction and allocation of allowances, and set-asides for R&D. Conventional thinking is that there will be no passage of legislation in 2008 because of the presidential elections. However, all three presidential candidates are supportive of climate change legislation - Republican candidate, Senator McCain, is the co-sponsor of one of the bills introduced in the Senate. Climate change legislation will continue to be discussed and debated in the near and medium-term future, with the potential for legislation to pass in the 2009-2010 timeframe. 

Vital influence

The Lieberman-Warner bill has gained traction in the Senate largely as a result of its sponsors. Senator Lieberman, an Independent, and Senator Warner, a long-serving Republican, are seen by Republican lawmakers as honest brokers. Their support of national climate legislation has sent a not-so-subtle signal to a group of moderate Republican lawmakers that support of national climate legislation passes a necessary litmus test of party loyalty. Without such a highly regarded and senior lawmaker as Senator Warner on the bill, it is unlikely to have made enough impact to survive. This is evident in the fact that the Bingaman-Specter bill, of which maverick Republican lawmaker Arlen Specter is a co-sponsor, has not moved out of committee.

Pragmatic appeal

Beyond politics, Senators and business people have been willing to show support for the legislation because it effectively takes a middle-of-the-road approach to most design issues, including a mix of upstream and downstream points of regulation and a generous balance of allocation and auction of allowances. It is generally assumed that national climate legislation passed by the 111th Congress will have striking similarities to the Lieberman-Warner bill.

The US business community sees the potential for this legislation to help drive the low carbon economy because it relies on market mechanisms and is less extreme than other proposals languishing in committee. Its measured approach to regulation is enticing to a business community which has repeatedly asked Congress to lay out workable rules so that it could adapt to and leverage these rules for its economic interests.

Trading buzz

In addition to legislation to frame the development of a price on carbon is the development of several mechanisms to trade carbon. In the US, many companies are preparing for the Regional Greenhouse Gas Initiative (RGGI) and the state-wide cap on emissions in California (AB-32) and are therefore buying from the compliance market.

The Chicago Climate Exchange (CCX) is a membership-based cap and trade system. Membership in the CCX is voluntary but members must meet legally binding limits on their GHG emissions. In addition to allowing member companies to trade allocated emissions allowances, the CCX allows members to use approved offsets from the voluntary markets to meet their emissions limit. In 2006, 10.3 million MT{CO2}e worth US$36.1 million were traded on the CCX, representing 43 per cent of total volume traded in the US voluntary markets. The fact that Goldman Sachs has a significant investment in the CCX also provides a good indication that the US financial markets are expecting to develop in the future. 

Unstoppable momentum?

The positive direction that climate change legislation and carbon markets are travelling in the US goes a long way to support the optimistic outlook that many of The °Climate Group's members share - perhaps enough to convince a cynical European onlooker that the US really is ready to roll up its sleeves and get stuck in to the fight against climate change. Continued niggling over the details aside, what is clear is that the momentum behind legislation, a budding carbon market and the appetite for leadership from North American corporations, states and cities means it will take a mighty force to stop it.


1 A summary chart of all the legislative bills for cap-and-trade is issued periodically by the World Resources Institute and can be found at http://www.wri.org/publication/usclimatetargets.

Emily Farnworth is director of corporate engagement at The °Climate Group.

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