Closer look: Climate bill, cap and trade could hurt industry

Experts share opinions, discuss concerns, fears
Sahely Mukerji
June 17, 2009
FABRICATION : CLOSER LOOK

First in a two-part series. See next month's issue for what the industry can do to help.

President Obama’s 946-page climate bill won approval of the House Energy and Commerce Committee in May and is now on its way to the Ways and Means and Agriculture committees. It is expected to go to the full House for consideration as early as July. Passing a Senate version will likely be much tougher.

The bill, brokered by Henry Waxman, D.-Calif., and chairman of the House energy committee, would cut U.S. carbon emissions to 83 percent of their 2005 levels by 2020, and thereafter impose progressively steeper cuts on the emitters. It also would mandate power companies to draw a fifth of their electricity from renewable sources, such as wind and solar, by 2020.

The $646 billion cap and trade system in that bill will reportedly begin generating revenue for the government in 2012, and is expected to bring some $80 billion a year from 2012 to 2019.

Like most other energy-intensive industries, the glass and glazing industry is concerned that the measure would increase the cost of its products and hurt production.

Potential GHG cap and trade legislation will impact the glass industry in two main ways: cost and technology, says Michael Turnbull, director of international and environmental management, Guardian Industries, Auburn Hills, Mich.

“There will be two significant direct costs under a cap and trade program: annual purchase of allowances, and increase in demand and cost for natural gas,” Turnbull says.

In terms of allowances, “as a rule of thumb, a typical float glass-melting furnace emits approximately 100,000 tons of GHGs per year, Turnbull says. “The most recent RGGI [Regional Greenhouse Gas Initiative] auction price for a ton of GHG was approximately $3.25. Therefore, if the federal cap and trade price set point is similar, the average float plant in the U.S. would have an additional annual expense of $325,000 to make glass.”

The European Union Emission Trading System price point is about $25/ton. If the federal cap and trade price point is similar, the average float plant in the U.S. would have an additional annual expense of $2,500,000, Turnbull says. “As the EU-ETS is a more mature and comprehensive cap and trade system, it is anticipated that the U.S. cost structure will reflect it and not the RGGI cost structure.”

In terms of natural gas, for a similar mmBtu heating value, fuel oil emits 50 percent more GHGs than natural gas and coal emits twice as much, Turnbull says. “Therefore, the trend to fuel switch from coal and oil to natural gas will be significantly increased under a cap and trade program. The increased demand will cause the price to increase accordingly.”
As far as the technological impact is concerned, direct emissions reductions under a cap and trade program can come from three possible primary means: fuel switching, increased energy efficiency, and carbon capture and storage, Turnbull says. As natural gas is the energy of choice for domestic float glassmakers, there is little opportunity to fuel switch in order to reduce GHG emissions, he says.

Victoria M. Holt, senior vice president, Glass & Fiber Glass, PPG Industries Inc., Pittsburgh, points out her concerns with the bill: “Any policy that creates a national price for greenhouse gas emissions needs to reflect basic principles to protect industry and U.S. jobs,” Holt says. “As a heavy user of natural gas, we have some serious concerns about key details of proposals that have been discussed.”

They are:
• The allocation of credits. “If the off-set credits are available on the open market, speculators will purchase them, reducing supply and driving up the cost to industry,” Holt says. “The glass industry and its consumers would be better served if these credits could only be purchased by energy-intensive manufacturers. The proposal outlined by the American Clean Energy and Security Act would allow the sale of credits to anyone.”
• Natural gas supply/price. “Since natural gas is cleaner burning that other fuel sources, a cap and trade system could create a surge in demand as other industrial users move from oil and coal to natural gas,” Holt says.

“We would also like to see revenue from any carbon pricing policy be used exclusively to develop and expand the use of clean energy, or to drive more widespread use of energy-saving technologies,” Holt says. “As I understand the President’s current plan, revenues would be used to fund non-energy related activities, such as social programs. If the goal is to reduce GHGs, that would be a more suited application for this tax on CO2.”

Read the second part of this article.
 

E-mail Sahely Mukerji, senior editor, at smukerji@glass.org.

  • History of climate change legislation

    DECK: Guardian director of international and environmental management, Michael Turnbull, explains

    The European Union Emission Trading System, the first climate change greenhouse gas system imposed on both utilities and industry, was launched in 2005. The current second phase runs from 2008 until 2012. Under the EU ETS “cap and trade” system, each country is provided a set amount of GHG “allowances” [one allowance = one metric ton of GHG emissions]. In turn, each country allocates allowances to larger industrial locations within its borders. This is the “cap.” Under the first phase, allowances were not initially auctioned, but rather given to each emitter at no cost. If the emitter needed more allowances than allocated, it needed to purchase additional allowances on the market. If the emitter did not need all of the allowances it was allocated, it could sell the excess. This is the “trade.” EU ETS allowances are currently trading at the equivalent of about $25/U.S. ton.

    The driving force behind the cap and trade program is reducing the number of allowances over time. In the EU ETS, the total number of allowances was reduced between the first and second phases, though not by enough to meet EU commitments under the Kyoto Protocol.

    The Regional Greenhouse Gas Initiative is the first mandatory cap and trade system in the U.S. Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont initiated the RGGI in 2005, specifically targeting electrical utilities. Under the RGGI, there will be an overall reduction of 10 percent GHG emissions from the RGGI participants by 2018. The first auction of allowances was held in 2008. The most recent auction had allowances being traded at approximately $3.25/ton.

    In the U.S., California enacted sweeping climate change legislation (AB-32) in 2006. AB-32 aims to reduce GHG emissions to 1990 levels by 2020, about a 25 percent reduction from business as usual projections. The specifics of cap and trade and other climate change regulations to implement AB-32 are still being promulgated. The first mandatory reporting of GHG emissions in California is due on June 1, 2009 for 2008 emissions. California is part of the Western Climate Initiative an international cooperative program addressing Climate Change and GHG emissions. Other participants in the WCI are Arizona, British Columbia, Manitoba, Montana, New Mexico, Ontario, Oregon, Quebec, Utah, and Washington. It is anticipated that many of the other WCI member states and provinces will adopt the regulations that California is developing.

    U.S. federal climate change legislation

    Many bills are being discussed in Congress concerning climate change greenhouse gas legislation, most incorporating a version of the cap and trade approach. However, there is still an under-current of support for a simple and direct “carbon tax” on the purchase and use of fossil fuels. If no new federal legislation is enacted, the EPA has stated its intent to write “command and control” industry-specific rules limiting GHG emissions.

    The current focus of discussions in Congress is a draft bill prepared by Congressmen Waxman (D-Calif.) and Markey (D-Mass.). The cap and trade system in that bill involves the U.S. Environmental Protection Agency establishing a baseline of carbon emissions for the entire United States. Each glass-making company that emits more than 25,000 tons of greenhouse gases--carbon dioxide, methane, nitrous oxide, etc.--would need to obtain enough allocations/credits to match its actual GHG emissions each and every year. It is anticipated that the U.S. cap and trade program would be “harmonized” with other regional and international programs.

    As cap and trade legislation is debated in Congress, key issues are: will allowances be given freely (industry’s desire), be sold at a complete auction (green lobby and Obama’s position to raise revenue), or be distributed through a hybrid scheme; whether to include mobile sources/fleets; whether to preempt state and regional programs; and most importantly, the effect this legislation would have an on an already depressed economy.