Use satellite GHG data to assign targets via proximity to GHG zones, and reduce price uncertainty via a well-defined cap-and-trade system.
This proposal recommends the following summary components for a program:
(1) Satellite data concerning GHG levels will be used to assign emissions reduction targets to companies based on proximity to those GHG zones. A separate emissions target allocation process will take place for midstream producers for the consumer transportation sector using the EPA’s SmartWay data as a guide.
(2) The six main GHGs will be covered by a cap-and-trade program.
(3) GHG credits will be distributed once yearly via a reverse, ascending price auction conducted online and open to any company with an IRS number.
(4) Funds generated by the auction will be used in the following manner:
(a) 40% will go into a for-profit venture capital fund focused on renewable energy investments with proceeds of the fund split between the contributing companies in the auction.
(b) 25% will go towards a feebates program to provide tab subsidies to consumers for the purchase of energy-efficient transportation vehicles.
(c) 25% will be used to produce a tab subsidy for energy-intensive domestic exports to ensure their pricing remains competitive abroad.
(d) 10% will go towards the administrative costs of running this cap-and-trade program.
(5) Companies will have two-year long compliance periods, and they will be allowed to bank carbon credits for future compliance periods in order to ensure compliance flexibility. Strict penalties will be established for non-compliance.
(6) Until similar proposals are adopted internationally, there will be no initial linkability between this program and other cap-and-trade programs.
(7) GHG credit price uncertainty will be reduced via publishing defined timetable of all carbon credits that will ever be issued, maintaining strict price movement limits for the exchange traded carbon credits, setting strict limits on offset use and offset availability per year, and by not using cost containment mechanisms to manipulate traditional market dynamics.
Category of the action
Mitigation - Helping U.S. enact carbon price legislation
What actions do you propose?
The following items constitute the core of this proposal:
(1) GHG Level Data Collection:
The number of global satellites providing observable, measurable GHG-related data allows for a level of data certainty that was previously untenable. Using the freely available, public data sets from various satellites, an overall, detailed picture of the GHG levels in all areas of the country can now be determined definitively, and the level of detail will only grow with each new satellite feed. A list of many of the freely available, public satellite-based data assets are available below in the “References” section.
(2) Program Goal:
The program should have a clear emissions reduction target. While this proposal will suggest reducing emissions to the emissions levels in the year 2000 with yearly emissions targets based on set percentages relative to this baseline, the defining of a particular target date or emissions level goal by this proposal is not the main goal so much as to introduce unique program construction suggestions.
(3) Program Scope:
The program will cover the six main GHGs, and any emission reductions progress will be calculated in terms of the carbon dioxide equivalent standard. For the purposes of this proposal, the phrases “carbon credits” and “GHG credits” will be used interchangeably. Also, all companies will be required to participate under this cap-and-trade system, but individuals will not be required to participate directly.
(4) Emissions Reduction Target Assignment:
This proposal would take all of those costly reduction assignment calculations out of the equation by relying on an objective element: proximity based on GHG levels from satellites. Any company with major operations within a certain geographic proximity to various GHG zones will be assigned a requisite emissions reduction target based on the denseness and growth of the size and intensity of that particular GHG zone. Emissions reduction targets will be calculated and assigned on a yearly basis.
However, proximity-based allocation by transportation companies poses a problem in that much of their emissions are generated in transit. Therefore, emission reduction targets for transportation companies will be allocated in the following manner:
(a) For industrial size transportation operations, such as companies operating major fleets, the government can use the EPA’s SmartWays data sets to determine the levels of emissions of particular fleets in order to most efficiently allocate the emissions reduction targets.
(b) For residential consumers, whose transportation efforts are responsible for a large portion of overall transportation-related GHG emissions, this proposal recommends a midstream point-of-regulation approach that would place the emissions reduction targets, using CAFE mileage standards as a guide, on the companies producing the vehicles. While these companies will likely pass along these burdens to consumers via high prices, roughly 25% of the carbon credit auction proceeds will be used as part of a broad consumer-based feebate program.
(5) Cap-and-Trade System:
A cap-and-trade system can reduce the overall, total cost of bringing about environmentally certain outcomes via carbon and GHG caps. The government will establish a timetable with all of the credits that will ever be needed by the United States to achieve its overall emissions targets by 2050.
(6) GHG Credit Distribution Mechanism:
The carbon credits will be distributed once yearly via a reverse auction. Grandfathering of carbon credits via free carbon credit allocation does not account for the current state of the emissions in these sectors, so it is not recommended as a distribution mechanism. The auction will be conducted entirely online via a reverse auction using software similar to that of Ariba (http://www.ariba.com/). The auction will start with a suggested carbon credit price, although the price is only to be used as an indicator by the auction participants. Using an easy to access online platform will allow full market participation from both large and small companies.
Any company with an IRS identification number would be allowed to participate, with certain exceptions to attempt to curb market manipulations. Each company would be entitled to a maximum number of carbon credits that they are able to bid for based on historical tax receipts or market cap to determine their ability to try to corner the carbon credit market. This process will allow smaller companies to still be able to participate while also ensuring that pricing are determined entirely by market conditions. Once the carbon credits for that year are all allocated to market participants, the credits will trade freely as exchange-traded products. An auction allows for price discovery, which is a critical component in establishing a viable carbon credit market.
(7) Usage of the Auction Proceeds:
The funds from the auction will be distributed in the following manner. 25% of the overall auction proceeds to support a nationwide feebates program where customers will be provided with large tax rebates for energy efficient vehicle purchases. Another 25% will be allocated towards a government subsidy to artificially reduce the prices of energy-intensive, emissions reduction-sensitive domestic companies who are large exporters that need to compete effectively with companies in areas of the world where such emissions reduction requirements do not exist. This 25% would remain in effect until a significant portion of the world’s countries also establish their own cap-and-trade systems, which would ensure price stability across international borders. 10% of the funds will go towards the expenses of running the overall program so as to make this whole process revenue neutral for the government, and the remaining 40% would be invested in a for-profit, independent venture capital fund focused exclusively on renewable energy investments. Each company that bought carbon credits in the yearly auction will be allocated a percentage equity ownership in the returns of the fund. The company associations with the fund will also keep companies in touch with the latest developments in clean energy while also providing them with a means for long term profit potential via the returns of the fund.
A new fund will be established once every five years. For each of the five years of the auction, 20% of the equity in the fund will be allocated to the companies who contributed that year’s 40% of auction carbon credit receipts. This five-year renewal process will allow for companies to maintain relevant equity levels in the particular funds while also allowing new companies to gain access to the potential profits of the new fund developed every five years.
By using 40% of the yearly funds to invest in renewable energy companies and projects, this proposal will ensure that adequate investments are being made in cutting edge renewable energy technology developments that will ultimately end of providing some of the greatest overall emissions reduction developments.
(8) Removing Carbon Price Uncertainty:
One of the main issues associated with establishing a clear carbon price is the price uncertainty brought on by various market conditions. This proposal recommends that the following actions be taken:
(a) The government, before the first national auction takes place, should assemble and publish a list with a defined timetable with all of the carbon credits and number of offsets that will be available for purchase each year until 2050. This list will be inflexible, and there will be certainty in the overall number of credits available per year. In this case, this will establish a supply baseline for companies to use for their risk projection and price projection analyses.
(b) Similar to the movement of many futures contracts, there will be strict daily maximum and minimum price fluctuation limits imposed on the price of carbon. Once the carbon price reaches those limits, new limits will be statistically calculated for the following day. This will prevent large price swings in the market.
(c) There will be a strict limit set on the maximum number of available offsets per year that can qualify for inclusion as a potential replacement for traditional carbon credits, and that number of available yearly carbon offsets available to the market will be made public at the beginning of each yearly auction. Also, offset applications for qualification as a full offset will only be available on a quarterly basis, and there will be monthly updates concerning the likelihood of a particular offset’s inclusion in the upcoming quarterly balance number.
(9) Offsets Qualification and Inclusion:
Both because of the lackluster push for proper credentials for many international offset projects and because of the need to promote domestic job and wealth creation, only domestic offsets that have been properly verified by an established organization should be included.
(10) Compliance Flexibility Options:
This proposal suggests allowing the banking of allowances with a cap on the maximum number of bankable allowances scaled to the percentage of emissions reduction targets assigned to a particular company. However, the use of the borrowing of allowances from a later date should not be allowed because it creates uncertainty concerning the number of allowances that will be available for sale in a particular year, which is a number that should be very clear from the outset.
In terms of compliance periods, the only available compliance periods should be a two-year long compliance period. If a company would like additional time, they can bank allowance credits to cover any other potential needs for longer term compliance. Allowing for much longer compliance periods allows for potential market abuses and the potential for the program to not properly achieve its overall emissions reduction goals.
(11) Non-Compliance Penalties:
If a company does not submit the requisite number of carbon credits necessary to ensure its compliance within a particular compliance period, the penalty will be a double allocation of emissions reduction targets in its regions within the following compliance period.
(12) No Initial Linkability:
This program will originally not be linkable to any other emissions trading scheme in order to ensure certainty concerning the standards for the overall cap-and-trade program. Linkability allows for uncertainty due to the changing nature of other programs around the world, and, until these programs are standardized in a manner similar to the one suggested by this proposal, this cap-and-trade program should function on its own.
(13) No Cost Containment Mechanisms:
It is important that no artificial cost containment mechanism for the price GHG credits be allowed under this proposal. The use of cost containment mechanisms introduces price uncertainty, and companies need strict rules for pricing in order to price out their risk assumptions for the future. Allowing traditional market dynamics to determine the price will keep the price at a level that the market needs in order to keep the program in line with its original goals.
(14) Political Mobilization Strategy
Due to the manner in which the program will be constructed, there are a number of potential supporters of the plan who can help galvanize support and adoption for the proposal. On the transportation front, the average consumer stands to earn a significant rebate on environmentally friendly travel options. Large U.S. domestic exporters, perhaps wary of how a cap-and-trade system might impact their competitiveness abroad, can look forward to the tab subsidies that will reduce their prices to bring them in line with prices abroad, and companies overall should embrace the clarity that this system will bring to the commoditization and clear trading rules involved in this cap-and-trade system.
Who will take these actions?
The GHG cap-and-trade bill should be handled by the Environment and Public Works Committee (EPW), but, since 25% of the funds from the auctions will be used to provide tax subsidies to energy-intensive domestic exporters, the bill will likely also have to go through the House Ways and Means Committee and the House Energy and Commerce Committee. The auction and administration of the overall cap-and-trade system will be administered by the EPA. This program should not require a large administrative staff. Also, the CFTC should monitor the market for potential price manipulators. The venture capital funds resulting from the auction proceeds will be run by independent venture capitals with significant experience in the renewable energy investment space.
Where will these actions be taken?
These actions will be taken by a broad spectrum of companies operating in the United States, and the carbon credit trading will take place on major exchanges.
How much will emissions be reduced or sequestered vs. business as usual levels?
Because emissions reduction targets and their respective allocations to businesses will be based on quantifiable data from satellites and on EPA established emissions calculations for midstream producers for the consumer transportation sector, the structure of the program will ensure that emissions targets will be achieved over time. GHG level reductions will be reflected in the actual GHG level data obtained from the satellites, so there will be quantitative certainty concerning progress accomplished via the program.
What are other key benefits?
This program would ensure carbon credit price certainty, ensure that energy-intensive domestic exporters will be able to remain competitive in international markets, and it will help eliminate potential market abusers.
What are the proposal’s costs?
The costs are expected to be relatively low considering that most of the emissions reductions target allocation will be based on quantifiable data, the auctions will only occur once per year, the trading will take place via public exchanges, and the rules of the program will be transparent and not subject to uncertainty concerning carbon credit supply and demand.
Because the data on emissions level is freely available, this process could begin within a year or two from the passage of the bill for its creation. The target date for the full emissions reduction would be based on producing the full, quantifiable results by the year 2050.
Available Satellite (and other) GHG Data:
(1) NASA’s OCO-2 (Orbiting Carbon Observatory-2):
(2) NASA’s AIRS and Aura Tropospheric Emission Spectrometer Products:
(3) The GOSAT (Greenhouse Gases Observing Satellite) Project:
(4) NOAA’s CarbonTracker:
(5) The FLUXNET Ground-based CO2 Measurement System: