The American Materials Manufacturing Alliance makes misleading arguments in letter to Senators Kerry and Lieberman, calling for EPA to redo its modeling of the American Power Act.
One common argument against climate legislation is that a cap on greenhouse gas emissions would be especially hard on the U.S. manufacturing industry. However, a close look at leading climate and energy proposals in Congress reveals that industrial emissions sources would either face very minor costs or be heavily compensated by the legislation. For instance, according a December 2009 interagency report, the American Clean Energy and Security Act (ACES or H.R. 2454) that passed the U.S. House last year would impose less than a 1% cost increase on 86% of all major industrial emissions sources1, relative to the total cost of their manufactured products. The report also finds that for the relatively few emissions sources that would face significant costs, allowance allocation provisions would fully offset their incremental compliance costs, and they would be given ample time to transition to a carbon constrained world.
On July 7, the American Materials Manufacturing Alliance (AMMA), a coalition of trade associations representing the most energy-intensive industries2, wrote a letter to Senators John Kerry and Joe Lieberman that questioned the findings of the interagency report as justification to request a re-do of EPA’s analysis of the American Power Act (APA) that the two senators co-sponsored. In making this request, the letter stated that the EPA analysis of the APA “relies on a previous inter-agency analysis of other climate change legislation that had used significantly flawed assumptions. The unfortunate result is that the EPA analysis of the APA is incomplete and draws faulty conclusions.”
However, several of the arguments AMMA uses to underpin this charge are factually incorrect.
There are four areas in which AMMA arguments are either misleading or incomplete in their reading of the APA and ACES. Note, some of the EPA’s analysis of APA was based on its analysis of ACES because the bills are structured similarly, particularly with respect to provisions designed to benefit the manufacturing sector. What legislative details does AMMA overlook?
1. The benefits of output-based allowance allocations
The AMMA letter begins by focusing on a worst-case scenario, in which the APA could theoretically force companies to close factories and lay-off workers, without acknowledging the provisions—known as output-based allowance (OBA) allocations—designed to prevent these outcomes and even yield profits for the most efficient facilities. The letter instead buries a reference at the end of page two to OBA allocation provisions, at which point it claims that these provisions would short-change the affected industries. In fact, Congressmen Inslee3 and Doyle drafted the OBA allocation provisions that were included in ACES (and APA), to ensure that industries that are vulnerable to competitive disadvantage are eligible to receive, for free, billions of emissions allowances to offset both direct and indirect costs incurred under the program4.
2. Electric Power Consumer Protection in Carbon-Intensive Regions
AMMA’s letter argues that coal-intensive electric utilities will be disproportionately burdened by the legislation and that the industrial consumers of these providers would bear the brunt of the added costs:
[A]ll of these substantial costs will be passed on to EITEs in the form of much higher energy prices. The 2009 interagency analysis EPA relied upon for its analysis of the APA makes the incorrect assumption that each utility produces the same amount of emissions and would be evenly impacted by the cap-and-trade legislation. It incorrectly assumes no disparity among the various types of utilities, and no negative impact on their energy-intensive industrial customers.
This argument falsely suggests that nothing in the legislation would mitigate these disparate costs for electricity consumers. First, the OBA allocation provisions are designed to ensure that allowances distributed to energy-intensive trade-exposed (EITE) industries would be given in greater proportion to the customers of more carbon-intensive electricity suppliers. Since this OBA provision would be applied on a facility-by-facility basis, it would have the kind of leveling effect that that EPA correctly assumed in its modeling. Second, APA’s consumer protection provisions would allocate more allowances for electricity consumers than ACES, and it would do so in greater proportion for the consumers of more emissions-intensive electric utilities5. Finally, the legislation would allocate tens of billions of dollars worth of allowances to support the research, development and deployment of carbon capture and storage technologies, so that coal-intensive utilities may continue to operate coal-fired plants at a lower cost to customers. The letter’s implication that the energy-intensive industrial consumers of coal-fired utilities were uncompensated by ACES or by APA for the cost impacts of climate policy is incorrect.
3. Potential for efficiency improvements
AMMA’s letter argues that the industry has peaked in its energy efficiency improvements. The letter lists efficiency improvements that were recently achieved by various industry sectors (in the range of 11 to 50% since 1990) to argue that, even with a price on carbon emissions6, the same sectors cannot possibly achieve efficiency improvements of 20 to 45%, as projected by the interagency report for 20207. This statement directly contradicts a number of recent studies (see here and here), including a series of energy bandwidth studies conducted by industry consulting firms, that found use of best practices (i.e., technologies available today) could achieve significant energy savings across a broad range of manufacturing processes at the following levels: 26% from pulp and paper; 18% from chemicals; 35% from glass; 21% from mining; 38% from refining; and 3%8 from iron and steel. Taken together, these studies show that government modeling estimates are consistent with published industry studies in finding that most of industry is not really, as the AMMA letter claims, at the “flat part of the curve,” and that efficiency opportunities are pervasive throughout the U.S. manufacturing sector.
4. Amount of Emissions Allowances
The AMMA letter claims that one of the reasons the EPA analysis should be redone is that APA provides 1.648 billion fewer emissions allowances to the EITE sectors over the course of the program than ACES (WRI’s calculations put that number slightly lower, at 1.48 billion). Most of the difference in allowances between the two bills has to do with the fact that APA coverage of EITE industries under the cap begins two years later than under ACES. A more legitimate comparison between the two bills would be during years when the same compliance obligations apply. For all years after 2016, for instance, ACES would make available 8.74 billion allowances, while the APA would provide 8.66 billion.
Regardless of how the two bills compare, one would be very hard pressed to find any other sector of the economy that receives as much compensation as the industries AMMA represents. In fact, when estimates of emissions from the affected sectors9 are compared with the number of available allowances (over 13% of the entire supply for over a decade), it is clear that the OBA provision would be more than sufficient to fully offset each of the eligible sector’s direct and indirect compliance costs for as long as 20 years.
Ultimately, AMMA’s misleading statements provide a very week argument for suggesting that government analyses of climate legislation pending before Congress are flawed. Furthermore, a close reading of proposed legislation reinforces that leading comprehensive climate change legislation includes numerous provisions to minimize negative impacts – and even provide profit and investment opportunities – for U.S. manufacturers.
Assuming a $20 price on carbon dioxide emissions. ↩
This includes the aluminum, chemical, paper, cement, steel and fertilizer industries. ↩
In the interest of full disclosure, I should note that I worked for Congressman Inslee from 2006 through 2009. ↩
The 46 industrial sectors that are presumptively eligible to receive free allowances under these provisions in the APA and HR 2454 are listed in the 2009 interagency report. Remarkably, this list includes all of the primary sectors that are represented by the members of the AMMA. ↩
ACES would allocate allowances to local distribution companies based 50% on electricity sales and 50% on the emissions-intensity of delivered electricity. Meanwhile, APA would allocate 25% based on sales and 75% based emissions-intensity. ↩
A price on carbon emissions would make energy efficiency investments more likely because they would become more cost effective. ↩
It is important to note that 1) these estimates are based on modeled projections by the independent Energy Information Administration, and 2) these estimates assume that industry would be under an emissions cap for the years after 2014. The same model projects that under a business-as-usual scenario, without a climate policy, these sectors would improve efficiency in the range of 10 to 33% below 2006 levels, by 2020. ↩
A 2009 National Academy of Science report cites other studies that estimate the economic potential for energy-efficiency improvements in 2020 by the US iron and steel industry in the rage of 15% to 22%. A 2005 American Iron and Steel Institute report sets an industry-wide goal to achieve a 39% reduction in energy-use per ton of steel production by 2025. ↩
The most up-to-date estimates of emissions from sectors that would be eligible to receive allowances under the OBA provision are provided by the December, 2009, interagency report. ↩