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Capitol Comment

    Capitol Comment 227 - Early Emissions Credits: Subsidizing the Ratification of the Kyoto Protocol

    03/10/1999

    Incentive for Ratification. The Kyoto Protocol, the international agreement to reduce emissions of greenhouse gases, seemed all but dead until the "Credit for Early Reductions Act," (S. 547) was introduced in the Senate. Designed to make ratification of the treaty more politically enticing, the bill would give President Clinton the power to hand out billions in subsidies to companies willing to reduce greenhouse gas emissions before the agreement is even implemented. The only catch is that companies cannot cash in the subsidies until the Kyoto Protocol is ratified, making a vote for S.

    Incentive for Ratification. The Kyoto Protocol, the international agreement to reduce emissions of greenhouse gases, seemed all but dead until the "Credit for Early Reductions Act," (S. 547) was introduced in the Senate. Designed to make ratification of the treaty more politically enticing, the bill would give President Clinton the power to hand out billions in subsidies to companies willing to reduce greenhouse gas emissions before the agreement is even implemented. The only catch is that companies cannot cash in the subsidies until the Kyoto Protocol is ratified, making a vote for S. 547 a significant first step toward ratification. Senate sponsors claim that this new legislation would reduce the cost of implementing the Kyoto Protocol. The truth is that the bill is a way to get businesses that have opposed the treaty in the past to support Clinton-Gore climate policies.

    What is the "Credit for Early Reductions Act" (S. 547)? Basically, the bill would allow the president to give companies that make voluntary reductions of greenhouse gas emissions "credits" toward compliance with the Kyoto Protocol. The credits could then be held for future use or sold in an emissions trading "market" that would be developed to implement the Kyoto Protocol in the United States.

    Emissions trading allows companies to sell "credits to emit" greenhouse gases to other companies so long as their own emissions are below the limit specified by the President. Companies with emissions below the limit set by the administration could sell their "extra" emissions on that market. Companies unable to reduce emissions to allowable levels would have to buy whatever credits were available or else shut down.

    Those companies able to make quick, inexpensive reductions in emissions stand to make billions of dollars selling credits. No one knows for sure exactly which firms will benefit, but it’s unlikely that smaller businesses could make the capital investments necessary to immediately reduce emissions. Nor do they have the political contacts to negotiate a deal for a contract with the administration. On the other hand, big corporations with plenty of capital, smart lawyers to navigate the regulatory landscape, and clever investment strategies, would reap the largest profits. Regardless of how the costs are divvied up among businesses, the cost of many consumer goods would increase.

    Invitation to Cronyism. The Senate plan to credit companies for early emissions reductions is an idea that originated in the Clinton administration. It is therefore not surprising that if passed, the bill would give the president the discretion to favor political allies when allocating credits and open the door for pork-barrel politics. According to the Senate legislation, "the President may enter into a legally binding [early action] agreement with any person," as long as they make emissions reductions as defined by the Senate. Thus the bill would allow the president to pick and choose the winners and losers in the domestic implementation plan under the Kyoto Protocol. Leaving such discretion to the president also ensures that the early credit policy will be arbitrary over time, changing with each succeeding administration. Companies who believe they are assured credit for early emissions reductions should beware.

    Is it Necessary? The Senate bill is also redundant. The government already has the legal authority to credit companies for early reductions of greenhouse gases. According to the General Accounting Office (GAO), a Department of Energy (DOE) program is currently tracking voluntary emission reductions, and the DOE maintains the program is fully compatible with any future implementation plan for the Kyoto Protocol.

    Another angle? What do Senators have to gain from the credit for early reductions bill? Some probably see it as a way of offsetting costs from current EPA regulations. For example, Ohio Senator George Voinovich, whose state is completely dependent on the biggest greenhouse gas culprit — coal-fired electricity generation — has co-sponsored the bill. Why? Perhaps because many coal-burners must make enormous cuts in pollution to comply with new air quality standards, resulting in concomitant reductions in greenhouse gases. Giving companies credit for reductions in greenhouse gases resulting from other regulations ensures they would make a killing trading emissions under the Kyoto Protocol. Presto, one of the treaty’s potentially biggest political opponents has just been eliminated. Shifting the regulatory burden among business, of course, doesn’t change the fact that higher energy costs will be passed on to consumers.

    Conclusion: An Honest Vote. Costing up to $397 billion per year according to the Energy Information Administration, the consequences of the Kyoto Protocol could be disastrous. Industries would be dislocated and the prices of nearly all consumer goods would increase. Congress is right to be concerned about the consequences of the Kyoto Protocol. However, allowing the president to single-handedly stack the political deck in favor of ratification of this economically disastrous agreement is not prudent. Senators must not cede their constitutional duty to President Clinton without first having an honest vote on ratification of the Kyoto Protocol.