Home The Washington Diplomat December 2009 Cap and Trade Fuels Horse TradingAs Auto Industry Gears Up for Fight

Cap and Trade Fuels Horse TradingAs Auto Industry Gears Up for Fight


Of all the industries that stand to be affected by pending climate change legislation, automobile manufacturers face perhaps some of the biggest potential changes to how business is done.

After surviving copious tweaks and debate, the current complex cap-and-trade bills in the House and Senate are a dizzying blueprint of how Congress will try to limit U.S. greenhouse gas emissions contributing to climate change. And while the Senate is unlikely to act on its version before this month’s global warming summit in Copenhagen begins (also see Cover Profile), the legislation’s winding road to become law could very well mean significant impacts on the auto industry as early as 2012.

In November, the legislation cleared a big — albeit contentious — hurdle, when Democratic members of a key Senate committee pushed it to the Senate floor despite the absence of their counterparts. All seven Republicans refused to vote, demanding the measure be more thoroughly analyzed by the Environmental Protection Agency.

The move was just the latest display of wrangling surrounding the controversial climate change legislation. Critics say it would raise energy prices and kill jobs in areas where manufacturing is the workforce lifeblood. Supporters claim it will boost employment in energy-related fields while moving America toward the clean energy necessary to curb global warming.

At the heart of the debate are the intricacies of cap-and-trade agreements that would provide per-company allowances for emitting pollutants. In President Obama’s original proposal, all allowances were to be auctioned off by the government. But after dozens of adjustments and disputes over the economic impacts of the auction-based system, the House and Senate bills have become a hodgepodge of methods for doling out pollution permits that would help reach a carbon-reduction goal of 17 percent to 20 percent by 2020 below 2005 levels.

On both sides are the markings of hundreds of corporations and interest groups — transportation officials among them — that have worked to get their imprint on the bills in the form of free allowances. The result, so far, is billions of dollars worth of credits that would be distributed over 40 years.

In the House version, an item inserted at the behest of Rep. John D. Dingell (D-Mich.), who represents the state most affected by slumps in vehicle manufacturing, would give the auto industry an estimated billion in extra allowances over six years. The current Senate version designates 3 percent of all allowances across sectors to the automobile industry until 2017, and another 1 percent for seven years after that.

Environmental supporters say the most important part of the legislation is a non-negotiable cap on the nation’s emissions. Less important, they say, is how the allowances and credits are handed out.

“From an environmental point of view, the allocation of allowances doesn’t have any bearing on the emissions reductions that are achieved,” Nathaniel O. Keohane, director of economic policy and analysis at the Environmental Defense Fund, said during recent testimony before the Senate Environment and Public Works Committee. “And from an economic point of view, the distinction between auctioning and freely allocating allowances matters much less than how the value of those allowances is distributed.”

But to many manufacturers and related industries, how the allowances are distributed matters a great deal.

“Setting aside funds from a cap-and-trade scheme for investment in the transportation sector is critical,” said Sherry Boehlert, co-chair of the Bipartisan Policy Center’s National Transportation Policy Project. “It allows for some portion of revenues from the transportation sector to be put back into transportation, thus enabling the sector to make smart investments that will eventually reduce its level of greenhouse gas emissions.”

She added: “Without these revenues, the systemic changes to our transportation network that will be essential for combating climate change will not be possible.”

For the automotive industry, the legislation before Congress is less about additional revenue and more about the stipulations that would come with the credits: In exchange for the freedom to release capped amounts of pollutants into the air, recipients will be required to invest credits in electric vehicles and other fuel-efficient cars, trucks and SUVs.

“These provisions assist our automobile manufacturers in a time of need by encouraging them to deliver the next generation of fuel-efficient cars, trucks and buses, which will create jobs for skilled workers and greater choice for consumers,” said Rep. Henry Waxman (D-Calif.), who sponsored the House bill.

At question though is how these new eco-friendly choices will be received by consumers, particularly in the midst of growing economic recovery. Will Americans revert to the gas-guzzling SUVs that ruled the roadways during the recent economic boom? A recent survey from PricewaterhouseCoopers’s Automotive Institute found that in Germany, a leader in automotive green technologies, most consumers won’t pay more for environmentally friendly cars. The majority of the country rates climate change as “problematic” but says it’s unwilling to pay premiums for fuel-efficient vehicles and other green technologies.

The Clean Fleet Report, an organization covering the “future of transportation,” counters that an influx of electric vehicles and plug-in hybrids will naturally bring about electric charging stations and other user-friendly commodities to help with the affordability factor, making the legislation a “win” for both sides.

Consumer incentives and new fuel-efficient technologies aside, some critics say a cap-and-trade system won’t do enough to effectively curb the U.S. carbon footprint anyway. Most scientists say industrialized nations need to pledge emission cuts of 25 percent to 40 percent below 1990 levels by 2020 to make any tangible dent in global warming. Currently, most nations have pledged cuts of around 23 percent below 1990 levels — but the United States is still nowhere near even that lowered target.

The House version of the climate bill, for instance, would reduce emissions by 17 percent from 2005 levels — but that represents a less than 4 percent reduction below 1990 levels.

Europe has been the leader in urging ambitious targets, calling for developed countries to cut greenhouse gas emissions by 80 percent to 95 percent by 2050, though leaders have offered little details on how this could be done. Still, the 27 European Union nations have already agreed to cut greenhouse gas emissions by 20 percent by 2020 below the 1990 base level — pledging to move the target up to 30 percent if other regions, namely the United States, make similar moves.

Yet not everyone thinks Europe has all the environmental answers. The European Union Emission Trading System (ETS), often cited as the model for an American cap-and-trade scheme, has been unsuccessful at effectively curbing environmental pollution, according to Iain Murray of the Competitive Enterprise Institute.

“So far, the ETS has been an embarrassing failure,” said Murray, quoting the British think tank Open Europe. “In its first phase of operation from 2005 to 2008, more permits to pollute have been printed than there is pollution. The price of carbon has collapsed to almost zero, creating no incentive to reduce pollution … across the European Union, emissions actually rose by 0.8 percent.”

Other opponents include industries where vehicle and fuel expenditures are non-discretionary. “The trucking industry consumes approximately 39 billion gallons of diesel fuel to deliver virtually all of the nation’s consumer goods,” said Barbara Windsor during testimony on behalf of the American Trucking Associations. “This will continue to be the case for the foreseeable future, even if the price of diesel fuel is dramatically increased by cap and trade.”

The result, she added, will be increased costs for consumers coupled with little to no reduction in the trucking industry’s carbon footprint.

Regardless of what Congress or Copenhagen ultimately produce on climate change, other measures affecting the auto industry have already taken form. The 2010 energy budget that President Obama signed into law in October, for instance, is filled with funding for alternative fuel and vehicle programs. It includes a 0 million provision for automotive fuel cells and hydrogen fuel that was returned to the budget after automakers rallied to convince Congress they could make fuel cell cars commercially available by 2015.

And although auto manufacturers have often fought past attempts to raise mileage standards, in recent years many have toned down their opposition, joining government efforts to increase fuel-efficiency standards that haven’t changed since they were originally established in 1975.

And with the government having to bail out ailing American automakers earlier this year, the industry has lost a lot of its luster — and lobbying position — so despite all the horse trading over pending climate legislation, cap and trade may very well drive a new wave of fuel efficiency and innovation. It could even be an unexpected boon to the industry in the form of additional subsidies from the government to coax automakers to become more environmentally friendly — after all, nothing gets businesses more motivated to go green better than greenbacks.

About the Author

Heather Mueller is a contributing writer for The Washington Diplomat.