**Industrial Energy Consumers of America**

One Thomas Circle, NW, Tenth Floor, Washington, D.C. 20005

Telephone 202-223-1661 Fax 202-530-0659

# 

June 3, 2002

Office of Policy and International Affairs

Office of Electricity and Natural Gas Analysis

PI-23

Attention: Voluntary Reporting Comments

U.S. Department of Energy

Forrestal Building, Room 7H-034

1000 Independence Ave., SW

Washington, D.C. 20585

The Industrial Energy Consumers of America (IECA) thanks the Department
of Energy for the opportunity to comment on this important NOI.

## **Executive Summary**

IECA supports the stance the Administration has taken to bring about a
reasoned and cost effective approach to addressing climate change at
both the domestic and international level. IECA supports the target of
reducing the GHG intensity per GDP, a standardized GHG accounting method
and improving the quality of the registry. However, we are deeply
concerned about the long-term policy implications of establishing a
"transferable credit" system.

A transferable credit system is a precursor to emissions trading (cap
and trade) and such credits do not have monetary value without an
emission cap at the company level. An emissions cap at the company level
would result in energy rationing, distorting energy markets, restraining
economic growth, damaging competitiveness of U.S. manufacturing and
accelerating the importation of energy containing products.
I[mplementing transferable credits is a "defining climate, energy and
economic policy issue" for this Administration and the U.S. economy long
term]{.underline}. If the Administration does not intend to implement an
emissions trading system (cap and trade), it should not establish a
transferable credit system.

There is a significant lack of understanding of transferable credits and
emissions trading, even by industry. Many falsely believe that an
emissions trading system can work without an emissions cap at the
company level. In fact, the only way to reduce absolute net GHG
emissions [is]{.underline} to place a cap at the company level and
continue to reduce the cap through time. IECA recommends that the DOE
conduct studies, hold workshops and seek other forms of stakeholder
dialogue, which will allow all entities to fully understand the pros and
cons before steps are taken to implement transferable credits.

Transferable credits and emissions trading are touted as an effective
"market mechanism" for reduction of GHG emissions. U.S. manufacturing
already has the most effective market mechanism and it has been
demonstrated to show significant long term and consistent performance.
It's called "global competition". Global competition forces
manufacturing to consistently reduce its costs, especially energy costs
per unit of manufactured product. From 1977 to year 2000, manufacturing
reduced its energy intensity per shipment by 49.53 percent, according to
the Pacific Northwest National Laboratory. This legacy can continue, but
not with higher costs through the purchase of GHG transferable credits.

Instead of transferable credits, IECA recommends a combination of
policies to encourage cogeneration of electricity and steam (CHP);
capital stock turnover (more energy efficient equipment); development,
commercialization and transfer of technology; and maximizing use of
carbon sequestration. Incentives to encourage these policies are a
win-win for the U.S. and will enhance the competitiveness of industry.
Transferable credits, on the other hand, are a precursor to a policy
that will create winners and losers and damage the U.S. economy and the
manufacturing sector in the long term.

If the Administration insists on moving forward with use of transferable
credits, it must create a credit based on "GHG intensity per unit of
manufactured product" and reward manufacturers for reductions prior to
1990. Further, a system of transferable credits must not "reward"
industry and utility segments that have been exempt for the Clean Air
Act until these exempt entities meet the same level of environmental
performance as the non-exempt industries.

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## 

## 

## **IECA membership are industrial energy consumers** 

The Industrial Energy Consumers of America (IECA) is a nonprofit
organization created to promote the interests of manufacturing companies
for which the availability, use and cost of energy, power and feedstock
(raw materials) play a significant role in their ability to compete in
domestic and world markets.

Transferable credits/emissions trading is a [defining climate, energy
and economic policy]{.underline} issue

The President, given his sincere interest is moving climate policy
forward has set an aggressive timetable for response by the DOE through
this NOI. However, this single policy issue\-\-- transferable
credits\-\-- will be a defining climate, energy and economic policy
issue not only for this Administration, but also for the American
economy for years to come.

We strongly encourage the Administration to not rush to implement such a
policy, but to take the necessary time to fully evaluate the
implications of this action. Past studies, including those by the Energy
Information Administration (EIA), have shown the negative impact that
transferable credits, through emissions trading, can have on our
economy.

## **Transferable credits and emissions trading (cap and trade) are synonymous.** 

IECA is concerned about the long-term policy implications of
establishing "transferable credits." Transferable credits are
[only]{.underline} of value under an emissions "cap and trade" regime.
If the Administration does not intend to implement emissions trading
(cap and trade), it should not implement transferable credits.

If a transferable credit policy is applied to energy producers it will
have the impact of forcing fuel switching to natural gas, distorting
energy markets and raising serious energy supply and cost concerns. Of
course, all costs associated with the emissions cap will be passed on to
customers like us.

## 

## **Transferable credits is an anti-growth policy for manufacturers who consume energy, power and hydrocarbon feedstock** 

If applied to industrial energy consumers, an emissions cap would have
the absolute effect of restraining economic growth and encouraging the
manufacturing sector to move offshore to locations where such a policy
does not exist. The manufacturing sector can and will continue to reduce
its GHG intensity per unit of output, but most are incapable of reducing
absolute quantities of greenhouse gases. And, purchasing transferable
credits will incur a cost, no different than an energy tax, thereby
adversely impacting competitiveness and supporting the movement of
manufacturing from this country to offshore locations that have no such
requirements.

## **Transferable credits may drive more energy crises in the future**

Transferable credits will drive fuel switching to natural gas since
natural gas contains less carbon, compared to coal, the primary
alternative. This is undesirable unless ample quantities of affordable
natural gas are available. Congress has thus far been unwilling to
promote the new exploration and production necessary to meet the
anticipated shortfall. Our great country, which is blessed with more
natural energy resources than most, just underwent an incredible energy
crisis that saw natural gas prices rise to \$10 per million Btu! This
price spike was a significant contributor to driving the U.S. economy
into a recession. In fact, every major U.S. recession was preceded by an
energy crisis. The manufacturing industries of this country were
devastated by these prices. As the price of natural gas passed \$4 per
million Btu, manufacturing plants were closed, idled and production was
moved offshore.

## **The policy of transferable credits cannot be considered in isolation of energy policy** 

If transferable credits are established, it will provide an incentive
for electric utilities to switch from coal to natural gas and there is
simply not enough natural gas to go around. The U.S. production of
natural gas is no greater today than in the 1970's! This is remarkable
given that demand for natural gas increased consistently in the last 30
years. Additionally, most electric utilities have an unfair advantage
over the manufacturing sector in that they can buy natural gas at any
price and automatically pass the cost on to consumers. As a result, it
matters less to the regulated utilities how high the price of natural
gas goes. Manufacturers most often have significant difficulty passing
these costs on to the consumer because of global competition. This was
the case during the last energy crisis. The ability of regulated
electric utilities to automatically pass on the price of natural gas,
coupled with air quality issues, could drive natural gas prices to
unaffordable levels and force manufacturing offshore. Further, electric
utilities have many choices for fuel including coal, nuclear, renewable
and wastes of all sorts. Most industrials have only one choice for fuel,
that being natural gas. Any policy that will push electric utilities to
switch to natural gas will do so at the expense of the United States'
manufacturing base.

The utility sulfur dioxide transferable credit/emission trading regime
is not directly applicable to carbon dioxide

The use of emissions trading to control sulfur emissions in the
regulated U.S. utility industry is the successful model which emissions
trading advocates propose applying to GHGs. Factors critical to the
success of the sulfur dioxide trading program were:

-   Technology and low sulfur fuels were available allowing emission
    reductions of by-product SO2

-   The utility industry was regulated and costs were passed through to
    customers

-   Trading was primarily within individual utility companies or between
    utilities with similar costs and margins

-   Government had a fixed cost price cap above which it would sell
    allowances

-   The product, electricity, is sold regionally, with no global
    competition

-   Customers have no alternative supplies

-   A significant number of plants were exempt

> [Few]{.underline} of the factors critical to the success of the sulfur
> dioxide trading program apply to carbon dioxide. The circumstances of
> any proposed carbon dioxide emissions-trading program will be very
> different from the successful sulfur dioxide model. Applying this
> model to carbon dioxide will be very difficult and unlikely to produce
> the same results.

Transferable credits/emissions trading sounds good in theory but is
incredibly complex

Transferable credits are of no value unless at some time in the future
an emissions trading (cap and trade) regime is put in place. Emissions
trading allows for the lowest cost GHG emission reductions in the form
of a transferable credit to be bought and sold, reducing total marginal
cost. On the surface, the economic theory behind emissions trading is
appealing, but real-world realities will not allow such a system to
efficiently function on a global basis. And, if all countries are not
participating, including developing countries that have the "low-cost"
emission reductions, why do it? The U.S. government could painfully
implement a stand-alone system because it has the regulatory hardware in
place to monitor and enforce. In our opinion, such comprehensive systems
in developing countries are problematic.

Transferable credits/emissions trading penalizes manufacturers who have
continuously reduced GHG intensity

[If applied domestically]{.underline}, a cap placed at the industrial
level would require manufacturing companies to purchase GHG credits from
the market place to allow these companies to meet the requirements of a
company emissions cap and future reductions of the cap. The purchase of
GHG credits would add an additional cost, no different than an energy
tax, thereby increasing the cost of goods and services. A domestic cap
would also result in energy rationing and distortion of energy markets
that would lead to higher energy costs everywhere in the U.S. Such a
regime would penalize manufacturing that has significantly reduced GHG
intensity per unit of output since the 1970's.

## **Transferable credits reward entities who have been abusively wasteful with energy**

These are complex decisions. Should we reward companies who have been
abusively wasteful with energy, reward them with transferable credits
that the manufacturing sector will be required to buy in the future?
Should we reward companies for shutting down manufacturing facilities in
the U.S. and building new plants in other countries? Should we reward
utilities with transferable credits when many of the costs are
automatically recovered from consumers and manufacturers' costs are not?
The conventional utility generation plant is only half as energy
efficient as a typical industrial CHP plant. Should we reward utilities
for improving energy efficiency given they have done so little all these
years? Should we reward utilities whose plants have been exempt from
many provisions of the Clean Air Act? Should we reward companies for
venting or flaring methane? Should historically more energy efficient
manufacturers be required to buy credits generated by historically
inefficient entities if they want to grow?

Should U.S. manufacturers pay (reward) companies in developing countries
billions of dollars through the purchase of transferable credits so they
will invest in new manufacturing technology and simultaneously position
themselves to compete more effectively with U.S. manufacturers?

Transferable credits are prone to market manipulation and fraud
(Enron-like trading practices, but on a global
[multi-billion]{.underline} dollar scale)

Most of the emissions are controlled by a relatively small group of
companies. If they reduce emissions, what guarantees do manufacturers
have that such companies will not have "market power?" What guarantees
do U.S. manufacturers have that such companies will actually sell their
GHG credits given that they will need them internally for future growth
and future offsets demanded by lower future caps? Given a global
transferable credit market, what is to prevent country governments from
competing with U.S. manufacturing companies for the purchase of credits?
The Netherlands has already purchased millions of dollars of Joint
Implementation transferable credits. Is it fair for U.S. manufacturing
to compete with countries for the purchase of transferable credits?
There are very large NGOs, which spend tens of millions of dollars, and
Foundations, which spend billions of dollars per year on environmental
issues. What is to prevent such organizations from buying up billions of
dollars of available transferable credits and retiring them, reducing
the liquidity of the market and driving up the price? Some purchases and
retirements have already occurred but in relatively small quantities.

One must only look at the well known practice of developing country
companies producing identical "copies" of U.S. branded products and
selling them as originals around the world. A recent ABC news report on
this subject featured China. The Chinese government is well aware of
this multi-billion dollar industry, yet does little to eliminate it
because it creates jobs! The inability of the Chinese government to
properly monitor and control emissions by its manufacturers is also well
known. Transferable credits from developing countries may provide the
lowest cost GHG emission reductions but can we guarantee the quality of
these credits? If businesses in some developing countries can copy
products and technology, it can also find ways to produce phantom GHG
reductions.

Transferable credits would overlay yet another set of unfair
disadvantages for U.S. manufacturing

Transferable credits and emissions trading would overlay yet another set
of unfair disadvantages on U.S. manufacturing in a world that
[already]{.underline} has unfair market rules set in place by trade
practices of world governments. The most cost effective and efficient
system for positive change is through fair trade, letting capital flow
to countries from companies using "real markets" that determines winner
and losers. This is the "American way." In fact, U.S. multinationals
have been a driving force around the world investing new capital and
technology in developing countries. And, as a result, reduction in GHG
intensity is occurring in developing countries. [Let us continue this
practice and improve upon it.]{.underline}

## **Global competition is our "market mechanism"**

Given economic growth, manufacturing companies can and will continue to
reduce their GHG intensity per unit of output but cannot (almost without
exception) [consistently]{.underline} reduce absolute amounts of GHGs
[and]{.underline} increase production of goods and services.
Manufacturing has had a legacy of consistent reduction in GHG intensity
per unit of output as a [direct result]{.underline} of intense domestic
and global competition! Global competition is a "market mechanism" that
works effectively to reduce consumption of energy per unit of product
produced! Energy, power and feedstock are a cost, sometimes a relatively
large percent of the total cost of producing a product. The drive to
reduce costs, including energy costs, has resulted in reduced GHG
intensity per unit of output since the 1970's. Capital stock turnover,
use of new more energy efficient technology and greatly increased use of
cogeneration (generation of electricity and steam at the same time with
one fuel) are responsible for consistent GHG intensity reductions.
Manufacturing has improved GHG intensity per output more than any other
sector of the economy. Why then should a transferable credit and
emissions trading policy be used for manufacturing sector?

## **A global transferable credit system/emissions system will not work** 

[If applied globally]{.underline}, an emissions cap would have to be
placed at the industrial level for every country in the world in order
to approach any semblance of fairness. Recognizing that the growth in
manufacturing competition is coming from the developing world, it is
doubtful that developing countries will place a cap on their companies'
ability to increase output. Manufacturing is the engine of growth in
these countries, with a major objective of exporting products to the US.
We doubt that governments, particularly those in developing counties,
will have the resources and capacity to monitor each manufacturing plant
to ensure that they do not exceed their cap. We doubt that governments
will have the resources and desire to prevent companies from switching
production to other faculties to avoid the constraints of a cap.

[If transferable credits are implemented, the design must address the
specific needs of industrial energy consumers to not damage
competitiveness.]{.underline}

IECA does not recommend implementation of transferable credits. However,
if this Administration moves forward, it must change the conventional
definition of "transferable credit" from "absolute" tons of reduced GHG
emissions to "GHG intensity per unit of output". This is complex, but to
measure absolute reductions is not fair to the manufacturing sector and
will lead to competitiveness problems. If manufacturing is to show
economic growth, it must produce more "widgets" per input of energy.
This does not result in absolute GHG emissions reductions (without
significant new technology). It means less GHGs are produced per widget.

In any transferable credit scheme, manufacturing must be rewarded for a
number of positive GHG impacts: GHG intensity reductions from the
1970's; use of onsite offgas or byproduct fuels; recycled energy, heat
and steam; use of CHP versus buying from a utility coal-fired power
plant, including credit for the improvement in energy efficiency, the
reduction in the GHG content of the fuel, credit for avoidance of energy
line loss, and avoided plant electricity use in general.

The entity that makes the investment to reduce an emission should
receive the GHG credit. This principle also applies to industrials that
reduce their electricity consumption. If an industrial reduces its
electrical load either because of energy reduction projects or because
it is shifting its electrical load to its own cogeneration facility, the
industrial is given the credit for the associated emission reduction at
the utility's stack.

There are a number of industrial and utility polluters that have been
exempt from the Clean Air Act since its inception. A system of
transferable credits must not "reward" industry and utility segments
that have been exempt from the Clean Air Act until these exempt entities
meet the same level of environmental performance as the non-exempt
industries. Second, there are industrial companies that have voluntarily
reduced waste, emissions and energy consumption beyond any mandate.
Federal policies should recognize those efforts and develop programs
that require those industries that have done nothing to catch up with
the industries that have voluntarily made improvements. [Only after
everyone is at the same level of performance should transferable credits
be considered.]{.underline}

Energy intensive industries must also be afforded the opportunity to
"opt-out" of the trading system and into a voluntary company or
sector-based commitment. This will assure that the complexities
mentioned above are dealt with in a participative process.

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IECA is grateful for this opportunity to provide input. We look forward
to working with the Administration to implement sound climate change
practices and policy that will keep a globally competitive,
manufacturing base operating in the United States.