Issue Date: March 10, 2008
Linking Energy To Climate-Change Policy
AS CONGRESS PREPARES to take up its first major global warming bill, chemical manufacturers and other fossil-fuel-dependent businesses are warning lawmakers that energy costs will skyrocket if mandatory limits are placed on greenhouse gas emissions.
"We are trying to educate people about the link between natural gas and climate change," says Thomas J. Gibson, senior vice president of advocacy for the American Chemistry Council (ACC), the industry's chief lobbying organization. "What Congress keeps missing is that we need more natural gas, not less."
Despite the politics of an election year, Gibson and other trade association officials aren't ruling out congressional action this year on global warming and a host of other key issues, including energy, security, taxes, and transportation.
Major business organizations, such as the U.S. Chamber of Commerce and the National Association of Manufacturers, remain adamantly opposed to so-called cap-and-trade proposals to cut emissions linked to climate change, mainly those of carbon dioxide from burning fossil fuels.
The chemical industry, however, is divided over whether mandatory limits should be placed on emissions of CO2 and other greenhouse gases. A handful of major companies, including Dow Chemical, DuPont, BP America, and ConocoPhillips, have joined the U.S. Climate Action Partnership, a coalition that believes regulation is inevitable. The companies want to play a role in shaping the framework of any legislation that may come to pass.
But industry officials agree that the cap-and-trade bill pending in the Senate would likely lead the utility industry to switch from coal to cleaner burning and more costly natural gas to generate electricity.
Legislation (S. 2191) sponsored by Sens. Joseph I. Lieberman (I-Conn.) and John W. Warner (R-Va.) is designed to cap U.S. greenhouse gas emissions from the electric utility, transportation, and manufacturing sectors at 2005 levels by 2012. These sectors, which are responsible for almost 80% of U.S. greenhouse gas emissions, would then need to reduce emissions 15% below 2005 levels by 2020 and 70% by 2050. The bill would allow industries to comply either by cutting their own emissions or by purchasing tradable emissions credits.
The measure narrowly passed the Senate Environment & Public Works Committee in December, the furthest a global warming bill has ever advanced in Congress. Senate Majority Leader Harry M. Reid (D-Nev.) has yet to give a firm commitment to bring the legislation to the floor, but aides who follow the issue are being told to be prepared for action on the bill as early as April.
"This bill is in some ways a 'reboot' of previous, unsuccessful legislation and follows the path of failed European attempts to control CO2 emissions," says Charles T. Drevna, president of the National Petrochemical & Refiners Association. "The Lieberman-Warner bill would still result in an all-cost, no-benefit scenario for American consumers and businesses, ultimately hurting most those who can afford it the least."
A dramatic increase in demand for natural gas by the utility sector would further boost prices for the fuel, which chemical manufacturers consume in large quantities both to power their plants and as a key raw material. "We need educated policymakers who understand that meeting forced CO2 reduction targets can have consequences," Gibson says. Natural gas prices are triple what they were in the late 1990s, and ACC estimates that more than 100,000 chemical industry workers lost their jobs as companies moved their operations overseas to feedstock-advantaged regions.
Unlike utilities, Gibson says, chemical manufacturers can't simply pass on higher energy costs by billing their customers. "Our products compete in a world market," he explains. "If you are going to make a product more expensive to produce in the U.S., you are creating an opportunity for someone who doesn't have to share that compliance cost."
That makes manufacturers different from electric utilities, Gibson points out. "If natural gas costs more, consumers may turn their thermostats down a degree, but they are still going to heat their homes. We cannot compete with utilities who can outbid us because they have the pricing power to pass on their costs," he remarks.
The U.S. Chamber of Commerce warns that the U.S. is not prepared for the changes the Lieberman-Warner bill would entail. The nation's largest broad-based business federation contends that the higher energy prices that would result from a strict greenhouse gas emissions cap would spread throughout the economy. "Climate change is anything but a cost-free issue," says Thomas J. Donohue, the chamber's president and chief executive officer. "It will have huge economic consequences for anyone who uses energy in this country."
Without the engagement of the international community, any climate-change policy will be ineffective, Drevna adds. "A ton of CO2 emitted in Dayton, Ohio, has the same effect as a ton of CO2 emitted in Shanghai or Mumbai or Moscow," he notes. "Reducing CO2 emissions in the U.S. alone under any of the current legislative proposals while emissions in developing countries like China and India are skyrocketing will not accomplish anything," he asserts.
INDUSTRY OFFICIALS say they will continue lobbying for increased domestic oil and natural gas production, more nuclear power generation, and the development of alternative sources of energy. "We need to make sure that the easy answer for utilities, which is to shift from coal to natural gas in order to meet emissions reduction deadlines that are unreasonable, does not kill us in the process," Gibson declares.
Of the 120 major new chemical plants being built worldwide, Drevna notes, only one is located in the U.S., whereas 50 are under construction in China. "Further tightening of the natural gas supply will only serve to worsen the situation and send more American jobs overseas," he says. "For any U.S. climate-change policy to be economically viable, the natural gas supply must be expanded."
Whether a cap-and-trade bill can be enacted into law in 2008 is far from certain. Several factors are working against the measure, including the need to muster the 60 votes required to overcome likely objections from senators such as James M. Inhofe (R-Okla.), a longtime skeptic of global warming, as well as a veto threat from the White House. President George W. Bush has long opposed mandatory limits on U.S. emissions as a threat to the economy. With Democrats holding only a one-seat majority in the Senate, the legislation will need the support of roughly 10 to 12 Republicans to offset possible Democratic defections and still get the votes required to end a filibuster.
"Getting a deal done this year in this Senate is a heavy lift," Gibson says. Approximately 55 senators are believed to support the Lieberman-Warner bill, but coming up with five more votes will be difficult. "Every time you try to pick one up by making concessions on one side, you run the risk of losing a vote on the other side," Gibson observes. "I don't think the Senate is ready to pass Lieberman-Warner in anything like its current form."
In the House, progress on a comparable cap-and-trade measure continues to lag well behind Senate action. House Energy & Commerce Committee Chairman John Dingell (D-Mich.) and Rep. Frederick (Rick) Boucher (D-Va.) are in the early stages of drafting legislation and plan to introduce a comprehensive climate-change bill later in the year.
If lawmakers decide to revisit energy policy in 2008, Democrats are expected to focus on passing mandates and tax incentives aimed at promoting alternative energy sources, such as wind and solar power. Nevertheless, industry officials say the chance of winning congressional support for greater access to domestic petroleum and natural gas reserves is realistic. The impact of high energy prices on consumers will prove to be a powerful catalyst for action, Donohue argues. "I don't think people want more $100-per-barrel oil," he says.
Gibson also doesn't rule out the possibility of Congress approving legislation to increase oil and gas production. He says lawmakers are beginning to understand the need to expand the U.S.'s fuel diversity and supply as part of any future climate-change policy. "We are probably the only major coastal nation that is not exploiting its clean natural gas resources," Gibson notes.
The business groups are trying to drum up support on Capitol Hill for legislation such as the National Environment & Energy Development Act (H.R. 2784). Cosponsored by Reps. John Peterson (R-Pa.) and Neil Abercrombie (D-Hawaii), the bill would lift moratoriums that currently prohibit offshore drilling for natural gas along more than 85% of the federal outer continental shelf. Environmental activists have consistently opposed more offshore drilling.
"I don't think there is a person in Congress who wants to put the chemical industry out of business or move it offshore. That's nobody's goal," Gibson declares. "Our job is to educate members of Congress about the link between the decisions they make on climate change and the energy prices that will affect where chemicals are going to be made over the next 50 years.
"Once those plants go into the ground," Gibson continues, "they are going to stay there along with the jobs that go with them. Those chemicals will be made somewhere. I think everybody in Congress, Republican or Democrat, would prefer that those products be made here in the U.S. rather than someplace else."
Chemical manufacturers are also concerned that Congress is considering making changes to temporary rules that the Department of Homeland Security (DHS) issued last April to protect the nation's chemical plants from terrorist attack. The chemical facility antiterrorism standards will expire in October 2009 unless Congress takes action. Industry officials say they share the goal of making the federal chemical security program permanent but oppose efforts to alter the requirements before the new standards are fully implemented and tested.
"We now have regulations in place at the national level that will force chemical facilities that are considered high risk to take some of the same kind of aggressive security actions that ACC member companies have taken over the past six years," says Martin J. Durbin, ACC's managing director of federal affairs. He says the organization's 134 members, which include industry giants such as Dow Chemical, DuPont, and Rohm and Haas, have already invested more than $5 billion to enhance security. "Our plea to Congress is to give DHS the resources it needs to implement the new regulations. And don't change things in midstream while everyone is racing to get these stringent requirements in place as soon as possible," Durbin adds.
DHS ESTIMATES that 30,000 facilities that use or store chemicals will need to invest more than $8 billion in additional enhancements over the next eight years to meet the new security requirements. As a first step toward implementation, the department recently began processing reports from more than 16,000 facilities across the U.S. to determine their vulnerability to attack.
But Congress is already moving to modify the program. In addition to giving DHS permanent authority to regulate security at chemical facilities, Democratic-sponsored draft legislation approved by a House Homeland Security subcommittee on Jan. 23 would impose several new mandates. One significant change would require "high risk" facilities to stop using toxic chemicals in their manufacturing processes and replace them with less hazardous substances to make sites in highly populated areas less inviting targets.
The chemical industry has long opposed mandating so-called inherently safer technologies. "You can't mandate innovation," Durbin asserts. "These are decisions that need to be made by process-safety experts and security experts at the facility." The Senate has not yet begun to work on chemical plant security legislation, and a prolonged fight over the details could leave the issue for the next Congress to resolve.
Durbin says chemical manufacturers will also continue to fight for passage of legislation to increase competition in the freight railroad industry, which has undergone massive consolidation over the past quarter century. "Our companies continue to see deterioration in service, as well as an increase in rates," he notes. One measure supported by ACC would eliminate rail carriers' long-standing exemptions from the nation's antitrust laws, and another would help ensure that "captive" shippers, those in areas served by only one railroad, have access to competitive pricing and service.
"We saw some positive movement in 2007, with legislation moving forward in both the House and the Senate," Durbin points out. The railroad antitrust bill (S. 772) is awaiting a vote on the Senate floor, and the railroad competition legislation (H.R. 2125) is expected to advance out of the House Transportation & Infrastructure Committee early this year.
In addition, Durbin notes that the Federal Railroad Administration plans to propose new design standards for rail tank cars that transport anhydrous ammonia, chlorine, and other highly hazardous materials during the first quarter of the year. The government's plan will target rail shipments of toxic inhalation hazards, a group of chemicals that are extremely dangerous if released. "Railroads provide one of the safer ways of moving these materials, so we're going to continue to focus on improving the safety and security of rail transportation," Durbin remarks.
MEANWHILE, ACC Tax Director Stephen Elkins anticipates that Congress will begin laying the groundwork to reform the corporate tax structure. "Taxes are likely to emerge as a larger policy issue and a greater concern for ACC member companies than they have been in recent years," he observes.
Elkins says hearings will be held on a comprehensive tax-reform package (H.R. 3970), introduced by House Ways & Means Committee Chairman Charles B. Rangel (D-N.Y.) in October. Among other things, the legislation would lower the corporate tax rate but abolish various tax breaks for manufacturers. Elkins calls the measure "a very far-reaching and innovative proposal," but he worries that "some provisions could be very difficult for the chemical industry."
Christopher L. Jahn, president of the National Association of Chemical Distributors, says chemical distributors do support a provision in the Rangel bill that would extend the corporate research and development tax credit, which expired at the end of 2007. "This important tax credit encourages innovation and helps U.S. companies to be competitive in the global economy," he notes.
The tax reform debate is also likely to focus on a report published by the Treasury Department in December that outlines various options for overhauling the corporate tax code but makes no recommendations. "It is a highly nonpolitical document that analyzes the alternatives and underscores the fact that, increasingly, the U.S. tax regime makes U.S.-based global businesses less competitive against our trading partners," Elkins observes.
He is concerned that proposals for changes in the tax system "could ultimately have a negative effect on earnings within the U.S. chemical industry." Although it is a long shot that the Democratic-led Congress and President Bush will strike a deal on tax reform, the stage could be set for action in 2009 after the national elections.
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