Hill Heat

CBO values carbon market in the billions—One of the most prominent methods of reducing greenhouse gas emissions involves a “cap-and-trade” mechanism. Under this system, the total level of CO2 emissions would be capped and corresponding emissions allowances would be issued. According to CBO, “the annual value of emissions allowances would be roughly $50 billion to $300 billion by 2020.”

According to CBO, under a cap-and-trade system, giving allowances away for free would generate windfall profits for private industry and shareholders—According to CBO’s review of the evidence, less than 15 percent of the total value of the allowances would be needed to compensate for the net financial losses of companies affected by the policies to restrict emissions. CBO cites one study that examined the impacts of a 23 percent reduction in emissions. Under this scenario, if all of the allowances were distributed for free to energy producers, stock values would double for oil and gas companies and increase more than sevenfold for coal producers.

Giving emission allowances away will not solve issue of energy prices, according to testimony—Witnesses testified that it is a common misperception that giving away the allowances to affected companies will mitigate against energy price increases. The law of supply and demand means that energy prices would be expected to rise whether energy companies have to buy allowances or are given them for free. A cap on emissions will limit the amount of energy produced from fossil fuels. Regardless of whether the government gives away or sells the allowances, witnesses testified that market forces would be expected to raise the price of fossil fuel energy.

Witnesses testified that government’s capture of the carbon market’s proceeds can be used to mitigate economic impacts— If allowances are sold, such as through an auction, the government would capture significant resources that could then be used to buffer the negative impacts of carbon trading systems for certain sectors, regions, and households.

Climate change control policies could disproportionately affect low-income households— The Center for Budget and Policy Priorities (CBPP) estimates that the average increase in energy-related costs for the poorest fifth of the population could amount to $670 to $950 per year (from a modest 15% emissions reduction). “Households with limited incomes will be affected the most by those higher prices, since they spend a larger share of their incomes on energy-related products and services than more affluent households do,” said Bob Greenstein, Executive Director of CBPP.

14 percent of auction proceeds would fully offset the increased costs to impoverished families, according to CBPP— CBPP estimates that the impact of carbon controls on the poorest 20 percent of the population could be fully offset by using just 14 percent of the total resources.

According to CBPP, use of existing mechanisms such as electronic benefit transfers and increases in the Low Income Home Energy Assistance Program would be the most effective way of reaching large numbers of low-income households.

Carbon tax vs. cap-and-trade— Carbon taxes represent another option to control greenhouse gas emissions. While CBO pointed out that “a tax is generally the more efficient approach,” CBO Director Peter Orszag (along with other panelists) suggested that there are ways of enhancing the economic efficiency of a cap-and-trade program to provide flexibility and minimize price spikes.

Federal cap-and-trade system may be reflected in the budgetary scoring process— CBO indicated that “there is a solid case to be made that even allowances that were given away by the government should be reflected in the budgetary scoring process—specifically that the value of any allowances initially distributed at no cost to the recipients should be scored as both revenues and outlays, with no net effect on the budget deficit.”

Financial Week:

Senate Banking Committee takes up corporate disclosure of financial risk from climate change By Nicholas Rummell October 31, 2007

Several leading Democrats on the Senate Banking Committee say they want to push for greater disclosure from companies about the financial risk they face from climate change.

The move by Democrats is largely the by-product of a petition sent to the Securities and Exchange Commission last month. That petition requested that the SEC require companies to spell out material losses from climate change, such as the impact of new fuel regulations on automakers.

According to the petitioners, who include regulators in 11 states as well as institutional investors and advocacy groups, companies are currently required to delineate such risks under accounting rules, but they often fail to meet those requirements because of poor regulatory guidance. Business groups often argue that such information is confidential.

A Banking Committee hearing on the topic late last month was sparsely attended, by only Democratic members, but it shows congressional interest in the financial risks argument. Sen. Robert Casey (D-Pa.) said he thinks the federal government should act to “chart a new course” for stopping climate change and improving financial returns for companies, which he called “two ends of a problem.”

A bill being marked up in another Senate committee reportedly would require new SEC regulations to require public companies to inform shareholders about financial disclosure of and economic impact of global warming on the company. The bill, sponsored by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.), places caps on carbon emissions.

Current climate change disclosures are inconsistent, which makes it difficult for investors to compare one company’s disclosure with others, said Russell Read, chief investment officer at the $259 billion California Public Employees’ Retirement System. Mr. Read said the SEC currently can require greater disclosure, but that it probably needs “prodding” by Congress to do so.

Some feel additional disclosure would lead to more inconsistent filings. Gary Yohe, an economics professor at Wesleyan University, said that, depending on whether a company evaluates risk to customers or the entire social cost of carbon use, “you get a wide range of numbers.”

Such guidance should focus only on companies that would be significantly impacted by climate change. “It would be a mistake for everyone to say something,” said Jeffrey Smith, lead partner in the environmental practice at law firm Cravath Swaine & Moore. Flooding the market with insignificant disclosure would hurt investors, he said, noting that companies should be “poised” to address useful information in filings. “Fake numbers are bad.”

Mindy Lubber, president of environmental advocacy group Ceres, testified that insurers face quantifiable financial risks from prolonged droughts and wildfires, energy companies face climate-change litigation and other companies face risk from greenhouse gas regulations. She cited recent investment bank research reports as evidence that Wall Street is starting to pay attention to the costs attributed to climate change.

Ms. Lubber said the petitioners don’t want “an onerous new disclosure regime,” but rather to tighten up current accounting standards on physical risks that can be evaluated, such as litigation or losses due to hurricanes. Petitioners in recent years have repeatedly asked the SEC to issue guidance, but the SEC has ignored such requests, she said.

The clamor for financial disclosure related to climate change has also made for strange bedfellows. Steven Milloy and Thomas Borelli, climate change skeptics and mutual fund managing partners, filed a petition for rule-making with the SEC earlier this month. They want companies to have to disclose the business risks of laws and regulations that address global warming.

The two activists, critical of the global warming movement and attempts at regulation, found that of 21 corporate members of the U.S. Climate Action Partnership, only five disclosed that global warming regulation is a business risk. USCAP is a group of 33 companies and environmental groups that calls for significant reductions in greenhouse gases. “USCAP members,” Messrs. Milloy and Borelli wrote in their petition, “are keeping shareholders in the dark.”

Case in point, the two say, is the impact on General Electric’s labor force of the proposed shift to compact fluorescent light bulbs from incandescent bulbs. GE manufactures the environmentally friendly compact bulbs in China, which has caused friction with the company’s U.S. employees. The petition also targets PepsiCo, Du Pont and Caterpillar—also members of USCAP—for not disclosing financial risks adequately, as well as Wal-Mart, which is not a member.

“Global warming regulation represents a serious risk to publicly owned corporations, yet this threat to corporate earnings and shareholder value is not being disclosed to shareholders,” the petition stated.

According to Ms. Lubber and supporters, companies actually could reap benefits by addressing climate change. One analysis cited by Ms. Lubber found that U.S. electric power companies that have not prepared for the future cost of carbon regulations could see losses in earnings of up to 17%. Conversely, the same analysis found that companies with less polluting fuel mixes could see earnings increase by as much as 15%, she said.

The SEC has not issued a response on either petition and is not required to do so, though staffers may review them.

Environmental proxy proposals seeking more data on financial risk from global warming have come into vogue (see “Green Proxies to Be Red Hot This Season,” FW, Oct. 29). Last year, environmental activist shareholders filed a record-breaking number of green proposals; even more are planned for the 2008 season.

Need for Legislation

The dwindling supply of water in the United States has created increasing concern at all levels of government. Since 1950, the United States population increased nearly 90 percent. In that same period, public demand for water increased 209 percent. Americans now use an average of 100 gallons of water per person each day. This increased demand has put additional stress on water supplies and distribution systems, threatening both human health and the environment. Approximately 26 billion gallons of water are used every day in the United States and thirty six states are anticipating local, regional, or statewide water shortages by 2013. However, some states are already in the middle of a severe drought. Most of the Southeastern United States, stretching from Tennessee across the Carolinas and into Georgia, is suffering from an exceptional drought, the highest intensity as measured by the U.S. Drought Monitor. The city of Atlanta is bracing as experts argue whether the city water supply will last as few as three months or as many as nine months.

In California, catastrophic fires burned across areas of the southern part of the state this October. Extreme drought conditions over the past two years have played a large role in creating the conditions that made such a disaster possible. More than 500,000 people were evacuated from their homes at height of fires, the largest number in California history. Over 2,000 homes and at least 180 commercial buildings were destroyed or damaged. The drought gripping the West is considered by some experts to be the worst in 500 years, with effects in the Colorado River basin that have been considerably more damaging than during the Dust Bowl years, according to scientists at the U.S. Geological Survey. Compounding the problem, the Colorado River had its highest flow of the 20th century from 1905 to 1922, the years used as the basis for allocating the River’s water between the Upper and Lower Colorado Basin states under the Colorado River Compact.

Climate change related effects are expected to exacerbate already scarce water resources in many areas of the country. The Intergovernmental Panel on Climate Change’s 2007 assessment states that water stored in glaciers and snow cover is projected to decline, reducing water availability to one-sixth of the world’s population that relies upon melt water from major mountain ranges. The IPCC also predicts droughts will become more severe and longer lasting in a number of regions. Although some water efficiency strategies require an initial capital investment, in the long run, conserving water provides significant cost savings for water and wastewater systems. Water efficiency and re-use programs help systems avoid, downsize, and postpone expensive infrastructure projects, by developing new water supplies.

Introduced by Representative Jim Matheson, H.R. 3957 would establish a research and development program within the Environmental Protection Agency’s Office of Research and Development (ORD) to promote water efficiency and conservation. The program would collect and disseminate information on water conservation practices. Through this program, EPA will be able to encourage the adoption of technologies and processes that will achieve greater wateruse efficiency thereby helping to address the water supply shortages in the United States.

H.R. 3957 would expand EPA’s scope and involvement solving the nation’s water crisis by researching innovations in water storage and distribution systems, as well as, behavioral, social, and economic barriers to achieving greater water efficiency. In addition, the program will research technologies and processes that enable the collection, treatment, and reuse of rainwater and grey water, waste water from sinks, baths and kitchen appliances.

Background on EPA’s Current Water Research and Outreach Programs

EPA currently has no research and development effort that addresses water supply issues. In conjunction with its statutory responsibilities to ensure water quality under the Clean Water Act and the Safe Drinking Water Act, EPA has a program of research and development on water treatment technologies, health effects of water pollutants, security from deliberate contamination, and watershed protection. Current annual funding for these activities is approximately $50 million. EPA does not have a research and development program to address water-use efficiency or conservation.

In June of 2006, the Environmental Protection Agency created a voluntary program entitled WaterSense, which focuses on educating consumers about available choices to save money and conserve water. Similar to Energy Star ratings, the WaterSense label indicates the performance of an appliance or product with respect to its water-use efficiency. Products displaying a WaterSense label must achieve water use reductions of at least 20 percent over similar appliances and products. In FY 07, EPA obligated $2.4 million in funding for the WaterSense program.

Under the program’s structure, manufacturers certify that products with the WaterSense label met EPA criteria for water efficiency and performance. Currently, the program has reviewed High-Efficiency Toilets, and plans on expanding its scope to include bathroom faucets, weatherbased irrigation controllers, commercial toilets and faucets, and autoclave water valves. EPA estimates that if all U.S. households installed water-efficient appliances, the country would save more than 3 trillion gallons of water and more than $17 billion dollars per year. In addition, the average American household could save 20,000 gallons of water per year if it installed an inexpensive low-flow showerhead. A low-flush toilet could reduce their water use by an additional 34 percent.

At present, there is a lack of significant federal research and development aimed at addressing water-use efficiency and conservation, especially focused on residential and commercial uses. Because of the agency’s complementary work on water quality, the EPA is the logical federal entity to complete this research due to the important relationship between water supply and water quality.

Current State Initiatives on Water Efficiency

Many states and local governments are taking action to promote greater water-use efficiency and conservation including metering and sub-metering, offering rebates for purchase of water efficient products, promoting processed water use, promoting greater grey water and rainwater utilization, correcting leaks, and promoting use of drought tolerant landscaping. Because water supplies are controlled by local, regional and state government, a variety of approaches are being tested and implemented. While there are many benefits to having a diversity of creative efforts, the establishment of a central repository for information on the approaches and their costs and benefits is lacking. H.R. 3957 directs EPA to gather this information and provide a central location for distributing information about successful projects that have been implemented by communities across the country to achieve greater adoption of technologies and policies on water conservation.

Listed below are some examples of such efforts.

• The city of Tucson, Arizona has been active in the promotion of xeriscaping: a practice of landscaping which does not require supplemental irrigation. Common plants used in this practice include agave, cactus, lavender, juniper, sedum and thyme. Each year, a xeriscaping conference is held in Tucson, as well as a contest awarding the best xeriscaping project. City policy prevents the use of municipal groundwater supplies for irrigating areas within public rights-of-way unless the landscaping uses plants from a low water-use list.
• The State of New York passed legislation to establish a Green Building Tax Credit, which allows building owners and developers to deduct expenses associated with the design and construction of “green” buildings, which includes a number of water-use efficient practices.
• The city of Austin, Texas has instituted a highly successful appliance replacement rebate plan to encourage consumers to purchase water-use efficient toilets, clothes washers, and irrigation equipment. Austin’s Water Conservation Program has contributed to a substantial reduction in per capita water use. In 2006, the Austin City Council formed the Water Conservation Task Force to find ways to implement a June 2006 directive to implement aggressive water conservation measures. The anticipated recommendations include changes to the plumbing code, a retrofit on resale for inefficient plumbing fixtures, mandatory irrigation analyses for large commercial properties, and stricter summer watering regulations. Together, the measures should result in peak-day water savings of nearly 33 million gallons per day at an average cost of roughly $1.13 per gallon, one-third the cost of building new treatment capacity.
• The Santa Rosa Subregional Reclamation System in Northern California is one of the largest recyclers of water in the world. Last year 6,400 acres of farmlands, vineyards, and public and private urban landscaping was irrigated with recycled water. Of that, 85 percent was used for agricultural purposes. The irrigation system is supported by storage reservoirs that can hold over 1.45 billion gallons of water. The Subregional System serves the cities of Santa Rosa, Rohnert Park, Sebastopol, Cotati, the South Park Sanitation District, and some unincorporated parts of Sonoma County. In addition, the Subregional System pipes its treated wastewater to a geothermal energy plant to be used as re-injection fluid, thereby prolonging the life of the reservoir while recycling the treated wastewater. The addition of wastewater produces close to 85 megawatts of electricity a day, enough to supply the residential energy needs of Santa Rosa.
• The Pennsylvania Water Conservation Leak Detection Program is a joint effort of the Pennsylvania Department of Environmental Protection and the Pennsylvania Rural Water Association (PRWA). PRWA uses set-aside funds to provide two circuit riders to conduct water audits and perform leak detection for small systems (serving fewer than 10,000 persons). Despite the time-consuming nature of the project, the circuit riders have detected 594 leaks and saved over 1.4 billion gallons of water and $1.36 million annually. From June 2001 to July 2002, 24 systems underwent water audits. A total of 152 leaks were detected, which saved systems over 396 million gallons of water from 36 percent to 9 percent.

Witnesses Dr. Daigger is a Senior Vice President and Chief Technology Officer for CH2M Hill. He received a B.S., M.S., and Ph.D. in Civil Engineering from Purdue University. He is the recipient of numerous awards, including the Kappe and Freese Lectures and the Harrison Prescott Eddy, Morgan, and the Gascoigne Awards from Water Environment Federation. A member of a number of professional societies, Dr. Daigger is also a member of the National Academy of Engineers. Mr. Clerico is a licensed professional engineer and licensed wastewater operator in NY, NJ, and PA and is an accredited LEED professional. He holds a B.S. and M.S. in Bio-Ag Engineering from Rutgers University. He was the founder and president of Applied Water Management, Inc. before holding executive roles with American Water as Technical Development Director and VP Strategy. Presently, he operates his own consulting business, Alliance Environmental, and focuses on initiatives that involve integrated water management, including the Solaire project in New York City. Ms. Little is the director of the Water Conservation Alliance of Southern Arizona. In addition, she serves as a Principal Research Specialist at the University of Arizona’s College of Architecture and Landscape Architecture. She received her A.B. in Landscape Architecture from the University of California, Berkeley, and her M.A. in Anthropology from the University of Arizona. Mr. Thompson is the District Manager of the Washington County Water Conservancy District. He graduated from Brigham Young University in 1971 with a degree in Accounting and received his law degree from the University of Utah in 1974. Mr. Thompson is a past president of the Utah Water Users Association, vice-chairman of the Resolutions Committee for the National Water Resources Association, and vice-chairman of the Resolutions Committee for the Colorado River Water Users. He also serves on the Board of Trustees of the Utah Water Finance Agency, State of Utah Drinking Water Board, and serves as the Utah representative for the National Water Resources Endangered Species Task Force. Mr. Veil is the manager of the Water Policy Program for Argonne National Laboratory in Washington, DC, where he holds the rank of senior scientist. He analyzes a variety of energy industry water and waste issues for the Department of Energy. Mr. Veil has a B.A. in Earth and Planetary Science from Johns Hopkins University, and two M.S. degrees, in Zoology and Civil Engineering, from the University of Maryland. Before joining Argonne, Mr. Veil managed the Industrial Discharge Program for the State of Maryland government where he had statewide responsibility for industrial water pollution control permitting through the National Pollutant Discharge Elimination System (NPDES), Underground Injection Control (UIC), and oil control programs.

Section by Section description of H.R. 3957

Title: Water Use Efficiency and Conservation Research Act 2007

Purpose: To increase research, development, education, and technology transfer activities related to water use efficiency and conservation technologies and practices at the Environmental Protection Agency (EPA).

Section 1: Short Title

The Water-Use Efficiency and Conservation Research Act.

Section 2: Findings

Section 2 includes the Congressional findings and defines the need for expanding the scope of research and development conducted by the Environmental Protection agency to include wateruse efficiency and conservation to address the problems of increasing water shortages across the country.

Section 3: Research Program

Section 3 directs the Assistant Administrator to establish a research, development, and demonstration program within the Environmental Protection Agency’s Office of Research and Development to promote water-use efficiency and conservation. The bill provides examples of several areas the program should address including water storage and distribution systems; and behavioral, social, and economic barriers to achieving greater water-use efficiency. In addition, the bill states the program should research technologies and processes that enable the collection, treatment, and reuse of rainwater and greywater. The specific projects selected for funding through the program should reflect the needs identified by local and state water managers.

Section 4: Technology Transfer

Section 4 directs the Assistant Administrator to collect and disseminate information on current water-use efficient and conservation technologies and practices to facilitate their adoption. This information should include incentives and impediments to development and commercialization, best practices, and anticipated increases in water-use efficiency resulting from the implementation of these processes.

Section 5: Report

Section 5 directs the Assistant Administrator to report to Congress on the progress being made by the Environmental Protection Agency with regard to the research projects initiated, and the outreach and communication activities conducted through the program.

Section 6: Authorization of Appropriations

Section 6 provides a five year authorization of the program with such sums as necessary to carry out the program.