March 22, 2005<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Honorable Pete V. Domenici                                                      

Chairman, Committee on Energy and Natural Resources

364 Dirksen Office BldgWashington, DC 20510

Dear Senator Domenici:

The undersigned organizations are writing to share our concerns about a provision in one of Senator Chuck Hagel’s climate bills.  Section 1612(a) of S. 388, the Climate Change Technology Deployment and Infrastructure Credit Act, would create a program to award, register, and track “transferable credits” for “voluntary” greenhouse gas emission reductions.  Such credits have no monetary value apart from the imposition or threat of a Kyoto-style cap on fossil energy use.  Consequently, every credit holder will have an incentive to lobby for a cap.  Only under a cap will credit holders be able to turn otherwise worthless paper assets into pots of gold.  Transferable credits will grow the “<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Kyoto lobby” of rent-seeking firms eager to profit from energy rationing.  Thus, 1612(a) directly imperils Senator Hagel’s great legislative achievement, the anti-Kyoto Byrd-Hagel resolution of July 1997.

Assurances that a credit program can do no harm because it is “voluntary” and “win-win” (good for business; good for the environment) are false.  A cap is a legal limit on how many tons of carbon dioxide companies may emit and, thus, on how many credits they may use.  If a future carbon cap is not to be broken, the supply of emission credits allocated to companies in the mandatory period must be reduced by the exact number awarded for “early” reductions in the pre-regulatory period.  For every company that earns a credit under 1612(a), there must be another that loses a credit under a future cap.  

In short, companies that do not “volunteer” will be penalized, forced in the mandatory period to make deeper cuts than the cap would otherwise require, or pay higher credit prices than would otherwise prevail.  Programs that penalize non-participants are coercive, not voluntary.  Programs that enrich participants at the expense of non-participants are zero-sum, not win-win.  This coercive, zero-sum dynamic ensures that a credit program will operate as a political force-multiplier for the Kyoto agenda.  Many businesses will “volunteer” just to avoid getting shoved to the shallow end of the credit pool later on.  The predictable result is a large mass of companies holding carbon coupons that mature and attain full market value only under a cap.  

Congress has consistently rejected Kyoto-style policies.  Unfortunately, by expanding the ranks of energy-rationing profiteers, transferable credits would shift the political balance of power in favor of carbon caps before any serious national debate even takes place.

Sincerely,

Marlo Lewis

Senior Fellow

Competitive Enterprise Institute