40th Anniversary Commemorative: How CEI killed credit for early action

The Competitive Enterprise Institute (CEI) turned 40 this month. I’m proud to have been a CEI scholar for more than a quarter century.

Our friends, allies, and opponents may be familiar with CEI’s successful campaigns to expose cap-and-trade as a stealth energy tax (“cap-n-tax”), rally free-market groups to oppose the so-called Clean Power Plan, and strengthen President Trump’s resolve to withdraw the US from the Paris Climate Accords.

Less well known is CEI’s pivotal role during 1999-2005 in foiling a strategy to mobilize corporate lobbying for domestic and international energy-rationing schemes. The strategy went by various names—credit for early action, credit for voluntary reductions, and transferable credits.

Credit for Early Action

The brainchild of Sen. Joe Lieberman (D-CT), the Environmental Defense Fund, and the Pew Center on Global Climate Change, and promoted by the Clinton-Gore administration, early action crediting was designed to grow a corporate clientele for cap-and-trade legislation and the Kyoto Protocol.

An early credit scheme works as follows. Companies “volunteering” to reduce their greenhouse gas (GHG) emissions before Congress enacts a mandatory program receive regulatory credits they can later apply to meet their obligations under a future cap-and-trade program. Sounds innocent enough, but it would massively politicize energy policy. 

Coercive, Not Voluntary; Zero-Sum, Not Win-Win

Proponents were fond of describing an early action program as “voluntary” and “win-win” (good for business, good for the environment). In reality, early credit programs set up a coercive zero-sum game in which one company’s gain is another’s loss.

Early credits have no monetary value apart from an actual or anticipated emissions cap—a legal limit on the quantity of emissions a firm, sector, or nation may release. The cap makes credits valuable by creating an artificial scarcity in the right to produce or use carbon-based energy. Both the market value of the credits and the program’s environmental integrity absolutely depend on restricting the supply of credits that may be traded under the cap.

And there’s the rub. If the cap is not to be broken, the quantity of credits allocated to companies in the mandatory period must be reduced by the exact number awarded for early reductions in the “voluntary” period. In short, companies that do not “volunteer” will be penalized—forced in the mandatory period to make deeper emission cuts than the cap would otherwise require, or pay higher credit prices than would otherwise prevail.

Simply put, early action schemes transfer wealth (in the form of tradable credits) from firms that do not act early to those that do.

Consequently, many firms would volunteer just to avoid being shoved to the shallow end of the credit pool under a mandatory emission-reduction program. This dynamic would further increase the number of companies keen to monetize their Kyoto credits by lobbying for a cap.

Had Congress enacted an early action program, or had the Department of Energy succeeded in awarding transferable credits under its own authority, a corporate coalition such as the US Climate Action Partnership, which lobbied for the Waxman-Markey cap-and-trade bill (H.R. 2454) during the 111^th Congress, might have formed earlier, grown larger, and wielded more clout.

Congressional Sojourn

During the 106^th Congress, I left CEI to work for Rep. David McIntosh (R-IN), who chaired the House Government Reform Subcommittee on Regulatory Affairs. The McIntosh team learned that another Member of Congress, Rep. Rick Lazio (R-NY), was planning to introduce H.R. 2520, a companion bill to Sen. Lieberman’s early action bill (S. 547). We decided to have some fun and upstage Lazio. Before Lazio could introduce his bill, McIntosh introduced H.R. 2221, a bill to defund any future credit for early action program. McIntosh lined up 32 co-sponsors compared to Lazio’s 15.

McIntosh also held a hearing titled Credit for Early Action: Win-Win or Kyoto through the Front Door? CEI Distinguished Fellow Jack Kemp testified, as did CEI ally David Ridenour of the National Center for Public Policy Research.

Due to those efforts, credit for early action became politically-radioactive among anti-Kyoto House Republicans. Without a viable House companion bill, Sen. Lieberman’s bill stalled. Although the Senate Environment and Public Works Committee held two hearings on S. 547, the bill was neither marked up in committee nor brought to the Senate floor for a vote.

Bushwhacked

Three years later, on Valentine’s Day 2002, President George W. Bush revived the early action agenda by directing the Department of Energy to “give transferable credits to companies that can show real emission reductions.” To carry out Bush’s directive, DOE conducted one of the most extensive rulemakings in its history.

Over a three-year period, DOE convened four public comment periods, two national workshops, and four regional workshops on how to transform the Energy Information Administration’s Voluntary Reporting of Greenhouse Gases Program, established by the 1992 Energy Policy Act, into a credit program. The length and scope of the proceeding reflect what was at stake: the accounting rules under which regulatory credits, potentially worth billions of dollars in a future cap-and-trade program, would be divvied up.

Through this comment letter and others, CEI helped persuade DOE General Counsel Lee Lieberman Otis that the Energy Policy Act provides no authority to award regulatory credits for voluntary GHG reductions. Dozens of lobbyists spent hundreds of billable hours trying to game the rules of a revamped GHG reporting program, only to have DOE pull the rug out from under them in the 11th hour. As one disappointed lobbyist blurted at the final stakeholder meeting: “Where’s the candy?”

In 2005, Sens. Larry Craig (R-ID) and Chuck Hagel (R-NE) introduced S. 388, a bill that would give DOE the authority it lacked. CEI submitted this non-invited testimony for an April 2005 hearing on the legislation. The testimony clarified for Sens. Craig and Hagel why they should delete Section 1612, which would authorize DOE to establish an early action credit program.

The late John Berthoud, then-President of the National Taxpayers Union, clinched the argument by confirming for Sen. Craig that blocking transferable credits was an issue of key importance to free-market organizations. Sens. Craig and Hagel canceled the hearing after deciding to withdraw the bill.

Conclusion

CEI helped kill early action crediting three times during 1999-2005. However, as useful as that may have been in its time, winning that policy battle obviously did not win the larger policy war between free-market energy and compulsory decarbonization. Moreover, as CEI Founder and Chairman Emeritus Fred L. Smith taught us, “political gains are always ephemeral, to be won anew each generation.”

President Trump formally withdrew America from the Paris Climate Accords in November 2020. President Biden formally rejoined in February 2021.

The Supreme Court vacated the Clean Power Plan in June 2022. The EPA today proceeds as if West Virginia v. EPA never happened, proposing in 2023, without clear congressional authorization, to rapidly phase out both fossil-fuel powerplants and gasoline-powered cars.

The next election may bring yet another reversal of political fortunes for US climate and energy policy. Fred Smith counseled us to do the research, policy development, and public education needed to advance the freedom agenda so that we are ready when and as new threats or opportunities arise.