CEI comments on repealing DOE’s 1605(b) Regulations: Ending the Trojan Horse for Cap-and-Trade
Dear Mr. Taggert:
On behalf of the Competitive Enterprise Institute (CEI), I respectfully submit these comments on the Department of Energy’s (DOE’s) proposed rule to rescind regulatory requirements for reporting, certification, independent verification, and DOE review of voluntary greenhouse gas (GHG) reporting.
CEI strongly supports DOE’s proposal to rescind CFR 300.9, 300.10, 300.11, and 300.12. Those regulations were finalized in 2006 by DOE pursuant to President George W. Bush’s directive of February 14, 2002 to transform the Voluntary Reporting of Greenhouse Gases Program (VRGGP), created by Section 1605(b) of the 1992 Energy Policy Act, into a rigorous accounting framework for awarding regulatory credits, applicable to a future domestic or international cap-and-trade program, for emission reductions achieved before such policies are enacted or adopted.
In President Bush’s words, “Our government will also move forward immediately to create world-class standards for measuring and registering emission reductions. And we will give transferable credits to companies that can show real emission reductions.”
When DOE in 2005 officially determined that it lacked authority to award credits for early GHG reductions, it had already invested three years building the accounting system. By that point, the regulations could not be used for their original purpose. However, they remain on the books, providing a turnkey operating system for a future Congress willing to give DOE the authority it lacks, or a court or agency willing to assert (however incorrectly) that DOE or some other agency possesses authority to award or certify regulatory credits for early voluntary emission reductions.
CEI raised legal and policy objections to this agenda—variously known as early action crediting, credit for voluntary reductions, and transferable credits—in 1999, 2002-2004, 2005, and 2016. The reason is simple. The political purpose of early action credit programs is to build an accounting system and corporate lobby for Kyoto-style energy rationing.
Because CEI has been the free-market movement’s point organization in each phase of the pushback against early action crediting, these comments are somewhat autobiographical.
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 build a corporate clientele for domestic cap-and-trade legislation and the Kyoto Protocol.
An early credit scheme works as follows. Companies “volunteering” to reduce their GHG emissions before enactment of a mandatory program receive regulatory credits they can apply to meet their obligations under a future cap-and-trade program. Sounds innocent enough, but it would massively politicize energy policy.
Early action credits worth peanuts or nothing at all in a free market suddenly become valuable when the prospect of a future cap-and-trade program arises. Credits previously earned for cheap or easy reductions can produce significant windfalls in a carbon-constrained economy. Thus, an early action program by design gives each participant a financial inducement to lobby for enactment of a cap.
Coercive, Not Voluntary; Zero-Sum, Not Win-Win
Proponents were fond of describing early action crediting as “voluntary” and “win-win” (good for business, good for the environment). In reality, such 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, i.e., 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. Consequently, companies that do not “volunteer” are 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.
In short, early action schemes transfer wealth (in the form of tradable credits) from firms that do not act early to those that do. The coercive, zero-sum dynamic of early action credit programs is easily illustrated.
Assume for simplicity’s sake there are only four utilities (A, B, C, and D) in a state, each emitting 25 tons of CO2, for a statewide total of 100 tons. Also assume the state’s mass-based goal is an emissions budget of 80 tons. Absent an early credit program, each utility would receive 20 allowances during the compliance period and have an obligation to reduce its emissions by 5 tons.
Now assume the state’s environmental agency creates an early action program that sets aside 20 allowances for reductions achieved before the compliance period. That reduces each utility’s compliance period allocation from 20 allowances to 15 (4 utilities X 15 credits = 60 + 20 early action credits = 80, the total state emissions budget).
Finally, assume Utilities A and B earn 10 allowances each for early reductions. In the compliance period, A and B will have 25 allowances apiece (10 + 15), which is 5 more than an equal share under the 80-ton cap would give them. In contrast, C and D will each have 5 fewer allowances (15 instead of 20). Thus, C and D must make deeper reductions than the state goal would otherwise require, or they must purchase additional allowances—very likely at higher prices—from A and B. Bottom line: Early reducers profit at the expense of non-participants.
The Center for Clean Air Policy, an influential proponent of early action crediting, explained, “Credits earned should be subtracted from the pool of allowances given out in the binding program, rather than added to it. This means that early reducers will be rewarded at the expense of those who do not participate.” As one CCAP scholar put it, “This is the essence of an early reductions program—it reallocates first budget period allowances from those who don’t take early action to those who do.”
The predictable consequence is that many firms will volunteer just to avoid getting shoved to the shallow end of the credit pool after a cap is imposed. That, in turn, will increase the number of companies earning early credits that cannot be fully monetized unless the participants successfully lobby for a cap.
Had Congress enacted an early action program, or had the Department of Energy under President Bush 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 111th Congress, might have formed earlier, grown larger, and wielded more clout.
Congressional Sojourn
During the 106th 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 by upstaging 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 in July 1999 titled “Credit for Early Action: Win-Win or Kyoto through the Front Door,” which spotlighted the policy’s coercive zero-sum dynamic.
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. Sen. Lieberman did not reintroduce the bill in subsequent Congresses.
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 VRGGP into a credit program. The length and scope of the rulemaking reflected 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 divided up.
Through this comment letter and others, CEI helped persuade DOE General Counsel Lee Lieberman Otis that the 1992 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. At the final stakeholder meeting, a disappointed Edison Electric Institute lobbyist exclaimed: “Where’s the candy?”
DOE’s March 2005 interim final rule memorialized the agency’s conclusion. DOE noted that CEI, the Natural Resources Defense Council (NRDC), the Northeast States for Coordinated Air Use Management (NESCAUM), and the Pew Center all concluded that DOE lacks authority to provide regulatory credits. It also observed that no commenter on agency’s December 2003 proposal argued that DOE could give VRGGP-reported emission reductions “a regulatory of financial value under some future climate policy.”
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 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 subsequently withdrew their bill and canceled the hearing.
DOE’s May 2025 Proposal
DOE proposes to repeal the 1605(b) regulations it finalized in April 2006. Those regulations are:
- 10 CRF 300.9 (regulations setting a specific deadline for annual reports and prescribing detailed procedures for record keeping and revisions).
- 10 CFR 300.10 (regulations requiring a detailed certification statement).
- 10 CFR 300.11 (regulations encouraging independent verification by professional verifiers).
- 10 CFR 300.12 (regulations requiring review of all reports for completeness, internal consistency, arithmetic accuracy, and plausibility).
Such record-keeping, reporting, certification, and verification requirements are necessary for a system intended to award credits potentially worth billions of dollars and altering participants’ competitive prospects. However, there was no policy rationale for such rigor and completeness in the VGGRP as originally enacted.
Jay Hakes, Administrator of the Energy Information Administration (EIA) explained in testimony at the July 1999 House Regulatory Affairs Subcommittee hearing:
EIA’s Voluntary Reporting of Greenhouse Gases Program was never designed as an emissions trading program, or as a “credit for early reductions” program. It was primarily designed as a registry for claims of reductions. Neither the Department of Energy nor the EIA attempted to resolve the many contentious [issues] that would arise in attempting to construct a set of reporting rules that would create a set of comparable, verifiable, auditable emission and reduction reports that represent “actual reductions” and are not double counted.
For example, under the VRGGP, participants were allowed to report GHG reductions by subtracting current emissions from past emissions or by subtracting current emissions from their expected levels in the absence of voluntary activities. Participants could report emission reductions on a project-specific or entity-wide basis. They could report emission reductions due to their own actions or changes in the marketplace, such as a reduction in the carbon intensity of electric generation.
The program as originally enacted was exploratory, designed to “document useful examples of how to reduce emissions that could be emulated elsewhere,” how to calculate both project-specific and entity-wide emissions and reductions, and how to distinguish “anyway tons” (reductions arising from ordinary business decisions or market developments) from reductions due to targeted GHG-mitigation investments.
To reiterate, in 2002, DOE began to develop the regulations it now proposes to repeal. DOE did so in response to President Bush’s directive to transform the VGGRP into the accounting framework for awarding “transferable credits.” When DOE later realized it lacked authority to award such credits, the elaborate and rigorous accounting requirements no longer served an intelligible policy purpose.
Here it should be noted that Sen. Lieberman tried to persuade Senate colleagues to support a draft of the 1992 Energy Policy Act that included a greenhouse gas early credit program. Instead, House and Senate conferees adopted the Section 1605(b) VGGRP program, which does not award or certify credits.
As noted, Lieberman tried to revise the VRGGP along the lines of his original conception by introducing S. 2617 in the 105th Congress (1998) and S. 547 in the 106th Congress (1999). EEI and several other corporate lobbyists persuaded the Bush White House in 2002 to direct DOE to transform the VRGGP into an early credit program, replete with rigorous accounting, certification, and verification requirements. In 2005, the usual suspects briefly persuaded Sens. Larry Craig and Chuck Hagel to carry water for Sen. Lieberman’s cap-and-trade Trojan Horse.
This brief historical overview is a cautionary tale of how readily the DC Swamp rallies to bring early action crediting back from the boneyard. The most recent episode in this tale is also instructive.
Early Action Crediting and the Clean Power Plan
EPA’s June 2014 proposed Clean Power Plan (CPP) does not contain the words “early action.” EPA’s October 2015 final CPP mentions “early action” 50 times, contains an entire section on “provisions to encourage early action,” and announces EPA’s adoption of an early action credit program dubbed the Clean Energy Incentive Program (CEIP).
In June 2016, EPA proposed a Clean Energy Incentive Program Design Details rule. Neither that proposal, nor the final CPP, nor EPA’s proposed CPP Federal Plan, which mentions “CEIP” 29 times, provides any definite information on the CEIP’s statutory basis. Apparently, EPA assumed its authority to award early action credits derived from its asserted authority to herd states into GHG cap-and-trade programs. As we know, the Supreme Court in West Virginia v. EPA (2022) vacated the CPP, noting that “Congress … has consistently rejected proposals to amend the Clean Air Act to create such a program.”
What changed between the proposed and final CPP that led EPA to adopt an early action program? The final CPP states: “Commenters raised concerns that the fast pace of reductions underlying the emission targets in the proposed rule could potentially shift investment from RE [renewable energy] to natural gas, thus dampening the incentive to develop wind and solar projects, in particular.”
A major criticism of the CPP generally is that it is a strategy to expand the market share of renewables rather than to improve the environmental performance of existing coal and gas power plants. Indeed, CPP “performance standards” were non-performance mandates: ‘Run the coal plant less, or, better still, shut it down!’
For example, CPP performance standards for existing—in many cases, decades old—coal and natural gas powerplants were more stringent than those EPA set for new (future) coal and gas powerplants. Imposing unattainable standards on existing sources is a recipe for squeezing them out of the marketplace.
However, as noted, some commenters were concerned the CPP would incentivize investment in gas at the expense of coal rather than in renewables at the expense of both coal and gas. The CEIP’s job was to ensure the CPP rigs the market against all fossil fuel generation.
Although all early credit GHG programs tilt the market against CO2-emitting energy, the CEIP is probably the first such program to exclude early actors who achieve CO2 emission reductions via the ‘wrong’ technologies.
Under the CEIP, only investment in renewable energy (RE) and demand-side energy efficiency (EE) would qualify for credits. No credits would be awarded for early emission reductions from coal powerplant heat-rate efficiency improvements or generation shifting from coal to gas, even though those strategies were CPP “building block” compliance options. Equally arbitrary, CEIP credits would be awarded for demand-side EE projects even though the final CPP rejected demand-side EE as a CPP “building block.”
Conclusion
Credit for early action is a favorite climate policy of the DC Swamp. Neither DOE under G.W. Bush nor EPA under President Obama discussed its coercive, zero-sum dynamic. Moreover, early action crediting easily hides regulatory windfalls under veneers of “climate action” and “corporate responsibility.”
Credit for early action is incompatible with President Trump’s energy dominance agenda. DOE should abolish the regulatory machinery required to make early action crediting operational. Rescinding of CFR 300.9, CFR 300.10, CFR 300.11, and CFR 300. 12 would do just that.
Sincerely,
Marlo Lewis, Ph.D.
Senior Fellow in Energy and Environmental Policy
Competitive Enterprise Institute