September 2009, TruckingInfo.com - Feature
The effort to create a cap-and-trade system to limit carbon emissions is generating more questions than answers right now, including whether or not Congress will be able to actually pass a bill.
One thing is sure, though. If a bill does pass, diesel fuel will become more expensive.
Of course, that's the whole idea: Raise the cost of carbon-based energy to encourage investment in cleaner energy and promote more efficient use of energy, with the long-term objective of slowing global warming and decreasing U.S. dependence on foreign oil.
There are a host of arguments for and against this idea, all of which are being debated at length on Capitol Hill as Congress considers climate legislation. But the possibility of a steep jump in diesel prices is first on trucking's list of concerns.
Ray Kuntz, chairman and CEO of Watkins and Shepard Trucking in Montana, told a Senate panel last month that the fuel cost increases arising from a cap-and-trade program would harm the industry and ripple through the economy. Kuntz, who was testifying before the Environment and Public Works Committee on behalf of the American Trucking Associations, said one estimate predicts diesel fuel will go up by as much as 88 cents a gallon under the cap-and-trade bill recently passed by the House of Representatives.
That bill, the American Clean Energy and Security Act, cleared the House by a narrow margin and is now being considered by the Senate as a starting point for its own climate measure.
Estimates vary on the size and timing of an increase. Kuntz's 88-cent estimate echoes a prediction by the U.S. Chamber of Commerce, but neither mentions a time frame. The conservative Heritage Foundation predicts a 58 percent increase over 25 years. Sen. Barbara Boxer, D-Calif., the chairman of the Environment and Public Works Committee, mentioned an economic model that shows a 2-cent per-gallon annual cost increase.
No one knows for sure because there are too many variables. But no matter how big the increase, the prospect is alarming to trucking.
"For an industry in which the cost of fuel you purchase today to make freight deliveries may not be recouped for 30, 60 or even 90 days, such fuel cost increases will have a devastating impact on all companies, but most especially on small trucking firms," said American Trucking Associations President and CEO Bill Graves.
Graves wrote this in a letter to Rep. Henry Waxman, D-Calif., chairman of the House Energy and Commerce Committee and the principal author of the House bill. The prospect of the increase is one of a number of reasons ATA opposed the House bill, although the association thinks well of the bill's support for the EPA's SmartWay public-private partnership that aims to improve fuel efficiency and reduce emissions.
In the Senate, ideological and geographical differences will make for a very tough fight with no certain outcome. That is not surprising, considering supporters and foes alike consider this to be one of the most ambitious legislative initiatives Congress has ever undertaken.
How cap-and-trade works
Cap-and-trade is the centerpiece of the House bill. Another major provision would require utilities to produce an increasing amount of electricity from renewable sources of energy. The bill also calls for big spending on energy technology and efficiency improvements - $190 billion by 2025. Some of that money would go to developing carbon storage technologies that coal-fired power plants would have to implement. The bill would set energy efficiency standards for consumer items such as light bulbs and appliances, as well as for buildings. It contains funding for training workers in energy technology and it promotes development of electric cars and improvements in the power transmission infrastructure.
The cap-and-trade provision follows the example of the federal program that has been successfully used to limit acid rain.
The cap part would gradually limit greenhouse gas emissions - primarily carbon dioxide but other gases as well - over the next 40 years. Starting in 2012, emissions would have to be 97 percent of 2005 levels. By 2020, they would have to be 80 percent. By 2030 they would have to be 58 percent and by 2050 they would have to be 17 percent.
These limits would apply to most economic activity, including electricity generators, natural gas suppliers, energy-intensive manufacturing and - most significantly for trucking - oil refiners.
The trade part of the bill sets up a market in which emissions can be bought and sold. A unit of emission, called an allowance, would represent one ton of CO2 or its equivalent. Producers would have to either reduce their emissions or obtain allowances, either by buying them from companies that have extra or borrowing them and paying interest. If a company exceeds its emission limits, it would have to pay a fine.
Most of these allowances - around 85 percent of them - would be given away free at the start of the program in order to phase in the cost increases. The number of free allowances would decrease over time. The remaining 15 percent of the allowances would be sold at auction.
The single biggest chunk of the free allowances - 30 percent of them - would go to electricity distributors, to help keep consumer electricity prices down. Energy-intensive industries like iron, steel and paper manufacturing would get 15 percent of the free allowances, and state governments would get 10 percent.
Oil refiners would get only 2 percent of the free allowances, starting in 2014 and ending in 2026. They would have to buy the rest of their allowances at auction.
The cost of being green
That is the source of ATA's concern about rising fuel prices. "[Oil refiners'] cost of purchasing allowances will find its way into the cost of the product," said Rich Moskowitz, ATA assistant general counsel.
The actual cost can only be a guess at this point. One gallon of diesel produces 22.2 pounds of CO2 when it's burned. ATA has calculated that the average long-haul truck emits about 200 tons of carbon per year. The Environmental Protection Agency estimates that an allowance to emit one ton of CO2 or its equivalent would go for $11 to $15 in 2016.
That adds up to an additional cost of between $2,200 and $3,000 per truck in 2016, but for several reasons that is not a reliable forecast. One, the EPA number is just an estimate. Two, oil refiners may not be able to pass through all of the cost. And three, a final bill - if it passes at all - may give refiners more free allowances. Also, oil refiners would be able to offset their emissions by funding clean-energy projects, and those numbers are still not known.
"Only time will give us the actual answer," said another ATA expert, Vice President and Environmental Counsel Glenn Kedzie.
Trucking is not discretionary
ATA's position is that while a higher price on fuel may lead to more fuel-conscious decisions by motorists - maybe they will buy more efficient cars, or take fewer trips - trucking is not discretionary driving. "We're burning fuel to deliver freight," Moskowitz said.
Trucking companies would have to absorb the portion of the cost that they cannot pass on (shippers have a voice in that decision). As higher transportation costs filter their way through to the retail level, consumers might make different buying decisions, but that will not materially change trucking's role in the distribution system, Kedzie said. "While consumer buying patterns will change, trucking is and will remain the predominant means of moving the nation's freight," he said. "By the year 2020, 71 percent of freight transportation tonnage will be delivered by a truck."
Neither will higher fuel costs drive much of a shift of freight from trucks to railroads, Kedzie added. That was a prospect offered by U.S. Energy Secretary Steven Chu at a recent hearing on the bill in the Senate.