A critical -- but widely ignored -- part of doing GHG policy right is making sure that the incentives and penalties are imposed at the point in the economy where the affected party can take meaningful action in response. Continuing to push our basketball theme, let's suppose that you got the best basketball coach in the world (anyone but Isiah Thomas!) and as your team picked a bunch of 5-footers with polio. It doesn't matter how good your coach is -- those players simply aren't going to match up against the Celtics.

From a greenhouse-gas perspective, which actors in the economy have the maximum ability to change their behavior in ways that can affect our release of fossil CO2 into the atmosphere? That's easy: people who burn fossil fuel.

And which sectors of the economy are most directly affected by Lieberman-Warner as presently structured? With one notable exception, not people who burn fossil fuel. Which means that no matter how much we yell at these folks, fine them, and/or dangle carrots in front of them, they have no more ability to lower GHG emissions than our 5'2" polio patient has of dunking over Kevin Garnett.

"Covered facilities"

Notwithstanding the details of my prior posts, the bulk of the action in Lieberman-Warner affects a relatively small sector of the economy. These "covered facilities" are those who are initially given most of the allocations, must bear the brunt of the future auctions as they slowly ramp up, and must find a way to comply with the 1.8 percent/year falling GHG cap. Therefore, these entities have a really strong incentive to change their GHG impacts. Let's look at who they are:

1. Any facility that uses more than 5,000 tons of coal in a year.
2. Any facility that is an natural gas processing plant or that produces natural gas in the state of Alaska, or any entity that imports natural gas.
3. Any facility that in any year produces, or any entity that in any year imports, petroleum- or coal-based liquid or gaseous fuel, the combustion of which will emit greenhouse gas, assuming no capture and sequestration of that gas.
4. Any facility that in any year produces for sale or distribution, or any entity that in any year imports, more than 10,000 carbon dioxide equivalents of greenhouse gas, assuming no capture and destruction of that gas.
5. Any facility that in any year emits as a byproduct of the production of hydrochlorofluorocarbons more than 10,000 carbon dioxide equivalents of hyrdofluorocarbons.
6. Any entity that produced hydrofluorocarbons in the U.S. for sale in the U.S. in 2005.
7. Any entity that imported hydroflurocarbons or products or equipment containing hydrofluorocarbons into the U.S. in 2005.

Let's parse this. If you burn coal or import natural gas, petroleum, CO2, or HFCs, process natural gas, or refine petroleum, you are a covered party. As a covered party, you have to account for either the CO2-equivalents you release (in the case of the coal burners and HFC or CO2 producers) or the carbon innate to your product (everyone else).

However, if you burn oil, gas, or less than 5,000 tons/year of coal or any other fossil fuel, you're outside of the program. OK, maybe the resulting price ripples through the system to affect your behavior ... but as an entity that is actually releasing CO2 into the atmosphere, you have no direct incentive to modify your behavior.

I'm not suggesting that we shed a tear for our fossil fuel importers and refiners, but you've got to admit that it's awfully strange to essentially ignore the entire industrial sector, where there are massive opportunities to increase efficiency and profitably lower greenhouse-gas emissions. By contrast, what are you going to do if you're a natural gas importer? You can either pay to pollute or else stop selling natural gas. Both options are economically painful, and those parties are undoubtedly going to oppose this bill.

I'm not remotely suggesting that we shouldn't reduce fossil fuel use, of course. But if that reduction comes about because an industrial figures out how to use fewer BTUs per widget, that fall-off in demand will be economically beneficial. By contrast, if it comes about simply because the importer went bankrupt, it's economically painful. Given two otherwise equivalent paths to lower GHG emissions, why are we picking the more economically painful route? This runs a very real political risk of creating a self-fulfilling prophesy that GHG mitigation is an economic disaster. Indeed, many pundits are lining up right now to complain about the economic costs of Lieberman-Warner, and they have a point ... but this is not a point that necessarily needs to apply universally to all possible GHG reductions. It is simply a criticism of the mechanism used by this particular approach.

Other actors

OK, so what's going to happen to the other sectors of the economy? Lots of big industrials have made public commitments to lower their GHG emissions, and many are publicly acknowledging that this reduction is actually growing their bottom line. (Which is not surprising, since buying less fuel equals spending less money.) Here's one incomplete list.

Many of these corporate leaders have already taken action without waiting for federal policy. That's good stuff, and one would like to believe that our policy rewards such behavior. Sure enough, Lieberman-Warner does set aside rewards for "early action." But there's a catch: allowances are granted only to covered facilities that took early action. Huh?

To be fair, L-W does provide some paths for "non-covered facilities" by directing the EPA to create offset regulations. Specifically:

... offset allowances come into being when EPA certifies that a non-covered facility has done something that either has reduced the number of CO2-equivalents that the facility otherwise would have emitted or has increased the number of CO2-equivalents that the facility otherwise would have captured and stored in that calendar year.

Sounds good. Too good, it turns out, because those activities certified by the EPA as offsets are required to be "verified, monitored, permanent, enforced, and additional."

Crap. There goes that additionality test again. And so, once again, L-W opts only to encourage those GHG reductions that are the most economically painful.

And so we have structured a bill with great intent but lousy execution. We've told the fans we're going to win the title this year, but we squandered all our draft picks. And in so doing, we have ensured that -- unless we fix the flaws innate to L-W as currently crafted -- it will be expensive and minimizes the number of tools we have at our disposal to cool the globe.

The good news about the Knicks' consistent stinkery is that they keep positioning themselves to get a great draft pick and land another Ewing. Even after a decade of ineptitude, we fans can still hope. But our GHG policy doesn't have that much time -- we need to get this one right from the start if we're going to avert a climatological disaster. Lieberman-Warner is playing for draft picks.