A new C2ES report highlights lessons useful for companies and policymakers as more states and countries consider carbon pricing to spur innovative technologies and cut emissions at the lowest possible cost.
The report, written for the World Bank’s Partnership for Market Readiness (PMR), examines how three companies — Pacific Gas and Electric (PG&E), Rio Tinto, and Royal Dutch Shell -- prepared for carbon pricing programs.
The PMR shares this type of information with developing countries to help them create their own market-based policies. We were pleased to partner with the PMR to explore how a few of the companies in our Business Environmental Leadership Council prepared for carbon pricing and we thank the companies for sharing their expertise.
The lessons they shared fall into two categories – what business can learn from other companies operating in carbon markets and what governments considering market-based climate policy can learn from business.
Lessons for companies include:
- Incorporate climate change into a company’s strategy. Regulations to curb greenhouse gas emissions can affect many industries, especially those that are energy-intensive. Companies need top-level support for a comprehensive climate change strategy that leverages expertise across the company. For instance, in 1998, Shell conducted its first formal study on the potential impact of climate-related regulations on its global business. Then managing director and later CEO Jeroen van der Veer was the driving force behind the study, which built an internal case for climate action.
- Monitor, report, and verify (MRV) greenhouse gas emissions. A first step is often to build a greenhouse gas inventory. The inventory helps a company understand its direct and indirect emissions and anticipate its exposure to new carbon pricing regulation. For example, some of Rio Tinto’s units started collecting inventory emissions as far back as the mid-1990s, several years before any regulations required them to do so. Today, Rio Tinto continues to measure and report on emissions from most operations, even in jurisdictions where there is no reporting requirement.
- Identify risks and opportunities. By engaging in the policymaking process, companies can reduce uncertainty as well as identify business opportunities.
- Build knowledge and skill early. There are many ways to increase company knowledge of future carbon policies, such as participating in a voluntary offset market to understand the methodologies, rules, and processes for acquiring carbon credits. PG&E gained experience with offsets in 2007 through its ClimateSmart program. Working with the Climate Action Reserve, PG&E supported the development of several offset protocols, and some of the protocols were later adopted by California’s cap-and-trade program. These activities can also build in-house expertise, including how to handle carbon trading transactions.
Lessons for policymakers include:
- Create a predictable regulatory environment. An environment of predictability, consistency, and flexibility is key to helping companies plan with confidence.
- Introduce early emissions reporting. Introducing reporting requirements in advance of carbon pricing regulations gives companies time to build an inventory of accurate emissions data.
- Include flexible market mechanisms. Certain design features, such as offsets and the banking and/or borrowing of allowances, can provide flexibility and improve the efficiency of a new program.
- Balance stakeholder interests. Each company and sector will have its own set of interests under a carbon pricing regime. The goal is to balance different interests and find solutions that benefit society as a whole.
The lesson for both companies and policymakers is that for an emissions policy to meet government objectives in a way that is also workable for the business community, it is crucial to create an open and transparent dialogue. This dialogue is essential as more states and countries look to carbon pricing.
Almost 40 countries and more than 20 cities, states, and provinces already use carbon pricing mechanisms or are planning to implement them. South Korea launched its carbon pricing program in January. China is running pilot carbon pricing programs in seven cities and two provinces and intend to release a plan for a national program next year. South Africa will also implement a carbon pricing program next year.
More than a quarter of the U.S. population lives in a state with a price on carbon, and some states may consider the policy as a way to implement new power plant emissions standards.
Getting ahead of the curve and preparing for these programs is just sound business strategy.
The 113th Congress (2013-2014) is on track to be one of the least productive and most divided in history. No legislation explicitly mentioning climate change has been enacted into law, but more bills and resolutions related to climate change have been introduced in this Congress than in the previous one. (For brevity, we refer to all legislative proposals, including resolutions, and amendments, and draft bills, as “bills.”)
Only two bills loosely related to climate change (though not directly referencing it) have been passed and signed into law: the Disaster Relief Appropriations Act and the Hurricane Sandy Relief bill, which provided $17 billion and $9.7 billion, respectively, to cope with Sandy’s aftermath.
Of the 221 bills introduced that explicitly reference climate change or related terms, such as greenhouse gases or carbon dioxide, the majority support climate action. These focus primarily on building resilience to a changing climate, supporting the deployment of clean energy, and improving energy efficiency. A number would use some form of carbon pricing to reduce emissions.
A recent Senate hearing highlighted some of the progress U.S. communities are making, and the major challenges they face, in better coping with costly extreme weather events — including those, such as heat waves and coastal flooding, whose risks are heightened by climate change.
Sen. Tom Carper, chairman of the Homeland Security and Governmental Affairs Committee, noted that the “frequency and intensity of these extreme weather events are costing our country a lot - not just in lives impacted – but in economic costs, as well.” Nearly 130 weather-related events in 2013 caused more than $20 billion in losses in the United States.
Extreme weather is costly, not only to federal, state, and local governments, but also to businesses and individuals.
Much of the Senate testimony echoed key findings in our report, “Weathering the Storm, Building Business Resilience to Climate Change.” Three key points made at the hearing were:
A year ago, the path ahead for climate action at the federal level was murky. Congress clearly had little appetite for climate and energy legislation, and while President Obama had declared that climate change would be a priority in his second term, the details were hazy.
Heading into 2014, there is a clear direction and a credible and comprehensive plan for action. The Climate Action Plan the president announced in June outlines a wide array of steps his administration plans to take using existing authorities to reduce carbon emissions, increase energy efficiency, expand renewable and other low-carbon energy sources, and strengthen resilience to extreme weather and other climate impacts.
Given congressional paralysis, this plan is likely to be the blueprint for U.S. climate action for at least the next three years. The reaction at the United Nations climate conference last month in Warsaw showed that other countries have noticed, and are encouraged to see stronger U.S. action.
A key step in implementing the plan was the Environmental Protection Agency’s proposal in September to limit carbon emissions from new power plants. Other elements of the plan that have already seen movement include:
The first year of the 113th Congress (2013-2014) draws to a close with no passage of climate-specific legislation, but signs that some in Congress understand the importance of addressing this issue. More bills were introduced that support climate action than oppose it. (For brevity, we refer to all legislative proposals as “bills.”)
Here’s a by-the-numbers look at what Congress has done so far this term explicitly referencing climate change or related terms, such as greenhouse gases or carbon dioxide:
- 131 climate-specific bills have been introduced, surpassing the 113 introduced during the entire 112th Congress (2011-2012), and perhaps on track to match the 263 of the 111th Congress (2009-2010).
- 81 of the bills (62 percent) support climate action in some way.
- 31 bills are intended to build resilience to a changing climate, compared with nine introduced in the previous Congress.
- 30 bills have bipartisan co-sponsorship. Of these, 16 support climate action in some way.
- 25 bills, five of them bipartisan, would block or hinder the Environmental Protection Agency’s authority to regulate greenhouse gas emissions under the Clean Air Act. Two such bills have passed the House, though are unlikely to be passed by the Senate and signed into law.
- 12 of the bills supporting climate action were written by Republicans, while eight bills opposing climate action were written by Democrats, showing that climate issues don’t always fall neatly along partisan lines.
- 7 of the 16 bipartisan bills that support climate action promote energy efficiency. The bipartisan Shaheen-Portman energy efficiency bill is considered to have the best chance of enactment of any energy measure in this Congress.
- 3 bills would block or hinder federal agencies from using the social cost of carbon in federal rulemaking.
- 2 bills seek to reduce short-lived climate pollutants.