Stephen C. Fotis
Early Action and Global Climate Change: An Analysis of Early Action Crediting Proposals
Robert R. Nordhaus and Stephen C. Fotis
Eileen Claussen, Executive Director, Pew Center on Global Climate Change
The challenge of our generation will be addressing climate change while sustaining a growing economy. We need to take concrete actions to reduce emissions, both here and abroad. The sooner we begin, the more likely we are to succeed in stabilizing atmospheric concentrations at a level that will prevent dangerous anthropogenic interference with the climate.
This report, which analyzes proposals to credit early, voluntary actions to mitigate greenhouse gas emissions, is the first in a series to be published by the Center. The Pew Center was established in 1998 by the Pew Charitable Trusts to bring a new cooperative approach and critical scientific, economic, and technological expertise to the global climate change debate. Some U.S. companies have indicated support for early action programs in keeping with their desire to take immediate action to reduce greenhouse gases and their need for assurance that such actions will be rewarded and not punished.
This report addresses the issues that policy makers will face in designing a domestic early action program, analyzes current proposals, and suggests a set of principles to guide an effective program. It suggests that, regardless of any eventual international framework, the U.S. can take steps to credit reductions in gases now, and therefore encourage and reward companies that act to minimize their emissions. The longer we wait to address climate change, the more it is likely to cost—both environmentally and economically. The Pew Center concludes:
- The cost of delay is significant. Steps taken now represent an investment that will pay environmental and economic dividends into the future. Conversely, continued inaction will result in greater environmental challenges and increased costs down the line.
- U.S. Leadership is imperative. Since the U.S. has both the highest greenhouse gas emissions and per capita income, implementing a voluntary early action program demonstrates to the world our commitment to address the problem of climate change.
- Leadership must start with Congress. Congress must provide the legislative framework to encourage early action.
The Pew Center and its Business Environmental Leadership Council believe climate change is serious business. Our effort is founded on the belief that enough is known about the science and environmental impacts of climate change for us to take action now to address its consequences. Awarding credit for early action is an important first step.
The ultimate objective of the Rio Convention, which the United States ratified in 1992, is to stabilize atmospheric concentrations of greenhouse gases (ghg) at levels that will prevent dangerous anthropogenic interference with the climate system. Such stabilization will require significant reductions in ghg emissions by the United States and other countries. One mechanism proposed for encouraging U.S. companies to begin reducing ghg emissions now is an early action crediting program. Such a program would provide U.S. companies with credits for ghg reductions achieved prior to the year 2008 (i.e., before the first budget period under the proposed Kyoto Protocol) that would be usable by those companies for compliance with any future domestic ghg regulatory program.
This paper analyzes the legal, policy, and technical issues that policy makers may wish to consider in designing an early action crediting program. Although many of these issues are quite complex and cannot be fully addressed with simple and uniform crediting rules for all industry sectors, the paper attempts to formulate a set of general principles to guide policy makers in fashioning an administratively workable and effective program. The paper begins with a review of current U.S. efforts to mitigate ghg emissions through voluntary actions and programs and provides an analysis of five early action crediting proposals publicly available as of July 1998.
Voluntary GHG Mitigation Efforts in the United States. The Rio Convention's non-binding goal for developed countries was to return ghg emissions to 1990 levels by 2000. To meet this goal, the Clinton Administration developed the Climate Change Action Plan (CCAP), which outlined a portfolio of about 50 ghg mitigation actions. The plan applied to all sectors of the economy that emit ghg emissions and was intended to foster voluntary partnerships with the private sector and local governments. Generally speaking, the CCAP initiatives were designed to provide information and tools to encourage participants to voluntarily undertake physical or operational changes that will reduce ghg emissions. Although they demonstrate that industry and government can work together to achieve cost-effective ghg reductions, the CCAP initiatives have not achieved the level of reductions necessary to return U.S. emissions to 1990 levels, as contemplated by the Rio Convention.
Review of Design Issues and of Current Extant Early Action Crediting Proposals. The paper provides an analysis of the legal, policy, and technical issues raised in the early action crediting proposals developed by the Environmental Defense Fund, the Coalition to Advance Sustainable Technology, the Center for Clean Air Policy, Resources for the Future, and Niagara Mohawk Power Corporation. Key issues include the legal framework for the program, source of credits, flexibility, actions eligible for credit, and technical design of the program.
Principles for Designing An Early Action Program. Based on the review of these issues, the paper identifies the following general principles that may be useful as a guide to policy makers in fashioning a workable and effective program:
1. Provide a predictable credit mechanism and clear legal framework for the program. The principal purpose of an early action crediting program is to encourage voluntary ghg reductions in the near term. The program should provide a substantial and reliable incentive that will stimulate immediate efforts to slow down the increase of, and, ultimately, to decrease, ghg emissions levels in the United States. For such an incentive to be effective, participants must know in advance the credits they will earn for particular ghg reductions or sequestration activities and be given clear assurances that they possess a legally enforceable right to receive earned credits. Existing law does not provide the legal framework to give participants that right. For that reason, the crediting mechanism should be clearly delineated by statute or in agreements authorized by statute.
2. Keep the program simple and flexible. Any early action crediting program will be voluntary. The extent of participation in the program will depend, among other things, on whether potential participants perceive benefits of participation to exceed the costs of complying with the requirements of the program. Simplicity and flexibility are key components of minimizing transaction and compliance costs. Because of the range of potential participants, the agency administering the program will need flexibility to tailor the program to the needs and circumstances of particular industries and companies. The program will also need the flexibility to encourage innovation and reward efficiency. The best mechanism for doing this is through agreements between the participants and the government that spell out the specifics of the crediting mechanism for that participant, or industry. Model agreements for particular industries may be useful tools in this regard.
3. Reward real reductions, not gaming. An early action crediting program takes ghg credits otherwise available to U.S. companies during the initial period of domestic ghg regulation and gives them to participants in the early action program as a spur to reducing ghg emissions before that initial period. It is important that credits be used to reward real net reductions in ghg emissions, rather than paper reductions. The program needs to incorporate safeguards that give the public and other emitters confidence that the system will not be gamed.
4. Provide some form of recognition of past voluntary ghg reductions. Voluntary ghg reductions achieved between 1990 and 1998 and reported to the federal government should be recognized either in the form of a baseline adjustment or as a direct credit. It is important to maintain the principle that companies will not be disadvantaged because of prior voluntary reductions. However, the reward for past mitigation efforts should be provided only to the extent that the ghg reductions are real, quantifiable, verified, and not double-counted.
5. Don't predetermine the eventual domestic regulatory program. An early action crediting program should be designed to operate within the framework of any likely domestic regulatory or tax program that might be fashioned to control domestic ghg emissions. This includes a range of regulatory options such as carbon taxes, direct regulatory programs, and marketable permit schemes (implemented through, for example, an auction or administrative allocation of allowances).
6. Don't make the early action crediting program contingent upon ratification of the kyoto protocol. The early action program should not depend upon Senate ratification of the Kyoto Protocol in its present form. Rather, it should be designed to operate in the context of whatever international control regime may eventually be adopted and ratified by the U.S.
7. Focus principally on domestic early action. The allocation of credits to the U.S. under Kyoto or any other international agreement is an asset that should be carefully husbanded for use by the U.S. economy. For that reason, the principal but not exclusive focus of the program should be on rewarding early domestic actions to mitigate ghg emissions. There are, however, a number of circumstances where credit for actions outside the U.S. should be considered.
8. Don't over-mortgage the U.S. ghg allocation. The Kyoto Protocol, if ratified, will not provide international credit for reductions attained prior to 2008 in developed countries. Early action credits for ghg reductions within the United States thus would have to come out of the U.S. first budget allocation under the Protocol. Careful consideration needs to be given to the impact of an early action credit program on the availability of credits to non-participants once domestic regulation commences, and the extent to which credit should be given for action outside the U.S.