This blog post originally appeared on Belfer Center's An Economic View of the Environment
Cap-and-trade has been demonized by conservatives as part of an effective strategy to stop climate legislation from moving forward in the U.S. Congress. As I wrote in my previous blog post (“Beware of Scorched-Earth Strategies in Climate Debates,” July 27, 2010), this unfortunate tarnishing of market-based instruments for environmental protection will come back to haunt conservatives and liberals alike when it becomes politically difficult to use the power of the marketplace to reduce business costs in the pursuit of a wide variety of environmental objectives.
Cap and trade has gotten a bad rap. It’s been vilified as a national energy tax, an elaborate Ponzi scheme, and a giveaway to corporate polluters.
While these attacks are wrong, they succeeded in shaping the political discourse around national climate and energy policy, which undoubtedly contributed to last week’s decision by Senate leaders to delay consideration of legislation that would limit greenhouse gas emissions.
This is unfortunate. We need a national policy to reduce emissions, and, as our new white paper shows, cap and trade is still the best, most cost-effective way of doing so. When lawmakers turn their attention back to this issue — as they must — they should make cap and trade a foundational element of the policy response to climate change.
By: Janet Peace and Robert N. Stavins
There is broad consensus among those engaged in climate policy analysis—from academia, government, NGOs, and industry—that any domestic climate policy should include, at its core, market-based policy instruments targeting greenhouse gas (GHGs) emissions, because no other approach can do the job and do it at acceptable cost. By “putting a price on carbon,” market-based polices harness the power of our free enterprise system to reduce pollution at the lowest costs. Recent concern, however, about the role of financial markets—and specific fraudulent investment vehicles—in the recent recession have raised questions among the public about the efficacy and functioning of markets. Not surprisingly, some have questioned the wisdom of employing market mechanisms to tackle climate change. Critics ask, how can market-based policy instruments be trusted to look after the public’s welfare with regard to global-warming pollution (or anything else, for that matter)?
When it comes to climate change and environmental issues more generally, environmental economists recognize that the source of many problems is not markets per se, but the absence of markets for environmental goods and services, such as clean air and water. In the absence of prices (costs) associated with environmental damages, producers and consumers need not account for such damages in their activities and choices. Environmental damage is thus an unintentional byproduct of decisions to produce or consume. Because these negative consequences are external to the firm or individual creating them, economists refer to them as externalities. They are one category of market failures; in this case, the failure of existing markets to price accurately the full costs to society of producing and consuming goods that create a pollution externality.
In the case of climate change, the burning of fossil fuels and other activities that release GHGs into the atmosphere are associated with increasing global temperatures. The costs of these impacts, including an increase in extreme weather events, rising sea levels, loss of biodiversity, and other effects, are borne by society as a whole, including future generations. In the absence of a price on carbon, these environmental costs are not included in the prices of GHG-based goods—thus there is no direct cost for emitting GHG pollution into the atmosphere. From a societal perspective, this leads to an inefficient use of resources, excessive emissions, and a buildup of excess concentrations of GHGs in the atmosphere.
The current status quo or “laissez-faire” approach to dealing (or rather failing to deal) with GHG pollution results in an outcome that is not in the interest of society. For this reason, many people have advocated putting a price on GHG emissions to cause market participants to confront or “internalize” the costs of their actions and choices. A policy instrument that puts a price on GHG emissions would, for example, raise the cost of coal-generated electricity, relative to electricity generated with natural gas, because coal as a fuel emits more carbon dioxide (CO2) per unit of energy. Producers and consumers would take this relative cost differential into account when deciding how much electricity to produce and what fuels to use in producing it. That is the point — to make the cost of emitting carbon explicit, so that it becomes part of the everyday decisionmaking process.
Two alternative market-based mechanisms can be used to put a price on emissions of GHGs—cap and trade and carbon taxes. With cap and trade, an upper limit or “cap” on emissions is established. Emission allowances that equal the cap are distributed (either freely or through auction) to regulated sources which are allowed to trade them; supply and demand for these allowances determine their price. Sources which face higher abatement costs have an incentive to reduce their abatement burden by purchasing additional allowances, and sources which face lower abatement costs have an incentive to reduce more and sell their excess allowances. Thus, the government establishes the environmental goal (the cap), but the market sets the price.
In contrast, a carbon tax sets a price on emissions, but leaves the environmental outcome uncertain. The tax creates an incentive for firms to reduce their emissions up to the point where the cost of reductions is equivalent to the tax. If the tax is low, fewer reductions will result; if the tax is high, more abatement effort will be forthcoming. Given the real-world U.S. political context, the more promising of the two market-based approaches to addressing climate change is clearly cap and trade, which creates a market for GHG reductions.
While the common sense justification for putting a price on carbon emissions seems straightforward, some of the public and even some policy makers are questioning whether creating a market for GHG reductions is a cure worse than the disease itself. Some questions and concerns include the following:
- Why employ market-based approaches to GHG emission reductions, when markets are subject to manipulation?
- Would a market-based approach to reducing GHG emissions be a corporate handout?
- Can markets be trusted to reduce emissions?
- Will a market-based approach, such as cap and trade, be too costly?
- Are other approaches—including conventional regulation and taxes—likely to be more effective and less complicated?
Our goal in this paper is to address the questions above, and—we hope—leave the reader with a better understanding of the issues, the rhetoric, and the fundamental reasons why cap and trade is the most promising approach to address the threat of climate change. We believe that past concerns about how markets operate can be effectively addressed and result in a policy that is both environmentally and economically superior to alternative approaches.
By: Jessica Shipley, Solutions Fellow, Pew Center on Global Climate Change
Any climate and energy legislation will impact U.S. farmers and ranchers, and this paper examines the many legitimate concerns the agriculture sector has with such legislation. There have been a large number of economic analyses, modeling exercises, and reports published in the past several months based on an array of climate policy assumptions, and the resulting scenarios have ranged from realistic to doomsday. The results of these efforts have often been skewed or cherry-picked to support particular arguments. This brief tries to objectively assess the impacts of climate legislation and identify ways that such legislation could be shaped to provide greater opportunities for the sector. U.S. farmers have long exhibited adaptability and entrepreneurship in the face of changing circumstances, and they will be presented with a host of new markets and opportunities with the advent of climate and energy legislation.
Farmers have many reasons to be engaged participants in the climate and energy policymaking process. It is imperative that the United States take constructive action on climate and energy to maintain a leading role in the new energy economy. In shaping those actions, productive engagement by American farmers can help ensure that U.S. policy addresses their concerns and embodies their ideas. America’s farmers will be the best advocates of both the principles of a robust offset market and the creation of other market and renewable energy opportunities.
Key takeaways from this brief are:
- American farmers and industry will face greenhouse gas limitations regardless of what happens in the legislative and regulatory process. Market-driven requirements from the private sector (e.g. Walmart), regulation by the U.S. Environmental Protection Agency (EPA), state or regional programs, and nuisance lawsuits will continue to require greenhouse gas (GHG) emissions to be reduced going forward. Legislation can simplify requirements on business, provide incentives and new markets for farmers, and provide mechanisms to lower the risks and costs to all sectors of the economy. In fact, without legislation, the piecemeal nature of GHG limitations will likely result in a worse outcome for farmers.
- Costs to farmers from GHG legislation can be substantially mitigated by cost-containment mechanisms. Though there is potential for increased costs (namely energy and fertilizer input costs) to farmers, mechanisms potentially available in legislation can significantly minimize price volatility and cost impacts to farmers and the economy as a whole, even though not all these can be adequately reflected in economic modeling.
- The opportunities for farmers to realize a net economic gain from climate legislation are significant. Offsets, biofuel and biopower, renewable power, and the ability to receive payments for multiple environmental benefits from well-managed working farmlands are among the new potential opportunities. The key to making this a reality is climate and energy policy that is shaped by the agriculture sector and farmers themselves.
- Climate change and resulting weather patterns pose numerous risk management concerns for agriculture. The strong scientific evidence behind climate change should concern farmers because of the significant new risks climate change poses to farmland and the rate at which those risks are increasing.
Companies that make everything from computer chips to potato chips, search engines to jet engines, rubber tires to rubber soles, have stepped up this year to publicly support passage of comprehensive clean energy and climate change legislation. Why are companies calling for increased regulation? Isn’t that akin to a teenager arguing for an earlier curfew, or a second grader demanding an end to recess?
Actually, no. The days when businesses could be counted on to reflexively oppose all environmental regulations are over, and that’s a good thing. Nowhere is this shift more evident than in the case of climate change policy. American Business for Clean Energy tracks nearly 6,000 businesses, both large and small, that support energy and climate legislation. Dozens of companies, representing trillions of dollars in revenue, have signed on to letters and paid advertisements calling for prompt action on such legislation. These companies have determined that a clear and consistent national framework to begin reducing emissions is good for the economy and good for their industries. Our new brief, The Business Case for Climate Legislation, details the reasons why.
This briefing will be held at two separate times and locations to accommodate House and Senate staff.
Wednesday, June 30
12:00 Noon to 1:30 PM
Rayburn House Office Building, Room 2325
3:30 to 4:45 PM
Capitol Visitors Center, Room SVC 202
Seasonal forecasters predict that 2010 will produce between 14 and 23 named hurricanes -- the most active season since 2005, when Hurricane Katrina and 27 other named storms swept the Atlantic and Gulf of Mexico. As economic challenges continue and oil spews from the damaged Deepwater Horizon well in the Gulf, the growing impacts to the region's economic recovery and unique ecosystems are staggering. What risks does an active hurricane season pose for other energy-related infrastructure, for inland areas as storm surges push oil beyond beaches and marshland, and for stakeholders dealing with flooding in coastal communities in the Gulf and along the East Coast? Can recent advances in hurricane prediction help manage these risks? Might related climate change impacts exacerbate them in the future? What does an increasing scale of catastrophic loss associated with hurricane activity mean for critical services provided by the insurance sector? Please join our panelists as they address these questions and discuss research results, institutions, and processes in place to help manage potential catastrophic risk of this hurricane season.
Opening remarks by Senator Mary Landrieu, Honorary Host (3:30pm briefing only)
- Heidi Cullen
CEO and Director of Communications, Climate Central
- Greg Holland
Director, NCAR Earth System Laboratory, National Center for Atmospheric Research
- Rick Luettich
Professor & Director, Institute of Marine Sciences, University of North Carolina at Chapel Hill
- Rowan Douglas
CEO, Global Dynamics, Willis Re and Chairman, Willis Re Research Network
RSVP to Gloria Kelly at email@example.com or (303) 497-2102 by Monday, June 28
Sponsored by the American Geophysical Union (AGU), the Congressional Hazards Caucus Alliance, the National Science Foundation (NSF), the Pew Center on Global Climate Change, the University Corporation for Atmospheric Research (UCAR), and the Weather Coalition.
With appreciation to the House Committee on Science and Technology and the Senate Subcommittee on Disaster Recovery of the Committee on Homeland Security and Governmental Affairs.
June 23, 2010
By Eileen Claussen and Jim Rogers
This op-ed first appeared in Politico.
Passing a meaningful energy and climate bill this year will be challenging — but not impossible.
It’s time for all of us — politicians, business leaders and environmentalists — to put wishful thinking aside, establish realistic goals and develop a consensus for legislation that can be passed this year.
If that means capping emissions from the utility sector first — so be it. There is growing consensus in the electric utility industry to act now, so let’s move forward.
Duke Energy and other electric utilities are already scheduled to retire and replace virtually all coal and other large power plants with cleaner and more efficient technologies by 2050.
A clear and predictable federal energy and climate policy can accelerate these projects and put private capital to work more rapidly. It can also create millions of jobs.
This would not only reduce greenhouse gas emissions but would also reduce sulfur dioxide, nitrogen oxide and mercury emissions, which contribute to acid rain, smog and other health issues. That would improve air quality across the board.
At Duke Energy, approximately 6,000 people are now working on designing and building more advanced power plants. That’s quite an economic stimulus.
When their work is done, permanent jobs would be created, municipal and county tax collections would increase and old and inefficient power plants would be shut down.
With the right signal from Washington, the company can by 2020 close roughly 4,000 megawatts of coal plants more than 45 years old.
This action will drive greater use of cleaner, domestic energy sources that will enhance our nation’s security and limit pollution.
Sensible policy should include incentives for new emissions-free nuclear power, renewable energy and carbon capture and storage for coal plants. It must also clarify federal emissions regulations so electric utilities can shift to cleaner and more efficient power plants without the uncertainty of patchwork regulatory approaches and the threat of litigation.
Electric utilities have some of the strongest balance sheets in industry. They can now borrow private capital at historically low rates. For example, over the past 2½ years, Duke Energy has borrowed $8 billion at an average rate of less than 5.5 percent.
This means lower long-term costs to electric consumers — with no increase in the national debt and deficit.
But this will all take time. We need to be willing to adopt the three C’s: commitment, collaboration and compromise.
Commitment: We have to be in this together — for the long haul. Good energy and climate policies will allow the electric utility industry to make sound investment decisions.
Electric utilities may be willing to go first. But they are not going to be willing to go alone.
Collaboration: All successful environmental legislation has been predicated on a collaborative and bipartisan approach. The 1990 Clean Air Act amendments, designed to reduce acid rain, urban air pollution and toxic air emissions, passed the House by a 401-21 vote and the Senate by a 89-11 vote.
That process of working together to find common ground among diverse stakeholders is what we need now.
Compromise: Collaboration succeeds only when there’s a real spirit of compromise. That’s why it is the cornerstone of our democracy. There must be give-and-take at every decision point.
Current clean energy and climate legislation is not an all-or-nothing proposition. It’s a work in progress that can begin our transition to a clean energy future. We need to look past our differences and act where there is agreement.
It’s time to get started.
Eileen Claussen is president of the Pew Center on Global Climate Change. Jim Rogers is chairman, president and CEO of Duke Energy.
June 17, 2010
Contact: Tom Steinfeldt, 703-516-4146
New Analysis Shows Broad Business Support for National Clean Energy and Climate Legislation
Pew Center on Global Climate Change Explains the Business Case for Action
Washington, D.C. – An unprecedented number of businesses are supporting passage of clean energy and climate legislation, a development that greatly improves the chances of a meaningful bill advancing through Congress this year. In a new analysis, the Pew Center on Global Climate Change examines the factors driving this business support and finds that leaders from a diverse collection of industries believe passing clean energy and climate change legislation is better for the economy and their businesses than maintaining the federal policy stalemate.
“A growing number of companies – both major corporations and small businesses – are calling on Congress to pass clean energy and climate legislation this year,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “Putting a price on carbon will provide the business community the certainty it needs to innovate, drive the creation of new jobs, and stimulate economic growth. We have an opportunity this year to put in place the foundation for a more secure energy future for the United States.”
In The Business Case for Climate Legislation, the Pew Center identifies three key reasons why leading companies have decided that legislation to limit greenhouse gas (GHG) emissions is good for their industries.
- The need for regulatory certainty
- The economic opportunities arising from climate solutions
- The reputational benefits of supporting public policies that combat climate change
Companies supporting federal clean energy and climate legislation have made a simple determination: the presence of a coherent national policy is better for the economy and their business than the status quo. Put another way, the absence of clear regulatory rules of the road creates uncertainty, which restricts sustained economic growth and is an obstacle to the development of new markets and business opportunities.
Without effective legislation, the U.S. risks missing huge economic opportunities in the hundred-billion-dollar global clean energy technology market, according to the Pew Center analysis. These opportunities will instead fall to foreign competitors like China and European countries. Thus, a growing number of U.S. businesses have made the decision that clean energy and climate legislation is the right approach for our economic and environmental future.
The Business Case for Climate Legislation can be accessed online at http://www.c2es.org/publications/brief/business-case-for-climate-legislation.
For more information about global climate change and the activities of the Pew Center, visit www.c2es.org.
# # #
The Pew Center on Global Climate Change was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
In recent years, leading businesses have emerged as some of the strongest advocates for passage of national climate and energy legislation that mandates reductions in greenhouse gas (GHG) emissions. While many have cheered this business engagement, others have been left confused and at times suspicious of why businesses would support such a policy.
In many ways, the confusion is understandable. Environmental politics in this country have often pitted business interests against environmental advocates in a binary struggle over the need for new or more stringent regulations. But today, major corporations cutting across a range of industries are allying themselves with nongovernmental organizations (NGOs), unions, national security hawks, and even religious groups to urge enactment of legislation that requires reductions in GHG emissions. To some observers on the left and the right, business backing for new legislation is a foreign, if not completely counterintuitive, concept, and the strange bedfellows of the climate change issue have left many scratching their heads.
This is partly because climate change is not strictly an environmental issue. Instead, it is a multi-faceted problem, encompassing national security, international diplomacy, and most crucially for business, economic policy. On a fundamental level, the companies supporting climate and energy legislation have made a simple determination: the presence of a coherent national policy is better for the economy and their business than the status quo. Put another way, the absence of such a policy creates uncertainty, which is a hindrance to sustained economic growth and an obstacle to the development of new markets and business opportunities.
This brief lays out the business case for national climate and energy policy, and explains why leading companies have decided that legislation that limits GHG emissions is good for their industries. While the details of individual companies’ policy positions will vary based on their own specific circumstances, broadly speaking there are three main reasons businesses support legislation that addresses climate change:
The need for regulatory certainty. Most companies understand that some form of climate policy is inevitable, but they do not know exactly what it will look like or what will be required of them. Today, when businesses look to the horizon they see an uneasy mix of evolving state and regional climate programs and burgeoning U.S. Environmental Protection Agency (EPA) regulations. It is unclear how these policy initiatives will unfold and interact with one another. This creates uncertainty, which hobbles business planning, especially for industries, such as electric utilities, that build and operate long-lived, capital-intensive assets. A clear, long-term, legislative framework for reducing GHG emissions would alleviate much of this uncertainty, allowing for more intelligent business planning.
The economic opportunities arising from climate solutions. Clean energy is projected to be one of the great global growth industries of the 21st century. Policy support can accelerate growth in these industries, and help U.S. companies compete against foreign firms that are quickly establishing dominant positions in these important markets.
The reputational benefits of supporting public policies that combat climate change. Customers, shareholders, employees, and other stakeholders are increasingly pushing companies to demonstrate social responsibility and environmental stewardship. For many companies, support for mandatory policies that promote clean energy, improve energy efficiency, and reduce GHG emissions has become an important plank in their broader corporate social responsibility (CSR) agendas.
Some companies are driven by all three of these reasons, while others are compelled by just one or two of them. Regardless of the specific reasons, one thing is clear: more companies today support climate legislation than ever before. Companies that make everything from computer chips to potato chips, search engines to jet engines, rubber tires to rubber soles, have publicly stated their support for legislation that caps carbon dioxide (CO2) emissions (see “Leadership Ad” for a list of some of these companies). Trade associations representing electric utilities and auto manufacturers are on record supporting national climate policy. The remainder of this brief provides additional detail on why this is the case.
Listening to opponents of clean energy and climate legislation and their predictions of American economic ruin if we try to reduce greenhouse gas pollution, you could scarcely imagine that even one business would be crazy enough to support energy and climate policy. Yet today, a group of 60 leading organizations and businesses representing over $1.2 trillion in revenue and over 1 million American employees sent a letter to the President and the Senate proving that idea wrong. These groups collectively said:
“The time to act is now. The U.S. needs a comprehensive energy and climate policy that will get us back on track by creating American jobs in the new, low-carbon economy…We face a critical moment that will determine whether we will be able to unleash homegrown American innovation or remain stuck in the economic status quo. Much as the transcontinental railroad ushered in an unprecedented era of expansion, innovation and economic growth, the transition to a diversified clean energy economy offers extraordinary opportunities for environmental and economic rewards. Americans need and deserve a comprehensive energy and climate policy and we urge you to take action without delay…It’s time for Democrats and Republicans to unite behind bipartisan, national energy and climate legislation that increases our security, limits emissions, and protects our environment while preserving and creating American jobs.”