Business

Capital Cycles and the Timing of Climate Change Policy

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Capital Cycles and the Timing of Climate Change Policy

Prepared for the Pew Center on Global Climate Change
October 2002

By:
Robert J. Lempert, Steven W. Popper, and Susan A. Resetar, RAND
Stuart L. Hart, Kenan-Flagler Business School, University of North Carolina at Chapel Hill

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Patterns of capital investment by businesses can have a major impact on the success and cost-effectiveness of climate change policies. Due to the high cost of new capital, firms often are reluctant to retire old facilities and equipment. Thus, capital investment decisions made today are likely to have long-term implications for greenhouse gas (GHG) emissions. Because businesses consider a range of factors when making capital stock decisions, policy-makers need to understand and focus on these factors in order to craft effective climate change policies.

The Pew Center commissioned this report to gain an understanding of the actual patterns of capital investment and retirement, or “capital cycles.” Authors Robert Lempert, Steven Popper, and Susan Resetar of RAND, with Stuart Hart of the Kenan-Flagler Business School at UNC-Chapel Hill combine analysis of the literature on investment patterns with in-depth interviews of top decision-makers in leading U.S. firms. Their work provides important insights into the differing patterns of capital investment across firms and sectors, and what factors spur those investments.

The authors found that capital has no fixed cycle. In reality, external market conditions often drive a firm’s decision whether to invest or disinvest in large pieces of physical capital stock, and a firm often invests in new capital only to capture new markets. In the absence of policy or market incentives, expected equipment lifetimes and the availability of more efficient technologies are not significant drivers of capital stock decisions. With regular maintenance, capital stock often lasts decades longer than its rated lifetime, and the availability of new technology rarely influences the rate at which firms retire older, more polluting plants.

The authors suggest certain policies that can stimulate more rapid turnover of existing capital stock. These include putting in place early and consistent incentives that would assist in the retirement of old, inefficient capital stock; making certain that policies do not discourage capital retirement; and pursuing policies that shape long-term patterns of capital investment. For example, piecemeal regulatory treatment of pollutants rather than a comprehensive approach could lead to stranded investments in equipment (e.g., if new conventional air pollutant standards are put in place in advance of carbon dioxide controls at power plants). The authors also note that even a modest carbon price could stimulate investment in new capital equipment. Ultimately, any well-crafted policy to address climate change must consider and harness market factors and policies that drive capital investment patterns.

The authors and the Pew Center wish to acknowledge members of the Center’s Business Environmental Leadership Council, as well as Byron Swift, Ev Ehrlich, Mark Bernstein, Debra Knopman, Alan Sanstad, and David Victor for their advice and comments on previous drafts of this report. We also thank the individuals who gave their time in interviews with the project team.

Executive Summary

One important source of climate-altering greenhouse gas (GHG) emissions is the capital equipment that supports the world’s economic activity. Capital stock, such as electricity generation plants, factories, and transportation infrastructure, is expensive and once built can last for decades. Such capital also presents important and conflicting constraints on policy-makers attempting to reduce society’s GHG emissions. On the one hand, attempts to reduce emissions too quickly may create a drag on the economy if they force the premature retirement of capital. On the other hand, delaying reductions may raise the cost of future actions because the facilities built today can still be polluting decades from now.

This report aims to help policy-makers navigate between these conflicting tensions by providing an understanding of the actual patterns of capital investment and capital retirement and the key factors that affect these patterns. “Capital cycles” have been studied extensively in the empirical and theoretical literature. Nonetheless, the topic remains poorly understood in the debates over climate change policy. In part, there are few good summaries available of the voluminous and complex literature. In addition, the differing patterns of capital investment across firms and sectors can have important implications for climate change policy. Such heterogeneity is not well-captured by the existing theoretical and empirical literature.

This report begins with a brief overview of the existing theoretical and empirical literature on capital cycles. It then turns to its main focus—the results of a small number of in-depth interviews with key decisionmakers in some leading U.S. firms. In the course of the study, nine interviews, designed to illuminate the key factors that influence firms’ capital investment decisions, were conducted with firms in five economic sectors. The firms interviewed are mostly members of the Center’s Business Environmental Leadership Council (BELC). Based on the information gathered during the interviews, this report closes with some observations regarding the implications for the timing of climate change policy.

This is a small study with limited scope. Nonetheless, several consistent and clear findings emerged from the firm interviews:

Capital has no fixed cycle. Despite the name, there is no fixed capital cycle. Rather, external market conditions are the most significant influence on a firm’s decision to invest in or decommission large pieces of physical capital stock. In particular, firms strive to invest in new capital only when necessary to capture new markets. Firms most commonly retire capital when there is no longer a market for the products they produce and when maintenance costs of older plants become too large.

Capital investments may have long-term implications. Today’s capital investment decisions can have implications that extend for decades. Capital stock is expensive, and firms often have little economic incentive to retire existing plants. The environmental performance of capital stock is not fixed over time and can improve as a firm makes minor and major upgrades. Nonetheless, there are limits to such upgrades, so that investment decisions made today may shape U.S. GHG emissions well into the 21st century.

Equipment lifetime and more efficient technology are not significant drivers in the absence of policy or market incentives. It is often assumed that the engineering and nominal service lifetimes of physical equipment are important determinants of the timing of capital investment. The phrase “capital cycle” derives at least in part from the notion that capital equipment in each sector has some fixed lifetime, which drives the industry’s capital investment decisions. This study finds that the physical lifetime of equipment does drive patterns of routine maintenance in different economic sectors, but it appears to be a less significant driver of plant retirement or for investment in new facilities. With regular maintenance, capital stock can often last decades longer than its rated lifetime.

In addition, discussions of climate change policy often highlight the potential of new technology to enable low-cost reductions in GHG emissions. This study finds that however beneficial such technology may be, it will likely have little influence on the rate at which firms retire older, more polluting plants in the absence of policies promoting technology or requiring emissions reductions. New process technology, that is, technology that improves the efficiency and cost-effectiveness of a factory or power plant, requires performance improvements of an exceptional magnitude to induce a firm to retire existing equipment whose capital costs have already been paid. Firms do adopt new process technology, but only when other factors, particularly changes in demand for their products or regulatory requirements and other government policies, drive them to invest in new capital stock.

Firms focus investment towards key corporate goals. Although manifested differently across firms and economic sectors, all the firms we interviewed followed the same basic decisionmaking process for capital investment. Each year a firm’s leadership allocates the funds available for capital investment—first to must-do investments, then to discretionary investments. The former are required to maintain equipment and to meet required health, safety, and environmental standards. The latter are prioritized according to their ability to address key corporate goals. In particular, firms’ capital investment is often driven by the desire to capture new markets. Uncertainty was a recurring theme in all our interviews. Capital investment decision processes are shaped by the desire to reduce the potential regret due to adverse or unforeseen events over the long lifetime of capital stock.

These results are based on interviews with a small number of firms and are by no means definitive. Nonetheless, they suggest that climate policy should combine modest, near-term efforts to reduce emissions and more aggressive efforts to shape capital investment decisions over the long term. In particular:

The long lifetime of much capital stock may slow the rate at which the United States can obtain significant GHG emission reductions. Firms are often reluctant to retire capital and attempts to force them to do so on a short-term timetable can be costly. Sporadic and unpredictable waves of capital investment make it more difficult for climate policy to guarantee low-cost achievement of fixed targets and timetables for GHG emissions reductions. Reductions may be more rapid during periods of significant capital turnover and less rapid otherwise.

Policy-makers should consider early and consistent incentives for firms to reduce GHGs. Incentives ranging from early action credits to emissions trading can take advantage of those rare times when firms make major investments in new capital. Relatively low-cost opportunities for GHG emissions reductions are often available during such periods of investment. This analysis suggests that introducing a relatively low carbon price could serve as a consistent incentive to reduce GHG emissions.

Policy-makers should avoid regulations and other rules that discourage capital retirement. The retirement of older facilities often provides the opportunity for low-cost deployment of new, emissions-reducing technologies. The grandfathering provisions of the Clean Air Act and other environmental regulations may delay the retirement of older plants by exempting them from the environmental regulations governing new plants. At the same time, regulations governing some pollutants may provide an opportunity to address GHGs simultaneously while these investments are being made.

Policy-makers should pursue policies that shape long-term patterns of capital investment. While policy may only make small perturbations in near-term decisions regarding the composition of U.S. capital stock, over the long term, policy may significantly shape the market forces and opportunities perceived by firms. Government-sponsored research and development on new, emissionsreducing technologies and policies such as a cap-and-trade program may have a profound effect on the direction of long-term investments in new capital stock. Overall, the dynamics of capital investment and retirement suggest that policy-makers can set ambitious long-term climate goals, but should allow firms a great deal of flexibility in the timing with which they will respond to them.

Robert J. Lempert
Steven W. Popper
Stuart L. Hart
Susan A. Resetar
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Press Release: SC Johnson Joins Pew Center's Business Environmental Leadership Council

For Immediate Release:  
June 24, 2002

Contact: Katie Mandes
703-516-4146

SC Johnson Joins Effort To Mitigate Climate Change - Pew Center's Business Environmental Leadership Council Climbs to 38 Members

Washington, D.C.-The Pew Center on Global Climate Change today announced that SC Johnson has joined the organization's efforts to battle global climate change.

The Pew Center established the Business Environmental Leadership Council (BELC) with 13 members in May 1998. The addition of SC Johnson brings the BELC's total membership to 38 companies. SC Johnson, the first and only consumer packaged goods company in the BELC, has committed to reduce its greenhouse gas emissions by 5 percent per year through 2005. Based in Racine, Wisconsin, with annual revenues of nearly $5 billion, the company is a leading manufacturer of household products including Windex®, Pledge®, and Ziploc®.

Members of the BELC are committed to take steps in their domestic and foreign operations to assess their greenhouse gas emissions and establish programs to reduce those emissions. The BELC considers the Kyoto Protocol a first step in global efforts to mitigate climate change and supports the development of market-based mechanisms as called for in the Kyoto Protocol.

The BELC includes many Fortune 500 companies in a diverse group of industries including energy, chemicals, metal, consumer appliances and high technology. These companies do not contribute financially to the Pew Center, which is supported solely by contributions from charitable organizations.

"These companies understand that the world cannot avoid dealing in a serious way with climate change," said Eileen Claussen, President of the Pew Center. "An important aspect of SC Johnson's philosophy is its dedication to reducing emissions from its operations," said the Pew Center's Claussen. "SC Johnson's decision to join the Pew Center demonstrates their commitment to this important issue and we look forward to working with them."

The other members of the BELC are: ABB; Air Products and Chemicals; Alcoa; American Electric Power; Baxter International; Boeing; BP; California Portland Cement Co.; CH2M HILL; Cinergy Corp.; Cummins Inc.; Deutsche Telekom; DTE Energy; DuPont; Entergy; Georgia-Pacific; Hewlett-Packard Company; Holnam; IBM; Intel; Interface Inc.; John Hancock Financial Services; Lockheed Martin; Maytag; Novartis; Ontario Power Generation; PG&E Corporation; Rio Tinto; Rohm and Haas; Royal Dutch/ Shell; Sunoco; Toyota; TransAlta; United Technologies; Weyerhaeuser; Whirlpool; and Wisconsin Energy Corporation.

For more information about global climate change and the activities of the Pew Center and the BELC, visit www.c2es.org.

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The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is conducting studies, launching public education efforts and working with businesses to develop market-oriented solutions to reduce greenhouse gases. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. The Pew Center includes the Business Environmental Leadership Council, which is composed of 36 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.

Press Release: Pharmaceuticals Industry Leader Teams With Other Top Businesses To Combat Climate Change

For Immediate Release:  
March 18, 2002

Contact: Katie Mandes, 703-516-4146 or
Sheldon Jones, 212-830-2457

Pharmaceuticals Industry Leader Teams With Other Top Businesses To Combat Climate Change

Washington, D.C.- Novartis is the latest major company to join a business coalition whose members are committed to decisive action to address the consequences of global climate change. With 71,000 employees and annual sales of more than $19 billion, Novartis, one of the world's leading healthcare companies, becomes the 37th member of the Business Environmental Leadership Council (BELC), a project of the Pew Center on Global Climate Change.

"Novartis has chosen to be a part of the solution. As a leader in healthcare, and now a leader on this critical issue, Novartis is sending a signal that market based solutions will be the way to solve this critical global issue," said Eileen Claussen, President of the Pew Center on Global Climate Change. "Together with the other members of the Business Environmental Leadership Council, Novartis is showing that success in the marketplace can go hand in hand with success in addressing the most important global environmental challenge of the 21st century."

In 2000, Novartis announced that it would voluntarily reduce its CO2 emissions by three per cent over three years. Novartis (NYSE: NVS, see also, www.novartis.com.) is a world leader in healthcare with core businesses in pharmaceuticals, consumer health, generics, eye-care, and animal health, and operates in over 140 countries around the world. Kaspar Eigenmann, Novartis' Global Head of Health, Safety & Environment, had the following comment about Novartis' commitment to the Business Environmental Leadership Council:

Novartis is very pleased to have the opportunity to join the other leading companies in working with the Pew Center on Global Climate Change. Our membership in the Pew Center's Business Environmental Leadership Council, like our recent endorsement of the UN Global Compact, is part our overall commitment to Corporate Citizenship. We believe that this association will help Novartis achieve its goal of reducing CO2 emissions, and complements the more broad goal set forth in our new Policy on Corporate Citizenship, to "do everything we can to operate in a manner that is sustainable: economically, socially, and environmentally - in the best interest of long-term success for our enterprise."

The Business Environmental Leadership Council was established by the Pew Center in 1998. Its members include major, largely Fortune 500 companies from a diverse group of industries. What the BELC members share is a belief that we know enough about the science of climate change to begin taking reasonable steps now to protect the climate. Acting individually and collectively, these companies are demonstrating that it is possible to take action to address climate change while sustaining global economic growth.

The members of the BELC include: ABB, Air Products and Chemicals, Alcoa, American Electric Power, Baxter International, Boeing, BP, California Portland Cement Co., CH2M HILL , Cinergy Corp., Cummins Inc., Deutsche Telekom, DTE Energy, DuPont, Entergy, Georgia-Pacific, Hewlett-Packard Company, Holcim, IBM, Intel, Interface Inc., John Hancock Financial Services, Lockheed Martin, Maytag, Novartis, Ontario Power Generation, PG&E Corporation, Rio Tinto, Rohm and Haas, Royal Dutch/Shell, Sunoco, Toyota, TransAlta, United Technologies, Weyerhaeuser, Whirlpool, and Wisconsin Energy Corporation.

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The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is conducting studies, launching public education efforts and working with businesses to develop market-oriented solutions to reduce greenhouse gases. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. The Pew Center includes the Business Environmental Leadership Council, which is composed of 36 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.

The Emerging International Greenhouse Gas Market

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The Emerging International Greenhouse Gas Market

Prepared for the Pew Center on Global Climate Change
March 2002

By:
Richard Rosenzweig, Matthew Varilek, Ben Feldman, and Radha Kuppalli of Natsource, LLC

Josef Janssen, University of St. Gallen

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

As businesses, policy-makers, and other stakeholders around the world have become familiar with greenhouse gas emissions trading, it has emerged as the policy of choice to address climate change. Now—with the recent agreements in Bonn and Marrakech, with new carbon trading systems in Europe, and with private sector interest and activity across many economic sectors both here and abroad—we are beginning to see the outlines of a genuine greenhouse gas market.

In this Pew Center report, authors Richard Rosenzweig, Matthew Varilek, Josef Janssen et al. describe the various public and private programs under which many early trades have occurred, the characteristics of the emerging market including the key features of early transactions, and the potential evolution of the market given the concurrent development of domestic and international climate change policy. Case studies of actual trades between four power companies—TransAlta and HEW, and PG&E and Ontario Power Generation—help illustrate leading companies’ motivations for engaging in trading, as well as the challenges they have faced in the absence of clear guidelines in the nascent market.

Despite the impressive interest in greenhouse gas trading, the market that has developed thus far remains fragmented. For example, as originally proposed, the trading regimes put forth by the United Kingdom and the European Union differ in important respects: the former is voluntary and the latter is not; the former covers the full basket of six greenhouse gases while the latter is restricted to carbon dioxide. This results in higher transaction costs just as the market is getting off the ground. The challenge ahead, for business, policy-makers, and others, is to work together to help forge linkages between the emerging regimes, and ultimately to achieve convergence.

I am optimistic that we can meet this challenge. We are beginning to see the first glimmers of interest in the U.S. Congress, although the debate is expected to be long and difficult. Perhaps more encouraging are private sector efforts to build a greenhouse gas trading system, such as the Chicago Climate Exchange. Also, many companies have set up their own internal trading systems to “learn by doing,” and have been eager to participate in early trades. The need for certainty, for consistency, and for a level playing field all will work to encourage a merging of regimes. Policy-makers must do their best to ensure that all systems are compatible.

The authors and the Pew Center would like to thank the companies featured in this report for sharing their experiences and perspectives, and acknowledge the members of the Center’s Business Environmental Leadership Council, as well as Aldyen Donnelly of GEMCo; Erik Haites of Margaree Consultants; Richard Sandor of Environmental Financial Products, L.L.C.; and Tom Wilson of EPRI for their review and advice on a previous draft of this report. 

Executive Summary

A market for greenhouse gas (GHG) emissions has begun to emerge over the past five years. This market is driven in large part by ongoing negotiations of an international global climate change treaty, which will likely impose limitations on GHG emissions. The market has been shaped by successful emissions trading programs established over the past decade, such as the sulfur dioxide (SO2) trading program incorporated in the U.S. Clean Air Act Amendments (CAAA) of 1990.

This paper describes: (1) programs and initiatives that have provided a framework for early trades and policy development; (2) characteristics of the emerging GHG market and key features of early transactions; (3) potential evolution of the market due to ongoing concurrent domestic and international climate change policy development; and (4) potential scenarios regarding the U.S. response to climate change.

Origins

Greenhouse gas trading has its origins in the United Nations Framework Convention on Climate Change (UNFCCC). Adopted in Rio de Janeiro, Brazil, in 1992, the UNFCCC established the goal for industrialized countries to return to their 1990 GHG emissions levels by the year 2000 and a long-term objective of stabilizing atmospheric concentrations of greenhouse gases “at a level that would prevent dangerous anthropogenic interference with the climate system.” In 1995, the Parties reviewed their progress and concluded that the non-binding goal would not lead to the achievement of the Convention’s objective of atmospheric stabilization. In response, Parties agreed to pursue a complementary agreement that would establish quantified emissions limitations and reduction obligations for developed countries. This culminated in the negotiation of the Kyoto Protocol in December of 1997.

The process to develop rules, mechanisms, and institutions necessary to bring the Protocol into force is ongoing, including the seventh Conference of Parties (COP-7), held in Marrakech, Morocco, during November of 2001. Though significant progress was achieved there and in previous negotiations, the Protocol has not yet entered into force, and few national governments have imposed limitations on domestic GHG emissions or established trading rules. Thus, the GHG market is evolving under a loosely constructed, ad hoc framework. To date, it has evolved from a variety of mostly project-based emissions trading programs, which have been voluntary in nature and which collectively serve as precursors to formal GHG regulation. More recently, the United Kingdom and Denmark have developed national regulatory programs.

Project-Based Programs

The UNFCCC allows industrialized countries to meet their emissions reduction commitments “jointly with other Parties” through a form of project-based emissions trading. This program became known as Joint Implementation (JI). Subsequent programs have provided practical experience with key aspects of project-based emissions trading. These programs and initiatives include the U.S. government’s Initiative on Joint Implementation (USIJI); the pilot phase of international project-based emissions trading known as Activities Implemented Jointly (AIJ); Ontario, Canada’s multi-stakeholder Pilot Emissions Reduction Trading program (PERT); Oregon’s Climate Trust; the Dutch government’s Emission Reduction Unit Procurement Tender (ERUPT); and the World Bank’s Prototype Carbon Fund (PCF), among others.

Each of these programs is governed by a unique set of rules. However, they exhibit some common elements that constitute a de facto (though non-binding) set of minimum quality criteria that govern the creation of credible emissions reductions. These common elements include: (1) establishment of a credible counterfactual emissions baseline; (2) proof of environmental additionality; (3) evidence that the reductions are surplus to existing regulatory requirements; (4) proof of permanence or durability of the reductions; (5) demonstration that the emissions-reducing project will not cause emissions to increase beyond the project’s boundaries (referred to as “leakage”); (6) establishment of credible monitoring and verification procedures; and (7) proof of ownership of the reductions.

Market Characteristics

Even though few sources of GHG emissions presently confront binding emissions limitations, a growing number of companies and governments have begun to purchase reductions generated in most part by the programs described above. Few trades of GHG emissions to date have involved an exchange of emissions permits such as “allowances” or “credits,” since these terms refer to government-issued commodities that only exist within the context of formal trading systems. Most GHG trades have taken place under a voluntary ad hoc framework involving a commodity defined by the trade’s participants and known commonly as verified emissions reductions (VERs). These carry only the possibility, but not a guarantee, that governments will allow them to be applied against future emissions reduction requirements.

The authors estimate that approximately 65 GHG trades for quantities above 1,000 metric tons of carbon dioxide equivalent (CO2e)1 have occurred worldwide since 1996. This figure includes trades of reductions as well as financial derivatives based on reductions. However, the figure probably understates actual market activity because not all trades are made public, and internal corporate trades and small trades are excluded. It is important to note also that this figure refers to purchases of emissions-related commodities and excludes countless investments in projects that either purposely or incidentally reduce GHG emissions. Prices for VERs have ranged between $.60 and $3.50 per metric ton of CO2e. Some of the price differentials between trades can be explained by differences in the features of the reductions such as their type and vintage, geographical location, and the rigor of the monitoring and verification procedures. Other factors that affect reductions’ commercial value include contractual liability provisions, seller creditworthiness, and demonstration of host country approval of the emissions-reducing project.

Two case studies provide a detailed look at actual GHG trades in this market, illustrating some of the challenges and benefits of early GHG trading as described by market participants. The first case study reviews a purchase of VERs by TransAlta, a Canadian electric utility, from HEW, a German utility. HEW generated reductions by displacing some of its fossil fuel-based generation with electricity generated by wind. The second case study examines a purchase of VERs by Ontario Power Generation, a Canadian utility, from US Gen, a subsidiary of the U.S.-based PG&E National Energy Group. US Gen created reductions by capturing and destroying methane produced at a landfill. Both case studies demonstrate that while participants benefited from these early GHG trades, the lack of clear trading rules has increased transaction costs and been a significant impediment to the development of a more robust GHG market.

National Trading Programs

Several governments have moved forward in designing domestic trading systems while international trading rules remain under development. At the national level, the United Kingdom and Denmark have each established domestic emissions trading programs. Some trading in these programs has already begun. The European Union (EU) and other countries are in various stages of domestic policy development. At the sub-national level, the state of Massachusetts, for example, will require reductions of carbon dioxide (CO2) emissions from power plants and will allow sources to use trading as a means of compliance.

The development of these and other trading programs demonstrates that emissions trading has gained acceptance as a preferred policy instrument in the world’s efforts to reduce GHG emissions. These programs will boost GHG trading activity and motivate more rapid emissions abatement than if governments had waited for the international community to conclude negotiation of the Kyoto Protocol. Already, the initiation of these programs is producing a shift in the commodity that market participants prefer to trade. Some buyers’ interest is starting to shift away from VERs, whose eligibility for use as a hedge against binding emissions limitations is uncertain. Interest is beginning to shift towards government-issued permits created by the programs, which are by definition eligible for use against an emissions limitation in their jurisdiction of origin. Permits also stand a superior chance of being transferable into foreign jurisdictions for purposes of compliance.

Significant benefits have and will result from the current development of domestic trading systems. However, some adverse impacts have also resulted from the concurrent development of international and domestic climate change policy. Emissions trading systems currently in operation or under development exhibit unique features that may render them incompatible with each other. For example, the Danish and United Kingdom (UK) systems allow for trading of different gases, cover different economic sectors, and utilize different mixes of allowance and credit-based trading. To date, they have not developed rules governing interchange and mutual recognition of their tradable units with each other, which could impede or preclude beneficial cross-border transactions. There are also significant differences between each of these systems and the one being developed in the European Union. Already, the European Commission has warned that the differences in the UK and the EU systems “could create market distortions in the future.”2 Had the treaty been concluded more rapidly, the international framework would have made it easier for Parties to conform their systems leading to increased trading. Several private-sector and nongovernmental organizations (NGOs) also have developed initiatives to help build the market and to create and take advantage of trading opportunities. They include the Partnership for Climate Action (PCA), the Emissions Market Development Group (EMDG), and the Chicago Climate Exchange (CCX).

Future Outlook

Recent international agreements negotiated at Bonn and Marrakech resolve many details concerning implementation of the Kyoto Protocol, providing greater clarity to Parties developing domestic trading programs. These agreements will increase the likelihood that future domestic climate change policy measures will be consistent with the rules of the Protocol. However, several issues still must be resolved, and, although likely, the treaty’s entry into force is not yet assured. Thus, in the near future, international and domestic GHG policy will continue to develop concurrently, with the risk that incompatibilities between regional, national, and sub-national climate change policies will lead to market fragmentation and sub-optimal economic and environmental outcomes. Such fragmentation does not mean that market participants will not trade across systems. Indeed, market participants will likely devise methods of trading across jurisdictions. However, devising such structures and mechanisms will increase costs.

Prospects for a well-functioning international GHG market have greatly improved as a result of the agreements reached in international climate change negotiations during 2001. However, significant barriers remain, including the unwillingness of the United States, the world’s largest emitter, to ratify the Kyoto Protocol. A qualitative analysis of several scenarios related to the United States’ future climate policy response reveals that, while in the near term the lack of an emissions constraint may provide an advantage to U.S. firms against foreign competitors confronting such constraints, continued policy uncertainty may be detrimental in the longer term.

In order for the market to achieve its intended environmental and economic results, much work remains to be done. The international community must make an ultimate decision on the legal nature of Parties’ compliance obligations with the Kyoto Protocol’s provisions and must resolve several other key issues. Institutions governing the treaty’s mechanisms must move forward expeditiously to implement the details of the Protocol. Such action will provide Parties with clear policy guidance allowing them to conform their domestic programs to international rules and to enjoy the full economic and environmental benefits of GHG emissions trading.  

About the Authors

Richard Rosenzweig
Natsource, LLC

Richard Rosenzweig provides consulting services to private firms, governments, international financial institutions, and associations on all aspects of the climate change issue, including risk management, market entry strategies, international climate change negotiations, and domestic policy development. He joined Natsource from the Washington law firm of Van Ness Feldman, where he was Principal. Mr. Rosenzweig counseled clients on Clean Air Act matters and provided strategic government affairs counsel on global climate change and energy matters. Mr. Rosenzweig has extensive experience in all aspects of emissions trading and risk management. He represented several companies in the design of the U.S. Acid Rain Program and the Nox SIP Call. Mr. Rosenzweig was involved in the first transactions of UK and Danish greenhouse gas allowances. He also assists companies to determine their risk to the climate issue and develop appropriate risk management strategies. Mr. Rosenzweig served as Chief of Staff to the U.S. Secretary of Energy from 1993-96. His national policy responsibilities included key roles in the development of the first U.S. Climate Change Action Plan. He also helped to negotiate voluntary agreements between the Department of Energy and more than 600 electric utilities in the "Climate Challenge" program.

Matthew Varilek
Natsource, LLC

Matthew Varilek is an emissions markets analyst in Natsource's Strategic Services unit. Since joining Natsource in 1999, he has led projects for clients including the World Bank, the European Commission, the U.S. Agency for International Development, the Dutch Ministry of Economic Affairs, the Government of Uganda, and several multinational companies. Previously, Mr. Varilek lectured for Columbia University on international environmental agreements as an environmental policy teaching assistant at Biosphere 2 Center in southern Arizona. Mr. Varilek has a Masters degree with distinction in Economic Development from the University of Glasgow, Scotland, and a B.A. with distinction in Philosophy and Environmental Policy from Carleton College, Minnesota.

Dr Josef Janssen
University of St. Gallen

Josef Janssen is an expert in financial and economic aspects of greenhouse gas emissions trading and the Kyoto Mechanisms. He is head of Emissions Trading and Climate Policy at the Institute for Economy and the Environment (IWOe) at the University of St. Gallen (HSG) in Switzerland (www.iwoe.unisg.ch/kyoto). He is also scientific coordinator of the European R&D project entitled "Implementing the Kyoto Mechanisms - Contributions by Financial Institutions." In early 2001, he completed his PhD in economics at the University of St. Gallen. In his PhD thesis (Risk Management of Investments in Joint Implementation and Clean Development Mechanism Projects) he focuses on carbon portfolio risk diversification and insurance.

Dr. Janssen has advised several firms and organizations on the Kyoto Mechanisms, including UBS, Swiss Re, Sanpaolo IMI, Landesbank Baden-Württemberg, and the World Bank. In 1998 he was a member of the Italian delegation to the international climate policy negotiations at the EU and UN level. Dr. Janssen frequently speaks on greenhouse gas emissions trading at international commercial and academic conferences, and has published a number of articles on this subject.  

Ben Feldman
Josef Janssen
Matthew Varilek
Radha Kuppalli
Richard Rosenzweig
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Technology and Climate Change: Sparking a New Industrial Revolution

Technology and Climate Change: Sparking a New Industrial Revolution

Remarks by Eileen Claussen, President
Pew Center on Global Climate Change

American Institute of Chemical Engineers
New Orleans, Louisiana

March 10, 2002

Thank you very much. I want to thank the American Institute of Chemical Engineers for inviting me here today and for pulling together a very impressive roster of speakers. You are to be commended for taking on such a critical topic, and for having the good sense to do it at such a critical moment, as both the United States and the global community struggle to come to grips with the challenge of global climate change.

It's especially fitting, I think, that we are gathered for this meeting in New Orleans, which of all the major cities in America, is perhaps the one most vulnerable to the effects of global warming. As I am sure all of you are aware, scientists project that climate change could raise sea levels by as much as three feet by the end of this century. And since much of this city already sits well below sea level, this is no idle concern to the good people of New Orleans.

Nor is it a joking matter. But let's imagine for a moment what the future may hold for New Orleans if global warming continues unabated: Imagine, for example, all of the watering holes along Bourbon Street filled up with, you guessed it, water. Imagine the Lake Pontchartrain Causeway, the longest over-water bridge in the world, becoming, yes, the longest underwater bridge in the world. Imagine the city identified for generations as The Big Easy becoming The Big Sloppy. You like gumbo? Well, stick around long enough and you'll be up to your ankles in crawfish.

In all seriousness, global climate change is a profound challenge. Indeed, I believe it is one of the most profound challenges of our time. Meeting it will not be easy. In fact, I'd like to suggest to you today that meeting the challenge of global climate change will require nothing short of a new industrial revolution. But unlike past industrial revolutions, we can't afford to wait for this one to happen all on its own. We must make it happen. We must look to governments to help launch this revolution. We must look to the marketplace to mobilize the resources needed to carry out this revolution. And we must look to the creative minds of people like yourselves for the expertise and ingenuity needed to make this revolution a success. Because in the final analysis, our success will rest on our ability to devise new, cleaner, more efficient technologies - new technologies that can power our global economy without endangering our global environment.

Climate Change: Where We Stand Today

A little later, I'll have more to say about the kinds of technologies we will need and the kinds of policies that can help bring them about. But first let me spend a few minutes looking at where we stand today in our efforts to address climate change, both here in the United States and abroad.

The best place to start, I think, is with the science. And here, I believe, the consensus that has emerged is quite clear. Both the Intergovernmental Panel on Climate Change and the report prepared last year by a panel of the National Academy of Sciences are agreed on three main points: 1) the earth is warming; 2) human activity is largely to blame; and 3) the warming trend is likely to accelerate in the years ahead. And the implications for the United States alone are profound, affecting everything from farming and tourism to the reliability of the water supply and the livability of our coasts.

Of course, there are uncertainties, and there always will be. But these uncertainties cut both ways. Certainly it is possible that the effects of climate change could be less than we currently project. But it is just as likely that the effects will be greater. And so I believe that uncertainty is a reason for action, rather than a reason for inaction.

How are governments responding? Let's look first at the international picture. Over the last year, we saw both the greatest success and the greatest setback since the international effort to address climate change was launched a decade ago. The success was that after years of wrangling, nations finally agreed on a set of rules for implementing the Kyoto Protocol, which sets the first binding international limits on greenhouse gas emissions. European nations are well on track to ratifying the Protocol. Vigorous debates are underway in Japan, Canada and other industrialized countries that face some serious challenges in meeting their targets, but the prognosis is for the treaty to enter into force either this year or next.

The setback, of course, was President Bush's outright rejection of Kyoto. I do not intend to spend any time here debating the merits of the Protocol. It's true, Kyoto is at best a modest first step on a long journey. But from my perspective, the basic architecture of the treaty is sound. In fact, it is an architecture largely designed in the United States. It uses emissions trading, a concept born and bred here in America, to ensure that emissions are cut as cost-effectively as possible. I happen to believe that the emissions target for the U.S. negotiated by the previous Administration was unrealistic. It couldn't be met. But there were ways to deal with this problem short of a unilateral withdrawal.

And what has President Bush offered as his alternative? The President has offered a promise - a promise that the United States will do really no better than it's doing right now. When you do the math, the President's goal of an 18-percent reduction in greenhouse gas intensity by 2012 amounts to a 12-percent increase in actual emissions. It essentially continues the same trends we've seen over the last two decades. In other words, the target is nothing more than business as usual. On the positive side, the President has said that companies reducing their emissions should not be penalized in the event that there is a future regulatory regime requiring reductions. A first step, perhaps, but a very modest one.

Fortunately, that's not the end of the story. There are people in Washington who think climate change is a serious issue that warrants serious action. It may come as a surprise to you, but despite the Administration's lackluster efforts - or, perhaps more correctly, inspired by the Administration's lackluster efforts - there is growing bipartisan interest in Congress in doing something about climate change. Nearly twice as many climate change bills were introduced in the past year as in the previous four years combined.

These bills cover everything from regulating carbon dioxide emissions from power plants to raising fuel economy standards for cars and trucks, boosting research and development on alternative fuels, and encouraging farmers to adopt practices that suck carbon out of the atmosphere. Several bills would establish a national system for tracking and reporting greenhouse gas emissions - an important first step. And, of course, Senators Lieberman and McCain plan to introduce legislation later this year to establish a comprehensive nationwide emissions trading system. That's a bold idea - one that frankly I can't see being enacted for some time, probably years. Still, for the first time, serious debate about how the United States should meet its responsibilities on climate change is now underway.

But what we really need, of course, is action, not debate. And I'm pleased to be able to tell you that real action is indeed taking place. To find it, though, you have to look beyond the Beltway--first, to the boardrooms and factories of major corporations that are taking it upon themselves to tackle their greenhouse gas emissions; and second, you have to look to the states and local communities that, instead of waiting for leadership from Washington, are taking up this challenge on their own.

On the corporate front, let me talk very briefly about some of the activities that are being undertaken by the membership of the Pew Center's Business Environmental Leadership Council. This is a group that now includes 37 major companies that accept the need for action on this issue and that are taking concrete steps to protect the climate. These are primarily Fortune 500 firms such as Weyerhaeuser, Intel, Boeing, Dupont, Shell and Alcoa. Together they employ more than 2 million people and generate annual revenues of nearly $900 billion.

What are these companies doing? Many are adopting voluntary targets for reducing their greenhouse gas emissions. Consider Dupont, which is working to reduce its emissions by a stunning 65 percent below 1990 levels before 2010. Alcoa's target, to cite another example, is a 25-percent reduction over the same period. Some companies are looking beyond their industrial processes. They're setting targets for reducing emissions from their products as well. Major automakers, for example, will reduce greenhouse gas emissions from their European fleets by 25 percent by 2005; and IBM is working to make sure that 90 to 100 percent of its computers are Energy Star-compliant. Still other companies are setting targets for their purchases of clean energy. Dupont anticipates getting 10 percent of its electricity from renewable sources by 2010; and Interface is aiming for 10 percent by 2005.

We recently completed a report taking a close look at six companies - why they've taken on targets, and what their experiences have been. The companies cited several motivations: They believe that the science of climate change is compelling, and that over the long term, their climate-friendly investments will pay off. They also believe that by taking the initiative, they can help the government create climate change policies that work well for business. But each of the companies cited one other important motivation for taking on a target - to improve their competitive position in the marketplace. And that, in fact, has been the result. Each is on track to meeting or exceeding its greenhouse gas goal. Together, they've delivered reductions equal to the annual emissions of 3 million cars. And all of the companies are finding that their efforts are helping to reduce production costs and enhance product sales today.

Equally impressive efforts are taking shape at the state level as well. Over the past year, the Pew Center has worked with the National Association of State Energy Officials to gather information on state programs that reduce greenhouse gas emissions. Earlier this month, we officially unveiled the results: a searchable database on our website describing 21 state programs that have delivered real emissions reductions. Here are just a few examples: Oregon requires that all new power plants limit or offset their carbon dioxide emissions, making it the first state in the nation to enact mandatory carbon controls. Texas requires that all its electricity providers generate about 3 percent of their power using renewable sources. New Hampshire is cutting emissions and saving $4 million a year through energy-saving retrofits on state-owned buildings. The state of Washington is battling emissions and traffic congestion by giving commuters alternatives to the single-occupancy auto. And finally, one of my favorite examples: High school students in Pattonville, Missouri, teamed up with state officials to fuel their school's boilers with methane captured from a neighboring landfill.

So what do all these examples from companies and from the states show us? First, that despite the lack of leadership in Washington, there are significant efforts underway across America to address climate change, and the momentum is growing. These efforts are delivering real reductions in greenhouse gas emissions-and, better yet, they are doing it cost-effectively. A second important lesson is that these efforts pay multiple dividends. In the case of the companies, they deliver operational efficiencies, reduced energy costs, and increased market share - all things that contribute to a healthier bottom line. In the case of the states, they deliver cleaner air, smarter growth, new energy sources, and real savings for taxpayers. A third important lesson is the sheer diversity of approaches being taken. Climate change is an enormous challenge. It has to be tackled on many fronts. If ever there were an issue that defied one-size-fits-all solutions, this is it.

New Technologies Needed

So, yes, these efforts represent a good start. But let's step back and ask ourselves, What is really needed if we are going to effectively address climate change? In the long run, I believe, the answer is clear: The only solution to climate change is a fundamental transformation in the way we power our global economy.

To keep our planet from overheating, we must dramatically reduce emissions of carbon dioxide and other greenhouse gases. The primary source of these gases is the combustion of fossil fuels. So our goal over time must be to steadily reduce our reliance on coal and oil and to develop new sources of energy that, as I said earlier, can power our economy without endangering our climate. Yes, it is a tall order. It implies technological and economic transformation on an unprecedented scale. As I said at the outset, it demands nothing short of a new industrial revolution.

Because there are so many sources of greenhouse gas emissions, and because energy is what powers our entire global economy, there is no silver bullet technology that will solve this problem alone. The ultimate success of a climate change strategy-whether at the national or international level-will hinge on the development and deployment over time of a vast array of technologies that dramatically reduce the carbon intensity of the overall economy. That includes changes in how we produce electricity, how we get from one place to another, how we farm and manage our forests, how we manufacture products, and even how we build and manage our buildings.

Granted, none of these changes will happen overnight. Some of the necessary technologies will take years or even decades to develop and to deploy on a sufficient scale to make a difference. By the same token, however, some technologies are already showing they can make a difference and contribute to climate solutions.

What sorts of technologies am I speaking of? I think the best way to look at them is sector by sector. And, as I prepared my remarks, I tried to come up with catchy phrases to describe the fundamental challenges we face in each of the four critical sectors - electricity, transportation, buildings, and industry.

In the electricity sector, for example, I'd boil it down this way: "Here's the Fix: A Better Mix." As all of you know, we now have a moderately diversified fuel mix. I say moderately because coal still supplies 55 percent of U.S. electricity. That said, we do have a significant and growing amount of power supplied by natural gas, a significant and stable amount of nuclear energy, some hydroelectric power, a small but growing share of wind power, and a very small share of renewables. And so the challenge over time is fairly obvious: we need to shift the supply mix--not necessarily to wean ourselves entirely from fossil fuels (at least not in the near future) but to place ever-increasing emphasis on the lowest carbon fossil fuel (natural gas) while increasing our reliance on renewables.

Next up is transportation, and here my catchphrase would be: "And to Oil a Goodnight." Initially, of course, we must focus on using oil more efficiently. As the National Academy of Sciences has made clear, there are huge cost-effective efficiency gains that could be made in the near term. Ultimately, however, we face a far more fundamental challenge. We must make the transition to entirely new fuel sources, and we must build the infrastructure needed to produce and deliver them. We'll have to think big - the new hydrogen fuel cell initiative launched by the Bush Administration is a step in the right direction. But we must be careful not to pick winners too early in the race. We must explore every viable option.

In the building sector, where we use one-third of our energy, the name of the game is efficiency. And my slogan? "Smart is beautiful." Efficiency doesn't mean we all sit in the dark wearing wool cardigans. Smart technology and smart building design can deliver enormous energy savings without sacrificing comfort or quality of life. In the near term, there is much we can do to save energy - things as simple as replacing conventional light bulbs with compact fluorescents, or shutting off computers when we go home at night. Over the longer term, new designs, new materials, new equipment, and new information technologies promise remarkable gains. In design, for example, we can take much better advantage of natural shading and sunlight to enhance heating, cooling and lighting. And, in the information technology area, new sensors that monitor the use of equipment and lighting will allow us to overcome ordinary humans' failure to "just shut it off."

Finally, there is industry, which accounts for about a third of our energy consumption. And here my slogan, with apologies to Descartes, is "I rethink therefore I am." Rethinking in this case means looking at the entire life cycle of products. It means doing four things: changing inputs, redesigning production processes, reworking the product mix, and, wherever possible, reusing and recycling products so they don't have to be produced again.

Consider the life cycle of one product, aluminum, as a case in point. Alcoa has reduced the electricity required to produce a ton of aluminum by 20 percent over the past 20 years-that's from redesigning production. The company also sponsors life cycle analysis on a number of products including automotive components, beverage cans, and more, to determine how product designs and the product mix can be improved. Andit encourages recycling by supporting research alloy separation and purchasing large amounts of scrap. As for changing inputs, let's stick with aluminum but look at another industry: automobile manufacturing. A recent study showed that every ton of aluminum substituted for steel in automobile construction reduces greenhouse gas emissions by 20 tons over the life of the vehicle. For automakers-and, indeed, for all of society-that should be an important incentive to rethink what goes into our cars.

Getting to Tomorrow

So there you have a sampling of some of the technologies that can help us meet the challenge of global climate change. The question is: How do we get them? What must we do now to ensure that the right technologies are in place in the years ahead?

As I said earlier, we must look to the marketplace to be the primary engine driving technology development. First, most of the changes needed to reduce greenhouse gas emissions - whether they be new products, new processes, or new sources of energy - must come from the private sector. Second, only the marketplace can redirect resources and mobilize investment on the scale needed to create a climate-friendly future. What's more, only the magic of the marketplace can ensure that the necessary goods are delivered at the least possible cost. So we must count principally on the private sector to generate, and to deliver, the broad array of technologies that will make possible this new industrial revolution.

But the market will only deliver if it perceives a demand. And for that, I am convinced, we must look to government. We must look to government, first, to set the goal - to send a clear signal to the marketplace that this is the direction we must go. We must look to government, second, to prime the pump - to provide strategic assistance that will help spawn new technologies and then move them from the laboratory to the marketplace. And we must look to government, third, to keep us all on track - to make sure we not only keep our eye on the goal, but meet it, or face clear consequences.

Let me be clear: I am not advocating a draconian command-and-control system that says do it, and do it this way, or else. We've had enough experience with such approaches to know they won't work here. Rather, I am suggesting a comprehensive but careful mix of measures that provides the private sector with the necessary incentives - and the necessary flexibility - to ensure that we get to where we need to go, and that we do it cost-effectively.

Let me be a little more specific. On the incentive side, there are a host of policy tools available: targeted tax credits or low-interest loans to encourage the development and use of energy-efficient technologies and alternative fuels; government investment in basic research and public-private partnerships that can lead to breakthrough technologies; incentives to builders and landlords to encourage the use of energy-saving materials, appliances and building methods; and incentives to farmers and other landowners to adopt innovative methods to capture carbon in soils and forests.

But incentives alone will not be enough, just as voluntary efforts will not be enough. We must also establish clear, enforceable expectations. At some point, we must resolve as a society that the risks posed by climate change are too great, and that government must mandate action to avert them. This could take the form of emissions targets or efficiency standards. In either case, we should use market-based strategies to reward those who exceed the norm - for instance, by awarding tradeable credits to those who exceed their targets or standards. But government's expectations - society's expectations - must be clear and they must be binding.

This, I would suggest, is how you launch a revolution. I won't tell you the revolution is just around the corner. But I believe in time it will come. And I believe there will be enormous opportunity for those who help lead the way. Over the past century, the chemical engineering field has made tremendous contributions to the protection of our environment. Catalytic converters, smokestack scrubbers, reformulated gasoline, and new recycling technologies are just a few of the environmental advances that owe their existence in one way or another to you and your peers. Time and again, this distinguished profession has answered the call to make the world a better place.

And today, I ask you to do so once again. As individuals who apply scientific and technical knowledge to solve problems, you have the power and the ability to help the world respond to one of the greatest challenges of the 21st century. You also have the knowledge and the understanding to inform the development of forward-looking climate policies for the United States-the types of policies that will make the second industrial revolution real.

In closing, let me say once again that climate change is a problem that calls for new thinking and new approaches. And, as we gather here in a city that could be profoundly affected by this problem in the coming years, I hope we will vow together to solve it so we can leave behind a safer, more prosperous world for generations yet to come.

Thank you very much. 

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State and Corporate Action on Climate Change: Multiple Benefits From Multiple Approaches

State and Corporate Action on Climate Change: Multiple Benefits From Multiple Approaches

Speech by Eileen Claussen, President
Pew Center on Global Climate Change

National Governors Association Workshop
Washington, DC

February 28, 2002

Thank you. I'm delighted to be here this morning to talk with all of you about climate change. And, before I begin, I want to tap into the spirit of the recently concluded Olympics by awarding a few medals. The first medal goes to the White House. It is for speed skating around an issue, and is awarded in recognition of the Bush Administration's recently announced climate policy. This policy could just as easily have won the slalom competition for the way it zigs and zags around the real problem. Or perhaps it should have been entered in the downhill race, because that's where it will inevitably lead us-downhill.

That said, I think there are plenty of medals to go around. The former administration, for example, is a prime candidate for the gold in the biathlon. This is the competition, of course, in which you do two entirely different things-such as talking big on the international stage about your commitment to addressing climate change while doing next to nothing at home to put any kind of serious policies in place. I apologize for being so harsh in my assessment, but you can rest assured I was not pressured in any way by other judges on the panel.

Seriously, though, it's always a pleasure to spend some time with a group of people who are not only interested in learning about climate change, but are in a position to do something about it. A little later on I'll talk about what many states already are doing about it, and why it's in your state's interest as well as the national interest for you to do even more. But first I'd like to spend just a couple of minutes looking at where we stand in our efforts to address climate change, both here in the United States and abroad, and where ultimately we need to go.

The best place to start, I think, is with the science. And here, I believe, the consensus that has emerged is quite clear. Both the Intergovernmental Panel on Climate Change and the report prepared last year by a panel of the National Academy of Sciences are agreed on three main points: 1) the earth is warming; 2) human activity is largely to blame; and 3) the warming trend is likely to accelerate in the years ahead. And the implications are profound, affecting everything from farming and tourism to the reliability of the water supply and the livability of our coasts. Of course there are always uncertainties, and there always will be. But these uncertainties cut both ways, and are not an excuse for inaction. For example, it is possible that the impacts will be less severe than we expected. But it is equally possible that the effects will not be linear, and that we are in for some serious and negative climate surprises, such as a dramatic shift in the Gulf Stream current that warms Western Europe.

So, with or without uncertainty, I believe it is absolutely essential that we act. Now what is it we need to do? There are lots of ways we can begin to attack this problem, and I'll come back to those. But right now I want to lay out the big picture - the grand scheme, if you will. I'll be blunt about it: In the long run, the only solution is a fundamental transformation in the way we power our global economy. To keep our planet from overheating, we must dramatically reduce emissions of carbon dioxide and other greenhouse gases. The primary source of these gases is the combustion of fossil fuels. So our goal, over time, must be to end our reliance on coal and oil and to develop new sources of energy that can power our growing economy without endangering our climate. Yes, it is a tall order. It implies technological and economic transformation on an unprecedented scale. In fact, it demands nothing short of a second industrial revolution.

Is this revolution underway? Let's look first at the international picture. Over the last year we saw both the greatest success and the greatest setback since the international effort to address climate change was launched a decade ago. The success was that after years of wrangling nations finally agreed on a set of rules for implementing the Kyoto Protocol, which sets the first binding international limits on greenhouse gas emissions. European nations are well on track to ratifying the Protocol. Vigorous debates are underway in Japan, Canada and other industrialized countries that face some serious challenges in meeting their targets, but the prognosis is for the treaty to enter into force either this year or next.

The setback, of course, was President Bush's outright rejection of Kyoto. I do not intend to spend any time here debating the merits of the Protocol. It's true, the Protocol is at best a modest first step on a long journey. But from my perspective, the basic architecture of the treaty is sound. In fact, it's an architecture largely designed in the United States. It uses emissions trading, a concept born and bred here in America, to ensure that emissions are cut as cost-effectively as possible. I happen to believe that the emissions target for the U.S. negotiated by the previous Administration was unrealistic. It couldn't be met. But there were ways that could have been fixed short of a unilateral withdrawal.

And what has President Bush offered as his alternative? The President has offered a promise - a promise that the United States will do really no better than it's doing right now. When you do the math, the President's goal of an 18 percent reduction in greenhouse gas intensity by 2012 amounts to a 12 percent increase in actual emissions. It essentially continues the same trends we've seen over the last two decades. In other words, the target is nothing more than business as usual. On the positive side, the President has recommended that companies that make emission reductions should not be penalized in the event there is a future regulatory regime that requires reductions. A first step, perhaps, but a very modest one.

Fortunately, that's not the end of the story. There are people in this town who think climate change is a serious issue that warrants serious action. (If there were not, I think I would be a very lonely person.) In fact, some of those who are supporting serious action happen to be members of Congress. It may come as a surprise to you, but there is growing bipartisan interest in Congress in doing something about climate change. In fact, nearly twice as many climate change bills were introduced in the past year as in the previous four years combined. There is, of course, a serious debate over whether or not carbon should be covered in new multi-pollutant legislation for power plants. But there are literally dozens of other bills that would do everything from raising fuel economy standards to boosting research and development to encouraging farmers to adopt practices that suck carbon out of the atmosphere, or use some of their land for wind farms. Several bills would establish a national system for tracking and reporting greenhouse gas emissions - an important first step, which, if coupled with provisions that legally recognize the private sector's accomplishments in reducing emissions, would at least begin to put us on a constructive path for dealing with this issue. And finally, Senators Lieberman and McCain plan to introduce legislation later this year to establish a comprehensive nationwide emissions trading system. That's a bold idea - one that frankly I can't see being enacted for some time, probably years. But for the first time, serious debate about how the United States should meet its responsibilities on climate change is now underway.

What we really need, of course, is action, not debate. And I'm pleased to be able to tell you that real action is indeed taking place. To find it, though, you have to look beyond the Beltway. You have to look in two places - first, in the boardrooms and factories of major corporations that are taking it upon themselves to tackle their greenhouse gas emissions; and second, you have to look to the states and local communities that instead of waiting for leadership from Washington are taking up this challenge on their own. None of these efforts can in the end substitute for a credible, comprehensive national effort. Ultimately that is the direction we need to go. But addressing climate change requires a multiplicity of strategies at all levels. And the states and corporations that are taking the lead right now are the laboratories and proving grounds that will help us identify the smartest, most cost-effective strategies that can best serve the nation as a whole. That's not all. In the process, they are discovering that addressing climate change delivers a host of other benefits as well.

Let me begin by telling you about some of the efforts underway in the private sector. The Pew Center's Business Environmental Leadership Council now includes 37 major companies that accept the need for action on this issue and are taking concrete steps to protect the climate. These are primarily Fortune 500 companies such as Weyerhaeuser, Intel, Boeing, Dupont, Shell and Alcoa. Together they employ more than 2 million people and generate annual revenues of nearly $900 billion.

The Pew Center recently released a report that takes a close look at six companies that are members of the Council and that have adopted voluntary greenhouse gas targets. It also looks more broadly at a total of 31 companies with emission reduction targets. The report assesses the reasons why these companies took on targets, and what the results have been. The companies cited a number of reasons for taking on a target. They believe that the science of climate change is compelling, and that over the long term, their climate-friendly investments will pay off. They also believe that by taking the initiative, they can help the government create climate change policies that work well for business. It is one thing to advocate policies such as reasonable targets and timetables and flexibility for businesses to use various means to implement clearly defined goals. It is another thing to actually demonstrate via corporate action that these measures work.

But each of the companies cited one other important motivation for taking on a target - to improve their competitive position in the marketplace. And that, in fact, has been the result. Each company is on track to meeting or exceeding its greenhouse gas goal. Together, they've delivered reductions equal to the annual emissions of 3 million cars. And all the companies are finding that their efforts are helping to reduce production costs and enhance product sales today.

I think one of the most important lessons to be gleaned from this analysis is the variety of approaches employed by these companies. For example, a number of companies have greenhouse gas emission targets that relate directly to their industrial processes: Alcoa plans to reduce its direct process emissions by 25% below 1990 levels by 2010; and Dupont is on track to reducing its greenhouse gas emissions by a remarkable 65% by 2010.

Others have determined that their greatest contribution comes from the use of their products: Ford Motor Company will reduce the greenhouse gas emissions from its European fleet by 25% by 2005; and IBM will have 90-100% of its computers Energy Star-compliant each year.

Some have chosen to use relative measures for their targets: Toyota North America will reduce its energy use per unit of production by 15% below 2000 levels by 2005; United Technologies will reduce its energy consumption per unit of sales by 25% below 1997 levels by 2007; and Baxter International will reduce its energy use and associated greenhouse gas emissions per unit of production by 30% below 1996 levels by 2005.

Still others have chosen to increase their purchases of renewable energy, thereby creating greater demand for clean energy. For example, Dupont will get 10% of its electricity from renewable sources by 2010; and Interface is aiming for 10% by 2005.

BP and Shell have set up internal emissions trading systems among their business units, and have much practical advice to offer based on their experiences. And many companies, including American Electric Power, PG&E and others have invested significantly in carbon sequestration projects to offset their emissions. So as you can see, companies are experimenting, innovating and coming up with an array of strategies best suited to their individual circumstances.

Let me turn now to the equally impressive efforts taking shape at the state level. Over the past year, the Pew Center has worked with the National Association of State Energy Officials to gather information on state programs that reduce greenhouse gas emissions. Earlier this month, we officially unveiled the results: a searchable database on our website describing 21 programs that have delivered real emissions reductions. We'll be adding more programs in the weeks and months ahead. What's different about this database-and the reason I recommend it to your attention-is that it provides detailed information about how these programs started, what kinds of barriers states encountered, and how they dealt with them. It also quantifies the emissions reductions resulting from each of the programs. We posted the database two weeks ago and it's been accessed more than 1,000 times already.

Let's look at some of the examples it provides. We all know about Nixon going to China. But what about George W. Bush as a champion of renewable power? It's true. Legislation signed by then-Governor Bush to restructure the Texas electricity industry requires that all electricity providers generate about 3 percent of their power using renewable sources. The Texas Renewable Portfolio Standard was expected to bring more megawatts of renewable power on line in 2001 than in the prior 100 years. The result should be a reduction of approximately 3.3 million tons of CO2 per year, as well as reductions in sulfur dioxide and nitrogen oxides.

Oregon, meanwhile, was the first state in the nation to enact mandatory controls on carbon dioxide. The state requires that all new power plants meet a tough new emissions standard, and allows utilities to comply by paying a fee to the nonprofit Climate Trust, which in turn invests in projects that reduce or sequester CO2 emissions.

Other states are reducing emissions - while also reducing the burden on taxpayers and consumers - by investing directly in energy efficiency. New Hampshire, for instance, is saving $4 million a year through energy-saving retrofits on state-owned buildings. And Colorado has provided free energy efficiency upgrades to more than 70,000 low-income households, trimming their energy bills an average of 20 to 25 percent.

In the transportation sector, Washington State is leveraging nearly $8 in private funding for every dollar from the state for a program that gives commuters alternatives to the single-occupancy auto. The payoff is enormous: The program is generating roadway capacity at just a third the cost of building and operating new roadways.

Farmers are also pitching in. A program in Georgia that gives growers access to special "no-till" equipment has not only cut emissions and saved energy, but also conserved more than 2 million tons of soil. And finally, on the local level, high school students in Pattonville, Missouri, teamed up with state officials to fuel their school's boilers with methane captured from a neighboring landfill.

So what do all these examples from companies and from the states show us? First, that despite the lack of leadership here in Washington, there are significant efforts underway across America to address climate change, and the momentum is growing. These efforts are delivering real reductions in greenhouse gas emissions-and, better yet, they are doing it cost-effectively.

A second important lesson is that these efforts pay multiple dividends. In the case of the companies, they deliver operational efficiencies, reduced energy costs, and increased market share - all things that contribute to a healthier bottom line. In the case of the states, they deliver cleaner air, smarter growth, new energy sources, and real savings for taxpayers. The fact of the matter is that many of these initiatives were launched for reasons having nothing to do with climate change. The emissions reductions they are producing are simply side benefits - but they are real, and they are making a difference.

A third important lesson is the sheer diversity of approaches being taken. Climate change is an enormous challenge. It has to be tackled on many fronts. If ever there were an issue that defied one-size-fits-all solutions, this is it. The efforts being initiated right now in the boardroom and in your state capitols demonstrate that we have the drive and the ingenuity to come up with strategies of all different shapes and sizes. We must be careful not to squash that drive and ingenuity. Yes, we ultimately need a comprehensive national program to meet this challenge. But it must be one that provides the necessary incentives - and the flexibility - to encourage and allow a broad array of strategies.

In closing, I'd like to commend all of you from states that are already stepping up to the challenge of climate change and seizing the very real opportunities it presents. I'd like to encourage the rest of you to go back home to your bosses and tell them why it's in the interest of their constituents to do the same. Many times in the past, when we couldn't count on Washington to take the lead, the states have stepped into the breach. Climate change is another opportunity for you and your states to demonstrate that real leadership and real innovation are not top-down but bottom-up. If you lead, Washington will follow. And only then will the United States be able to become a real gold medal contender in the global effort to meet this global challenge. Thank you very much. I will be very happy to answer any questions. 

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Implications for U.S. Companies of Kyoto's Entry into Force without the United States

This working paper examines some of the potential implications for U.S. business of the Kyoto Protocol's entry into force – in particular, the effects of the U.S. decision to stay out of the Protocol.

The Bonn and Marrakech meetings adopted generally sound rules regarding the Kyoto mechanisms. However, the implications for U.S. business will depend as much or more on the domestic policies and measures of Annex B parties1 as on the Kyoto rules themselves. The Kyoto rules merely establish the general framework within which national implementation will take place. Although bad Kyoto rules might have precluded efficient implementation of the Protocol, the Bonn and Marrakech rules do not ensure efficiency, since this will depend on the extent to which governments choose to utilize the Kyoto mechanisms to achieve their targets.

The implications of Kyoto for U.S. business will also depend significantly on whether the United States decides as a matter of domestic policy to undertake emission reduction requirements, and the stringency of any such requirements. This paper generally assumes a scenario in which the U.S. does not take significant domestic action to control emissions. In the final section, it considers an alternative scenario involving adoption of strong U.S. domestic measures to reduce emissions.

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by: Daniel Bodansky, University of Washington

Daniel Bodansky
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Corporate Greenhouse Gas Reduction Targets

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Corporate Greenhouse Gas Reduction Targets

Prepared for the Pew Center on Global Climate Change
November 2001

By:
Michael Margolick and Doug Russell, Global Change Strategies International, Inc.

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

In the United States and around the world, many businesses are demonstrating their commitment to solving the problem of climate change. Not only are companies speaking out on the severity of the problem, they are setting and meeting corporate targets to reduce greenhouse gas (GHG) emissions from their businesses.

DuPont has committed to reduce its GHG emissions by 65 percent from 1990 levels by 2010. Shell will reduce its GHG emissions 10 percent from 1990 levels by 2002. And earlier this year, Alcoa announced it would reduce its GHG emissions by 25 to 50 percent by 2010.

In this report, authors Michael Margolick and Doug Russell of Global Change Strategies International, Inc. provide guidance to companies contemplating targets. Based on in-depth case studies of six diverse members of the Center’s Business Environmental Leadership Council—ABB, Entergy, IBM, Shell, Toyota, and United Technologies Corporation—the authors trace the corporate target-setting process from the point of deciding to act on climate change, to the factors involved in setting a target, to management and employee engagement, and to evaluating, monitoring, and performance review.

A number of underlying themes emerged regarding companies’ motivations for setting targets. Among the most salient are these: companies that set GHG reduction and energy efficiency targets do so because they believe that setting and meeting the targets will improve their bottom line and drive innovation. They believe that over the long term, the world will have to deal with climate change, so their climate-friendly investments will pay off. They also believe that by taking the initiative, they can help the government to create a climate change policy regime that works well for business. It is one thing to advocate policies such as reasonable targets and timetables and flexibility for businesses to use various means (such as emissions trading) to implement clearly defined goals. It is another thing to actually demonstrate via corporate action that these measures work.

However, in taking these actions, these leading businesses are taking risks. They are betting that there will ultimately be government policy on climate change, that it will allow companies flexibility, and that it will reward and not punish early movers. If they turn out to be wrong, these companies could be disadvantaged relative to their less proactive competitors.

As climate policy continues to develop, we should keep the following lessons in mind. First, it is clear that GHG emissions can be substantially reduced, and that there are many approaches that can be employed to meet this objective. Second, emissions can be reduced in ways that are cost-effective, and that generate ancillary benefits that improve companies’ competitive positions. Finally, the diversity in the type and scope of targets and implementation activities that companies have taken on voluntarily indicates that policies to reduce emissions should be as flexible as possible. Flexibility not only allows for more cost-effective reductions, but also ensures that companies can focus their limited resources on achieving the greatest reductions. Companies and countries have only so much money to invest in addressing climate change. The more flexibility we allow, the more economically efficient our response will be, and thus the more environmental progress we will achieve.

The authors and the Pew Center would like to thank the companies featured in this report for sharing their experiences and perspectives, and acknowledge the members of the Center’s Business Environmental Leadership Council, as well as Jennifer Nash of the John F. Kennedy School of Government and Sarah Wade of Environmental Defense for their review and advice on a previous draft of this report, and Matt Jones and Bob Masterson for their valuable contributions. Additionally, the Pew Center would like to thank the Energy Foundation for its generous support of this project.

Executive Summary

A growing number of companies have voluntarily adopted climate-related targets—numerical performance objectives for indicators related to climate change, such as energy efficiency and greenhouse gas (GHG) emissions. This report explores companies’ reasons for adopting targets, their choices of target types and levels, their plans for meeting the targets, and their progress to date. It also provides guidance, based on their experiences, to other companies that are considering climate-related targets.

The report is based on in-depth case studies of six members of the Business Environmental Leadership Council (BELC) of the Pew Center on Global Climate Change, supplemented by surveys and a workshop with additional BELC members. The case study companies are ABB, Entergy, IBM, Shell, Toyota Motor Manufacturing North America (TMMNA), and United Technologies Corporation. These particular companies were chosen to reflect a diversity of industries, target types, and headquarters locations.

The companies in this study vary widely in their reasons for adopting climate-related targets, and most have done so for several reasons. All of the companies see targets as improving their competitive market position by reducing production costs and enhancing product sales today, and in anticipation of regulatory and market environments of the future. Other reasons for setting climate-related targets include: to prepare for future regulation by investing in GHG emissions reductions now, to contribute to the design of efficient and equitable international and domestic GHG policies and programs, and to enhance corporate reputation via environmental leadership. However, voluntary targets can present risks to shareholders. Like the motivations for setting a target, the risks of doing so also vary by company. Risks include the following possibilities: governments will not recognize early action; governments will select a late baseline, rendering early reductions less valuable; and governments will not regulate at all, essentially punishing companies with targets for their good deeds because they, but not their competitors, will have incurred costs of making emissions reductions.

Companies have adopted several different kinds of targets. Some targets apply to purchases, others to companies’ own energy use or emissions, and others to products; some focus on greenhouse gases, and others on energy use; some serve as absolute limits, and others are relative to indicators such as production levels and revenues. Which type of target an individual company chooses depends on its products and production methods, policy environment, and business models. The target’s effect on emissions reductions, the existence of uncontrollable factors relating to emissions or energy use, the opportunity for cost-effective emissions or energy reductions, and the potential impact on company growth are four general considerations that influence a company’s choice of target type.

Companies also have different methods for setting the target level. A “top-down” target-setting process sets the level for the whole corporation at once, without a plant-by-plant analysis. Under a “bottom-up” process, the corporate target level is based on analysis of potential reductions by individual plants.

Top-down and bottom-up elements occur within each company’s target-setting process, but in widely varying proportions. Common steps in setting the target level include an emissions or energy use inventory, choice of target year, projection of business-as-usual emissions, and an iterative process that weighs potential target levels against the feasibility and costs of prospective action plans. It is beneficial to involve those who will be responsible for implementing the action plan in this process, in order both to ensure a reasonable target, and to put the organizational elements of the action plan into place. The case studies suggest that an environmental management system is a valuable tool for these purposes.

Naturally, the specific components of action plans to achieve climate-related targets depend on the target type and the products and production methods of each company. However, every company must make several general design decisions, including whether the plan will be designed through a “top-down” or “bottom-up” process, how the target will fit in with other environmental management activities, to what extent the plan will feature market mechanisms such as internal emissions trading and external offsets, and how to use research and development (R&D) resources and other means to drive technology innovation. Emissions trading may be useful for companies that wish to drive down costs by using market competition to encourage efforts to discover least-cost reductions. Internal emissions trading is especially useful for companies that are uncertain as to whether their allocation of the target among business units is least-cost, that are uncertain as to how their target will be achieved, and that have low trading transaction costs. Offsets may be valuable where the cost of emissions reductions within a company’s own operations is high. The action plan may also need to respond to external risks imposed by markets, technological change, and regulation. An assessment of these factors may be useful in explaining the target results, both internally and externally, should emissions or energy use trend off-target.

The companies studied found that incentive systems for specific ideas and initiatives, as well as reinforcement of commitment by senior management, motivated employees and managers throughout the company. Many managers indicated that targets drive innovation within the company. Sometimes the mere existence of emissions or energy use data generates interest in, and ideas for, improvements that turn out to be profitable on their own. Companies also found that climate-related targets have a positive influence on employee morale. Internal communications are important in all cases — increasing employee understanding of climate change helps gain buy–in to the target, and generates new ideas on how to improve environmental performance.

Communications efforts and styles also vary by company. Typically, firms with relatively high direct emissions and top-down target-setting processes have higher-profile climate change communications efforts, including speeches and public presentations by the CEO. Companies with lower direct emissions, that have had environmental management systems in place for a number of years, and that have bottom-up target-setting processes, tend to take a more low-key approach to communications. Several companies have benefited from collaboration with third parties, such as environmental non-governmental organizations, to help get the message across. Partnerships with non-governmental organizations can build credibility and provide useful services.

Finally, all the companies studied are committed to reach their targets systematically, at low cost, and according to conditions in their particular businesses. The companies consider the achievement of climate-related targets to be as important as other critical indicators of the health of the business.

About the Authors

Michael Margolick, Ph.D.
Global Change Strategies International, Inc.

Dr. Margolick is one of Canada's leading experts in energy planning and in the economics and policy development of climate change. He was a Research Associate in the Program in Natural Resource Economics and the Senior Scientist of the Forest Economics and Policy Analysis Project, both at the University of BC. He has also worked for the Corporate Strategic Planning Unit at BC Hydro and was the Executive Director of the British Columbia Energy Council. Related expertise includes research and program evaluation, and public/stakeholder consultation. He is an adjunct professor in the School of Resource and Environmental Management at Simon Fraser University.

Douglas J. Russell
Global Change Strategies International, Inc.

Mr. Russell is President of GCSI - Global Change Strategies International Inc., a Canadian firm dedicated to working with progressive corporate and public sector organizations to anticipate and respond to the challenges and opportunities of global change. Mr. Russell is responsible for the overall management and operation of GCSI. Prior to moving to the private sector, Mr. Russell was a senior executive in the Canadian government where he managed the development of Canada's National Action Program on Climate Change, and co-headed the Canadian delegation to the UN Framework Convention on Climate Change. He was the chief negotiator for Canada for the Berlin Mandate approved in April 1995 at the first meeting of the Conference of the Parties, and he chaired the international work of the OECD and IEA to define the reporting guidelines for Annex I countries under the Framework Convention. His professional experience includes complex international negotiations, federal-provincial and business- government relations, development of strategic plans, financial and personnel management, and management of organizations during periods of change.

Doug Russell
Michael Margolick
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Press Release: Hewlett-Packard Joins Effort To Mitigate Climate Change

For Immediate Release:  
November 6, 2001

Contact: Katie Mandes, 703-516-4146

Hewlett-Packard Joins Effort To Mitigate Climate Change - Pew Center's Business Environmental Leadership Council Climbs to 37 Members

Washington, D.C.- The Pew Center on Global Climate Change today announced that Hewlett-Packard Company has joined the organization's efforts to battle global climate change.

The Pew Center established the Business Environmental Leadership Council (BELC) with 13 members in May 1998. The addition of Hewlett-Packard Company brings the BELC's total membership to 37 companies. Members of the BELC are committed to take steps in their domestic and foreign operations to assess their greenhouse gas emissions and establish programs to reduce those emissions. The BELC considers the Kyoto Protocol a first step in global efforts to mitigate climate change and supports the development of market-based mechanisms as called for in the Kyoto Protocol.

The BELC includes many Fortune 500 companies in a diverse group of industries including energy, chemicals, metal, consumer appliances and high technology. These companies do not contribute financially to the Pew Center, which is supported solely by contributions from charitable organizations.

"These companies understand that the world cannot avoid dealing in a serious way with climate change," said Eileen Claussen, President of the Pew Center. "An important aspect of Hewlett-Packard's philosophy is its dedication to operating in an environmentally responsible manner, said the Pew Center's Claussen. "HP's decision to join the Pew Center demonstrates their commitment to the climate change issue and we look forward to working with them."

The other members of the BELC are: ABB; Air Products and Chemicals; Alcoa; American Electric Power; Baxter International; Boeing; BP; California Portland Cement Co.; CH2M HILL; Cinergy Corp.; Cummins Inc.; Deutsche Telekom; DTE Energy; DuPont; Enron; Entergy; Georgia-Pacific; Holnam; IBM; Intel; Interface Inc.; John Hancock Financial Services; Lockheed Martin; Maytag; Ontario Power Generation; PG&E Corporation; Rio Tinto; Rohm and Haas; Royal Dutch/ Shell; Sunoco; Toyota; TransAlta; United Technologies; Weyerhaeuser, Whirlpool and Wisconsin Energy Corporation.

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The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan 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.

Press Release: Businesses Gain Competitive Edge, Other Benefits by Adopting Greenhouse Gas Reduction Targets

For Immediate Release:  
November 2, 2001

Contact: Katie Mandes
703-516-4146

Businesses Gain Competitive Edge, Other Benefits by Adopting Greenhouse Gas Reduction Targets

Washington, DC - By committing themselves to reducing their greenhouse gas emissions, leading companies in the United States and worldwide are doing more than addressing the problem of climate change. They are also improving their competitive positioning, according to a new report from the Pew Center on Global Climate Change.

The report, Corporate Greenhouse Gas Reduction Targets uses case studies of a variety of companies that have established climate-related targets for reducing their emissions and/or energy use to show how the adoption of such targets, along with concerted efforts to meet them, can help improve performance and bottom-line results. All of the profiled companies view their efforts to set and meet climate-related targets as a way to reduce production costs and enhance product sales today. The companies also report that, in working to achieve their targets, they are improving their prospects for success under future regulatory and market environments.

"These companies understand that the world cannot avoid dealing in a serious way with climate change," said Eileen Claussen, President of the Pew Center on Global Climate Change. "They know that their climate-friendly investments will pay off. And they see that taking action now and not later can drive new efficiencies, performance improvements and innovation."

This report was authored by a team from Global Change Strategies International. Drawing on the experiences of companies that are part of the Pew Center's Business Environmental Leadership Council (BELC), the report explores the companies' reasons for adopting targets, their choices of various types and levels of targets, their plans for meeting the targets, and their progress to date. The report also provides guidance to businesses that are considering climate-related targets, based on the experiences of the profiled companies, which include ABB, Entergy, IBM, Shell, Toyota, and United Technologies Corporation.

Talking Targets

Corporate Greenhouse Gas Reduction Targets defines climate-related targets as quantitative performance objectives for indicators related to climate change, such as greenhouse gas emissions or energy use. One of the report's key conclusions is that setting climate-related targets can help companies prepare for future mandates by investing now to reduce greenhouse gas emissions. In addition, by taking the initiative and showing how emissions can be reduced in cost-effective ways, the companies profiled in the report believe they can contribute to the design of efficient and equitable climate policy. They also believe that their adoption of climate-related targets enhances their reputation as environmental leaders in the marketplace.

"The diversity in the type and scope of targets and implementation activities that companies have taken on voluntarily indicates that policies to reduce emissions should be as flexible as possible," reports Eileen Claussen, President of The Pew Center on Global Climate Change.

At the same time that it cites the business advantages that can accompany a commitment to climate-related targets, the Pew Center report also notes the inherent risks of such a strategy. The companies profiled in the report are acting on the assumption that government will sooner or later develop a policy on climate change, that it will allow companies flexibility, and that it will reward and not punish early movers. If these assumptions turn out to be wrong, the companies could be disadvantaged in relation to competitors who were less proactive.

Part of "Solutions" Series

Corporate Greenhouse Gas Reduction Targets was authored by Michael Margolick and Doug Russell of Global Change Strategies International. The report is part of the Pew Center's Solutions series, which is aimed at providing individuals and organizations with tools to evaluate and reduce their contributions to climate change. Other Pew Center series focus on domestic and international policy issues, environmental impacts, and the economics of climate change.

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The Pew Center was established in May 1998 by the Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is conducting studies, launching public education efforts and working with businesses to develop market-oriented solutions to reduce greenhouse gases. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. The Pew Center includes the Business Environmental Leadership Council, which is composed of 36 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.

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