Economics

Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read More
 

Additional topic 1 - Cost containment

Our Response to:

"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"

Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
February 2006

Additional Topic #1
Download Additional Topic #1 (pdf)
Download Cost Containment Chart (pdf)

Cost containment: A function of the whole package

The Center and most of the over 30 large corporations surveyed by the Center believe that, rather than focusing on any one design element in isolation, any bill must be evaluated as a whole, especially in minimizing the costs to covered entities and the economy.  The issue is raised by a design question not specifically mentioned in the White Paper: the concept of a “safety valve.”  Under a safety valve provision, exemplified by the recommendation of the National Commission on Energy Policy (NCEP), covered entities would be allowed to pay the implementing agency a specified amount per ton of GHG instead of submitting emissions allowances, thus capping the cost per ton at the specified “safety valve” level.  In fact, a safety valve is only one tool for providing cost containment.  Moreover, it is one that could limit environmental effectiveness of the program and present complications for linking to other trading programs (as discussed in response to Question 3).  A GHG cap-and-trade program can be designed to minimize costs using a variety of other approaches:

  • selection of moderate targets and timetable;
  • advanced notice of policy;
  • banking of allowances and offsets;
  • borrowing of allowances;
  • staggering compliance deadlines;
  • extending compliance deadlines;
  • providing consumer dividends (payments made to energy consumers to compensate them for any increased energy costs);
  • providing relief for individual emitters;
  • inclusion of offsets;
  • linkage with other trading systems; and
  • complementary policies that drive energy efficiency and technological innovation

Additionally, low price caps act as a tax.  Taxes have been shown to be fairly ineffective in the short term at eliciting significant results. (See attached chart on cost containment mechanisms.)

The companies surveyed by us hold a wide range of opinions about the policy benefits of a safety valve, though most say that a safety valve may be politically necessary. Of companies that favor a safety valve, or at least think it might be politically necessary, several note that $7/ton of CO2 (the initial level recommended by NCEP) is too low to achieve significant emissions reductions or to drive market-based transition to a wide range of low-carbon technologies. If a safety valve is used, it should be set high enough to encourage meaningful change. For instance, integrated gasification combined cycle (IGCC) coal or supercritical pulverized coal electric power generation combined with carbon capture and sequestration (CCS) may only become economically viable on a self-sustaining basis (without continued government subsidy) with CO2 values at or above $25-35 per ton. This does not necessarily mean the safety valve should be set immediately at $25-$35 per ton. Rather, the starting point and growth curve of the safety valve must be such that the net present value of paying it will be more than what companies project will be that of investment in IGCC-CCS.

One company notes that mere inclusion of some reasonable cost limit may be more important for getting legislation enacted than the limit’s specific level. The presence of a safety valve, even at a high dollar level, could undercut assertions that GHG regulation will bring about the “end of the economy,” since it would remove from consideration the modeling results that posit extreme cases of unlimited cost. Another company notes that, when GHG regulation is viewed as inevitable and may affect upstream energy producers, financial structuring for large new oil and gas production projects may not be possible without a price cap, since otherwise these projects would involve a large unknown liability that constrains equity value and cash flows.

A few companies opposea safety valve altogether because of its distortionary effect on the market, or only favor a safety valve with a sunset clause. Companies express concern that a safety valve would complicate linkage between the U.S. carbon trading market and the cap-and-trade programs of other countries, which likely would increase the cost of U.S. reductions and reduce the economic efficiency of the system. Some companies point out that the market, left to develop without interference, will develop a range of financial products and services that provide cost certainty to firms but are less distortionary than safety valves. Under a mature carbon emissions trading market with adequate certainty about cap levels beyond the short term, financial services firms will offer hedging products such as forward call options that allow companies to lock in a maximum cost.

Press Release: Agenda for Climate Action

Press Release
February 8, 2006

Contact: Katie Mandes, (703) 516-0606

PEW CENTER ON GLOBAL CLIMATE CHANGE RELEASES FIRST COMPREHENSIVE APPROACH TO CLIMATE CHANGE

All Sectors Must Share in Solution

WASHINGTON, D.C. – The Pew Center on Global Climate Change released the first comprehensive plan to reduce greenhouse gas emissions in the United States.  The Agenda for Climate Action identifies both broad and specific policies, combining recommendations on economy-wide mandatory emissions cuts, technology development, scientific research, energy supply, and adaptation with critical steps that can be taken in key sectors.  The report is the culmination of a two-year effort that articulates a pragmatic course of action across all areas of the economy.  

The report calls for a combination of technology and policy and urges action in six key areas:  (1) science and technology, (2) market-based programs, (3) sectoral emissions, (4) energy production and use, (5) adaptation, and (6) international engagement.  Within these six areas, the Agenda outlines fifteen specific recommendations that should be started now, including U.S. domestic reductions and engagement in the international negotiation process.  All the recommendations are capable of implementation in the near-term. 

The report concludes that there is no single technology fix, no single policy instrument, and no single sector that can solve this problem on its own.  Rather, a combination of technology investment and market development will provide for the most cost-effective reductions in greenhouse gases, and will create a thriving market for GHG-reducing technologies.  To address climate change without placing the burden on any one group, the report urges actions throughout the economy. 

“Some believe the answer to addressing climate change lies in technology incentives.  Others say limiting emissions is the only answer.  We need both,” said Eileen Claussen, President of the Pew Center.

Emissions in the United States continue to rise at an alarming rate.  U.S. carbon dioxide emissions have grown by more than 18% since 1990, and the Department of Energy now projects that they will increase by another 37% by 2030. 

Joining the Pew Center at the announcement were representatives from the energy and manufacturing sectors.  Speaking at the release were:  David Hone, Group Climate Change Adviser, Shell International Limited; Melissa Lavinson, Director, Federal Environmental Affairs and Corporate Responsibility, PG&E Corporation; Bill Gerwing, Western Hemisphere Health, Safety, Security, and Environment Director, BP; John Stowell, Vice President, Environmental Strategy, Federal Affairs and Sustainability, Cinergy Corp., Ruksana Mirza, Vice President, Environmental Affairs, Holcim (US) Inc.; and Tom Catania, Vice President, Government Relations, Whirlpool Corporation.

Recommendations:

While actions are needed across all sectors, some steps will have a more significant, far-reaching impact on emissions than others and must be undertaken as soon as possible. 

  • A program to cap emissions from large sources and allow for emissions trading will send a signal to curb releases of greenhouse gases while promoting a market for new technologies.
  • Transportation is responsible for roughly one-third of our greenhouse gas emissions, and this report addresses this sector through tradable emissions standards for vehicles.
  • Because energy is at the core of the climate change problem, the report makes several recommendations in this area: calling for increased efficiency in buildings and products, as well as in electricity generation and distribution.  Incentives and a nationwide platform to track and trade renewable energy credits are recommended to support increased renewable power.  In recognition of the key role that coal plays in U.S. energy supply, the report calls for the capture and sequestration of carbon that results from burning coal. Nuclear power currently provides a substantial amount of non-emitting electricity, and is therefore important to keep in the generation mix. The report recommends support for advanced generation of nuclear power, while noting that issues such as safety and waste disposal must also be addressed.
  • While most of the recommendations focus on mitigation efforts, the report acknowledges that some impacts are inevitable and are already being seen. As a result, it proposes development of a national adaptation strategy to plan for a climate-changing world. 
  • Finally, despite the importance of efforts by individual countries on this issue, climate change cannot be addressed without engagement of the broader international community.  The report recommends that the U.S. participate in international negotiations aimed at curbing global greenhouse gas emissions by all major emitting countries.

Other recommendations include: long-term stable research funding, incentives for low-carbon fuels and consumer products, funding for biological sequestration, expanding the natural gas supply and distribution network, and a mandatory greenhouse gas reporting program that can provide a stepping stone to economy-wide emissions trading. 

The full text of this and other Pew Center reports is available at http://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 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.

Political Climate Change

Full Article (PDF)

by Truman Semans, Director for Markets and Business Strategy at the Pew Center--Appeared in Petroleum Economist, September 2005
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Press Release: New Report Examines Impacts of Storing Carbon

Press Release           
For Immediate Release:  January 19, 2005             

Contact:  Katie Mandes
703.516-0606 

CLIMATE SOLUTIONS AND FORESTS
New report examines the economic and climate impacts of storing carbon in trees

Washington, DC — Cost-effective climate change policies should include storage of carbon dioxide (CO2) in U.S. forests, according to a new report from the Pew Center on Global Climate Change. 

“Climate change is the major global environmental challenge of our time and in order to deal with it in the most cost-effective way, we need to consider the full range of solutions – and that includes carbon storage in forests,” said Eileen Claussen, President of the Pew Center on Global Climate Change.  “If we ignore the potential for forest-based sequestration, any projection of the costs and feasibility of addressing climate change is going to be overly pessimistic and wrong.”

Most analyses of the climate issue have tended to focus on the implications of reducing emissions of carbon dioxide and other greenhouse gases from key industrial and transportation sources. Less attention is paid to the potential for storing (or “sequestering”) carbon in forests and other ecosystems.  Both emissions reduction and carbon sequestration are important strategies for addressing climate change.

The Pew Center report, The Cost of U.S. Forest-based Carbon Sequestration, investigates the potential for incorporating land-use changes into climate policy.  Authored by economists Robert Stavins of Harvard University and Kenneth Richards of Indiana University, the Pew Center report looks at the true “opportunity costs” of using land for sequestration, in contrast with other productive uses. The report also examines the many factors that drive the economics of storing carbon in forests over long periods of time.

Among the authors’ key conclusions: The estimated cost of sequestering up to 500 million tons of carbon per year—an amount that would offset up to one-third of current annual U.S. carbon emissions—ranges from $30 to $90 per ton. On a per-ton basis, this is comparable to the cost estimated for other options for addressing climate change, including fuel switching and energy efficiency.

A sequestration program on the scale envisioned by the authors would involve large expanses of land and significant up-front investment. As a result, implementation would require careful attention to program design and a phased approach over a number of years. Nevertheless, the report offers new evidence that sequestration can and should play an important role in the United States’ response to climate change.

“This report shows that large-scale forest-based sequestration can be a cost-effective tool which should be considered seriously by policymakers,” said the Pew Center's Claussen.

The full text of this and other Pew Center reports is available at http://www.c2es.org.

###

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.

The Cost of U.S. Forest-based Carbon Sequestration

US Forestbased Carbon Sequestration Cove

The Cost of U.S. Forest-based Carbon Sequestration

Prepared by the Pew Center on Global Climate Change
January 2005

By:
Robert N. Stavins, Harvard University
Kenneth R. Richards, Indiana University

Press Release

Download Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Most analyses to date of options for mitigating the risk of global climate change have focused on reducing emissions of carbon dioxide and other greenhouse gases (GHGs). Much less attention has been given to the potential for storing (or “sequestering”) significant amounts of carbon in forests and other ecosystems as an alternative means of offsetting the effect of future emissions on GHG concentrations in the atmosphere. The tendency to overlook sequestration opportunities can lead to incorrect and overly pessimistic conclusions about both the cost and feasibility of addressing global climate change in the decades ahead.

To remedy that gap, and to inform U.S. policymaking, the Pew Center asked economists Robert Stavins of Harvard University and Kenneth Richards of Indiana University to synthesize and expand upon available studies of forest-based carbon sequestration in the United States. They analyze the true opportunity costs of using land for sequestration, in contrast with other productive uses, and examine the multiple factors that drive the economics of storing carbon in forests over long periods of time. These factors include forest management practices for different tree species and geographical regions; the costs of land and competing prices for agricultural products; the ultimate disposition of forest materials, including the potential for fire damage as well as harvesting for use in different kinds of end products; the specific carbon management policy employed; and the effect of key analytical parameters, including in particular the discount rate applied to future costs and benefits. The authors then adjust the findings from major recent studies of forest sequestration to reflect consistent assumptions in each of these areas and use the normalized results to establish a likely range for the overall scope and likely costs of large-scale carbon sequestration in the United States. 

Their conclusions are striking. Estimated costs for sequestering up to 500 million tons of carbon per year—an amount that would offset up to one-third of current annual U.S. carbon emissions—range from $30 to $90 per ton. On a per-ton basis, these costs are comparable to those estimated for other climate change mitigation options such as fuel switching or energy efficiency. A sequestration program on this scale would involve large expanses of land and significant upfront investment; as such, it would almost certainly require a phased approach over a number of years and careful attention to policy details to ensure efficient implementation. Nevertheless, the results of this study indicate that sequestration can play an important role in future mitigation efforts and must be included in comprehensive assessments of policy responses to the problem of global climate change.

The Pew Center and the authors are grateful to Ralph Alig, Ronald Sands, and Brent Sohngen for helpful comments on previous drafts of this report. A future Pew Center domestic policy report will focus on design aspects of a domestic mitigation program that includes sequestration. Insights from this report and from companion papers in the Pew Center’s Economics series are being utilized to develop a state-of-the-art assessment of the costs to the United States of taking action to address climate change.

Executive Summary

When and if the United States decides on mandatory policies to address global climate change, it will be necessary to decide whether carbon sequestration should be part of the domestic portfolio of compliance activities. The potential costs of carbon sequestration policies will presumably be a major criterion, so it is important to assess the cost of supplying forest-based carbon sequestration in the United States. In this report we survey major studies, examine the factors that have affected their carbon sequestration cost estimates, and synthesize the results.

The Earth’s atmosphere contains carbon dioxide (CO2) and other greenhouse gases (GHGs) that act as a protective layer, causing the planet to be warmer than it would otherwise be. If the level of CO2 rises, mean global temperatures are also expected to rise as increasing amounts of solar radiation are trapped inside the “greenhouse.” The level of CO2 in the atmosphere is determined by a continuous flow among the stores of carbon in the atmosphere, the ocean, the earth’s biological systems, and its geological materials. As long as the amount of carbon flowing into the atmosphere (as CO2) and out (in the form of plant material and dissolved carbon) are in balance, the level of carbon in the atmosphere remains constant.

Human activities—particularly the extraction and burning of fossil fuels and the depletion of forests—are causing the level of GHGs (primarily CO2) in the atmosphere to rise. The primary sources of the slow but steady increase in atmospheric carbon are fossil fuel combustion, which contributes approximately 5.5 gigatons (billion metric tons) of carbon per year, and land-use changes, which account for another 1.1 gigatons. In contrast, the oceans absorb from the atmosphere approximately 2 more gigatons of carbon than they release, and the earth’s ecosystems appear to be accumulating another 1.2 gigatons annually. In all, the atmosphere is annually absorbing approximately 3.4 gigatons of carbon more than it is releasing.

While the annual net increase in atmospheric carbon may not sound large compared with the total amount of carbon stored in the atmosphere—750 gigatons—it adds up over time. For example, if the current rate of carbon accumulation were to remain constant, there would be a net gain in atmospheric carbon of 25 percent over the next fifty years. In fact, the rate at which human activity contributes to increases in atmospheric carbon is accelerating. Emissions from land-use change have been growing at the global level, though not nearly as rapidly as emissions from fossil fuel combustion. In the United States, land-use change—which was a substantial source of carbon emissions in the 19th and early 20th centuries—became a sink (or absorber of carbon) by the second half of the 20th century. However, the rate of carbon absorption by terrestrial systems in the United States peaked around 1960 and has been falling since.

It may be possible to increase the rate at which ecosystems remove CO2 from the atmosphere and store the carbon in plant material, decomposing detritus, and organic soil. In essence, forests and other highly productive ecosystems can become biological scrubbers by removing (sequestering) CO2 from the atmosphere. Much of the current interest in carbon sequestration has been prompted by suggestions that sufficient lands are available to use sequestration for mitigating significant shares of annual CO2 emissions, and related claims that this approach provides a relatively inexpensive means of addressing climate change. In other words, the fact that policy makers are giving serious attention to carbon sequestration can partly be explained by (implicit) assertions about its marginal cost, or (in economists’ parlance) its supply function, relative to other mitigation options.

The economist’s notion of cost, or more precisely, opportunity cost, is linked with—but distinct from—everyday usage of the word. Opportunity cost is an indication of what must be sacrificed to obtain something. In the environmental context, it is a measure of the value of whatever must be sacrificed to prevent or reduce the chances of a negative environmental impact. Opportunity cost typically does not coincide with monetary outlays—the accountant’s measure of costs. This may be because out-of-pocket costs fail to capture all of the explicit and implicit costs that are incurred, or it may be because the prices of the resources required to produce an environmental improvement are themselves an inaccurate indication of the opportunity costs of those resources. Hence, the costs of a climate policy equal the social benefits that are foregone when scarce resources are employed to implement that policy, instead of putting those resources to their next best use.

The costs of carbon sequestration are typically expressed in terms of monetary amounts (dollars) per ton of carbon sequestered—that is, as the ratio of economic inputs to carbon mitigation outputs for a specific program. The denominator, carbon sequestered, is determined by forest management practices, tree species, geographic location and characteristics, and disposition of forest products involved in a hypothetical policy or program. The costs reflected in the numerator include the costs of land, planting, and management, as well as secondary costs or benefits such as non-climate environmental impacts or timber production. Well-developed analytical models include landowners’ perceptions regarding all relevant opportunity costs, including costs for land, conversion, plantation establishment, and maintenance.

Among the key factors that affect estimates of the cost of forest carbon sequestration are: (1) the tree species involved, forestry practices utilized, and related rates of carbon uptake over time; (2) the opportunity cost of the land—that is, the value of the affected land for alternative uses; (3) the disposition of biomass through burning, harvesting, and forest product sinks; (4) anticipated changes in forest and agricultural product prices; (5) the analytical methods used to account for carbon flows over time; (6) the discount rate employed in the analysis; and (7) the policy instruments used to achieve a given carbon sequestration target.

Given the diverse set of factors that affect the cost and quantity of potential forest carbon sequestration in the United States, it should not be surprising that cost studies have produced a broad range of estimates. This report identifies eleven previous analyses that are good candidates for comparison and synthesis. Results from these studies were made mutually consistent, or normalized, by adjusting for constant-year dollars, identical discount rates, identical geographic scope, and reporting in equivalent annual costs. This normalization narrows the range of results considerably; for a program size of 300 million tons of annual carbon sequestration, nearly all estimated supply functions (or marginal costs) fall within the range of $25 - $75 per short ton of carbon ($7.50 - $22.50 per metric ton of CO2-equivalent). This range increases somewhat—to $30 - $90 per ton of carbon—for programs sequestering 500 million tons annually. In addition, econometric methods were used to estimate the central tendency (or “best-fit”) of the normalized marginal cost functions from the eleven studies compared here; this is presented as an additional result of the analysis and as a rough guide for policy makers of the projected availability of carbon sequestration at various costs.

Three major conclusions emerge from our survey and synthesis:

1) There is a broad range of possible forest-based carbon sequestration opportunities available at various magnitudes and associated costs.

This range depends upon underlying biological and economic assumptions, as well as the analytical methods employed. Several factors affect estimates of cost: forest species and practices; the value of land for alternative uses; the disposition of biomass, forest and agricultural product prices; methods used to account for carbon flows over time; the discount rate employed; and the policy instruments used.

2) A systematic comparison of sequestration supply estimates from national studies produces a range of $25 to $75 per ton for a program size of 300 million tons of annual carbon sequestration.

The range increases somewhat—to $30 - $90 per ton of carbon—for programs sequestering 500 million tons annually. This range is obtained from a synthesis of eleven national studies of U.S. sequestration opportunities in the forestry sector, where each study was adjusted for use of equivalent annual costs in constant-year dollars, together with identical discount rates and identical geographic scope. This approach allows for consistent comparisons across a variety of studies and narrows the range of estimated supply functions considerably.

3) When a transparent and accessible econometric technique is employed to estimate the central tendency (or “best-fit”) of costs estimated in these eleven studies, the resulting supply function for forest-based carbon sequestration in the United States is approximately linear up to 500 million tons of carbon per year, at which point marginal costs reach approximately $70 per ton.

A 500-million-ton-per-year sequestration program would be very significant, offsetting approximately one-third of annual U.S. carbon emissions. At this level, the estimated costs of carbon sequestration are comparable to typical estimates of the costs of emissions abatement through fuel switching and energy efficiency improvements. This result indicates that sequestration opportunities ought to be included in the economic modeling of climate policies. It further suggests that if it is possible to design and implement a domestic carbon sequestration program, then such a program ought to be included in a cost-effective portfolio of compliance strategies when and if the United States enacts a mandatory domestic GHG reduction program.

Conclusions

When and if the United States chooses to implement a domestic GHG reduction program and/or joins in any international efforts to mitigate climate change, it will be necessary to decide whether carbon sequestration policies should be part of the domestic portfolio of compliance activities. The potential opportunities and associated costs of carbon sequestration will presumably be a major criterion in determining its role and so it is important to assess the cost of supplying forest-based carbon sequestration in the United States. Failure to include carbon sequestration as a mitigation option in economic models will lead to over-estimation of the cost of reducing net GHG emissions. However, including carbon sequestration in a naïve manner could produce misleading results as well.

In this report, we have surveyed major previous studies of sequestration, examining the factors that have affected their cost estimates and synthesizing their results. The assumptions that stand out as being particularly important in previous cost estimates include those concerning biological factors such as species, forestry practices, and carbon yield patterns; the opportunity cost of land; management practices; methods of disposition of biomass; relevant prices; and policy instruments used to achieve carbon sequestration.

We identified eleven previous analyses of carbon sequestration costs in the United States as particularly good candidates for comparison and synthesis and normalized their findings to narrow the useful range of estimated costs and allow for consistent comparisons. The normalization included adjustments for constant year dollars, use of identical discount rates, adjustments to scale for identical (national) geographic scope, and consistent reporting in equivalent annual costs. As anticipated, normalizing results across studies led to a significant narrowing of the range of estimated marginal cost functions (Figure 4). This range was subsequently narrowed further by excluding regional studies, since we judged the extrapolation from regional results to national estimates to be problematic. After excluding the three regional studies, our analysis shows that at 300 million tons of annual carbon sequestration nearly all supply functions fall within a marginal cost range of $25 - $75 per short ton of carbon ($7.50 - $22.50 per metric ton of CO2-equivalent). Not surprisingly, the range increases somewhat—to $30 - $90 per ton—for programs sequestering 500 million tons annually (Figure 5).

To make our results more transparent and accessible, we also used econometric techniques to estimate the central tendency of these marginal cost functions; the resulting “best fit” cost curve is presented as an additional output of our analysis. Graphically (Figure 6), it approximates a straight line up to 500 million tons of annual sequestration at which point each additional ton of carbon sequestration costs a bit more than $70 per ton.

Three conclusions emerge from our analysis:

(1) there is a broad range of possible forest-based carbon sequestration supply functions whose shape and magnitude depend on what is assumed about underlying biological and economic factors, as well as on the analytical methods used to estimate costs and supply;

(2) by limiting the set of supply functions to those that come from national studies and that lend themselves to quantitative normalization, the results from previous analyses can be rendered more comparable and the range of estimated supply functions can be narrowed considerably;

(3) when a transparent and accessible approach is employed to estimate econometrically the central tendency of the individual studies making up this range of results, the resulting marginal cost function indicates that the cost of supplying forest-based carbon sequestration in the United States is nearly, though not exactly, linear up to 500 million tons per year, where marginal costs reach a bit more than $70 per ton.

The results presented in this report represent a synthesis of the best existing cost studies, not the final word on the topic. Future research could benefit from further attention to important issues of programmatic leakage (or countervailing forces) that might diminish the positive impacts of a program and thus raise the social cost of sequestration, the impermanence or reversibility of forest carbon sequestration, the broader impacts of a forest carbon sequestration program on the agriculture and forestry sectors and on public finance and tax systems, and the potential secondary costs and benefits of a carbon sequestration program with respect to, for example, natural resources such as water quality and wildlife habitat. Moreover, additional exploration is needed of the interaction between different policy mechanisms to promote sequestration (whether offset trading, agricultural subsidies for specific practices, command-and-control, or direct government production) and the ultimate opportunity costs of sequestration. In general, there may be a tradeoff between the power of incentives directly linked to desired outcomes (in this case the quantity of carbon sequestered) and the costs of implementing and monitoring a program. The optimal program design for promoting sequestration, and how that design affects the issues delineated above, merits more attention.

It is important to understand the magnitude of the hypothetical programs under consideration in this study. The amount of agricultural land involved is huge—approximately 27 million acres for a program achieving 50 million tons of sequestration per year and 148 million acres for a program achieving 300 million tons of sequestration per year. Total annual costs, based on the cost estimates developed here, would be approximately $840 million and $7.2 billion, respectively, for 50 and 300 million ton programs. Because much of this cost would occur upfront, the total social cost in present value terms may be thought of as similar to incurring a one-time cost of $17 billion to $143 billion. Needless to say, this would be a large amount for the U.S. or any other economy to absorb—financially, physically, and administratively—and so a program of this size would probably need to be implemented gradually over many years.

The estimate of carbon sequestration potential discussed in this report (i.e., up to 500 million tons per year) would require a very significant sequestration program, equivalent to about one-third of annual U.S. carbon emissions. Given that available sequestration cost estimates (at these quantity levels) are not very far above typical cost estimates for emissions abatement through fuel switching and energy efficiency improvements, it follows that a domestic carbon sequestration program (assuming such a program can be designed and implemented) ought to be included in a cost-effective portfolio of compliance strategies if and when the United States chooses to implement a domestic GHG reduction program.

 

 

Kenneth R. Richards
Robert N. Stavins
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Taking The Long View

Read the full article (pdf)

by Elliot Diringer

This article appeared in Environmental Finance, Dec/Jan 2004 Issue

 

by Elliot Diringer, Director of International Strategies— Appeared in Environmental Finance, Dec/Jan 2004 Issue
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An Effective Approach to Climate Change

POLICY FORUM: CLIMATE POLICY

An Effective Approach to Climate Change

By Eileen Claussen

Enhanced online at www.sciencemag.org/cgi/content/full/306/5697/816
Originally published October 29, 2004: VOL 306 SCIENCE

The Bush Administration’s “business as usual” climate change policy (1), with limited R&D investments, no mandates for action, and no plan for adapting to climate change, is inadequate. We must start now to reduce emissions and to spur the investments necessary to reduce future emissions. We also need a proactive approach to adaptation to limit the severity and costs of climate change impacts.

Science and Economics

Those who are opposed to national climate change policies make much of the uncertainties in climate models, specifically the rate and magnitude of global warming. The Climate Change Science Program’s plan, points out Secretary Abraham, would address these uncertainties, although he offers no assurances that the program will be adequately funded. However, the scientific community already agrees on three key points: global warming is occurring; the primary cause is fossil fuel consumption; and if we don’t act now to reduce greenhouse gas (GHG) emissions, it will get worse.

Yes, there are uncertainties in future trends of GHG emissions. However, even if we were able to stop emitting GHGs today, warming will continue due to the GHGs already in the atmosphere (2).

National climate change policy has not changed significantly for several years. The first President Bush pursued a strategy of scientific research and voluntary GHG emissions reductions. The new Climate Change Science Program has a budget comparable, in inflation-adjusted dollars, to its predecessor, the Global Climate Research Program, during the mid-1990s. The Administration’s current GHG intensity target will increase absolute emissions roughly 14% above 2000 levels and 30% above 1990 levels by 2010 (3). These increases will make future mitigation efforts much more difficult and costly.

While reducing uncertainty is important, we must also focus on achieving substantial emissions reductions and adapting to climate change.

Low-Carbon Technology Development

The Administration’s more substantive R&D initiatives, such as Hydrogen Fuels and FutureGen (clean coal) are relatively modest investments in technologies that are decades away from deployment. We need a far more vigorous effort to promote energy efficient technologies; to prepare for the hydrogen economy; to develop affordable carbon capture and sequestration technologies; and to spur the growth of renewable energy, biofuels, and coal-bed methane capture.

Equally important, we need to encourage public and private investment in a wide-ranging portfolio of low-carbon technologies. Despite the availability of such technologies for energy, transportation, and manufacturing, there is little motivation for industry to use them. Widespread use of new technology is most likely when there are clear and consistent policy signals from the government (4).

One-fifth of U.S. emissions comes from cars and trucks (5). The Administration’s targets to improve fuel economy for light trucks and “sports utility” vehicles (SUVs) by 1.5 miles per gallon over the next three model years fall far short of what is already possible. California is setting much more ambitious emission standards for cars and light trucks. Current efficiency standards can be improved by 12% for subcompacts to 27% for larger cars without compromising performance (5).Hybrid vehicles can already achieve twice the fuel efficiency of the average car.

About one-third of U.S. emissions results from generating energy for buildings (6). Policies that increase energy efficiency using building codes, appliance efficiency standards, tax incentives, product efficiency labeling, and Energy Star programs, can significantly reduce emissions and operating costs. Policies that promote renewable energy can reduce emissions and spur innovation.Sixteen states have renewable energy mandates (7).

The Power of the Marketplace

Policies that are market driven can help achieve environmental targets cost-effectively. A sustained price signal, through a cap-and-trade program, was identified as the most effective policy driver by a group of leaders from state and local governments, industry, and nongovernmental organizations (NGOs) (8).

Senators Lieberman (D–CT) and McCain’s (R–AZ) 2003 Climate Stewardship Act proposes a market-based approach to cap GHG emissions at 2000 levels by 2010. The bill, opposed by the Administration, garnered the support of 44 Senators. Nine Northeastern states are developing a regional “cap-and-trade” initiative to reduce power plant emissions. An important first step would be mandatory GHG emissions reporting.

Adapting to Climate Change

An important issue that Secretary Abraham failed to address is the need for anticipating and adapting to the climate change we are already facing. Economic sectors with long-lived investments, such as water resources, coastal resources, and energy may have difficulty adapting (9). A proactive approach to adaptation could limit the severity and costs of the impacts of climate change.

By limiting emissions and promoting technological change, the United States could put itself on a path to a low-carbon future by 2050, cost-effectively. Achieving this will require a much more explicit and comprehensive national commitment than we have seen to date. The rest of the developed world, including Japan and the European Union, is already setting emission-reduction targets and enacting carbon-trading schemes. Far from “leading the way” on climate change at home and around the world, as Secretary Abraham suggested, the United States has fallen behind.

References and Notes

1. S. Abraham, Science 305, 616 (2004). |
2. R. T. Wetherald, R. J. Stouffer, K. W. Dixon, Geophys. Res. Lett. 28, 1535 (2001).
3. “Analysis of President Bush’s climate change plan” (Pew Center on Global Climate Change,Arlington,VA, February 2002); available at www.c2es.org.
4. J. Alic, D. Mowery, E. Rubin, “U.S. technology and innovation policies: Lessons for climate change” (Pew Center on Global Climate Change,Arlington,VA, 2003).
5. National Research Council, “The effectiveness and impact of corporate average fuel economy (CAFÉ) standards” (National Academies Press, Washington, DC, 2002).
6. “U.S. greenhouse gas emissions and sinks: 1990–2002”(EPA/430-R-04-003, Environmental Protection Agency, Washington, DC, 2002), Table 3–6.2002.
7. Workshop proceedings, “The 10-50 solution: Technologies and policies for a low-carbon future,”Washington, DC, 25 and 26 March 2004 (The Pew Center on Global Climate Change and the National Commission on Energy Policy, Arlington,VA, in press).
8. J. Smith, “A synthesis of potential climate change impacts on the United States” (Pew Center on Global Climate Change, Arlington,VA, 2004). Published by AAAS

by Eileen Claussen, President— Appeared in Science, October 29, 2004
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Induced Technological Change and Climate Policy

ITC Cover

Induced Technological Change and Climate Policy

Prepared for the Pew Center on Global Climate Change
October 2004

By Lawrence H. Goulder, Stanford University

Press Release

Download Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

Over the upcoming decades, large-scale reductions in emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs) will be required to reduce the risks of global climate change.  In order to achieve this transformation, the development and diffusion of new technologies to reduce GHG emissions will be critical.  As the world’s largest and most inventive economy, the United States must play a decisive role in the discovery, innovation, and marketing of these new technologies, and climate policies can be influential drivers in this process.

Technological change occurs for a variety of reasons as firms compete in existing and new markets.  However, climate policies can spur additional or “induced” technological change (ITC).  This can be achieved through technology “push” policies that boost the invention and innovation processes (such as funding for R&D), and through direct emissions control policies that “pull” new technologies into the market (such as a GHG cap-and-trade program). 

In this report, Lawrence Goulder of Stanford University explores the role of induced technological change (ITC), and examines the implications of ITC for the effective design of climate policy.  These implications fall into four main categories: (1) how much ITC can lower the costs of climate policies, (2) what this means for the timing of policies, (3) the value of announcing policies well in advance of enactment, and (4) the most appropriate use of various policy instruments to boost technological change.  Until recently, economic models of climate change could not address these issues.  However, state-of-the-art modeling now treats ITC as an integral or “endogenous” component in calculations, thus providing new insights into this critical topic.
 
This report finds that all economic models that include ITC produce lower overall cost estimates for GHG reductions, especially when the climate policy is announced in advance.  Goulder also concludes that in order to reduce GHG emissions most cost-effectively, both technology-push and emissions reduction policies are required.  In addition, although studies show different implications of ITC on the overall timing of climate policy, all find that some abatement must begin now in order to jump-start the critical process of technological change.

The Pew Center and the author are grateful to Ian Parry, Richard Newell, Ev Ehrlich, Alan Manne, and Koshy Mathai for helpful comments on previous drafts of this report, and to Mark Jacobsen for his research assistance.  Previous Pew Center reports have addressed the role of technology in economics modeling (Edmonds et al.) and lessons for climate change from other U.S. programs in technology and innovation (Alic et al.). Insights from this report, together with companion papers in the Pew Center’s Economics series, are being utilized in the development of a state-of-the-art assessment of the costs to the United States of climate change mitigation.

Executive Summary

A central goal of climate policy is to avoid potential changes in climate and associated adverse biophysical impacts by slowing or avoiding the atmospheric build-up of greenhouse gases (GHGs).  Technological change will crucially influence the extent to which nations achieve this goal.  The direction and extent of technological change over the next century has profound implications for emissions and atmospheric concentrations of GHGs over time, the extent of future climate change, and associated impacts on human welfare. 
Climate policy can alter the future by influencing the rate and direction of technological change.  “Induced technological change” (ITC) here refers to the additional technological change that is brought about by policy.  This report explores how climate policy can induce technological change and examines the implications of ITC for the effective design of climate policy.

Some of the main findings are:

1.  The presence of ITC lowers the costs of achieving emissions reductions. By stimulating additional technological change, climate policy can reduce the costs of meeting a given target for reductions in GHG emissions or concentrations.  Until recently, most economy-wide climate change policy studies ignored ITC.  Models that disregard policy-induced technological advances will tend to overestimate policy costs. 


2.  The presence of ITC justifies more extensive reductions in GHGs than would otherwise be called for. Because ITC lowers the costs of achieving emissions reductions, the optimal extent of GHG reduction is greater than would be predicted by models that ignore ITC.  The net benefits from climate policy are larger as well.


3.  The presence of ITC alters the optimal timing of emissions abatement. Although considerable technological change occurs in the absence of policy intervention, climate policy can induce additional technological change by providing incentives for additional research and development (R&D) and by stimulating additional experience with alternative technologies or processes, thereby generating “learning-by-doing.”  Analysts offer contrasting views as to how ITC alters the optimal timing of emissions abatement compared to a case where climate policy does not affect the rate of technological change (that is, the case with no ITC).  Does ITC justify more extensive near-term emissions reductions, or does it justify postponing reductions?  Recent analyses indicate that insofar as technological change results from R&D, the presence of ITC justifies somewhat less abatement in the near-term, and more abatement in the future (when technological change has lowered the costs of abatement).  On the other hand, if ITC primarily results from learning-by-doing, greater emphasis on abatement in the short term may be called for, since early abatement efforts accelerate the learning process and can thereby lower costs.


4.  In the presence of ITC, announcing climate policies in advance can reduce policy costs. Announcing policies in advance can lower the cost of meeting given targets for cumulative abatement or reductions in GHG concentrations.  Illustrative results indicate that announcing a $25 per ton carbon tax 10 years in advance can reduce discounted economic costs (as measured by changes in gross domestic product or GDP) by about a third, compared to the same climate policy imposed with no prior notice.


5.  Economic analysis offers a justification for public policies to induce technological change, even when the returns are highly uncertain. Uncertainties surround many aspects of ITC.  Neither the returns to a given investment in R&D nor the extent of future learning-by-doing can be precisely predicted.  As a result, one cannot estimate with precision the cost savings from ITC or pinpoint the optimal timing of abatement.  Moreover, while prior announcements of climate policies will yield cost-savings, uncertainties about costs of adjustment make it impossible to accurately forecast these savings.  Despite these uncertainties, two key market failures provide a strong rationale for public policy to stimulate ITC.  These are: (1) the “spillover benefits” to society as a result of R&D investments by individual firms and (2) the presence of negative “externalities” – adverse impacts that are not accounted for in the market prices of carbon based fuels.


6.  To promote ITC and reduce GHG emissions most cost-effectively, two types of policies are required:  policies to reduce emissions and incentives for technological innovation. This study emphasizes that two types of policies are necessary to address the two market failures noted above and to achieve, at least-cost to society, a given target for cumulative reductions in emissions or GHG concentrations.  Technology incentives can deal with the market failure created by firms’ inabilities to capture all the returns on their R&D investments.  Direct emissions policies (such as carbon caps or carbon taxes) can deal with the market failure created by climate-related externalities.  Attempting to address the climate change problem with only one of these policy approaches cannot fully correct both market failures.  As a result, adopting one approach is likely to involve higher costs than utilizing the two approaches in tandem.  To date, direct GHG emissions policies have had little political success at the federal level.  But there is a strong need for these policies, along with technology incentives, to deal with the prospect of climate change in a cost-effective manner.

Lawrence Goulder
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Press Release: New Report Examines How Cimate Policies Affect the Cost of Greenhouse Gas Mitigation

For Immediate Release: 
October 13, 2004     

Contact:
Katie Mandes 703-516-4146        

CLIMATE POLICY AND TECHNOLOGICAL CHANGE

New Report Examines How Cimate Policies Affect the Cost of Greenhouse Gas Mitigation

Washington, DC — With Russian ratification of the Kyoto Protocol now likely, the development and deployment of technologies to reduce global emissions is more critical than ever. While technological change occurs naturally as companies compete in the marketplace, climate policies can spur additional or “induced” technological change (ITC).

Induced Technological Change and Climate Policy, by Larry Goulder of Stanford University, explores the use of ITC in climate policy, using state-of-the-art economic modeling and analysis. Goulder finds that models that include ITC produce lower cost estimates for GHG reductions, and that costs are lowest when climate policies are announced in advance.  Furthermore, he finds that to reduce greenhouse gas emissions most cost-effectively, both policies that boost technological innovation, such as R&D funding, and policies that limit emissions, such as a GHG cap-and-trade program, are required.

“This research shows us that the costs of meeting a long-term CO2 emissions target using both R&D subsidies and a carbon tax (or cap-and-trade) is roughly 10 times less than with R&D subsidies alone,” said Eileen Claussen, President of the Pew Center on Global Climate Change.

A crucial point is that although studies show different implications of ITC on the overall timing of climate policy, all find that some abatement must begin now in order to jumpstart the critical process of technological change.  “Timing is crucial for dealing with this issue in a cost-effective manner; the longer we wait, the more expensive it will be,” said the Pew Center’s Claussen.

The full text of this and other Pew Center reports is available at http://www.c2es.org.  


###

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.

Global Climate Change and Coal's Future

Global Climate Change and Coal's Future

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

Spring Coal Forum 2004 - American Coal Council

May 18, 2004

It is a pleasure to be here in Dallas.  And I want to thank the American Coal Council for inviting me to address this forum. 

I thought I would open my remarks today with some commentary on the upcoming FOX movie about climate change—it is entitled “The Day After Tomorrow.”  It is not often, after all, that I get to talk about the movies in my speeches.  And I suppose that’s because there are not a lot of movies on the topic of climate change—of course, I am not counting “Some Like It Hot.”

In case you haven’t already heard, “The Day After Tomorrow” comes out Memorial Day weekend.  It is a movie that tries to show the consequences of climate change by letting loose tornadoes in Los Angeles, dropping grapefruit-sized hail on Tokyo, and subjecting New York City to a one-day shift from sweltering-to-freezing temperatures.

The only thing I can say is it’s a dream scenario for the people at The Weather Channel. 

Actually, the reason I bring this up is because we are bound to be hearing a great deal about the issue of climate change over the next several weeks.  This is a major motion picture with a major marketing push behind it. 

And, while I know of no one in the scientific community who believes climate change will unfold in the way it is portrayed in the film, I also know this: If this movie sounds far-fetched, it is frankly less of a distortion—much less—than the argument that climate change is a bunch of nonsense.  It is not.  Climate change is a very real problem with very real consequences for our way of life, our economy and our ability to ensure that future generations inherit a world not appreciably different from our own. 

I strongly believe it is time for some straight talk about the problem of climate change and what it means for you  - the coal industry.   So while my remarks here today are also relevant to the oil and gas industry, I believe coal to be in a more precarious position, and I believe that for 2 reasons:  1) I think coal is an easier target politically and 2) oil and gas are already involved in the policy process.    So despite the current outlook for coal in the United States, I am here to say that a robust future for coal is not a sure thing, particularly if we do not find environmentally acceptable and cost-effective ways to use it. 

So let’s look at some facts. 

Here in this country, as all of you know very well, coal provides 52 percent of all electricity, more than double the amount of any other fuel source and five times more than gas, oil or hydro-electric power.  Coal is the most abundant energy source today, it is dispersed throughout the world, and it is available at a relatively low cost.  Worldwide coal consumption, according to the U.S. Energy Information Administration, is expected to grow by more than 40 percent between 2001 and 2025, with China and India accounting for three-fourths of that increase. 

Given these facts, a scenario in which we meet the world’s various energy challenges without coal seems to me highly unlikely. 

At the same time, however, I cannot imagine—or, rather, I fear to imagine—what will happen if over the next 50 years we do not get serious about reducing worldwide emissions of carbon dioxide and other greenhouse gases that we know contribute to climate change. 

Coal alone is responsible for 37 percent of CO2 emissions in the United States.  Thirty-seven percent.  Worldwide, the EIA projects that coal will continue as the second largest source of carbon dioxide emissions after petroleum, accounting for 34 percent of the total in 2025. 

Coal’s dominant role in the global energy mix, together with its responsibility for a large share of CO2 emissions, suggests it is high time to figure out how to continue using coal in a way that results in the least amount of harm to the global climate. 

I am not going to tell you that we can address this problem with no costs.  Our goal must be to ensure that the costs themselves do not become a barrier to action.  I believe we can manage those costs in a way that enables continued economic growth and, equally important, in a way that causes the least amount of harm to the environment.

And finally, we must acknowledge the very real costs of not acting to address the problem of climate change.  I will talk more about that later. 

And so today I want to lay out for you how important it is for this industry—your industry—to become a part of the solution to climate change.  I also want to talk about your role in helping to shape the policies and in developing the technologies that will allow us to reduce greenhouse gas emissions from coal generation and other sources. 

But before that, I need to address the question of why I am here and why we are having this discussion in the first place.  And the answer is because the threat of climate change, as I have already noted, is very real.  If you still have any doubts about this, then I refer you to the findings of a special, well-balanced panel put together by the National Academy of Sciences at the request of President George W. Bush. The panel’s conclusion: the planet is warming and human activities are largely to blame.  And, of course, the human activity that is most responsible is the burning of fossil fuels.

Let's get one other thing out of the way  -- the Kyoto Protocol.  I am not here to argue the merits of the Protocol.  And I'm certainly not here to argue for ratification of Kyoto.  Because I think it's pretty clear that, at least as far as the United States is concerned, the Kyoto Protocol is a dead issue.  So, let's agree on that, and let's move beyond Kyoto, and talk about what really needs to happen.

This is what we know. The 1990s were the hottest decade of the last millennium.  The last five years were among the seven hottest on record. Yes, the earth's temperature has always fluctuated, but ordinarily these shifts occur over the course of centuries or millennia, not decades.

Now I know there are skeptics on this issue - there might even be a few here today, so let me take a minute to talk about some of the more common misconceptions I hear.

A common one is to point to the satellites circling our planet overhead and to note that these precision instruments show no warming of our atmosphere.  Global warming, some skeptics say, is therefore just an artifact of urbanization or some other miscalculation here on the ground. 

All I can say about these claims is that they are dead wrong.  As early as 2000, the National Academy of Sciences concluded that the warming observed on the ground was real, despite what the satellites might tell us.  What’s more, since that time estimates of warming from satellites have progressively increased.  Just this month, in fact, a new study in the journal Nature took a fresh look at the satellite data and found that the so-called “missing warming” had been found, bringing the satellite estimates more in line with temperatures observed on the ground.        

Warming by itself, of course, is not proof of global warming.  Climate conditions vary naturally, as we all know, and I am sure you have heard arguments that such natural variability, whether caused by volcanoes or the sun, can account for the climate change we’ve seen in recent decades.  But, when scientists actually take a look at the relative importance of natural vs. human influences on the climate, they consistently come to the same conclusion.  And that is this: observed climate change, particularly that of the past 30 years, is outside the bounds of natural variability.  Atmospheric concentrations of carbon dioxide are more than 30 percent higher now than they were just a century ago.  Despite what you may hear, this increase in carbon dioxide is undeniably human in origin, and it is the only way to explain the recent trends in the global climate. 

Scientists project that over the next century, the average global temperature will rise between two and ten degrees Fahrenheit. A ten-degree increase would be the largest swing in global temperature since the end of the last ice age 12,000 years ago.  And the potential consequences of even gradual warming are cause enough for great concern.

What will those consequences be?  We can expect increased flooding and increased drought.  Extended heat waves, more powerful storms, and other extreme weather events will become more common.  Rising sea level will inundate portions of Florida and Louisiana, while increased storm surges will threaten communities all along our nation’s coastline, including the Texas coast.

Looking beyond our borders, we can see even broader, more catastrophic effects.  Imagine, for example, what will happen in a nation such as Bangladesh, where a one-meter rise in sea level would inundate 17 percent of the country.  

In addition to the obvious threat to human life and natural systems, climate change poses an enormous threat to the U.S. and world economies.  Extreme weather, rising sea level and the other consequences of climate change will result in substantial economic losses. 

We cannot allow the argument that it will cost too much to act against climate change to prevail in the face of the potentially devastating costs of allowing climate change to proceed unchecked.

Furthermore, the longer we wait to address this problem, the worse off we will be.  The Pew Center in 2001 held a workshop with leading scientists, economists and other analysts to discuss the optimal timing of efforts to address climate change.  They each came at it from a different perspective, but the overwhelming consensus was that to be most effective, action against climate change has to start right now. 

Among the reasons these experts offered for acting sooner rather than later was that current atmospheric concentrations of greenhouse gases are the highest in more than 400,000 years.  This is an unprecedented situation in human history, and there is a real potential that the resulting damages will not be incremental or linear, but sudden and potentially catastrophic.  Acting now is the only rational choice. 

But what can we do?  The Pew Center on Global Climate Change was established in 1998 in an effort to help answer this very question.  We are non-profit, non-partisan and independent.  Our mission is to provide credible information, straight answers and innovative solutions in the effort to address global climate change.  We consider ourselves a center of level-headed research, analysis and collaboration.   We are also a center in another sense–a much-needed centrist presence on an issue where the discussion too often devolves into battling extremes where the first casualty is the truth.

The Pew Center also is the convenor of the Business Environmental Leadership Council.   The group’s 38 members collectively employ 2.5 million employees and have combined revenues of $855 billion.  These companies include mostly Fortune 500 firms that are committed to economically viable climate solutions.  And I am pleased to say that they include firms that mine coal and firms that burn it—some of whom are represented here today.  As members of the Business Environmental Leadership Council, all of these companies are working to reduce their emissions and to educate policy makers, other corporate leaders and the public about how to address climate change while sustaining economic growth. 

And, if their work with the Pew Center proves anything, it is this:  Objecting to the overwhelming scientific consensus about climate change is no longer an acceptable strategy for industry to pursue. 

We need to think about what we can realistically achieve in this country and around the world and begin down a path to protecting the climate.  And that means making a real commitment to the full basket of technologies that can help to reduce the adverse environmental effects of coal generation.  The most promising of these technologies, of course, are: carbon capture and storage; and coal gasification, or IGCC.

Carbon capture and storage, or CCS, holds out the exciting prospect for all of us that we can continue using proven reserves of coal even in a carbon-constrained world.  In only the last three decades, CCS has emerged as one of the most promising options we have for significantly reducing atmospheric emissions of greenhouse gases.  Today, 1 million tons of CO2 are stored annually in the Sleipner Project in the North Sea, and several more commercial projects are in various stages of advanced planning around the world.  Between off-shore, saltwater-filled sandstone formations, depleted oil and gas reservoirs, and other potential storage locations, scientists say we have the capacity to store decades worth of CO2 at today’s emission rates.  

Of course, it will still take a great deal more effort before CCS is ready for prime time.  In a paper prepared for a recent Pew Center workshop held in conjunction with the National Commission on Energy Policy, Sally Benson of the Lawrence Berkeley National Laboratory identified several barriers to the implementation of carbon capture and storage, or CCS.  They include:

  • The high costs and quote-unquote “energy penalties” of post-combustion CCS.
  • The high capital costs of gasification, as well as a lack of experience with the technology in the utility sector.
  • Limited experience with large-scale geologic storage.
  • Uncertainty about public acceptance of CO2 storage in geologic formations.
  • A lack of legal and regulatory frameworks to support widespread application of CCS.
  • And, last but not least, a lack of financial resources to support projects of a sufficient scale to evaluate the viability of CCS. 

Yet another technology that could potentially help to reduce the climate impact of coal generation is IGCC.   Of course, IGCC’s principal benefit from a short-term environmental perspective is a significant reduction in criteria air pollutant emissions  and in solid waste.  But, over the long haul, IGCC has great potential to reduce CO2 emissions as well, both because, compared to pulverized coal combustion, it could result in significant improvements in efficiency, because it can be much more easily combined with CCS, and because it enables hydrogen production from coal. 

But, as with CCS, IGCC still has a ways to go before it can deliver on its enormous promise.  As of today, there are only two real IGCC plants in operation in the United States, but neither is operating fully on coal.  Yes, the Bush administration has made a big splash with its announcement of the $1 billion FutureGEN project—which, as you know, would build the world’s first integrated sequestration and hydrogen production research power plant.  But no specific plans have yet been announced.

The bottom line: these technologies—both CCS and IGCC—are nowhere near prime time.  Right now, to stretch the analogy further, they are far enough from prime time to be on the air around 3 a.m. with a bunch of annoying infomercials.  And they won’t get any closer to prime time without substantial investment in research and development, as well as a major policy commitment to these technologies. 

The potential rewards are great.  If we make the necessary commitment to CCS and IGCC, these technologies could make an important contribution to the United States’ efforts to control greenhouse gas emissions in the decades ahead.  And the potential for coal to become a source of hydrogen for transportation could revolutionize the industry and our energy future.

But we need to make a commitment. 

Investing in the development of these technologies, in fact, may be the only way for coal to have a long-term future in the U.S. energy mix.  There will be a time in the not-too-distant future when the United States and the world begin to understand the very real threat posed to our economy and our way of life by climate change. 

When that happens, those industries that are perceived as part of the problem and not part of the solution are going to have a difficult time.  Allow me to put it another way: if current trends continue, there is a strong possibility that, at some point, policymakers and the public are going to see the need for drastic reductions in our emissions of carbon dioxide and other greenhouse gases.  The coal industry—because of its responsibility for such a large share of those emissions—may find itself the focus of intense scrutiny and finger-pointing.  And it will need to demonstrate that it is making steady and significant progress in reducing its emissions—or else face draconian policy measures.

The coal industry, of course, cannot tackle this challenge alone. Government, too, must become a part of the solution, and this is not just a matter of technology policy; there is a need for a broader climate policy.  I mean a policy that sets a national goal for greenhouse gas emissions from ALL important sectors - including transportation, utilities and manufacturing - and then provides companies and industries with the flexibility to meet that goal as cost-effectively as possible.  This is the approach taken in the Lieberman-McCain Climate Stewardship Act.

The need for a broader climate policy was the key conclusion of a recent Pew Center study that looked at three future energy scenarios for the United States.  Even in the most optimistic scenario where we develop a range of climate-friendly technologies such as CCS and IGCC, the study projected that we will achieve no net reduction in U.S. carbon emissions without a broader policy aimed at capping and reducing those emissions.

So the challenge before us is clear: we need to craft a wide-ranging set of policies and strategies to reduce humanity’s impact on the global climate.  And coal needs to be proactively and positively engaged—much more so than has been the case thus far.

I am pleased to report that there are elected leaders at the state level and in Congress who understand the importance of government action.  In Congress, of course, last year we saw the Climate Stewardship Act introduced by Senators Joseph Lieberman and John McCain.  This measure, which would establish modest but binding targets for reducing U.S. greenhouse gas emissions, attracted the support of 43 senators—a respectable number and an indication of growing support for U.S. action on this issue.  A companion measure to the Senate bill was introduced in the House of Representatives earlier this year.

Policymakers, particularly at the state level are moving beyond debate to real action on this issue.  Among the examples:

  • Thirteen states, including Texas, now require utilities to generate a specified share of their power from renewable sources.  
  • New York and nine other mid-Atlantic and northeastern states are discussing a regional “cap-and-trade” initiative aimed at reducing carbon dioxide emissions from power plants.  
  • And, last September, the governors of three Pacific states—California, Oregon, and Washington—announced that they will be working together to develop policies to reduce emissions from all sources. 

So the fact is, we have a lot of people in government at the state and federal levels who are beginning to look seriously at this issue and who are trying to figure out how best to respond.  So the coal industry needs to be at the table now, because the policy discussion has begun.  

But understand - getting to the table is not just a matter of showing up and saying, “Let’s talk.”  To earn a seat at the table, coal is going to have to demonstrate that it is committed to real and serious action on this issue. And as you are probably aware, some of your competitors from a climate change perspective - the gas, oil and renewable industries are already there.

The benefits of active involvement by industry in environmental policy became clear to me during negotiations on the Montreal Protocol. 

An important reason for the success of that agreement, I believe, is that the companies that produced and used ozone-depleting chemicals—and that were developing substitutes for them—were very much engaged in the process of finding solutions.  As a result, there was a factual basis and an honesty about what we could achieve, how we could achieve it, and when. And there was an acceptance on the part of industry, particularly U.S. companies, that the depletion of the ozone layer was an important problem and that multilateral action was needed. 

In the same way, industry involvement was an important part of the process that developed the Acid Rain Program created under the Clean Air Act Amendments of 1990.  And, once again, those with a seat at the table, by and large, came out with a policy they could live with.  Those who were not at the table were not as happy with the outcome. 

It is a basic principle of democratic governance: the more you get involved in the process and in shaping solutions, the more likely it will be that those solutions are agreeable to you.  Or, as the Chinese proverb puts it, “Tell me, I forget.  Show me, I remember.  Involve me, I understand.”  For those of you who think there is no possible configuration that would allow the coal industry, government and environmental advocates to sit around one table—I am here to tell you that I for one am willing to make the seating arrangements work.  Because we need them to work.
Whether the issue is public-private partnerships, incentives for technology development, or the level and timing of reductions in emissions, coal has a chance to shape the right solutions. 

What are the right solutions?  A lot of it has to do with technology—and, more specifically, with the policies needed to push and pull solutions such as CCS and IGCC to market.  (Let me say here that I don’t want to leave the impression that these are the only technologies we need to look at because there are others, such as coalbed methane, that show enormous promise as well.) 

I will say it one more time: coal’s place in the U.S. and global energy mix in the decades to come will depend largely on the industry’s ability, in concert with government, to develop the technologies that will allow us to achieve dramatic reductions in carbon emissions from coal generation.  Without those technologies, coal loses out when the United States and the world finally appreciate the need for serious action to address this very serious problem. 

In closing, I want to note that the promotional materials for the film, “The Day After Tomorrow,” ask the question: “Where will you be?”  It is my sincere hope that, whether you go and see the movie or not, this industry will be on the side of solutions to this very urgent problem. 

I honestly believe you don’t have much of a choice.  After all, a mine is a terrible thing to waste. 

Thank you very much. 

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