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
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
Induced Technological Change and Climate Policy
Prepared for the Pew Center on Global Climate Change
By Lawrence H. Goulder, Stanford University
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.
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.
For Immediate Release:
October 13, 2004
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
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.
For Immediate Release:
April 28, 2004
Contact: Katie Mandes
MARKET AND NON-MARKET IMPACTS FROM CLIMATE CHANGE
Two New Reports Detail the Implications for the Economy and Natural Resources of the U.S.
Washington, DC — Over the next century, global climate change is expected to have substantial consequences for the United States. While scientists continue to narrow remaining uncertainties about the magnitude and timing of future warming, these two new reports detail likely impacts on the U.S. economy, its diverse natural resources and the welfare of its citizens.
The first report, A Synthesis of Potential Climate Change Impacts on the United States, by Joel Smith of Stratus Consulting Inc., concludes a series of Pew Center reports examining the impacts of climate change on several economic sectors and natural resources in the United States. The companion report, U.S. Market Consequences of Global Climate Change, by a team of authors led by Dale Jorgenson of Harvard University and Richard Goettle of Northeastern University used analysis by Stratus Consulting based on the published literature to offer an in-depth analysis of the effects of climate change on the U.S. economy.
These studies find that natural systems are more vulnerable to climate change than societal systems. Any species or ecosystem that is less able to adapt?for example, coral reefs, coastal wetlands, already endangered species, and alpine forests?is at the greatest risk. In contrast to natural systems, economic sectors that are managed— for example, forestry and agriculture— may be less vulnerable to the effects of climate change provided that timely and potentially substantial investments are made.
The U.S. economy as a whole appears to be resilient to a gradual change in climate for a moderate increase in temperature (up to 2-4ºC). For a range of scenarios of climate change and related impacts, the U.S. may experience a 0.7-1.0% gain (under optimistic assumptions), or a 0.6-3.0% loss (under pessimistic assumptions) in GDP by year 2100. However, the economic impact on individual sectors are far more pronounced.
A critical finding in these reports is that as climate change continues past critical thresholds, any benefits diminish and, ultimately, reverse as the U.S. economy struggles to adapt to the changing climate. While some sectors may enjoy gains at low levels of warming (for example improvements in agriculture), beyond critical temperature thresholds, these benefits diminish and eventually become costs.
Just as with individual sectors, different U.S. regions will experience different impacts. The Southeast and the Southern Great Plains are at most risk due to their low-lying coasts and the impacts of warmer conditions on agriculture. Sectors with long-lived infrastructure and investments, such as water resources and coastal communities, will have the most difficulty adjusting.
"What is important to keep in mind about these studies, said Eileen Claussen, President of the Pew Center on Global Climate Change, “'is that ultimately all credible scenarios lead to negative impacts and costs. Taken together, these reports build the case that when it comes to climate change, policy inaction is costly?costly to certain sectors and regions of our economy, and costly to our environment,” said Claussen. “And without near-term action to address climate change, the U.S. is likely to face the need for more expensive and dramatic measures in the future.”
U.S. Market Consequences of Global Climate Change
Prepared for the Pew Center on Global Climate Change
Dale W. Jorgenson, Harvard University
Richard J. Goettle, Northeastern University
Brian H. Hurd, New Mexico State University
Joel B. Smith, et al, Stratus Consulting, Inc.
Download Report (pdf)
Download Appendix A (pdf)
Download Appendix B (pdf)
Eileen Claussen, President, Pew Center on Global Climate Change
Over the next century, global climate change is likely to have substantial consequences for the economy of the United States and the welfare of its citizens. As scientists work to narrow remaining uncertainties about the magnitude and timing of future warming, it is becoming increasingly important that we improve our understanding of the likely implications for human and natural systems.
In this report, a team of authors led by Dale Jorgenson of Harvard University developed an integrated assessment of the potential impacts of climate change on the U.S. market economy through the year 2100. The analysis combines information about likely climate impacts in specific market sectors with a sophisticated computable general equilibrium model of the U.S. economy to estimate effects on national measures of productivity, investment, consumption and leisure. To account for uncertainties— both in the trajectory of future climate change and in the ability of different sectors to adapt—a variety of scenarios were modeled to characterize a range of possible outcomes.
The results indicate that climate change could impose considerable, lasting costs or produce smaller, temporary benefits for the U.S. market economy in coming decades. Importantly, potential costs under pessimistic assumptions are larger and persist longer than potential benefits achieved under optimistic assumptions. Because of “threshold effects” in key sectors like agriculture, initial benefits from a moderate amount of warming begin to diminish and eventually reverse as temperatures continue to rise toward the end of the century and beyond. These findings suggest that near-term action to limit the pace and scale of future climate change would be warranted not only because the potential damages outweigh potential benefits (which are transient in any case), but because early intervention would reduce the long-term damage under either set of assumptions, and reduce the need for more costly measures if pessimistic scenarios materialize.
This study makes an important contribution to our current understanding of the potential impacts of climate change, but it represents at best a partial assessment of the full range of those impacts. Certain market sectors (e.g., tourism) and a variety of indirect effects (e.g., climate change induced healthcare expenditures) could not be included because of a lack of data. Even more significantly, the analysis does not account for critical non-market impacts such as changes in species distributions, reductions in biodiversity or loss of ecosystem goods and services. These types of effects are described in a companion Pew Center report—A Synthesis of Potential Impacts of Climate Change on the United States—but remain extremely difficult to value in economic terms. Their inclusion in a more complete evaluation of both market and non-market impacts would almost certainly offset any temporary market benefits and add to the negative impacts, thereby underscoring the case for mitigative action.
The Pew Center and the authors are grateful to Henry Jacoby and Billy Pizer for helpful comments on previous drafts of this report.
The continued accumulation of heat-trapping gases in the atmosphere is projected to have far reaching consequences for earth’s climate in coming decades. For example, in 2001, the Intergovernmental Panel on Climate Change (IPCC) predicted that average global temperatures could rise anywhere from 1.4oC to 5.8oC (2.5-10.4oF) over the 21stcentury, with warming for the United States as much as 30 percent higher. Climatic shifts of this magnitude would affect human and natural systems in many ways. Therefore, quantifying these impacts and their likely costs remains a critical challenge in the formulation of appropriate policy responses.
This study aims to advance understanding of the potential consequences of global climate change by examining the overall effect on the U.S. economy of predicted impacts in key market activities that are likely to be particularly sensitive to future climate trends. These activities include crop agriculture and forestry, energy services related to heating and cooling, commercial water supply, and the protection of property and assets in coastal regions. Also considered are the effects on livestock and commercial fisheries and the costs related to increased storm, flood and hurricane activity. Finally, the analysis accounts for population-based changes in labor supply and consumer demand due to climate-induced mortality and morbidity. Impacts in each of these areas were modeled to estimate their aggregate effect on national measures of economic performance and welfare, including gross domestic product (GDP), consumption, investment, labor supply, capital stock and leisure.
At present, our knowledge of the direct or indirect impacts of climate change on a broad range of economic activities is incomplete. Accordingly, there are important sectors and activities—such as tourism—that are omitted from this effort. Similarly, there is little information concerning possible interactions among the benefits and costs in different sectors. For example, the impacts on crop and livestock agriculture may have consequences for human health. Given the absence of reliable insights into such externalities or spillovers, these effects are also excluded from consideration. These limitations suggest that the results of this analysis are likely to understate the potential market impacts of climate change.
More importantly, this analysis does not consider the non-market impacts of climate change such as changes in species distributions, reductions in biodiversity, or losses of ecosystem goods and services. These considerations are essential to a complete evaluation of the consequences of climate change but are very difficult to value in economic terms. A companion report, A Synthesis of Potential Impacts of Climate Change on the United States, provides more detail on the relative vulnerability of different U.S. regions to both the market and non-market impacts of climate change.
To capture the range of market consequences potentially associated with climate change in the United States and to address the considerable uncertainties that exist, several distinct scenarios were developed for this analysis. Each incorporates different assumptions about the magnitude of climate change over the next century and about the direction and extent of likely impacts in the market sectors analyzed. Specifically, three different levels of climate change (low, central and high) were considered in combination with two sets of market outcomes (optimistic and pessimistic) for a total of six primary scenarios. In terms of climate, the low, central and high scenarios encompass projected increases in average temperature ranging from 1.7oC to 5.3oC (3.1-9.5oF) by 2100, together with precipitation increases ranging from 2.1 to 6.6 percent and sea-level rise ranging from 17.2 to 98.9 cm (7-40 inches) over the same period. In terms of impacts, the optimistic and pessimistic scenarios reflect a spectrum of outcomes from the available literature concerning the sensitivity of each sector to climatic shifts and its ability to adapt. As one would expect, the optimistic scenarios generally project either smaller damages or greater benefits for a given amount of climate change compared to the pessimistic scenarios.
Because several of the market sectors included here are especially sensitive to changes in precipitation, two additional scenarios were analyzed. The first assumes the high degree of temperature change combined with lower precipitation (“high and drier”) while the second assumes the low level of temperature change combined with higher precipitation (“low and wetter”).
By introducing the sector-specific damages (or benefits) associated with each of these scenarios into a computable general equilibrium model that simulates the complex interactions of the U.S. economy as a whole, the combined effect of climate impacts across multiple sectors could be assessed in an integrated fashion. Detailed results are described in the body of this report, but five principal conclusions emerge:
1) Based on the market sectors and range of impacts considered for this analysis, projected climate change has the potential to impose considerable costs or produce temporary benefits for the U.S. economy over the 21st century, depending on the extent to which pessimistic or optimistic outcomes prevail. Under pessimistic assumptions, real U.S. GDP in the low climate change scenario is 0.6 percent lower in 2100 relative to a baseline that assumes no change in climate; in the high climate change scenario, the predicted reduction in real GDP is 1.9 percent. Under the additional “high and drier” climate scenario, however, real GDP is reduced more dramatically—by as much as 3.0 percent by 2100 relative to baseline conditions. Furthermore, under pessimistic assumptions negative impacts on GDP grow progressively larger over time, regardless of the climate scenario. In contrast, under optimistic assumptions real U.S. GDP by 2100 is 0.7 to 1.0 percent higher than baseline conditions across the low, central and high climate scenarios, but these benefits eventually diminish over time. Nevertheless, to the extent that responses in certain key sectors conform to the optimistic scenarios, there is a distinct possibility that some degree of climate change can provide modest overall benefits to the U.S. economy during the 21st century.
2) Due to threshold effects in certain key sectors, the economic benefits simulated for the 21st century under optimistic assumptions are not sustainable and economic damages are inevitable. In contrast to the pessimistic scenarios which show increasingly negative impacts on the economy as temperatures rise, the economic benefits associated with optimistic scenarios ultimately peak or reach a maximum. Specifically, the agriculture and energy sectors initially experience significant cost reductions, but only so long as climate change remains below critical levels. Once temperature and other key climate parameters reach certain thresholds, however, benefits peak and begin to decline—eventually becoming damages. Different thresholds apply in different sectors and the time required to reach them depends on the rate at which warming occurs. In the high climate change scenario, the trend toward economic benefits under optimistic assumptions slows and peaks around mid-century, whereas, in the central climate case, this transition appears toward century’s end. In the optimistic, low climate change scenario, benefits continue to accrue throughout the 21st century. Nevertheless, the existence of these thresholds means that continued climate change—even if it proceeds slowly—eventually reverses market outcomes so that predicted economic benefits are only transient and temporary.
3) The effects of climate change on U.S. agriculture dominate the other market impacts considered in this analysis. Currently, the agriculture, forestry and fisheries industries represent about 2.0 percent of total U.S. industrial output and about 3.5 percent of real GDP. However, agriculture accounts for a much larger share of the overall climate-related economic impact estimated in this analysis. For example, across the low, central and high climate change scenarios, field crop and forestry impacts account for over 70 percent of the total predicted effect of climate change on real GDP under optimistic assumptions and almost 80 percent of the total GDP effect under pessimistic assumptions. These figures rise to 75 and 85 percent, respectively, if one includes climate effects on livestock and commercial fisheries. Clearly, significant impacts in relatively small sectors can exert a disproportionate influence on the overall economic consequences of a given climate change.
4) For the economy, wetter is better. All else being equal, more precipitation is better for agriculture —and hence better for the economy—than less precipitation. Not surprisingly, reductions in precipitation are costlier at higher temperatures than at lower temperatures and the negative impacts of drier climate conditions are greater under pessimistic assumptions than they are under optimistic assumptions. These results are driven by model assumptions about the relationship between agricultural output and different levels of precipitation; they do not consider regional or seasonal variability nor do they account for possible changes in the incidence of extreme events such as drought and flooding. To date, variations in precipitation have not been routinely incorporated in assessments of the agricultural impacts of climate change; nevertheless, they are potentially quite important and could significantly affect actual benefits or damages associated with climate change in this sector of the economy. Therefore, in future assessments, more attention should be paid to the specific effects of precipitation under different climate scenarios.
5) Changes in human mortality and morbidity are small but important determinants of the modeled impacts of climate change for the U.S. economy as a whole. An increase in climate-induced mortality or illness reduces the population of workers and consumers available to participate in the market economy, in turn leading to a loss of real GDP. In this analysis, mortality and morbidity effects alone account for 13 to 16 percent of the aggregate predicted effect of climate change on the economic welfare of U.S. households. Failure to include such effects therefore understates the potential market impacts of climate change as well as the likely benefits of climate-mitigating policies. Furthermore, the economic consequences of the mortality and morbidity effects arising from a given change in temperature are at the low end of mortality valuations found in the reported literature. Hence, the contribution of health effects to the aggregate market impacts of climate change could be even higher than these results suggest.
Taken together, these findings have important implications for current policy debates and for ongoing efforts to further refine our understanding of the likely impacts of global climate change. From a policy standpoint their primary relevance lies in the extent to which they support (or diminish) the case for intervention to avoid or mitigate the impacts being evaluated. Specifically, does the analysis suggest that the likely consequences of future climate change will be sufficiently negative as to warrant near-term actions aimed at reducing greenhouse gas emissions? This question is all the more difficult to answer because the benefits of policy intervention tend to accrue slowly, over a long period of time, while the costs of mitigative action must be borne in the near term.
On the one hand, the results of this analysis clearly point to the possibility that climate change could produce measurable negative impacts on the U.S. economy within this century that might justify anticipatory policy responses. On the other hand, the fact that some of the scenarios analyzed produce positive, albeit temporary, benefits for the U.S. economy in the same timeframe might seem to weigh in favor of forgoing, or at least delaying, such actions.
A number of nuances in these results—together with several larger considerations related to limitations inherent in the study’s design—argue against the latter conclusion. Within the scope of this analysis, perhaps the most important point is the fact that most, if not all, potentially positive impacts of climate change under optimistic assumptions are likely to be transient and unsustainable over the long run in the face of steadily rising temperatures. If, on the other hand, pessimistic assumptions prove to be more correct, the economic impacts of climate change are not only immediately negative, but worsen steadily over time. Thus, the potential for temporary economic benefits must be balanced against the potential for immediate and lasting economic damages.
A second important point is that the modeling results reveal asymmetries in the magnitude of potential benefits versus potential damages. Specifically, the economic losses estimated under pessimistic assumptions are generally larger than the transient benefits gained under optimistic assumptions in all but the low climate change scenarios. Moreover, the asymmetry becomes more pronounced with rising temperatures as certain types of costs—such as those associated with extreme weather events—increasingly offset possible benefits to other sectors of the economy.
A further caution relates to the partial and incomplete nature of the analysis itself. This effort was limited from the outset to considering only market impacts of global climate change within the United States. As has already been noted, it was not possible to include all potentially climate-sensitive market sectors in the analysis; nor was it possible to account for all externalities or spillover effects. Moreover, the results of this analysis are not likely to be representative of other parts of the world, especially for those countries whose overall economic well-being is more closely tied to sectors like agriculture. For these countries, the potential damages associated with future climate change could be a much larger proportion of GDP than in the United States and the downside risks under pessimistic assumptions—especially in regions where climate change is likely to cause increasingly warmer and drier conditions—could be far more substantial.
Even more significant, in terms of drawing policy conclusions from these results, is the fact that the underlying analysis does not address a host of potential non-market impacts associated with climate change. These include shifts in species distribution, reductions in biodiversity, losses of ecosystem goods and services and changes in human and natural habitats. Such impacts—many of which are explored in other Pew Center reports—are probably of great concern to the public and could carry substantial weight in future policy deliberations. They are, however, extremely difficult to value in economic terms. To the extent that they have been assessed—even qualitatively—the results suggest that climate-related impacts on natural systems are far more likely, on the whole, to be negative rather than positive. As such they would tend to add to any negative market impacts associated with future climate change, while offsetting potential market benefits of the kind simulated in this study under optimistic assumptions.
In sum, the disparity in results between optimistic and pessimistic scenarios—and the likelihood that a consideration of non-market impacts would tend to exacerbate this disparity—highlights the continuing uncertainty associated with quantifying climate change impacts. The fact that the economic losses associated with pessimistic scenarios are both larger and more continuous than the transient benefits gained under optimistic scenarios would seem, by itself, to provide some support for cautionary action on climate change. In fact, such action—by slowing the pace and magnitude of temperature increases in the U.S. market consequences of global climate change coming decades—actually could forestall any damages or even improve the odds that optimistic rather than pessimistic outcomes prevail. If, on the other hand, worst-case scenarios appear more likely over time and ultimately justify more dramatic intervention, early efforts to achieve moderate near-term emissions reductions may help avoid the need for more costly measures later on. Meanwhile, high priority should be given to improving and integrating future assessments of market and non-market outcomes and to refining our understanding of the probabilities associated with varying degrees of climate change and the positive or negative responses that follow.
April 16, 2004
Contact: Katie Mandes (703) 516-4146
The Impacts and Market Consequences of Global Climate Change
Two new reports from the Pew Center on Global Climate Change
Washington, DC — Over the next century, global climate change may have serious consequences for the economy of the United States and the health and welfare of its citizens, according to two new reports by the Pew Center on Global Climate Change.
The first report, A Synthesis of Potential Climate Change Impacts on the United States by Joel B. Smith of Stratus Consulting, Inc., is the final in a series of Pew Center reports chronicling the possible national and regional effects of global climate change on important economic sectors, health, and natural resources.
The second report, U.S. Market Consequences of Global Climate Change, presented by lead author Dale Jorgenson of Harvard University, provides an in-depth analysis of the potential effects of climate change on the U.S. economy.
Anyone interested in global climate change or climate change policy is invited to attend.
WHEN: Wednesday, April 28, 2004 at 10 A.M.
WITH: Eileen Claussen, President, Pew Center on Global Climate Change;
Joel B. Smith, Vice President, Stratus Consulting, Inc.;
Dale W. Jorgenson, Professor, Harvard University; and
Richard J. Goettle, Professor, Northeastern University
WHERE: National Press Club, First Amendment Room
529 14th Street, N.W.
Washington, DC 20045
All materials pertaining to this press briefing are embargoed until April 28, 2004 at 10 A.M.
The 10-50 Solution: Technologies and Policies for a Low-Carbon Future
A workshop sponsored by the Pew Center on Global Climate Change and the National Commission on Energy Policy
March 25-26, 2004
The St. Regis Hotel, Washington, DC
On March 25-26th, the Pew Center on Global Climate Change and the National Commission on Energy Policy (NCEP) sponsored a workshop entitled “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future.” The goal of this workshop was to articulate a long-term vision for a low-carbon economy within 50 years and to discuss the technologies, industrial processes and policies needed in the short and medium term to achieve it. Over 100 policy-makers, business leaders, NGO representatives, and leading experts participated in the event.
In preparation for the workshop, the Pew Center and NCEP commissioned background papers on technological advances in five key areas (efficiency, hydrogen, carbon sequestration/coal gasification, advanced nuclear technologies, and renewables) and on policies designed to promote these and other low-carbon technologies in the marketplace. Workshop presentations and final proceedings, including a summary of common themes and policies identified during the workshop, and workshop background papers are now available.
"A Climate Policy Framework: Balancing Policy and Politics"
Proceedings from the joint Aspen Institute/Pew Center Conference, March 2004
A diverse group of business, government, and environmental leaders, brought together by the Aspen Institute and the Pew Center, recommends a framework for a mandatory greenhouse gas reduction program for the United States. The group started with the premise that, if mandatory action is taken, climate policies should be environmentally effective, economical and fair. After a three-day dialogue, the participants reached consensus on a policy framework that is both effective and politically feasible.
Emissions Trading in the U.S.: Experience, Lessons and Considerations for Greenhouse Gases
Prepared for the Pew Center on Global Climate Change
A. Denny Ellerman and Paul L. Joskow, Massachusetts Institute of Technology
David Harrison, Jr., National Economic Research Associates, Inc.
Eileen Claussen, President, Pew Center on Global Climate Change
In recent years, emissions trading has become an important element of programs to control air pollution. Experience indicates that an emissions trading program, if designed and implemented effectively, can achieve environmental goals faster and at lower costs than traditional command-and-control alternatives. Under such a program, emissions are capped but sources have the flexibility to find and apply the lowest-cost methods for reducing pollution. A cap-and-trade program is especially attractive for controlling global pollutants such as greenhouse gases because their warming effects are the same regardless of where they are emitted, the costs of reducing emissions vary widely by source, and the cap ensures that the environmental goal is attained.
Report authors Denny Ellerman and Paul Joskow of the Massachusetts Institute of Technology and David Harrison of National Economic Research Associates, Inc. review six diverse U.S. emissions trading programs, drawing general lessons for future applications and discussing considerations for controlling greenhouse gas emissions. The authors derive five key lessons from this experience. First, emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Second, the use of emissions trading has enhanced—not compromised—the achievement of environmental goals. Third, emissions trading has worked best when the allowances or credits being traded are clearly defined and tradable without case-by-case certification. Fourth, banking has played an important role in improving the economic and environmental performance of emissions trading programs. Finally, while the initial allocation of allowances in cap-and-trade programs is important from a distributional perspective, the method of allocation generally does not impair the program’s potential cost savings or environmental performance.
With growing Congressional interest in programs to address climate change—including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions—the application of lessons learned from previous emissions trading programs is timely. In addition to this review, the Pew Center is simultaneously releasing a complementary report, Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., which examines additional options for designing a domestic climate change program.
The authors and the Pew Center are grateful to Dallas Burtraw and Tom Tietenberg for reviewing a previous draft of this report. The authors also wish to acknowledge Henry Jacoby, Juan-Pablo Montero, Daniel Radov, and Eric Haxthausen for their contributions to various parts of the report, and James Patchett and Warren Herold for their research assistance.
Emissions trading has emerged over the last two decades as a popular policy tool for controlling air pollution. Indeed, most major air quality improvement initiatives in the United States now include emissions trading as a component of emissions control programs. The primary attraction of emissions trading is that a properly designed program provides a framework to meet emissions reduction goals at the lowest possible cost. It does so by giving emissions sources the flexibility to find and apply the lowest-cost methods for reducing pollution. Emission sources with low-cost compliance options have an incentive to reduce emissions more than they would under command-and-control regulation. By trading emission credits and allowances to high-cost compliance sources, which can then reduce emissions less, cost-effective emission reductions are achieved by both parties. When inter-temporal trading is allowed, sources can also reduce emissions early, accumulating credits or allowances that can be used for compliance in future periods if this reduces cumulative compliance costs. Accordingly, cap-and-trade programs achieve the greatest cost savings when the costs of controlling emissions vary widely across sources or over time. In practice, well-designed emissions trading programs also have achieved environmental goals more quickly and with greater confidence than more costly command-and-control alternatives.
Emissions trading has achieved prominence beyond the United States largely in the context of discussions regarding implementation of the Kyoto Protocol, a proposed international agreement to control emissions of carbon dioxide (CO2) and other greenhouse gases. The Kyoto Protocol provides for the use of various emissions trading mechanisms at the international level. Some countries already are developing emissions trading programs while the process of ratifying the Protocol moves forward. Both the United Kingdom and Denmark have instituted greenhouse gas (GHG) emissions trading programs, and, in December 2002, the European environment ministers agreed on the ground rules for a European Union trading program that would begin in 2005 for large sources of CO2 emissions (and later for other GHG emissions). Indeed, proposals to control GHG emissions in the United States also include the use of emissions trading.
The theoretical virtues of emissions trading have been recognized for many decades—the basic elements were outlined in Coase (1960) and elaborated in Dales (1968)—but actual emissions trading programs have been brought from the textbook to the policy arena mostly in the last decade. It is important to recognize, however, that while properly designed emissions trading programs can reduce the cost of meeting environmental goals, experience does not indicate that significant emissions reductions can be obtained without costs. Emissions trading can be an effective mechanism for controlling emissions by providing sources with the flexibility to select the lowest-cost opportunities for abatement, but it does not make costs disappear. Moreover, emissions trading programs must be designed properly in order to realize their potential cost-reduction and environmental compliance goals. As with any emissions control program, poor design is likely to lead to disappointing results.
Experience with emissions trading, including both the design and operation of trading programs, provides a number of general lessons for future applications. This report reviews the experience with six emissions trading programs with which one or more of the authors have considerable experience:
- The early Environmental Protection Agency (EPA) Emissions Trading programs that began in the late 1970s;
- The Lead Trading program for gasoline that was implemented in the 1980s;
- The Acid Rain program for electric industry sulfur dioxide (SO2) emissions and the Los Angeles air basin (RECLAIM) programs for both nitrogen oxides (NOx) and SO2 emissions, all of which went into operation in the mid-1990s;
- The federal mobile source averaging, banking, and trading (ABT) programs that began in the early 1990s; and
- The Northeast NOx Budget trading program, which began operations in the late 1990s.
Based on this experience, this report identifies and discusses five general lessons concerning the design and implementation of emissions trading programs, and two considerations of particular relevance for GHG applications.
General Lessons from Experience with Emissions Trading
Emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Experience shows that properly designed emissions trading programs can reduce compliance costs significantly compared to command-and-control alternatives. While it is impossible to provide precise measures of cost savings compared to hypothetical control approaches that might have been applied, the available evidence suggests that the increased compliance flexibility of emissions trading yields costs savings of as much as 50 percent.
The use of emissions trading has enhanced—not compromised—the achievement of environmental goals. While some skeptics have suggested that emissions trading is a way of evading environmental requirements, experience to date with well-designed trading programs indicates that emissions trading helps achieve environmental goals in several ways.
For one thing, the achievement of required emission reductions has been accelerated when emission reduction requirements are phased-in and firms are able to bank emissions reduction credits. The Lead Trading program for gasoline, the Acid Rain program for the electric industry, the federal mobile source ABT programs, and the Northeast NOx Budget programs each achieved environmental goals more quickly through these program design features. Moreover, giving firms with high abatement costs the flexibility to meet their compliance obligations by buying emissions allowances eliminates the rationale underlying requests for special exemptions from emissions regulations based on “hardship” and “high cost.” The reduction of compliance costs has also led to instances of tighter emissions targets, in keeping with efforts to balance the costs and benefits of emissions reductions. Finally, properly designed emissions trading programs appear to provide other efficiency gains, such as greater incentives for innovation and improved emissions monitoring.
Emissions trading has worked best when allowances or credits being traded are clearly defined and tradable without case-by-case pre-certification. Several different types of emissions trading mechanisms have been implemented. Their performance has varied widely, and these variations illuminate the key features of emissions trading programs that are most likely to lead to significant cost savings while maintaining (or exceeding) environmental goals.
The term “emissions trading” is used, often very loosely, to refer to three different types of trading programs: (1) reduction credit trading, in which credits for emission reductions must be pre-certified relative to an emission standard before they can be traded; (2) emission rate averaging, in which credits and debits are certified automatically according to a set average emission rate; and (3) cap-and-trade programs, in which an overall cap is set, allowances (i.e., rights to emit a unit) equal to the cap are distributed, and sources subject to the cap are required to surrender an allowance for every unit (e.g., ton) they emit.
The turnaround in perception of emissions trading over the last decade—from a reputation as a theoretically attractive but largely impractical approach to its acceptance as a practical framework for meeting air quality goals in a cost-effective manner—largely reflects the increased use of averaging and cap-and-trade type programs. The performance of the early EPA reduction credit programs was very poor and gave “emissions trading” a bad name. These early EPA programs emphasized case-by-case pre-certification of emission reductions and were characterized by burdensome and time-consuming administrative approval processes that made trading difficult. The averaging and cap-and-trade programs have been much more successful. While the use of cap-and-trade or averaging does not guarantee success, and the problems with the reduction credit-based approach can be reduced by good design, avoiding high transaction costs associated with trade-by-trade administrative certification is critical to the success of an emissions trading program. The success of any emissions trading program also requires several additional elements: emissions levels must be readily measured, legal emissions rates or caps must be clearly specified, and compliance must be verified and enforced aggressively.
Banking has played an important role in improving the economic and environmental performance of emissions trading programs. Early advocates of emissions trading tended to emphasize gains from trading among participants (i.e., low-cost compliance sources selling credits and allowances to high-cost compliance sources) in the same time period. The experience with the programs reviewed here indicates that inter-temporal trading also has been important. The form that inter-temporal trading most often takes is credit or allowance banking, i.e., reducing emissions early and accumulating credits or allowances that can be used for compliance in future periods. Banking improves environmental performance and reduces cumulative compliance costs. Moreover, it has been particularly important in providing flexibility to deal with many uncertainties associated with an emissions trading market—production levels, compliance costs, and the many other factors that influence demand for credits or allowances. Indeed, the one major program without a substantial banking provision, the Los Angeles RECLAIM program, appears to have suffered because of its absence.
The initial allocation of allowances in cap-and-trade programs has shown that equity and political concerns can be addressed without impairing the cost savings from trading or the environmental performance of these programs. Because emissions allowances in cap-and-trade programs are valuable, their allocation has been perhaps the single most contentious issue in establishing the existing cap-and-trade programs. However, the ability to allocate this valuable commodity and thereby account for the economic impacts of new regulatory requirements has been an important means of attaining political support for more stringent emissions caps. Moreover, despite all the jockeying for allowance allotments through the political process, the allocations of allowances to firms in the major programs have not compromised environmental goals or cost savings. The three cap-and-trade programs that have been observed so far all have relied upon “grandfathering,” i.e., distributing allowances without charge to sources based upon historical emissions information, which generally does not affect firms’ choices regarding cost-effective emission reductions and thus the overall cost savings from emissions trading. There are other methods of allocating initial allowances—such as auctioning by the government and distributing on the basis of future information—that can affect cost savings and other overall impacts; but the major effects of the initial allocation are to distribute valuable assets in some manner and to provide effective compensation for the financial impacts of capping emissions on participating sources.
Considerations for Greenhouse Gas Control Programs
Emissions trading seems especially well-suited to be part of a program to control greenhouse gas emissions. The emissions trading programs reviewed for this report generally have spatial or temporal limitations because sources of the pollutants included in these programs—such as lead, SO2, and NOx—may have different environmental impacts depending on the sources’ locations (e.g., upwind or downwind from population centers) and the time of the emissions (e.g., summer or winter). The concerns of trading programs associated with climate change are different because greenhouse gases are both uniformly mixed in the earth’s atmosphere and long-lived. The effects of GHG emissions thus are the same regardless of where the source is located and when the emissions occur (within a broad time band). This means that emissions trading can be global in scope as well as inter-temporal, creating an opportunity for the banking of emission credits, which allows emissions to vary from year to year as long as an aggregate inter-temporal cap is achieved.
Emissions trading is also well suited for GHG emissions control because the costs of reducing emissions vary widely between individual greenhouse gases, sectors, and countries, and thus there are large potential gains from trade. While other market-based approaches, such as emissions taxes, also would provide for these cost savings, the cap-and-trade version of emissions trading has the further advantage of providing greater certainty that an emission target will be met. Moreover, GHG emissions generally can be measured using relatively inexpensive methods (e.g., fuel consumption and emission factors), rather than the expensive continuous emissions monitoring required for some existing trading programs.
Furthermore, emissions trading provides important incentives for low-cost compliance sources initially outside the program to find ways to participate, and thereby further reduce costs. This opt-in feature is useful because an environmentally and cost-effective solution for reducing concentrations of greenhouse gases should be comprehensive and global, whereas initial controls on GHG emissions will—for political reasons—likely be limited, if not to certain sectors and greenhouse gases, then almost certainly to a restricted number of countries. Therefore, an important criterion for initial measures is that they be able to induce participation by sources not yet controlled. The markets created by cap-and-trade programs provide incentives for sources outside the trading program to enter if they can provide reductions more cheaply than the market prices—a common feature of any market. Although, as discussed below, the voluntary nature of these incentives can create some problems, the ability to induce further participation is an important reason to include a market-based approach initially. Indeed, it is hard to imagine how command-and-control regulations or emissions taxes could provide similar incentives to non-participants to adopt new measures to reduce greenhouse gas emissions.
Opt-in or voluntary features have a strategic role that is likely to warrant their inclusion despite the potential problems associated with them. Experience with allowing sources not covered by mandatory emissions trading programs to “opt-in,” i.e., to voluntarily assume emissions control obligations and to participate in the emissions market, has revealed a trade-off. Setting clear baselines for opting-in lowers transactions costs and thus encourages participation; but some of this participation consists of credits for calculated “reductions” that are unrelated to the trading program and actually lead to increased emissions. For example, in the Acid Rain Program, evidence indicates that many of the voluntary participants received credits for having emissions below the pre-specified baseline even though they took no abatement actions. The simple emissions baseline had been set higher than these facilities’ actual emissions, so at least some of the credits they received did not represent real emissions reductions.
This experience suggests that the decision whether or not to include opt-in provisions should be determined by weighing the cost-saving benefits against the emissions-increasing potential. For greenhouse gases, the potential cost-savings benefits of including a voluntary element in the mandatory program are large because initial efforts are not likely to be comprehensive and global, as they must be eventually to achieve their environmental goals and be cost-effective. Opt-in provisions also have value in improving measurement and monitoring techniques, in familiarizing participants with the requirements of emissions trading, and more generally with inducing participation of sources outside the trading program that can offer cheaper abatement. As a result, allowing participants outside the mandatory GHG emissions control program to opt-in has a strategic value that has not been prominent in other opt-in programs. Indeed, it should be possible to learn from existing experience with opt-in programs how to reduce adverse effects while achieving cost-savings.
Viewed from a broad historical perspective, emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Although still not the dominant form of controlling pollution in the United States or elsewhere, emissions trading is being included in an increasing number of programs and proposals throughout the world, and its role seems likely to expand in the future.
Emissions trading has emerged as a practical framework for introducing cost-reducing flexibility into environmental control programs and reducing the costs associated with conventional command-and-control regulation of air pollution emissions. Over the last two decades considerable experience with various forms of emissions trading has been gained, and today nearly all proposals for new initiatives to control air emissions include some form of emissions trading. This report has attempted to summarize that experience and to draw appropriate lessons that may apply to proposals to limit GHG emissions. In doing so, we hope that the reader has gained a better understanding of emissions trading and the reasons for its increasing importance as an instrument for addressing environmental problems.
Six diverse programs constitute the primary U.S. experience with air emissions trading. The EPA’s early attempts starting in the late 1970s to introduce flexibility into the Clean Air Act through netting, offsets, bubbles, and banking were not particularly encouraging. Most of the potential trades, and economic gains from trading, in these early systems were frustrated by the high transaction costs of certifying emission reductions. The first really successful use of emissions trading occurred in the mid-1980s when the lead content in gasoline was reduced by 90 percent in a program that allowed refiners to automatically earn credits for exceeding the mandated reductions in lead content and to sell those credits to others or bank them for later use.
The Acid Rain or SO2 allowance trading program for electricity generators, which has become by far the most prominent experiment in emissions trading, was adopted in 1990 and implemented beginning in 1995. This innovative program introduced a significantly different form of emissions trading, known as cap-and-trade, in which participants traded a fixed number of allowances—or rights to emit—equal in aggregate number to the cap, instead of trading on the differences from some pre-existing or external standard as had been the case in the early EPA trading programs and the lead phase-down program.
Another cap-and-trade program, the RECLAIM program for both SO2 and NOx emissions, was developed and implemented at the same time as the Acid Rain program by the regulatory authority in the Los Angeles Basin as part of its efforts to bring that area into attainment with National Ambient Air Quality Standards. The RECLAIM program is the first instance of emissions trading both supplementing and supplanting a pre-existing command-and-control structure that theoretically was capable of achieving the same environmental objective. The standards of the pre-existing command-and-control system largely determined the level of the cap, and the program’s ten-year phase-in design and trading provided the flexibility that led to the achievement of environmental goals that had been previously elusive. RECLAIM also introduced trading among different sectors.
The 1990 Amendments to the Clean Air Act also provided enabling legislation for two other emissions trading programs. Emissions from mobile sources were more effectively and efficiently controlled by the introduction of mobile source averaging, banking, and trading programs. The mobile source programs followed the example of the lead phase-down program by allowing firms to create credits automatically for any reductions beyond a required uniform emission standard and to use these credits in lieu of more costly reductions elsewhere or later within the company and to sell them. The 1990 Amendments also provided the mechanism that encouraged states in the Northeastern United States to adopt cap-and-trade programs to control NOx emissions that contributed to ozone non-attainment in that region of the country. As was the case in the RECLAIM program, emissions trading was adopted as a means to attain environmental objectives more quickly and cost-effectively than had proved possible through conventional command-and-control regulation.
There are many lessons to be gained from the experience with these six programs, but the five most important lessons can be summarized as follows. First, the major objective of emissions trading, lowering the cost of meeting emission reduction goals, has been achieved in most of these programs. Second, emissions trading has not compromised the achievement of the environmental goals embodied in these programs. If anything, and this is perhaps surprising, the achievement of those goals has been enhanced by emissions trading. Third, emissions trading has worked best in reducing costs and achieving environmental goals when the credits being traded are clearly defined and readily tradable without case-by-case certification. Fourth, temporal flexibility, i.e., the ability to bank allowances, has been more important than generally expected, and the ability to bank has contributed significantly to accelerating emission reductions and dampening price fluctuations. Fifth, the initial allocation of allowances in cap-and-trade programs has shown that equitable and political concerns can be met without impairing either the cost savings from trading or the environmental performance of these programs. In addition, the success of any emissions trading program requires that emissions levels can be readily measured and compliance verified and enforced.
All of these five lessons are relevant when considering the use of emissions trading in a program aimed at reducing GHG emissions. In fact, emissions trading seems especially appropriate for this environmental problem. Greenhouse gas emissions mix uniformly and remain in the atmosphere for a long time. Thus, it matters little where or when the emissions are reduced, as long as the required cumulative reductions are made. These specific characteristics of GHG emissions eliminate two of the concerns that have limited the scope of emissions trading in many other programs.
Although an effective GHG mitigation program must eventually be global in scope and comprehensive in its coverage of pollutants and economic sectors, the likelihood that control efforts will be limited initially to the richer countries, the more easily measurable gases, and perhaps to certain sectors of the economy introduces another consideration. The ability to induce initially uncapped sources to participate voluntarily in the early efforts will reduce costs and prepare the way for extending the caps. Thus, providing opportunities to opt-in for uncapped sources that can reduce emissions at lower cost than those within the cap has a strategic value beyond the potential cost savings. Although some existing programs with voluntary provisions have revealed opportunities for misuse, these problems can be managed more successfully now with the benefit of experience. The strategic value of opt-in provisions in any GHG emission control program makes their inclusion highly desirable.
Emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Since then, the use of emissions trading has expanded steadily and significant experience has been gained. Although not the dominant form of controlling pollution in the United States or elsewhere, emissions trading now seems firmly established as a valuable instrument and its future use seems sure to increase. Our review of experience over the past quarter century suggests that this trend toward greater use of emissions trading will improve the performance of environmental regulation, including efforts to control GHG emissions.
About the Authors
A. Denny Ellerman, Massachusetts Institute of Technology
Dr. Ellerman is a Senior Lecturer with the Sloan School of Management at the Massachusetts Institute of Technology, where he also serves as the Executive Director of the Center for Energy and Environmental Policy Research and of the Joint Program on the Science and Policy of Global Change. His former employment includes Charles River Associates, the National Coal Association, the U.S. Department of Energy, and the U.S. Executive Office of the President. He served as President of the International Association for Energy Economics for 1990. Dr. Ellerman received his undergraduate education at Princeton University and his Ph.D. in Political Economy and Government from Harvard University. His current research interests focus on emissions trading, climate change policy, and the economics of fuel choice, especially concerning coal and natural gas.
Paul L. Joskow, Massachusetts Institute of Technology
Paul L. Joskow is Elizabeth and James Killian Professor of Economics and Management at MIT and Director of the MIT Center for Energy and Environmental Policy Research. He received a B.A. from Cornell University in 1968 and a Ph.D. in Economics from Yale University in 1972. Professor Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998.
At MIT he is engaged in teaching and research in the areas of industrial organization, energy and environmental economics, and government regulation of industry. Professor Joskow has published five books and over 100 articles and papers in these areas. He has been studying the behavior and performance of the SO2 allowance trading program created by the Clean Air Act Amendments of 1990 for several years and is a co-author of the book Markets for Clean Air: The U.S. Acid Rain Program (Cambridge University Press).
Professor Joskow has served as a consultant on regulatory and competitive issues to organizations around the world. He served on the EPA’s Acid Rain Advisory Committee from 1990-1992 and was a member of the Environmental Economics Advisory Committee of the EPA’s Science Advisory Board from 1998-2002. He is a Director of the National Grid Transco Group and the Whitehead Institute for Biomedical Research and a Trustee of the Putnam Mutual Funds. He is a Fellow of the Econometric Society and the American Academy of Arts and Sciences.
David Harrison, Jr. , National Economic Research Associates, Inc.
David Harrison is a Senior Vice President at National Economic Research Associates (NERA), an international firm of 500 consulting economists operating in 16 offices on five continents and a Marsh & McLennan company. Dr. Harrison is co-chair of NERA’s energy and environmental economics practice.
Before joining NERA in 1988, Dr. Harrison was an Associate Professor at the John F. Kennedy School of Government at Harvard University, where he taught microeconomics, environmental and energy policy, transportation policy, and benefit-cost analysis. He was a member of the Faculty Steering Committee of Harvard’s Energy and Environmental Policy Center. Dr. Harrison earlier served as a Senior Staff Economist on the President’s Council of Economic Advisors, where his areas of responsibility included environmental regulation, natural resource policy, transportation policy, and occupational health and safety.
Dr. Harrison has consulted for private firms, trade associations, and government agencies in the U.S. and abroad on many energy and environmental issues. Dr. Harrison has been active in the development of major emissions trading programs, including serving on the advisory committee to develop RECLAIM, an author of proposals for averaging, banking, and trading programs for mobile sources and for NOx trading proposals for the Northeast, and a consultant to the European Commission (EC) with regard to aspects of its proposed greenhouse gas emissions trading program. He is currently advising the UK government with regard to aspects of its EU program and the EC with regard to trading programs for non-greenhouse gas emissions.
Dr. Harrison holds a Ph.D. in Economics from Harvard University, a M.Sc. in Economics from the London School of Economics, and a B.A. in Economics from Harvard University.