Economics

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

Climate Change 101: Cap and Trade

Download the full brief (pdf)

 

There are a variety of policy tools to reduce the greenhouse gas emissions responsible for climate change. This installment of the Climate Change 101 series explains how a cap-and-trade program sets a clear limit on greenhouse gas emissions and minimizes the costs of achieving this target. By creating a market and a price for emission reductions, cap and trade offers an environmentally effective and economically efficient response to climate change.

 

 

 

 

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EPA’s Regulation of Greenhouse Gases: What are the Facts?

With EPA’s recent announcement of timelines for additional regulation of greenhouse gases (utility and refinery sectors) and the arrival in town this week of the new Congress, the shouting about EPA’s regulatory actions has already begun. Many of these claims are clearly political posturing – the facts are that schools, churches, and libraries will NOT be subject to regulations, there will NOT be a moratorium on all new industrial facilities for at least 18 months, and new coal plants will NOT be banned. But it is also true that regulating greenhouse gases (GHGs) has the potential to substantially impact our economy and is critical to reducing the risks and costs associated with climate change. The critical challenge facing EPA is how to properly balance the costs of reducing GHG emissions against the benefits of limiting climate change. How EPA balances these interests demands a serious discussion. In an effort to lower the volume and better inform future discussions about EPA’s use of its regulatory authority, the following are key factors that should be considered.

1. EPA is not overreaching by regulating greenhouse gases (GHGs) under the Clean Air Act but is doing so in direct response to the Supreme Court’s 2007 ruling in Mass. v. EPA.

Some have incorrectly claimed that EPA has overstepped its authority in regulating greenhouse gases and is attempting to regulate GHGs even though Congress failed to pass climate legislation last year. In fact, it is the Supreme Court in 2007 that clarified that EPA had the authority to regulate GHGs under the existing Clean Air Act. EPA had denied a petition by some states and environmental groups calling on it to begin regulating GHGs under the existing Clean Air Act. The Supreme Court rejected EPA’s claim that the Clean Air Act does not apply to GHGs and held that these emissions meet the definition of an “air pollutant” under the Act. The court held that “under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” Based on its extensive review of the scientific evidence in its endangerment finding, EPA reached the only conclusion that the evidence supported – that GHG emissions cause or contribute to air pollution, which may reasonably be anticipated to endanger public health or welfare and, therefore, are subject to regulation under the Clean Air Act.

2. EPA’s regulations will not require unproven technologies, impose excessive costs at a time when our economy is hurting, or harm small and previously unregulated sources.

There are legitimate concerns that the Clean Air Act was not developed specifically with GHGs in mind and these emissions are different in fundamental ways from traditional hazardous and criteria pollutants covered by the Act. As a result, EPA has gone to great lengths to “tailor” its regulations -- for example, with respect to new source permitting -- in such a way that only the largest sources of GHGs are covered. This tailoring rule has been challenged in courts (along with all other GHG regulations). If it is overturned, Congressional intervention would likely be necessary. But the Clean Air Act includes many provisions that minimize compliance costs, and many of its fundamental requirements apply equally well to regulating GHGs. For example, the Act requires that technological feasibility and costs be considered in setting emission performance standards and allows for different requirements for new and existing sources. In its guidance to states on what constitutes “best available control technology,” EPA has focused on energy efficiency technologies as a means to achieve both reductions in GHG emissions and cost savings to firms. The agency has also made it clear that the use of coal as a fuel can be continued under its guidelines. While EPA regulations will impose some costs on firms, based on guidance to date, those costs are likely to be modest and will result in far greater benefits than costs to society.     

3. Delaying any EPA regulatory actions would be bad for business and bad for the climate.

Delaying regulations by EPA will allow some firms to avoid compliance costs in the near term but will increase overall costs over the longer term. For firms in states already facing GHG requirements (e.g., utilities in 10 northeast and mid-Atlantic states, large emitters in California), any delay in EPA regulations are not likely to alter the requirements they face. For firms in other locations that are planning facilities with long lifetimes, some are likely to install the same technology that would be required by EPA in an effort to avoid more expensive retrofits in the near future. These firms would prefer the certainty of knowing what regulatory requirements they must meet prior to making large capital investments. Finally, delay in reducing GHG emissions will result in greater economic harm throughout our society as families and communities face the costs associated with increases in extreme weather (droughts and floods), impacts from sea level rise, limits on the availability of water resources, and other climate impacts.

4. EPA’s regulatory actions are not a form of backdoor cap and trade or an energy tax.

Congress rejected a comprehensive cap-and-trade approach to regulating GHG in its last session. EPA’s approach does not rely on a cap-and-trade regime and is far from comprehensive. EPA’s regulations focused first on the transportation sector with the issuance of widely supported standards for light-duty vehicles and proposed standards for medium and heavy-duty vehicles. On the stationary source side, EPA first targeted the largest new sources and major modifications of existing sources and recently announced plans to develop new source performance standards for the electric utility and refinery sectors. Such standards are the traditional approach used under the Clean Air Act and are generally implemented through state programs.The regulations are being developed on a timeframe consistent with Clean Air Act requirements covering other pollutants to allow covered sources the flexibility of developing compliance plans that cost-effectively meet a comprehensive set of requirements.

5. EPA is not attempting to meet the same reduction requirements that were rejected by the last Congress.

The House-passed climate change bill called for reductions in GHG emissions of 17 percent of 2005 levels by 2020, increasing to reductions of over 80 percent by 2050. EPA’s use of the Clean Air Act is not likely to produce emission reductions of the magnitude or in the timeframe set forth in the legislation proposed last year.

6. Important questions do need to be addressed in moving forward.

EPA’s initial set of regulations represent an important beginning in addressing the risks associated with climate change but also raise important issues. In moving forward, several questions will need to be addressed:

* How will EPA’s regulation be implemented in a manner consistent with current and future state actions?

* Given market forces driving utilities toward increased use of natural gas, the regulatory uncertainty that currently exists, and the age and fuel mix of the current utility fleet, what is the likely future role of coal in this sector?

* As EPA moves forward in regulating stationary sources through the use of emission performance standards, how might it be able to provide flexibility to regulated sources to achieve cost-effective reductions?  

* How might EPA regulatory actions specific to utilities interact with possible Congressional interest in a clean energy standard?   

Steve Seidel is Vice President for Policy Analysis

Solutions in Steps, Not Leaps: The Year in Review and a Look Ahead

By Eileen Claussen
December 20, 2010

2010 was a year of highs and lows.

On the high side were global temperatures; 2010 will mark the hottest year in recorded history. At the start of the year, there was also the short-lived high of thinking we might be on the precipice of meaningful action in the U.S. Congress to protect the climate. Finally, at year’s end the climate talks in Cancún delivered (surprise!) tangible results in the form of agreement on key elements of a global climate framework.

But alas, the lows won out for most of 2010 as a trumped-up email controversy, continuing economic unease, and growing anti-government sentiment in the United States undermined the effort to forge lasting climate solutions at all levels. 

Congress. Until quite recently, the Pew Center and many others were actively supporting cap and trade as the number-one climate policy solution. After the House passed a fairly comprehensive energy and climate bill in June 2009 that had a cap-and-trade system at its core, we actually thought that it might become the law of the land.

Before long, however, it became eminently clear that the Senate would not be able to pass a similar bill. The 2010 U.S. elections, which brought more doubters of climate change into the halls of Congress, only made it clearer that comprehensive climate action is off the table for now.

EPA. With Congress unable to pass comprehensive climate legislation in 2010, attention turned to what EPA might be able to do under existing authorities. And it turns out that EPA can do quite a lot by taking reasonable steps that have garnered critical support from the business and environmental communities. In late October, for example, the agency announced a sensible proposal to reduce greenhouse gas emissions and improve fuel efficiency for medium and heavy-duty vehicles. This was followed by a November announcement that will go a long way to making sure that new industrial facilities use state-of-the-art technologies to boost efficiency and reduce emissions.

Of course, opponents of these and other EPA regulations will surely raise a ruckus, and there will be loud cries in Congress to delay the regulations and even cut funding for the EPA. But the possibility remains that the agency could conceivably begin to chip away at U.S. emissions in the months and years ahead.

State Actions. Looking beyond Washington, state capitals were the focus of creative thinking and leadership on the issue of clean energy in 2010. Massachusetts, for example, set a statewide energy efficiency standard in 2010 supported by $1.6 billion in incentives. Meanwhile, California voters upheld the state’s greenhouse gas reduction law by defeating Proposition 23. This marked the first direct vote on addressing climate change in the United States, and it won in an overwhelming fashion.

But the overall story regarding climate action in the states was more mixed. While several regional climate initiatives continued to push forward, the November elections brought to the nation’s statehouses a group of new leaders who adopted strong stands against climate action in their campaigns. We will stay tuned to see how their campaign rhetoric translates into governing.

International. The agreement reached by international negotiators in Cancún in December closed out 2010 on a positive note. The Cancún Agreements import the essential elements of the 2009 Copenhagen Accord into the U.N. Framework Convention on Climate Change, including a stronger system of support for developing countries and a stronger transparency regime to better assess whether countries are keeping their promises. The Cancún Agreements also mark the first time that all of the world’s major economies have made explicit mitigation pledges under the Convention.

Of course, the ultimate goal of the continuing international talks should be a legally-binding climate treaty, but in Cancún we saw countries agreeing on incremental steps that will deliver stronger action in the near term and lay the foundation for binding commitments down the road.

Looking Ahead. Looking ahead, I believe 2011 holds promise only if those of us who support climate action can learn from what happened in 2010. In recent years, domestic and international efforts largely centered on a “big bang” theory of trying to achieve everything at once. Instead, it’s instructive now to take a cue from Cancún and accept that a step-by-step approach to building support for climate solutions offers our best shot at progress. 

Calling on the new Congress to pass cap and trade or similarly comprehensive solutions will be a nonstarter, for example.  But there may be an opportunity on Capitol Hill for less sweeping steps to reduce U.S. emissions.  

Supporters would do well to spend the next several months laying the groundwork for incremental solutions by strengthening communications with the public. We need to do a better job of helping people understand both the risks and the opportunities presented by climate change. In the same way we buy fire insurance to protect against an event that has a statistically small chance of happening but would result in severe damage, acting now to cut emissions reduces our vulnerability to severe events that are likely to become more common in a warming world. And the success of the “No on Prop 23” campaign in California suggests that there remains a healthy appetite among the general public and in the business community (which provided substantial support for the effort) to back well-framed climate solutions. 

After a year of highs and lows, we still must aim high in our efforts to address one of the greatest challenges of our time. But we should also heed the lessons of the past year and work for more modest victories now that can keep us on the path to longer-term solutions. 

by Eileen Claussen, President, Pew Center on Global Climate Change-- December 2010
Eileen Claussen
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Economics

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

Beyond Binding or Bust

This post also appears in National Journal's Cancún Insider blog

CANCUN – We’ll see tomorrow here in Cancún whether countries are ready to move past binding-or-nothing in the international climate effort.

For the past five years, negotiators have deadlocked over whether and how to extend a legally binding climate regime beyond 2012, when the first Kyoto targets expire. In that time, over countless sessions, the U.N. climate talks have produced little in the way of tangible results.

Cancún is an opportunity for a more sensible approach.

CARB’s Economic Analysis Helps Make the Case to Reject Proposition 23

Last Thursday, the California Air Resources Board (CARB) published details on the proposed greenhouse gas trading program to be implemented under state law AB 32. AB 32, as our blog readers know, is under threat from Proposition 23 – which would forestall (perhaps indefinitely) meaningful action to reduce greenhouse gases in California. The analyses done by CARB in association with the development of the proposed program bolster the case for rejecting Prop 23.

These CARB analyses show that the trading program under AB 32 will “shift investment and growth within the overall economy toward those sectors driven by the production of cleaner and more-efficient technologies.” The importance of this targeted growth should not be understated – by moving toward energy technologies that are both home-grown and energy efficient, we reduce our economic exposure to the price volatility of global energy markets. Since the world is using more and more of what are ultimately finite quantities of fossil energy, protecting ourselves by transitioning the economy toward energy systems that are not subject to global supply and demand imbalances is important to protecting our future economic growth.

While transitioning to new and different systems for energy production and use will necessarily result in some temporary economic dislocation, the market mechanisms included in CARB’s regulatory program minimize these impacts. Taken directly from the CARB economic analysis appendix:  “Overall, staff finds no significant adverse impacts on California business or consumers as a whole as a result of the proposed regulation.”

With climate change legislation stalled on Capitol Hill in Washington, D.C., for the foreseeable future, maintaining the critical environmental legislation of AB 32 is extremely important for advancing the nation’s climate policy. Even absent action by other states, California is the world’s 8th largest economy and a significant contributor to global greenhouse gas emissions. Action taken through policy in California is a huge step forward in addressing the global climate crisis.

Much of the rest of the world is waiting for the United States to take a leadership role on the issue of global climate change. With political gridlock in D.C., the best chance for the nation to make significant progress on this issue starts in California. AB 32 is the start of California’s transition to a 21st century economy of clean, green, homegrown energy – and represents an opportunity for the state, and the nation, to retake a leadership position in what will be some of the most important industries of the coming decades. 

Russell Meyer is the Senior Fellow for Economics and Policy

Some Heavy-Duty Good News

At a time when political gridlock in Washington has blocked climate legislation, EPA and NHTSA have jointly come forward with a sensible proposal that will substantially reduce oil consumption and greenhouse gas (GHG) pollution from heavy-duty trucks. EPA and NHTSA’s proposed new rules build on their recent success in finalizing GHG and fuel efficiency standards for cars and light-duty trucks. Once again, the two agencies collaborated with industry to make sure their standards accomplish environmental and energy security goals in a practical manner.

The transportation sector is responsible for 27 percent of our nation’s GHG emissions. Within this sector, heavy-duty vehicles are the second largest source of emissions (after light-duty vehicles), accounting for 20 percent of the sector’s total. The new proposal covering heavy-duty vehicles (long-haul trucks, large pick-ups and vans, school and transit buses, and utility trucks) manufactured from 2014 through 2018 is estimated to reduce emissions by 7-20 percent from these vehicles (depending on the category of truck) from current levels, achieving an overall reduction of 250 million metric tons of carbon dioxide over the life of the vehicles sold during this five-year period. As a result, emissions in 2030 from this fast growing subsector will be 9 percent below what they would have been in the business as usual case. The proposed rule is also estimated to reduce oil consumption by 500 million barrels over this same period. 

Cost and Benefits

To achieve the proposed standards, truck manufacturers will need to modify their vehicles drawing from a range of existing technologies including improvements in aerodynamic designs, lower rolling resistant tires, advanced transmissions, and reduced idling. The agencies report that the cost of meeting the standard for many trucks will be recouped in less than 2 years in the form of fuel savings. The regulatory impact analysis accompanying the proposed rule looks at both the costs and benefits of meeting the proposed standards. It shows the following:

Estimated Lifetime Discounted Costs and Benefits for 2014-2018 Model Year Heavy-Duty Vehicles

3 percent discount rate$ billions
Costs$7.7
Benefits$49
Net Benefits$41


Source: Table I-4 of the proposed regulations.

The bottom line is clear – with a net benefit to society of $41 billion, the proposed rule is a worthwhile investment in reducing both our reliance on foreign oil and our emissions of greenhouse gases.  

Steve Seidel is Vice President for Policy Analysis

Regulations Do Impose Costs – But So Does Not Regulating

Steve Seidel, vice president for policy analysis, co-wrote this post.

With the failure of the Senate to act on climate change legislation, the focus of attention now shifts to possible regulatory actions by EPA. The Supreme Court in 2007 made it clear that greenhouse gases (GHGs) are pollutants under the existing Clean Air Act (CAA), and the overwhelming scientific evidence (spelled out in great detail in the endangerment finding) demonstrates that such pollutants represent possible harm to public health and welfare. 

Opposition to EPA action rests in part on concerns that any regulations will be excessively costly and burdensome to households and U.S. manufacturers. While it is certainly true that regulating GHGs will result in costs, it is also important to look at whether the economic benefits from those regulations will be greater than the costs they impose. In other words, will societal costs of allowing global GHG emissions to continue unabated (costs that will come in the form of impacts from rising sea levels, increased extreme weather including heat waves and droughts, among others) be greater than the costs of regulating those emissions responsibly?

This basic regulatory framework – that regulatory costs should be less than the resulting benefits – is codified in OMB review of all major federal regulations by both Republican and Democratic Administrations, has historically been applied to all EPA regulations, and would certainly be applied to any future regulations of GHGs.

So what have been the costs and benefits of past EPA regulations under the CAA historically? Congress required EPA to undertake a retrospective assessment of the costs and benefits of regulations under this statute. The conclusion of this retrospective review is that the CAA resulted in total benefits that are around $37 trillion, while total costs were $0.874 trillion (in 2010 dollars) – an astounding 40 to 1 benefit to cost ratio! 

EPA has also produced a prospective assessment of the costs and benefits of the CAA – this time for the time period of 1990 through 2010. In this review, EPA estimated that the most likely benefit to cost ratio of the CAA for this period is 4 to 1. While a very strong and positive value, the ratio is substantially lower than the estimated benefits for the first 20 years of the CAA. 

This is not unexpected – early gains are usually greater, and more cost effective, because simple or cheap remedies are the first to be applied in response to regulatory requirements. As those requirements become more stringent, creating additional benefits becomes more costly (from an economics perspective this is described as moving up the marginal cost curve).  

How credible is EPA’s assessment of its regulations? Alan Krupnick, formerly of the President’s Council of Economic Advisors, has testified before Congress about the credibility of EPA’s analyses:  “Under the auspices of the agency’s Science Advisory Board, both studies were scrutinized throughout the decade-long preparation by at least three expert committees of outside economists, air quality modelers, epidemiologists, and other health experts.” 

In addition to these EPA assessments, there have been a handful of quality external analyses of the costs and benefits of the CAA. The Office of Management and Budget (OMB) found that the “major rules” from EPA’s Office of Air resulted in total benefits between $145 and $218 billion annually, for the years between 1992 and 2002. This is compared to costs of between $22 and $25 billion over that same period. A study by researchers at MIT found total annual benefits rising from $50 billion in 1975 to $400 billion in 2000. This report accounts for the monetary benefits of avoided premature death differently than the EPA studies, and as a result reports lower values for the total benefits. A sum of the total discounted benefits yields a total benefit of $6.85 trillion from 1975 through 2000 – a figure still substantially greater than the EPA estimate for the costs of the regulations. 

So how might this play out in terms of future regulations of GHGs? EPA’s first GHG regulations were standards set for light duty vehicles (which it coordinated with the efficiency standards set by NHTSA). These standards are expected to lead to net benefits of between $0.5 and 1.2 billion dollars (discounted back to present values using 7 percent and 3 percent discount rates, respectively) without even including a social cost of carbon. If a value is assigned to the avoided GHG emissions associated with this regulation, the net present benefits are even greater! 

If there is a lesson that can be drawn from these previous regulatory efforts it is that while regulations do impose real costs, EPA’s actions under the CAA have consistently led to positive environmental and economic outcomes. By not regulating, we would have foregone these positive net benefits and incurred the social costs imposed by unabated pollution.

So the next time someone tells you that the costs of reducing air pollution are too high, ask them what would be the costs to society of not reducing those emissions. 

Russell Meyer is the Senior Fellow for Economics and Policy. Steve Seidel is Vice President for Policy Analysis.

Standing Up for Cap and Trade

Cap and trade has gotten a bad rap. It’s been vilified as a national energy tax, an elaborate Ponzi scheme, and a giveaway to corporate polluters.

While these attacks are wrong, they succeeded in shaping the political discourse around national climate and energy policy, which undoubtedly contributed to last week’s decision by Senate leaders to delay consideration of legislation that would limit greenhouse gas emissions.

This is unfortunate. We need a national policy to reduce emissions, and, as our new white paper shows, cap and trade is still the best, most cost-effective way of doing so. When lawmakers turn their attention back to this issue — as  they must — they should make cap and trade a foundational element of the policy response to climate change. 

Congressional Testimony of Elliot Diringer: Climate Change Finance and Providing Assistance for Vulnerable Countries

Testimony of Elliot Diringer 
Vice President, International Strategies 
Pew Center on Global Climate Change 

Submitted to the Subcommittee on Asia, the Pacific and the Global Environment 
Committee on Foreign Affairs 
U. S. House of Representatives 

July 27, 2010

Climate Change Finance: Providing Assistance for Vulnerable Countries

Click here to download a PDF of the testimony. 


Chairman Faleomavaega, Ranking Member Manzullo, members of the committee, thank you for the opportunity to testify on the critical challenge of ensuring U.S. financial support for climate change efforts in developing countries.  My name is Elliot Diringer, and I am the Vice President for International Strategies at the Pew Center on Global Climate Change.

The Pew Center on Global Climate Change is an independent non-profit, non-partisan organization dedicated to advancing practical and effective policies to address global climate change.  Our work is informed by our Business Environmental Leadership Council (BELC), a group of 46 major companies, most in the Fortune 500, that work with the Center to educate opinion leaders on climate change risks, challenges, and solutions.  The Pew Center is also a founding member of the U. S. Climate Action Partnership (USCAP) , a coalition of 23 leading businesses and five environmental organizations that have come together to call on the federal government to enact strong national legislation to significantly reduce U.S. greenhouse gas (GHG) emissions.

Mr. Chairman, the Pew Center believes that providing sustained financial support to developing countries is in the U.S. national interest and an essential ingredient for a meaningful global response to the urgent challenge of climate change.  While some developing countries have adequate resources to finance their own climate efforts, most do not.  They need our help both in mitigation (deploying policies and technologies to reduce their rapidly rising greenhouse gas emissions) and in adaptation (coping with the unavoidable impacts of a warming climate).  Delivering adequate support will require decisions here in Washington to mobilize the United States’ fair share of the necessary resources.  And it will require effective multilateral agreements ensuring that in return, all major economies – both developed and developing – contribute equitably to the global climate effort.

In my testimony, I would like to outline some of the reasons we believe it is in our strong national interest to provide sustained climate support to developing countries; suggest principles to guide a U.S. climate finance strategy at home and abroad; and recommend domestic and international policy frameworks to generate and effectively deploy climate finance.

My principal points are as follows:

  • There are strong environmental, security, economic, humanitarian and diplomatic rationales for supporting developing countries’ climate efforts.  Developing countries are unlikely to commit to strong climate action without assurances of sustained finance, severely weakening prospects for an effective global response to climate change.  Providing this support will reduce the United States’ exposure to climate impacts and related security risks, and will help ensure strong markets for U.S. clean energy technologies.
  • In both domestic policy and multilateral negotiations, U.S. strategy on international climate finance should promote reliability, accountability, coherence, efficiency and the preservation of national sovereignty.
  • Key international objectives should be the establishment of a new multilateral climate fund, as agreed in the Copenhagen Accord; creation of a finance body to promote coherence and coordination among multilateral and bilateral finance efforts; and adoption of clear guidelines for the verification of financial flows and supported actions.
  • These steps should be agreed only in the context of a balanced package that includes effective international procedures to verify the mitigation actions of all major-emitting countries.
  • Domestically, Congress should approve the Administration’s request for increased international climate appropriations in FY 2011; establish a dedicated funding source, such as a set-aside of emission allowances, to sustain higher levels of finance in the future; and establish an interagency trust fund board to allocate these funds, subject to Congressional oversight.     


Why the U.S. Should Provide Sustained Climate Assistance to Developing Countries

Climate change is a global predicament in which causes and effects are distributed unequally.  All countries face the consequences of a warming climate.  However, some countries, including the United States, have far greater capacity to cope with them.  These same countries, by and large, also bear far greater responsibility for the cumulative greenhouse gas emissions that have begun to alter our climate.

For these reasons, the world’s developed countries, including the United States, have committed to lead the global climate effort and to support the mitigation and adaptation efforts of developing countries.  These general commitments are contained in the 1992 U.N. Framework Convention on Climate (UNFCCC), signed by President George H. W. Bush and unanimously ratified by the Senate.

Responsibility, however, is only one rationale for fulfilling these commitments.  Sustained U.S. support for developing countries is in our national interest from multiple perspectives:

  • Environmental – Dangerous climate change can be averted only with the concerted efforts of all major emitting countries.  While some have begun to take action, and such unilateral efforts are likely to grow, achieving a critical mass of effort on a global scale will require durable multilateral agreements through which countries can be confident that all are undertaking their fair share.  For developing countries to sign on to such agreements, they will need reasonable assurance that developed countries will significantly scale up their financial support.  Sustained U.S. support is therefore essential for the global deal we need to reduce our exposure to potentially catastrophic climate risks.
  • National security – The U.S. military now recognizes that unabated climate change poses rising risks to our national security and new demands on our military resources.  In its latest Quadrennial Defense Review, the Pentagon says climate change may act as “an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”[1]  In strained regions, chronic drought, rising seas, extreme weather and other climate impacts could undermine weak governments, induce mass migrations, and trigger or heighten resource competition, contributing to social instability and, potentially, armed conflict.[2]  U.S. support would mitigate these risks, first, by helping to reduce global GHG emissions, thereby limiting impacts, and second, by helping poor, highly vulnerable countries anticipate and manage the stresses of climate change.
  • Economic – China, Germany and other countries are taking a lead in a global clean energy market projected to attract more than $1.5 trillion in investment over the coming decade.[3]  As the United States positions itself to compete, it has a vested interest in ensuring that developing countries have the technical, institutional and financial capacity to adopt clean energy technologies.  U.S. finance can help establish, and ease the entry of U.S. firms into, these new markets.   
  • Humanitarian – An important dimension of U.S. leadership is our readiness to assist those in need, whether the victims of Haiti’s tragic earthquake or the millions in Africa suffering HIV/AIDS.  Within 10 years, global warming may reduce crop yields in parts of Africa by as much as half; by 2050, rising seas could displace as many as 30 million people in Bangladesh, and receding glaciers could leave a billion others across Asia facing chronic water shortages.[4]  Increasingly, the United States’ humanitarian record will be seen against a backdrop of worsening climate impacts.
  • Diplomatic – A willingness to assist vulnerable countries is among the strongest levers available to the United States to secure meaningful climate commitments from China and other major developing countries. In Copenhagen, China showed flexibility on U.S. demands for transparency only after Secretary of State Clinton proposed a long-term finance goal, which fractured the developing country bloc by drawing support from many least developed and small island countries.  With further progress on finance, this dynamic can be expected to continue as negotiations go forward.

Policy Context and Challenges

The Copenhagen Accord represents an important step toward an effective international climate framework.  Although nonbinding, the Accord reflects a political consensus among world leaders on key elements, including: a goal of limiting warming to 2 degrees Celsius; a balanced but differentiated approach to mitigation, with economy-wide emission targets for developed countries and nationally appropriate actions for developing countries; and agreement in principle on how these efforts are to be verified.[5] To date, 109 countries have associated with the Accord.  Fifty-six countries accounting for more than 80 percent of global emissions – including China and the other major emerging economies – have pledged specific targets or actions.[6] 

In the area of finance, the Accord calls for a new Copenhagen Green Climate Fund; sets a goal of $30 billion in mitigation and adaptation assistance from developed countries in 2010-2012; and sets a goal of mobilizing $100 billion a year in public and private finance for developing countries by 2020, in the “context of meaningful mitigation actions and transparency in implementation.” 

Fulfilling the Copenhagen Accord requires action at home by the United States and other countries and further agreement among parties on operating rules and mechanisms.  With respect to finance, the immediate priority is delivering on the goal of $30 billion in “fast-track” support.  At President Obama’s request, Congress increased international climate appropriations more than three-fold in FY 2010, to $1.3 billion.  The President has proposed a further increase, to $1.9 billion, in FY 2011.  These funds would help address urgent needs and, as an important signal of Congress’ intent, would help advance U.S. negotiating objectives.  The Pew Center strongly urges Congress to fully fund this request.

The broader challenge on climate finance is two-fold.  First, the United States must establish a domestic strategy to generate and effectively manage its share of the long-term finance envisioned under the Accord.  Second, the United States must work with other countries to establish multilateral financial arrangements compatible with this domestic funding strategy.  I will offer recommendations in both of these areas later in my testimony.

The upcoming U.N. Climate Conference in Cancún presents a major opportunity to begin elaborating the international financial architecture.  Any further agreement on finance, however, should come in the context of a balanced package also advancing other key issues.  Chief among these is the issue of transparency.  Having agreed in Copenhagen that all parties’ actions are to be verifiable – and that developing country actions are to undergo “international consultation and analysis” – parties must now begin to establish this system of accountability.

We believe that in the long run the goal must be a comprehensive treaty with binding commitments for all major economies.  We will likely get there, however, only in stages.  For now, the objective should be to build on the Copenhagen consensus with nuts-and-bolts decisions on finance, transparency, and other key operational areas.  As the architecture takes shape, and countries move forward with domestic implementation, they will hopefully gain the confidence needed to convert their current political pledges into more ambitious binding commitments.

Objectives of a U.S. Climate Support Strategy

The Copenhagen Accord, as noted, envisions a mix of public and private finance for developing countries.  While there is no consensus on the appropriate mix, there is broad acceptance that the carbon market and other private finance will comprise a substantial portion.  Indeed, with a strong carbon market, private finance could generate a substantial majority of needed flows.  There is also broad recognition, however, that a significant increase in public finance is needed to build mitigation capacity, so that countries can establish the policies and practices necessary to attract private investment, and to support adaptation.  Our recommendations focus primarily on the public finance portion.

We believe that U.S. strategy on international climate finance, both in domestic policy and in multilateral negotiations, should reflect the following objectives:

  • Reliability – To be politically credible and effective, new support must be steady and predictable.  Strong, stable climate agreements will not be feasible without reliable financial flows.  Nor will developing countries be able to build the capacities needed to become more self-reliant in meeting the climate challenge.
  • Accountability – Clear, workable guidelines are needed to verify the delivery of support and the performance of supported actions.
  • Coherence – Support will flow through multiple channels – public and private, bilateral and multilateral – to address a wide range of needs.  Mechanisms are needed to set priorities and to promote coordination and consistency.
  • Efficiency – Rapidly scaling up support calls for fully leveraging, and not replicating, the capacities of existing institutions and for deploying public finance in ways that maximally leverage private flows.
  • Sovereignty – National prerogatives must be respected and preserved.  Donor countries should retain discretion on the means of generating, and avenues for delivering, increased finance.  Recipient countries should be able to access finance directly (through national, rather than multilateral, implementing entities).

An International Climate Finance Architecture

Climate support is presently provided through an array of bilateral and multilateral channels, including a number of funds established under the UNFCCC and the Kyoto Protocol.  In this largely ad hoc structure, funding levels are erratic and well below assessed needs, there is little coordination among the various funding entities, and developing countries frequently complain of difficulty in accessing those funds that are available.

A major aim of the ongoing UNFCCC negotiations is the establishment of new financial arrangements to ensure stronger, predictable flows and improved access to funding.  Many developing countries have advocated a comprehensive new apparatus under the UNFCCC to centrally gather and disburse funding for the full range of mitigation and adaptation needs.  We believe a more practical and politically viable approach is a finance framework that promotes adequate, reliable flows by encouraging a variety of funding mechanisms and channels, while ensuring greater consistency, coordination and accountability.  The major elements of this enhanced architecture should include: a new multilateral climate fund, as agreed in the Copenhagen Accord; a new finance body to advise the UNFCCC Conference of the Parties (COP); and clear guidelines for the verification of financial flows and supported actions.

A New Climate Fund – Principal issues in the design of a new climate fund include its intended uses, its governance structure, and how it will be funded.

We believe a new multilateral climate fund should serve as a principal, but not exclusive, mechanism for delivering public finance to developing countries.  It could support any or all of the following activities: capacity building (to help countries analyze mitigation potentials, develop national policies, and institute measurement and verification systems); adaptation planning and implementation; technology deployment; forestry-related measures; and other types of mitigation programs.  In determining the fund’s scope, countries must assess and modify existing UNFCCC funds accordingly to avoid funding gaps and redundancies.

The new fund should be governed by an independent board operating under the guidance of, and accountable to, the COP, but not under its direct authority.  This would allow the COP to set broad policy directions and maintain oversight, while reducing the risk of procedural delays and political interference.  For this arrangement to be acceptable to developing countries, many of which prefer that the fund be under the direct authority of the COP, it is essential that the board’s composition and decision-making provide for balanced representation.   These could be modeled on the provisional Climate Investment Funds (CIFs) formed in 2008 by the United States and other major economies.  The CIFs’ Trust Fund Committees include equal representation from contributor and recipient countries and operate by consensus.

Another concern is the new funds’ relationship to existing multilateral financial institutions, in particular the World Bank.  Many developing countries object to the Bank’s donor-weighted governance structure and feel it has been unresponsive to their concerns; stakeholder groups are critical of its historic support for carbon-intensive energy development.  While both sets of concerns warrant continued reforms at the Bank, they should not preclude it from an appropriate role in a new climate fund.  Given the urgency and scale of the climate finance challenge, countries must take full advantage of available capacities and expertise.   The Bank should be a candidate to serve as the new fund’s trustee, a strictly fiduciary role.  And parties should explore seconding staff from the Bank and from other multilateral development banks and agencies to form an independent secretariat supporting the new climate fund.

A wide range of proposed funding sources are being examined by the Secretary-General’s High-Level Advisory Group on Climate Change Financing, but near-term agreement on any particular revenue mechanism, particularly one at the international level, appears unlikely.  In the absence of such a mechanism, countries should agree on an indicative scale of assessment establishing their relative contributions to the new climate fund and set funding targets through periodic pledging (every three to five years); each should decide for itself how to generate its respective contribution.  This scale of assessment could take into account factors such as a country’s total and per capita emissions and GDP, and should be evolving, so that emerging economies also contribute as they achieve higher levels of development.

A UNFCCC Finance Body – As noted, a new climate fund would be one among many means of delivering climate support.  This disaggregated architecture has the advantage of encouraging multiple bilateral and multilateral channels, thereby achieving the highest feasible overall flow.  A mechanism is needed, however, to promote some degree of coordination and coherence among these efforts.

We believe this role is best served by a new UNFCCC body appointed by the COP to advise it on finance-related issues.  Specifically, this finance body, comprised of parties and independent experts, could:

  • Recommend broad funding priorities to guide the allocation decisions of multilateral funds and bilateral donors;
  • Continually assess finance needs and progress toward meeting finance objectives;
  • Review the performance of, and recommend further guidance to, UNFCCC funds;
  • Provide a forum where multilateral and bilateral donors could seek to coordinate their efforts;
  • Promote harmonization of application procedures; and
  • Recommend guidelines for the measurement and verification of finance.

Verification – Parties have agreed in principle that their mitigation actions – and that support for developing country actions – are to be measurable, reportable and verifiable (MRV).  A goal for Cancún should be agreement on the basic parameters of an MRV system so that detailed guidelines can then be developed.

Verification of finance will require stronger tracking and reporting of financial flows and some form of UNFCCC review.  For the system to be credible, there must be some further delineation of what flows, both public and private, qualify as “climate finance.”

Developing countries agreed in Copenhagen that “supported” mitigation actions would be subject to “international verification.”  In the case of bilateral finance, the United States and other donors can be expected to apply their own verification standards.  But COP guidance is needed to ensure some consistency among them and to define how MRV applies to multilateral support.

A balanced agreement must also address MRV of the mitigation actions taken by developing countries without international assistance, which under the Copenhagen Accord are subject to “international consultations and analysis.”  This includes a substantial majority of the actions pledged by China and other major emerging economies.  We believe that effective MRV of these unilateral efforts will require: biennial GHG inventories and implementation reports from developing countries; a technical review and report by experts; an open peer review based on the expert report and parties’ inputs; and publication of all reports and the peer review conclusions.  Similar MRV procedures should apply to the mitigation actions of developed countries as well.

Domestic Policy Issues

In the domestic policy context, there are two principal needs: a stable funding base enabling the United States to provide sustained support for developing country efforts; and a mechanism to allocate and coordinate those resources and ensure strong Congressional oversight.

A Stable Funding Base – Unless it is prepared to support some form of international revenue-generating mechanism, the United States must rely on domestically generated resources for its share of future international climate finance.  Past U.S. climate support has come through appropriations by Congress to multiple agencies, including the Departments of State, Treasury, Energy, Commerce and Agriculture, the U.S. Agency for International Development (USAID), and the Environmental Protection Agency (EPA).  The core climate assistance budget averaged $237 million a year from 2001 to 2009,[7] before rising to $1.3 billion in FY 2010.

We urge Congress to approve the President’s request for increased appropriations in FY 2011, and to consider a further increase in FY 2012, enabling the United States to provide a reasonable share of the $30 billion in “fast-start” resources pledged collectively by developed countries in Copenhagen.  However, looking toward 2020, with competing demands on the federal budget and the growing imperative of deficit reduction, there is no certainty that appropriations alone can provide the level of sustained support that is needed.  We believe that the United States will prove a more reliable partner in the global climate effort, and that the prospects for effective climate agreements will be greatly enhanced, if Congress establishes a dedicated source of funding. 

Ideally, this source should derive from GHG-generating economic activities, and thereby help to correct the market failures that contribute to climate change.  Our first choice would be a set-aside of emission allowances in an economy-wide cap-and-trade system regulating U.S. greenhouse gas emissions.  While there now appears little prospect of cap-and-trade legislation in this Congress, we continue to believe strongly in the value of a market-based approach to reducing U.S. emissions.  Properly designed, a cap-and-trade system can minimize the costs of meeting our environmental goals, create an ongoing incentive for technological innovation, and generate resources for critical climate investments, including international finance. 

We commend the House for its approval of H.R. 2454, the American Clean Energy and Security Act of 2009, and the inclusion of specific set-asides to support adaptation, reduced deforestation and technology deployment in developing countries.  At projected allowance prices, these set-asides would generate about $8.5 billion in public finance for developing countries in 2020.[8]  According to EPA’s analysis, the purchase of international emission offsets authorized under H.R. 2454 could also generate on the order of $20 billion of private investment in developing countries in 2020.[9] Combined, these set-asides and offset purchases would meet or exceed the presumed U.S. share of the $100 billion goal set under the Copenhagen Accord.

Other potential sources of public finance that we believe may be worth exploring include:

  • International shipping and aviation – Two sectors drawing particular attention from the international community because of their trans-boundary nature and rising emissions are international shipping and aviation.  A number of the proposals by countries to limit or reduce their emissions could serve simultaneously to generate finance for developing countries.  Some parties have proposed international levies on bunker fuels or other forms of emission charges.  Alternatively, countries could agree to apply such charges nationally and to dedicate a portion of the proceeds to international climate finance.  In such an approach, the United States would directly administer any charges at domestic ports and decide how to apportion the resulting revenues.        
  • Fossil fuel subsidies/royalties – Another option is to redirect some of the federal tax subsidies provided for fossil fuel production, or of the federal royalties it generates.  The United States and other G20 countries agreed last year in Pittsburgh to phase out “inefficient fossil fuel subsidies.”[10] The President’s proposed FY 2012 budget calls for ending a number of oil and gas subsidies, generating an estimated $39 billion in revenue through 2020.[11]
  • Levy on international offsets – Another potential source, assuming the establishment of a federal cap-and-trade system, would be a levy on international emission offsets entering the domestic market.  A similar levy on the international Clean Development Mechanism presently supports the Adaptation Fund under the Kyoto Protocol.


Coordinating U.S. Support – Regardless of the source of finance, a coherent strategy for sustained U.S. support requires a mechanism to coordinate across federal entities.  Ideally, Congress should establish a trust fund to receive appropriated or dedicated funds and a board to oversee it.  The board would develop a long-term climate support strategy and, on that basis, make annual allocations to bilateral and multilateral programs.

To best align the funding strategy with broader U.S. diplomatic objectives, the board should be chaired by the Secretary of State.  Other members should include the Secretaries of Treasury, Energy, Agriculture and Commerce, and the Administrators of USAID and EPA.  The board should report regularly to Congress, its executive director should be Senate-confirmed, and Congress should use other means at its disposal to ensure strong oversight

In conclusion, Mr. Chairman and members of the committee, we believe sustained U.S. support for climate efforts in developing countries is a sound and prudent investment in the environmental, economic and national security of the United States.  We strongly urge Congress to increase appropriations for “fast-track” finance, and to establish the means for providing long-term support in the context of agreements ensuring that all major economies contribute equitably to the global climate effort.  I would be pleased to answer your questions.

 


Footnotes

[1] Department of Defense, 2010. Quadrennial Defense Review Report, Page 85.  Available at http://www.defense.gov/qdr/images/QDR_as_of_12Feb10_1000.pdf.

[2] Fingar, T., 2008. Testimony Before the House Permanent Select Committee on Intelligence and the House Select Committee on Energy Independence and Global Warming, 25 June 2008 and; Center for Naval Analyses, 2007. National Security and the Threat of Climate Change, Military Advisory Board, Center for Naval Analyses (CNA), April 2007. Available at http://www.cna.org/sites/default/files/National%20Security%20and%20the%20Threat%20of%20Climate%20Change.pdf.

[3] Pew Center on Global Climate Change, 2010. Clean Energy Markets: Jobs and Opportunities, April 2010 Update. Available at http://www.c2es.org/publications/brief/clean-energy-markets-jobs-and-opportunities.

[4] Intergovernmental Panel on Climate Change, 2007. Summary for Policy Makers. Available at http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-spm.pdf.

[5] Copenhagen Accord.  Available at http://unfccc.int/resource/docs/2009/cop15/eng/11a01.pdf#page=.4.

[6] The 27 Member States of the European Union are counted here as a single entity.  Emission reduction targets pledged by developed countries are available at http://unfccc.int/home/items/5264.php.  Mitigation actions pledged by developing countries are available at http://unfccc.int/home/items/5265.php.

[7] Office of Management and Budget, Federal Climate Change Expenditures, Report to Congress for Fiscal Years 2003-2008 and 2011.

[8] Purvis, N. and Stevenson A., 2010. International Provisions in U.S. Climate Legislation. Available at http://www.climateadvisers.com/pdf/International%20Provisions%20in%20U.S.%20Climate%20Legislation.pdf.

[9] Environmental Protection Agency, 2009. EPA Analysis of the American Clean Energy and Security Act of 2009—H.R. 2454 in the 111th Congress, 23 June 2009. Available at http://epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf.

[10] G20 Leaders’ Statement, The Pittsburgh Summit, 24-25 September 2009.  Available at http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

[11] Office of Management and Budget, 2010. Budget of the U.S. Government, Fiscal Year 2011. Available at http://www.whitehouse.gov/omb/budget/fy2011/assets/budget.pdf.

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