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
 

In Brief: The Business Case for Climate Legislation

Download the Brief (PDF)

 

June 2010

Press release

Introduction
In recent years, leading businesses have emerged as some of the strongest advocates for passage of national climate and energy legislation that mandates reductions in greenhouse gas (GHG) emissions. While many have cheered this business engagement, others have been left confused and at times suspicious of why businesses would support such a policy.

In many ways, the confusion is understandable. Environmental politics in this country have often pitted business interests against environmental advocates in a binary struggle over the need for new or more stringent regulations. But today, major corporations cutting across a range of industries are allying themselves with nongovernmental organizations (NGOs), unions, national security hawks, and even religious groups to urge enactment of legislation that requires reductions in GHG emissions. To some observers on the left and the right, business backing for new legislation is a foreign, if not completely counterintuitive, concept, and the strange bedfellows of the climate change issue have left many scratching their heads.       

This is partly because climate change is not strictly an environmental issue. Instead, it is a multi-faceted problem, encompassing national security, international diplomacy, and most crucially for business, economic policy. On a fundamental level, the companies supporting climate and energy legislation have made a simple determination: the presence of a coherent national policy is better for the economy and their business than the status quo. Put another way, the absence of such a policy creates uncertainty, which is a hindrance to sustained economic growth and an obstacle to the development of new markets and business opportunities.

This brief lays out the business case for national climate and energy policy, and explains why leading companies have decided that legislation that limits GHG emissions is good for their industries. While the details of individual companies’ policy positions will vary based on their own specific circumstances, broadly speaking there are three main reasons businesses support legislation that addresses climate change:

The need for regulatory certainty. Most companies understand that some form of climate policy is inevitable, but they do not know exactly what it will look like or what will be required of them. Today, when businesses look to the horizon they see an uneasy mix of evolving state and regional climate programs and burgeoning U.S. Environmental Protection Agency (EPA) regulations. It is unclear how these policy initiatives will unfold and interact with one another. This creates uncertainty, which hobbles business planning, especially for industries, such as electric utilities, that build and operate long-lived, capital-intensive assets. A clear, long-term, legislative framework for reducing GHG emissions would alleviate much of this uncertainty, allowing for more intelligent business planning.

The economic opportunities arising from climate solutions. Clean energy is projected to be one of the great global growth industries of the 21st century. Policy support can accelerate growth in these industries, and help U.S. companies compete against foreign firms that are quickly establishing dominant positions in these important markets.

The reputational benefits of supporting public policies that combat climate change. Customers, shareholders, employees, and other stakeholders are increasingly pushing companies to demonstrate social responsibility and environmental stewardship. For many companies, support for mandatory policies that promote clean energy, improve energy efficiency, and reduce GHG emissions has become an important plank in their broader corporate social responsibility (CSR) agendas.

Some companies are driven by all three of these reasons, while others are compelled by just one or two of them. Regardless of the specific reasons, one thing is clear: more companies today support climate legislation than ever before. Companies that make everything from computer chips to potato chips, search engines to jet engines, rubber tires to rubber soles, have publicly stated their support for legislation that caps carbon dioxide (CO2) emissions  (see “Leadership Ad” for a list of some of these companies). Trade associations representing electric utilities  and auto manufacturers  are on record supporting national climate policy. The remainder of this brief provides additional detail on why this is the case.

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GDP Impacts of U.S. Energy-Climate Legislation

The above graph shows projected growth in Gross Domestic Product (GDP) through 2030 under three different analyses of the energy-climate bill passed by the U.S. House of Representatives in 2009. The analyses were conducted by the U.S. Environmental Protection Agency (EPA), the National Association of Manufacturers - American Council for Capital Formation (NAM-ACCF), and the Heritage Foundation, the latter two of which strongly opposed the bill. 

The top line in the graph shows EPA’s reference case, i.e., EPA’s projection of what GDP will look like if Congress does not enact a greenhouse gas cap-and-trade program. (ACCF-NAM and Heritage both projected a slightly lower reference case.) The next three lines show what EPA, ACCF-NAM and the Heritage Foundation project would happen to GDP under the House-passed bill. Even NAM-ACCF and Heritage projections show the House-passed bill having minimal effect on the growth of GDP. 

As shown in the inset, the EPA analysis projects that GDP will rise to slightly more than $24 trillion in 2030 without the House-passed bill. All three analyses project that GDP will reach this same level with only a few months delay if the House bill were enacted.  None of the analyses account for the economic benefits of avoiding climate change.

 

Further Resources:

 

 

Workshop Proceedings: Assessing the Benefits of Avoided Climate Change: Cost-Benefit Analysis and Beyond

Workshop Proceedings: Assessing the Benefits of Avoided Climate Change: Cost-Benefit Analysis and Beyond
May 2010

Executive Summary:

Based on decades of research by the scientific community, there is now wide recognition that emissions of greenhouse gases are changing our climate and that the future impacts from such changes will largely be harmful. In response, policymakers across the U.S. government are beginning to consider what actions should be taken to limit climate change damages. An important tool used in making such policy choices is cost-benefit analysis (CBA), but this technique has been widely criticized as inadequate as the primary approach to valuing the impacts of climate change.

In March 2009, the Pew Center on Global Climate Change convened an expert workshop to examine the state of the art, limitations, and future development needs for analyzing the benefits of avoided climate change. Approximately 80 people from academe, federal agencies, and nongovernmental organizations participated. This event was motivated by widespread recognition of two developments: First, policy decisions that result in reduced greenhouse gas emissions are becoming more commonplace across the government. Second, one of the key tools used to analyze such policies, CBA, is challenged by the longterm, global, and uncertain nature of climate change.

Drawing from the environmental economics, impacts and vulnerability, and risk analysis communities, the workshop sought to glean insights on how to better quantify the benefits of reducing greenhouse gas emissions. The main objectives were to inform the development of a set of practical recommendations that decision makers could employ in the near-term and to outline new approaches to improve decision-making tools over time. Based on the outcome of the workshop, the Pew Center responded to the Office of Management and Budget’s request for public comments on how to improve the process and principles governing federal regulatory review. In February 2010, the Interagency Working Group on the Social Cost of Carbon issued a report detailing its recommendations for how this metric should be calculated in agency regulatory decisions.

Press Release

Summary Report (pdf)

Full Workshop Proceedings (pdf)

Workshop Agenda, Videos, and Presentations

 

Expert Papers:

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Press Release: Workshop Proceedings Assess Benefits of Avoided Climate Change

Press Release
May 3, 2010
Contact: Tom Steinfeldt, 703-516-4146


Pew Center on Global Climate Change Releases Report Assessing
the Benefits of Avoided Climate Change
Workshop Proceedings Suggest Risk-Management Approach

Washington, D.C. – There is now wide recognition that emissions of greenhouse gases are changing the global climate in ways that are largely harmful. In response, policymakers across the U.S. government are beginning to consider what actions should be taken to limit climate change damages. 

An important tool used in making such policy choices is cost-benefit analysis (CBA). But this technique has been widely criticized as inadequate as the primary approach to valuing the impacts of climate change. 

Motivated by recent attempts by government agencies to account for the benefits of reduced greenhouse gas emissions in rulemaking, the Pew Center on Global Climate Change held an expert workshop to examine the current state of the art, limitations, and future development needs for analyzing the benefits of avoided climate change. Approximately 80 experts from academe, nongovernmental organizations, and the federal government attended.

“The benefits of avoided climate change are substantial, but too often they are underestimated or ignored,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “Incorporating the risks of inaction into our assessments of greenhouse gas reduction benefits will give us a more accurate view of the benefits of acting. These proceedings help identify practical steps forward to provide policy makers with more sound estimates of the benefits of climate action.

The main objectives of the workshop were to inform the development of a set of practical recommendations that decision makers could employ in the near term and to outline new approaches to improve decision-making tools over time. Based on the outcome of the workshop, the Pew Center submitted recommendations on the appropriate use of cost-benefit analysis to the Office of Management and Budget during its 100-day review of its own role in regulatory review. These recommendations are available on the Pew Center’s web site: http://www.c2es.org/docUploads/Pew-Recommendations-OMB.pdf.

Many participants agreed that estimates of the social cost of carbon (i.e. benefits estimates used in CBA) are systematically biased low and require significant improvement. However, with such improvements, and with appropriate discounting, CBA can be an appropriate tool for incorporating the societal benefits of reduced greenhouse gas emissions into individual policies, such as CAFE standards, that would reduce greenhouse gas emissions incrementally.

A major focus of the workshop was the inadequacy of traditional analytical tools, such as CBA, for guiding policy decisions about non-incremental changes in economy-wide greenhouse gas emissions. Many participants recommended a risk-management approach that views climate stabilization as insurance against uncertain but intolerable outcomes.

The workshop report contains an extended summary of 17 presentations and the full text of nine background papers by experts in climate science and economics. Please visit http://www.c2es.org/events/2009/benefitsworkshop to access the full contents of the workshop proceedings, including video of expert presentations and free downloads of the workshop summaries and background papers.

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

# # #

The Pew Center was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

Breaking the Ice on U.S. Clean Energy Opportunities

On Friday, March 12, we held a briefing on jobs and opportunities in clean energy markets.

Today, the President signed an Executive Order creating an Export Promotion Cabinet of top officials and an Export Promotion Council, a private-sector advisory body. This Executive Order serves to highlight once again how important American exports and competitiveness are to economic recovery and continued US economic strength.  While much hand-wringing has occurred over the potential for climate and energy policy to hurt the ability of U.S. firms to compete in international markets, the opportunity of such policy to enhance the competitiveness of U.S. businesses has received less notice. The irony is that even as the planet warms, the United States may be left standing out in the cold if it doesn’t choose to lead in the development of next-generation energy technologies.

Carbon Market Oversight and Regulation

March 5, 2010

By Janet Peace and Timothy Juliani

This article originally appeared in Point Carbon News.

At the heart of any successful cap-and-trade program is a well-functioning market for the trading of emissions allowances.  At the same time, the recent high-profile market scandals and crises have led many to question market mechanisms in general.  Rather than leading to a wholesale indictment of markets, these events should instead highlight the critical need for appropriate market design, transparency and oversight.  Luckily, Congress has the opportunity to design the carbon trading market oversight framework at a point in time before long-standing carbon trading practices and systems have been fully established. 

A well-designed carbon market should reflect a balance between free market activity and regulation.  To the extent that the market cannot be manipulated or distorted, it can achieve its purpose—to spur innovation and reduce GHG emissions at the least possible cost to the economy.  Policies should include effective means to prevent excessively high prices, extreme price volatility, and irresponsible risk-taking.  Thousands of businesses would be affected by a mandatory GHG emissions trading system, and it is in the public interest to ensure the market functions efficiently and allowance prices generally reflect the balance of supply and demand.

The challenge faced by lawmakers and regulators is to create conditions that provide effective transparency and oversight while allowing market participants to structure contracts that best fit their specific circumstances.  A central question in this regard is whether carbon market transactions should be allowed to take place in the over-the-counter (OTC) market as well as on exchanges.  While exchange-based trading allows more transparency and possibly more direct access for market regulators, many argue that OTC trading should also play a key role in a carbon market. 

Both exchange-based and OTC trading have their strengths and weaknesses. Trading on exchanges provides transparency, ease of oversight, the virtual absence of counterparty risk, and market liquidity. Excessive speculation can be curbed to some degree through position limits, while daily cash settlement and clearing services lower the risk of default and limit the potential for negative ripple effects if default occurs.

While exchanges are not a panacea and do not ensure the absence of excessive speculation or market manipulation, they do provide a fair trading platform for market participants and regulators alike to see and access prices for carbon commodities. The centralized, standardized, digitized, and rules-based nature of exchange-based trading lends itself to efficient and effective oversight, provided that exchanges are required to take preventive measures and regulators are authorized to protect markets from abuse. The high level of transparency associated with exchange-based trading facilitates regulatory market surveillance as well as price discovery and competitiveness.

On the other hand, exchanges only offer standardized contracts, and have significant collateral requirements, which can make it more difficult for some important market participants, such as utilities, to participate.  OTC transactions provide greater flexibility than those on an exchange, as contracts can be customized more precisely to a company’s particular risk management needs, and a wider array of assets can be used as collateral for transactions.  This can be particularly helpful both to smaller participants and to utilities, which may look to minimize their carbon risk over a period of decades while maintaining significant cash resources for infrastructure investments.  Offset contracts provide another example of the need for customization, as the volume and timing of future credits can be uncertain due to factors such as project approval, verification, and performance. A non-standard OTC contract might be necessary in such cases. 

There is no question that a market approach provides the clearest and lowest-cost incentive to reduce GHG emissions and invest in new technologies. In developing the most effective carbon market, lawmakers and regulators have several options for improving oversight of exchange-based and OTC trading. They include the imposition of position limits, clearing and collateral requirements, reporting obligations, and restrictions on participation in certain types of transactions.  While OTC markets are more challenging to regulate by virtue of their decentralization and traditional lack of transparency, nothing technically prevents regulators from establishing the types of requirements above for OTC trades as well as those on exchanges.

In the end, both OTC and exchange-based systems can have roles to play in a federal carbon market, and it may be possible to maintain a role for OTC transactions while ensuring an appropriate level of regulatory oversight and efficient market operation.  The challenge faced by lawmakers and regulators is to strike the right balance between market transparency and oversight, and the ability of market participants to structure contracts that best fit their specific circumstances.

An expanded discussion of this topic can be found in the new Pew Center brief, “Carbon Market Design and Oversight: A Brief Overview.”

Janet Peace is Vice President for Markets and Business Strategy at the Pew Center on Global Climate Change.
Timothy Juliani is the Pew Center's Director of Corporate Engagement.

by Janet Peace, Vice President for Markets & Business Strategy, and Timothy Juliani, Director of Corporate Engagement--Appeared in Point Carbon News, March 5, 2010
Janet Peace
Timothy Juliani
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Press Release: Pew Center Briefs Point to Clean Energy Jobs, Detail Carbon Market Oversight

Press Release
February 17, 2010
Contact: Tom Steinfeldt, (703) 516-4146


MARKET-BASED SOLUTIONS CAN GROW U.S. CLEAN ENERGY ECONOMY
Pew Center Briefs Point to Clean Energy Jobs, Detail Carbon Market Oversight

WASHINGTON, D.C. – The Pew Center on Global Climate Change has released two timely publications that make the case for market-based clean energy and climate solutions.

Clean Energy Markets: Jobs and Opportunities, a new brief, explains how investment in clean energy technologies will generate economic growth and create new jobs in the United States and around the world. Comprehensive, market-based national policy that attracts investment in clean energy markets can help create these economic benefits.

A second brief, Carbon Market Design & Oversight, assesses the opportunity now before Congress to create the optimal design and oversight mechanisms to ensure a viable, transparent, and robust carbon market.

“It’s in our economic self-interest to ramp up development and deployment of U.S. clean energy technologies so that we can compete in the rapidly growing global clean energy markets,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “It’s not too late for the U.S. to position itself as a global clean energy leader, but we must act now. Passing comprehensive climate and energy legislation that prices carbon will give businesses the certainty needed to unleash millions of dollars in clean energy investments that will create U.S. jobs and expand economic opportunities.”

Worldwide, clean energy markets are already substantial in scope and growing fast, explains the Clean Energy Markets brief. Historically, regions where an industry gains an initial foothold are more likely to become a major center of growth for the industry. In the United States, comprehensive climate and energy policy can give nascent clean energy industries this initial start by attracting investment in clean energy markets and helping to create homegrown jobs.

In crafting sensible, market-based climate and energy policy, lawmakers should build on best practices and lessons from a number of existing markets to create the optimal carbon market design and oversight mechanisms. The Carbon Market brief provides policymakers a thorough yet concise assessment of the key considerations involved in establishing a sound, transparent U.S. carbon market. These include:

  • Roles and rationales of exchange-based and over-the-counter markets;
  • Options for improving oversight of these markets;
  • Assessments of potential regulatory agencies for a U.S. carbon market; and
  • Comparisons of carbon market oversight provisions in legislative proposals.

“Effective carbon market oversight will be critical, but it is fundamental and achievable,” said Claussen.
For more information about global climate change and the activities of the Pew Center, visit www.c2es.org.

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The Pew Center was established in May 1998 as a non-profit, non-partisan, and independent organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

Carbon Market Design and Oversight: A Short Overview

February 17, 2010

Download the full brief (pdf)

At the heart of any successful cap-and-trade program is a well-functioning market for the trading of
emissions allowances. The sulfur dioxide allowance market created under 1990 Clean Air Act
Amendments to control acid rain is an example of such a success. At the same time, several recent highprofile
market crises, such as the 2008 petroleum price spike, the crash of subprime mortgage and credit
default swap (CDS) markets, the Lehman bankruptcy, and the Madoff Ponzi scheme have led many to
question market mechanisms.

Yet, these events should not be viewed as indictments of markets in general, as our entire economy is in
fact a market-based system. Rather, they serve to highlight the critical need for appropriate market
design, transparency and oversight. Luckily, Congress has the opportunity to design the carbon trading
market oversight framework at a point in time before long-standing carbon trading practices and
systems have been fully established. This presents the opportunity to get the system right from the
outset.

Oversight is critical because a carbon market will be intimately connected to other energy markets,
including natural gas, coal, petroleum, and electricity. Because of these links, the potential exists for
manipulation of one or more of these markets to result in pricing issues in the others. Furthermore,
while a carbon market has many characteristics of a traditional commodity market, it also differs in two
important aspects:

  • First, the carbon market exists specifically to address an environmental goal—to reduce greenhouse gas (GHG) emissions—and regulated entities will have no choice but to participate.
  • Second, there is a limited supply of emissions allowances, determined by the government, which
    will decrease over time.

So in essence, both demand and supply are created by the government. To address these realities,
lawmakers should build upon best practices and lessons from a number of existing markets to create the
optimal design and oversight mechanisms to ensure a viable, transparent, and robust carbon market.

Click here for a related article that appeared in Point Carbon News.

Click here for the press release. 

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In Brief: Economic Insights from Modeling Analyses of H.R. 2454 — the American Clean Energy and Security Act (Waxman-Markey)

January 2010

Economic models are an important tool for evaluating the potential impact of proposed legislation on our economy. This brief compares modeling analyses of the House-passed clean energy and climate bill (H.R. 2454) conducted by seven different groups including government agencies, non-governmental organizations, and an academic institution. It identifies key similarities and differences among these analyses and draws the following conclusions:

  • GDP will continue to grow robustly with the passage of the House bill.
  • Household income grows robustly across all models with many models finding relatively modest impacts.
  • The availability of low-carbon technologies to generate electricity is crucial to minimizing the costs of achieving the greenhouse gas (GHG) reduction targets in the House bill.
  • The more offsets included in the program, the lower the costs.
  • The degree to which the modeling analyses accurately reflect key provisions in the House bill will impact their estimates of costs.

Download full brief (PDF)

 

 

 

 

 

 

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Our Year in Review

Domestically and internationally, climate action in 2009 laid critical groundwork for potential breakthroughs in Congress and global negotiations in 2010. Yet with an issue as complex and political as climate change, turning groundwork into policy is a challenge.  2010 will undoubtedly be a pivotal year for climate change – but first it is instructive to take a look back at what happened in 2009 and how that shaped where we are today.

We captured these highlights in our annual Year-in-Review Newsletter – a useful compilation of 2009’s big climate change stories and related insights. The year’s major domestic action included passage of the landmark House climate and clean energy bill along with numerous Obama administration efforts to improve our climate and economy. These accomplishments included the stimulus bill’s $80 billion in clean energy-related funding and EPA actions, including the endangerment finding, the greenhouse gas reporting rule, and stricter auto-efficiency standards.

Copenhagen consumed international climate attention in 2009, culminating in the pre-dawn hours of December 19 when final touches were put on an accord directly brokered by President Obama and a handful of key developing country leaders. While many questions remain after Copenhagen, our summary of the conference provides a sound starting point for grasping what transpired at the year’s largest climate event.

The lead-up to 2009’s main events required a great deal of work, and some of the year’s highlights include the detailed Blueprint for Climate Action released one year ago this month by the influential business-NGO coalition U.S. Climate Action Partnership (USCAP). More industry leaders also showed support for mandatory climate action by joining our Business Environmental Leadership Council (BELC). And efforts to reach business communities, employees, and families expanded through the Make An Impact program. In partnerships with aluminum manufacturer Alcoa and utility Entergy, we continue to provide individuals with strategies to save energy and money while protecting the environment. 

We continued to educate policy makers and opinion leaders, producing reports, analyses, and fact sheets on topics ranging from clean-energy technologies, climate science, competitiveness, and adaptation. Featuring expert insights and thoughtful opinions, we informed broad audiences about the immediate need for climate action. And our timely, relevant work moves forward in 2010 as we seek progress in addressing the most important global issue of our time.

Tom Steinfeldt is Communications Manager

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