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
 

Paper: Assessing Offset Quality in the Clean Development Mechanism

November 2009

Download the Paper (pdf)

Download the Executive Summary (pdf)

The Offset Quality Initiative (OQI) responds to the intensifying debate over international offsets by releasing a policy paper assessing offset quality in the Clean Development Mechanism (CDM). In the paper, titled “Assessing Offset Quality in the Clean Development Mechanism,” OQI gives the international offset program a passing grade, but named specific reforms that are necessary to ensure and improve quality moving forward.

The CDM, created as a greenhouse gas (GHG) reduction “offset” program under the Kyoto Protocol,
provides developed countries an opportunity to achieve their emission reduction targets cost-effectively by investing in GHG reduction projects (“offset projects”) in developing countries. Over the past several years the CDM has been subject to a number of critiques, many of which question the program’s ability to generate high quality offsets.

“As the first large-scale offset program in the world, the CDM had to develop standards, procedures, and other infrastructure necessary to ensure offset quality. While there have been concerns about the quality of offsets, especially regarding additionality and third party verification, OQI’s analysis shows that the CDM is making improvements to address the concerns of its critics,” said Michael Gillenwater of the Greenhouse Gas Management Institute, one of six OQI member organizations. “As OQI’s recommendations are adopted, particularly those regarding additionality and third-party
validation/verification, the CDM could provide quality international offset credits for use in a future U.S. cap-and-trade program.”

OQI is a coalition of six leading nonprofit organizations—The Climate Trust, Pew Center on Global Climate Change, Climate Action Reserve, Environmental Resources Trust/Winrock International, Greenhouse Gas Management Institute, and The Climate Group—that provides leadership on GHG offset policy and best practices. The group neither endorses nor opposes the CDM, but rather seeks to provide an impartial assessment through the lens of the eight offset quality criteria outlined in OQI’s 2008 white paper, “Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets Into North American Cap-and-Trade Policy.”

OQI writes that “CDM’s processes perform sufficiently against most of our core offset quality criteria.” The group notes that the CDM has made progress in some areas of concern, citing recent actions such as the Executive Board’s suspension of two third-party auditors for rules violations. There is still room for improvement, however, and recommendations include streamlining and standardizing additionality tools and restructuring the third-party verification system.

“High-quality international offsets have a critical, cost-saving role to play under a federal climate policy,” said Janet Peace of the Pew Center on Global Climate Change. “Policymakers, however, must be confident that offsets will yield real, lasting carbon reductions. This paper serves as a resource to help build this confidence, and we look forward to working with policymakers on effective ways to integrate offsets into reasonable climate policy.”

About OQI
The Offset Quality Initiative (OQI) was founded in November 2007 to provide leadership on greenhouse gas offset policy and best practices. OQI is a collaborative, consensus-based effort that brings together the collective expertise of its six nonprofit member organizations: The Climate Trust, Pew Center on Global Climate Change, Climate Action Reserve (formerly The California Climate Action Registry), Environmental Resources Trust/Winrock International, Greenhouse Gas Management Institute, and The Climate Group.

The four primary objectives of the Offset Quality Initiative are:

  • To provide leadership, education, and expert analysis on the issues and challenges related to the design and use of offsets in climate change policy.
  • To identify, articulate, and promote key principles that ensure the quality of greenhouse gas emission offsets.
  • To advance the integration of those principles in emerging climate change policies at the state, regional, and federal levels.
  • To serve as a source of credible information on greenhouse gas offsets, leveraging the diverse collective knowledge and experience of OQI members.

The Offset Quality Initiative achieves its objectives through the development of white papers and
regulatory comments, through presentations and workshops, and through meetings with key
policymakers, media, and other stakeholders. For more information, please visit the OQI website.

 

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Energy Committee Tries to Figure Out to Whom to Pay the Rent

No, Chairman Bingaman isn’t lurking around the Capitol avoiding calls from his landlord.  We’re talking about economic rent.

This week, the Senate Energy and Natural Resources Committee continued its excellent series of hearings on climate change policy options.  At issue this time was a hearing “on the costs and benefits for energy consumers and energy prices associated with the allocation of greenhouse gas emission allowances.”  Whether or not cap-and-trade programs were more or less transparent and costly than carbon taxes and fees was a topic debate during the hearing, as it has been throughout the series. 

Dr. Denny Ellerman, recently retired senior lecturer at the Sloan School of Management at MIT, kicked off the hearing with some powerful testimony, including thoughts on how different carbon control programs create economic rent.  He offered:

Welcome To Our Blog

Welcome to our new blog. This blog presents ideas and insights from the Center and its experts on topics critical to the climate conversation. These topics include domestic and international policy, climate science, low-carbon technology, economics, corporate strategies to address climate change, and communicating these issues to policymakers and the public. Our bloggers include policy analysts, scientists, economists, and communication specialists – all of whom are working to advance solutions to our climate and energy challenge.

Thank you for visiting our blog, and check back often for more timely posts.

Tom Steinfeldt is Communications Manager

New Administration Puts Carbon Reduction on the Agenda

Featured in MetalMag's June edition.  See page 66.

New Administration Puts Carbon Reduction on the Agenda

By Andre de Fontaine

During the past decade, climate change steadily has moved up the political agenda. Now, with a new administration in Washington, D.C., that has demonstrated a clear commitment to action, comprehensive climate-change legislation appears ripe for passage within the next couple years. As a result, many industries are appropriately wondering what the new regulatory environment will mean for their businesses.

First, it is important to note that reducing greenhouse-gas (GHG) emissions will impose a cost to society, though that cost is likely to be small and manageable within the context of the overall economy. These costs must also be balanced against the costs of unabated climate change, which are projected to be much greater than taking action now. Still, there likely will be distributional impacts as the U.S. transitions to a low-carbon economy, with certain industries being able to handle the transition with greater ease than others.

The green-building industry widely is expected to be a major beneficiary of public policies to reduce greenhouse-gas emissions because policymakers recognize two related facts. First, the country’s existing buildings are major contributors to climate change, accounting for about 43 percent of U.S. GHG emissions; and second, a number of low-cost mitigation options available involve improving the efficiency of new and existing buildings. Additionally, as the nation is mired in a serious economic downturn, efforts to stimulate the economy are increasingly focused on green buildings as a major source of new jobs in the coming years.  For example, the recently enacted American Recovery and Reinvestment Plan of 2009 contained billions for weatherization assistance for low-income households, grants for states to improve the efficiency of residential, commercial and government buildings, and tax credits for energy efficiency improvements to existing homes.

While these stimulus provisions will benefit the green building sector in the near term, longer-term policy, in the form a cap and trade system for GHGs is also on the horizon. How does a cap-and-trade program work? The government sets an annual cap on allowable emissions, which declines over time. It then distributes allowances to entities– free of charge, through an auction, or a combination of the two – to entities included in the program. These typically are major emitters, like power plants and large manufacturing facilities. The total number of allowances distributed must match the total emissions allowed under the cap. 

Regulated firms must hold and submit to the government one allowance for each ton of GHGs they emit. This creates a market for allowances—a carbon market—and an economic incentive for firms to reduce emissions. Those that easily can cut emissions can position themselves to purchase fewer allowances and/or sell excess allowances to firms that face higher reduction costs.

Buildings would not be directly regulated under the cap, but they could be impacted by increases in electricity and fuel costs attributable to the price of carbon. These higher energy prices will, over time, make investments in efficiency more attractive in the buildings sector.

This year the prospects for aggressive government action appear better than ever. President Obama has made clear his commitment to cap-and-trade legislation and related clean-energy policies, and key members of the U.S. Congress have pledged fast action in moving climate change legislation forward. Adding to the momentum for action is a strong push from the business community. This especially is noticeable in the advocacy efforts of the U.S. Climate Action Partnership, a unique coalition of 25 businesses and five nongovernmental organizations that is calling on Congress to pass comprehensive climate legislation this year.

Even as the country faces a significant economic challenge, business and political leaders increasingly are vocal about their commitment to addressing climate change--not at a later date, but right now. The green-building industry uniquely is positioned to ride this wave and make a major contribution in the country’s transition to a low-carbon future.


Andre de Fontaine is a Markets and Business Strategy Fellow at the Pew Center on Global Climate Change.  He works with the Center's Business Environmental Leadership Council (BELC), a group of 43 largely Fortune 500 corporations that have partnered with the Pew Center to address issues related to climate change.  He also engages in Pew Center analytic work on climate-related markets and investment issues.

 

(See page 58 for the article)by Andre de Fontaine, Markets & Business Strategy Fellow— Appeared in Eco-Structure magazine, June 2009
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Eileen Claussen discusses the costs of cap and trade

OnPoint Interview with Eileen Claussen
Tuesday, June 9th, 2009

Watch the interview here.
Watch Video

With a number of studies showing varying statistics on how much a federal cap-and-trade program will cost the average American, how can Congress accurately assess the true impact? President of the Pew Center on Global Climate Change, Eileen Claussen, breaks down the numbers and discusses disparities among the studies. She explains why she does not believe there is an economic argument against cap and trade and gives her take on how inaccurate numbers and modeling may negatively affect Americans' perception of climate legislation.

 

Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets

Maintaining Carbon Market Integrity: Why Renewable Energy Certificates Are Not Offsets

A brief by the Offset Quality Initiative
June 2009

 

 


Brief

Executive Summary

This brief explains how and why renewable energy certificates (RECs) differ from greenhouse gas (GHG) emission offsets (offsets). While the Offset Quality Initiative (OQI) is a strong supporter of renewable energy and believes it has a critical role to play in addressing climate change, OQI does not believe that RECs sold in voluntary green power or mandatory renewable energy portfolio standard (RPS) markets should be treated as equivalent to GHG offsets. REC programs fail to meet two basic definitional requirements of emissions offsets: First, they do not adequately establish a clear and unambiguous claim of ownership to emission reductions. Second, they fail to adequately establish that RECs are associated with offsetting emission reductions. Specifically, REC programs do not ensure that emission reductions are additional to what would have occurred in the absence of a REC market.

In order to ensure that markets for RECs function appropriately and do not undermine the effectiveness and integrity of markets for GHG emissions reductions, OQI recommends the following:

  • RECs should not be treated as equivalent to GHG offsets.
  • The definition of a REC should be clearly established and consistently applied. A suggested definition would be the following: “A Renewable Energy Certificate (REC) is the unique and exclusive proof that one megawatt-hour of electricity has been generated from a qualified renewable resource connected to the grid.”
  • It is inappropriate to treat RECs as an environmental commodity that conveys ownership of indirect “emission attributes” such as GHG emission reductions. OQI strongly recommends against the inclusion of indirect or derived “environmental attributes” or “benefits” in any definition of a REC, including those used in the various certificate tracking systems (e.g., Generation Attribute Tracking System [GATS] and Western Renewable Energy Generation Information System [WREGIS]).
  • Purchasers of RECs should not make GHG emission reduction claims associated with the retirement of RECs.



In addition to the Pew Center on Global Climate Change, OQI members include The Climate Trust, Climate Action Reserve (formerly CCAR), Environmental Resources Trust/Winrock International, Greenhouse Gas Management Institute, and The Climate Group. OQI was founded in November 2007 to provide leadership on greenhouse gas offset policy and best practices. OQI is a collaborative, consensus-based effort that brings together the collective expertise of its six nonprofit member organizations.

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Press Release: Analysis Projects Modest Competitiveness Impacts Under Cap and Trade

Press Release - May 6, 2009

Contact: Tom Steinfeldt, (703) 516-4146 

Press Teleconference Audio


PEW CENTER ANALYSIS PROJECTS MODEST COMPETITIVENESS IMPACTS
UNDER A U.S. GREENHOUSE GAS CAP-AND-TRADE PROGRAM

Report Outlines Policy Options to Ease Potential Impacts
on Energy-Intensive Manufacturers

Washington, DC – A close look at the historical relationship between energy prices and U.S. production and consumption of energy-intensive goods suggests that energy-intensive manufacturers are likely to face only modest “competitiveness” impacts under a U.S. greenhouse gas cap-and-trade program, according to a new analysis released today by the Pew Center on Global Climate Change.

The Pew Center study projects that U.S. energy-intensive manufacturing industries would on average lose 1 percent of their annual production to imports assuming a CO2 price of $15 per ton in the United States and no carbon price in other countries.  Both the U.S. Energy Information Administration (EIA) and the Environmental Protection Agency (EPA) have projected CO2 prices of approximately $15 per ton under cap-and-trade programs proposed in Congress.

The authors conclude that the projected impacts can be addressed through policies targeted to energy-intensive sectors.  They outline a range of policy options, including: compensating energy-intensive sectors covered by a mandatory cap for their regulatory costs; excluding those sectors from the cap-and-trade program; and using border adjustment measures to equalize costs for domestic and imported energy-intensive goods.

“This is one of the most sophisticated efforts ever to quantify the potential competitiveness impacts on energy-intensive industries.  The analysis shows clearly that, at the price level studied, the potential impacts are very modest and very manageable,” said Pew Center President Eileen Claussen.  “Policymakers have a range of policy tools to mitigate the modest economic impacts that may be foreseen.  The bottom line is that fear of competitive harm should not stand as an obstacle to strong climate policy.”

The report is authored by economists Joseph E. Aldy and William A. Pizer, who were affiliated with Resources for the Future, a think tank in Washington, D.C., at the time the analysis was undertaken.  Both have since taken positions in the federal government.

The report, “The Competitiveness Impacts of Climate Change Mitigation Policies,” bases its projections on an econometric analysis of the historical relationship between fluctuations in energy prices and shipments, trade, and employment within energy-intensive manufacturing industries.  The analysis draws on 20 years of data for more than 400 energy-intensive subsectors.

Based on the historical relationships identified, the authors estimate the likely impacts of energy price increases at the levels associated with a CO2 price of $15 per ton.  An EIA analysis cited in the report projects a CO2 allowance price of $16.88 per ton in 2012 under the Lieberman-Warner cap-and-trade proposal considered last year in Congress (S.2191).  A preliminary EPA analysis of the draft Waxman-Markey climate and energy bill released in April projects an allowance price of $13 to $17 in 2015.

In assessing the potential impacts on energy-intensive manufacturers, the analysis distinguishes “competitiveness” impacts – the loss of market share to foreign competitors facing no carbon price – from the broader economic impacts these sectors may face under a mandatory greenhouse gas policy. 

For U.S. manufacturing as a whole, the analysis estimates an average production decline of 1.3 percent, and a decline in consumption of 0.6 percent, suggesting only a 0.7 percent shift in production overseas.  For energy-intensive industries (those with energy costs exceeding 10 percent of shipment value), output and consumption are projected to decline 4 percent and 3 percent, respectively, suggesting a 1 percent shift in production.  The findings indicate that most of the projected economic impact reflects a move towards less emissions-intensive products, rather than an increase in imports or a shift of jobs or production overseas.

Looking at specific sectors, the report estimates a “competitiveness” impact of 0.6 percent for bulk glass; 0.7 percent for aluminum and cement; 0.8 percent for iron and steel; and 0.9 percent for paper and industrial chemicals.  The authors note that the analysis assumes similar behavior among industries with similar energy intensity, and that at any given level of energy intensity, some industries may face impacts higher than the calculated average.

The analysis contributed to a recent Pew Center policy brief, “Addressing Competitiveness in U.S. Climate Change Policy,” which further examines available policy options.  It also was cited by Claussen in recent testimony before the Energy and Environment Subcommittee of the House Energy and Commerce Committee.

Claussen noted that the competitiveness provisions of the Waxman-Markey discussion draft – which would use output-based rebates to compensate energy-intensive manufacturers for increased costs, and resort to border measures only if the President determines the rebates have been ineffective – are largely consistent with earlier Pew Center recommendations. 

“The draft provides a very sound framework for managing what we now know are relatively modest risks,” said Claussen.

The new report, and additional information on global climate change and the Pew Center, are available at 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.

The Competitiveness Impacts of Climate Change Mitigation Policies

The Competitiveness Impacts of Climate Change Mitigation Policies

May 2009

By:
Joseph E. Aldy and William A. Pizer
Resources for the Future


A close look at the historical relationship between energy prices and U.S. production and consumption of energy-intensive goods suggests that energy-intensive manufacturers are likely to face only modest “competitiveness” impacts under a U.S. greenhouse gas cap-and-trade program, according to this report.

 

Press Release

Audio of report release press teleconference

Download the entire report (PDF)

 

Also see Eileen Claussen's Congressional Testimony on Competitiveness

Review of Proposed Options for Addressing Industrial Competitiveness Impacts (PDF)

Joseph E. Aldy
William Pizer
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Assessing the Benefits of Avoided Climate Change

Promoted in Energy Efficiency section: 
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This workshop considers what useful insights can be gleaned now about quantifying the benefits of reducing greenhouse gas emissions. The workshop’s objectives are to develop a set of practical recommendations that decision makers can employ in the near-term and to outline a research path to improve decision making tools over time.

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

Op-Ed: Goals Can Be Met Without Auctioning Emission Allowances

By: Eileen Claussen and Jim Rogers
March 31, 2009

This article originally appeared in the National Journal's Energy & Environment Experts Blog.

Let’s get one thing straight: Though not perfect, we like the way President Obama and his team are addressing the potential catastrophe of climate change.

The Administration unequivocally accepts the underlying science. They realize that the cost of not acting will be far greater than the cost of taking responsible action – and that the longer we wait, the greater the costs will be for American consumers. Their emissions goals are ambitious but achievable, as is the timetable to meet them. And we agree that cap and trade is the right way to go. It’s based on common sense capitalism: it puts a price on carbon and rewards facilities that can reduce carbon dioxide and other greenhouse gases at the lowest cost, even as it provides incentives for others to find more economic ways to reduce their own emissions.

Where we temporarily part ways is when it comes to the Administration’s proposal calling for a full auction of emission allowances. How these allowances are distributed doesn’t change the overall environmental goal set by the cap. We believe it is critical that a number of them be used to reduce price impacts on households and businesses – in the early years of the program.  Just this week Chairmen Waxman and Markey released a discussion draft of energy and climate legislation that leaves open how we can best address this critically important issue.

In all states, electricity is distributed by local companies regulated by public service commissions whose fundamental purpose is to protect consumers and keep electricity rates low.  We recommend protecting households and businesses that purchase electricity from utilities by providing allowances to the regulated distribution companies during a transition period.

There is little question that an auction, in which allowances to emit specified amounts of carbon are sold to the highest bidders, will result in a price spike for electricity in some regions. That price spike will hit households and businesses the hardest, and for some, it will be very tough to manage.

We believe we need a climate change plan that protects against price spikes in electricity bills. Our plan would effectively curb carbon, limit the risk of price volatility, target relief to those who need it most, and take advantage of the distribution companies’ and public service commissions’ ability to deliver energy efficiency.

During the transition period from granting allowances to a full auction, there would be no windfall for utility companies or their investors. The legislation itself and actions by public service commissions would guarantee it.  On the flipside, there would not be huge price increases for electricity in coal-fueled states and a much smoother transition to a cleaner economy. If this approach is not taken, the whole argument for climate change legislation could be moot – senators and representatives from those states might effectively kill legislation mandating cap and trade.

Overall, we think a cap-and-trade system that shifts from granting allowances to a full auction over time will provide the most reasonable transition to the low-carbon and thriving economy we all desire.  To help ensure a smooth transition, granting allowances and auction revenues should be used to help cushion workers, households, and vulnerable industries from volatile prices.  It should also support the development of critical low-carbon technologies like carbon capture and storage, and assist in efforts to better adapt to the climate change we are already beginning to experience.

With a price on carbon, energy companies will more rapidly invest in clean technologies, as long as they can be certain that future regulations neither bankrupt them nor mandate that they bet on specific untried technologies. It will also help them look deeper into renewable sources of energy, be they solar, wind, hydropower, or even agricultural waste. They will rethink nuclear power which, despite its scary image, is actually a safe, clean way to generate electricity.

We know that some of those technologies still need the kinks worked out, and that others remain prohibitively expensive. But this is where the government could use some of the revenues that it gets from auctioning allowances to other emitters now, and to utilities and competitively challenged manufacturers down the road.

We’re not ostriches, and we’re not Pollyannas. We know there is a cost to addressing climate change, and that this cost will filter down to big business, to small business, and to households. Utilities that buy carbon allowances or shift to lower-carbon generating options will have to increase their rates, but energy efficiency can lower customer bills even in the face of rate increases. And there will be far less economic upheaval if higher prices come gradually, which our transition program would ensure.

Appeared in the National Journal Energy & Environment Expert Blog— by Eileen Claussen and Jim Rogers
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