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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.” 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. 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. 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. 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. 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.
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, 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. 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. 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.” 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.
- 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.
 Department of Defense, 2010. Quadrennial Defense Review Report, Page 85. Available at http://www.defense.gov/qdr/images/QDR_as_of_12Feb10_1000.pdf
 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.
 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.
 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.
 Copenhagen Accord. Available at http://unfccc.int/resource/docs/2009/cop15/eng/11a01.pdf#page=.4.
 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.
 Office of Management and Budget, Federal Climate Change Expenditures, Report to Congress for Fiscal Years 2003-2008 and 2011.
 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.
 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.
 G20 Leaders’ Statement, The Pittsburgh Summit, 24-25 September 2009. Available at http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
 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.
By: Janet Peace and Robert N. Stavins
There is broad consensus among those engaged in climate policy analysis—from academia, government, NGOs, and industry—that any domestic climate policy should include, at its core, market-based policy instruments targeting greenhouse gas (GHGs) emissions, because no other approach can do the job and do it at acceptable cost. By “putting a price on carbon,” market-based polices harness the power of our free enterprise system to reduce pollution at the lowest costs. Recent concern, however, about the role of financial markets—and specific fraudulent investment vehicles—in the recent recession have raised questions among the public about the efficacy and functioning of markets. Not surprisingly, some have questioned the wisdom of employing market mechanisms to tackle climate change. Critics ask, how can market-based policy instruments be trusted to look after the public’s welfare with regard to global-warming pollution (or anything else, for that matter)?
When it comes to climate change and environmental issues more generally, environmental economists recognize that the source of many problems is not markets per se, but the absence of markets for environmental goods and services, such as clean air and water. In the absence of prices (costs) associated with environmental damages, producers and consumers need not account for such damages in their activities and choices. Environmental damage is thus an unintentional byproduct of decisions to produce or consume. Because these negative consequences are external to the firm or individual creating them, economists refer to them as externalities. They are one category of market failures; in this case, the failure of existing markets to price accurately the full costs to society of producing and consuming goods that create a pollution externality.
In the case of climate change, the burning of fossil fuels and other activities that release GHGs into the atmosphere are associated with increasing global temperatures. The costs of these impacts, including an increase in extreme weather events, rising sea levels, loss of biodiversity, and other effects, are borne by society as a whole, including future generations. In the absence of a price on carbon, these environmental costs are not included in the prices of GHG-based goods—thus there is no direct cost for emitting GHG pollution into the atmosphere. From a societal perspective, this leads to an inefficient use of resources, excessive emissions, and a buildup of excess concentrations of GHGs in the atmosphere.
The current status quo or “laissez-faire” approach to dealing (or rather failing to deal) with GHG pollution results in an outcome that is not in the interest of society. For this reason, many people have advocated putting a price on GHG emissions to cause market participants to confront or “internalize” the costs of their actions and choices. A policy instrument that puts a price on GHG emissions would, for example, raise the cost of coal-generated electricity, relative to electricity generated with natural gas, because coal as a fuel emits more carbon dioxide (CO2) per unit of energy. Producers and consumers would take this relative cost differential into account when deciding how much electricity to produce and what fuels to use in producing it. That is the point — to make the cost of emitting carbon explicit, so that it becomes part of the everyday decisionmaking process.
Two alternative market-based mechanisms can be used to put a price on emissions of GHGs—cap and trade and carbon taxes. With cap and trade, an upper limit or “cap” on emissions is established. Emission allowances that equal the cap are distributed (either freely or through auction) to regulated sources which are allowed to trade them; supply and demand for these allowances determine their price. Sources which face higher abatement costs have an incentive to reduce their abatement burden by purchasing additional allowances, and sources which face lower abatement costs have an incentive to reduce more and sell their excess allowances. Thus, the government establishes the environmental goal (the cap), but the market sets the price.
In contrast, a carbon tax sets a price on emissions, but leaves the environmental outcome uncertain. The tax creates an incentive for firms to reduce their emissions up to the point where the cost of reductions is equivalent to the tax. If the tax is low, fewer reductions will result; if the tax is high, more abatement effort will be forthcoming. Given the real-world U.S. political context, the more promising of the two market-based approaches to addressing climate change is clearly cap and trade, which creates a market for GHG reductions.
While the common sense justification for putting a price on carbon emissions seems straightforward, some of the public and even some policy makers are questioning whether creating a market for GHG reductions is a cure worse than the disease itself. Some questions and concerns include the following:
- Why employ market-based approaches to GHG emission reductions, when markets are subject to manipulation?
- Would a market-based approach to reducing GHG emissions be a corporate handout?
- Can markets be trusted to reduce emissions?
- Will a market-based approach, such as cap and trade, be too costly?
- Are other approaches—including conventional regulation and taxes—likely to be more effective and less complicated?
Our goal in this paper is to address the questions above, and—we hope—leave the reader with a better understanding of the issues, the rhetoric, and the fundamental reasons why cap and trade is the most promising approach to address the threat of climate change. We believe that past concerns about how markets operate can be effectively addressed and result in a policy that is both environmentally and economically superior to alternative approaches.
By: Jessica Shipley, Solutions Fellow, Pew Center on Global Climate Change
Any climate and energy legislation will impact U.S. farmers and ranchers, and this paper examines the many legitimate concerns the agriculture sector has with such legislation. There have been a large number of economic analyses, modeling exercises, and reports published in the past several months based on an array of climate policy assumptions, and the resulting scenarios have ranged from realistic to doomsday. The results of these efforts have often been skewed or cherry-picked to support particular arguments. This brief tries to objectively assess the impacts of climate legislation and identify ways that such legislation could be shaped to provide greater opportunities for the sector. U.S. farmers have long exhibited adaptability and entrepreneurship in the face of changing circumstances, and they will be presented with a host of new markets and opportunities with the advent of climate and energy legislation.
Farmers have many reasons to be engaged participants in the climate and energy policymaking process. It is imperative that the United States take constructive action on climate and energy to maintain a leading role in the new energy economy. In shaping those actions, productive engagement by American farmers can help ensure that U.S. policy addresses their concerns and embodies their ideas. America’s farmers will be the best advocates of both the principles of a robust offset market and the creation of other market and renewable energy opportunities.
Key takeaways from this brief are:
- American farmers and industry will face greenhouse gas limitations regardless of what happens in the legislative and regulatory process. Market-driven requirements from the private sector (e.g. Walmart), regulation by the U.S. Environmental Protection Agency (EPA), state or regional programs, and nuisance lawsuits will continue to require greenhouse gas (GHG) emissions to be reduced going forward. Legislation can simplify requirements on business, provide incentives and new markets for farmers, and provide mechanisms to lower the risks and costs to all sectors of the economy. In fact, without legislation, the piecemeal nature of GHG limitations will likely result in a worse outcome for farmers.
- Costs to farmers from GHG legislation can be substantially mitigated by cost-containment mechanisms. Though there is potential for increased costs (namely energy and fertilizer input costs) to farmers, mechanisms potentially available in legislation can significantly minimize price volatility and cost impacts to farmers and the economy as a whole, even though not all these can be adequately reflected in economic modeling.
- The opportunities for farmers to realize a net economic gain from climate legislation are significant. Offsets, biofuel and biopower, renewable power, and the ability to receive payments for multiple environmental benefits from well-managed working farmlands are among the new potential opportunities. The key to making this a reality is climate and energy policy that is shaped by the agriculture sector and farmers themselves.
- Climate change and resulting weather patterns pose numerous risk management concerns for agriculture. The strong scientific evidence behind climate change should concern farmers because of the significant new risks climate change poses to farmland and the rate at which those risks are increasing.
June 17, 2010
Contact: Tom Steinfeldt, 703-516-4146
New Analysis Shows Broad Business Support for National Clean Energy and Climate Legislation
Pew Center on Global Climate Change Explains the Business Case for Action
Washington, D.C. – An unprecedented number of businesses are supporting passage of clean energy and climate legislation, a development that greatly improves the chances of a meaningful bill advancing through Congress this year. In a new analysis, the Pew Center on Global Climate Change examines the factors driving this business support and finds that leaders from a diverse collection of industries believe passing clean energy and climate change legislation is better for the economy and their businesses than maintaining the federal policy stalemate.
“A growing number of companies – both major corporations and small businesses – are calling on Congress to pass clean energy and climate legislation this year,” said Eileen Claussen, President of the Pew Center on Global Climate Change. “Putting a price on carbon will provide the business community the certainty it needs to innovate, drive the creation of new jobs, and stimulate economic growth. We have an opportunity this year to put in place the foundation for a more secure energy future for the United States.”
In The Business Case for Climate Legislation, the Pew Center identifies three key reasons why leading companies have decided that legislation to limit greenhouse gas (GHG) emissions is good for their industries.
- The need for regulatory certainty
- The economic opportunities arising from climate solutions
- The reputational benefits of supporting public policies that combat climate change
Companies supporting federal clean energy and climate 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 clear regulatory rules of the road creates uncertainty, which restricts sustained economic growth and is an obstacle to the development of new markets and business opportunities.
Without effective legislation, the U.S. risks missing huge economic opportunities in the hundred-billion-dollar global clean energy technology market, according to the Pew Center analysis. These opportunities will instead fall to foreign competitors like China and European countries. Thus, a growing number of U.S. businesses have made the decision that clean energy and climate legislation is the right approach for our economic and environmental future.
The Business Case for Climate Legislation can be accessed online at http://www.c2es.org/publications/brief/business-case-for-climate-legislation.
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 on Global Climate Change 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.
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.
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.
- In Brief: Economic Insights from Modeling Analyses of H.R. 2454 — the American Clean Energy and Security Act (Waxman-Markey)
- Climate Policy Memo: Cost of the American Clean Energy and Security Act of 2009 Found to Be Small According to Government Analyses
- American Clean Energy and Security Act summaries and other analysis
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
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.
Summary Report (pdf)
- The Economics of Climate Change Impacts: A Case Study on the Motivation for Government Decisions to Limit Greenhouse Gas Emissions
James Lester and Joel B. Smith, Stratus Consulting
- Challenges to Providing Quantitative Estimates of the Environmental and Societal Impacts of Global Climate Change
Michael C. MacCracken, Climate Institute
L. Jeremy Richardson, Pew Center on Global Climate Change
- Social Vulnerability and Risk
Kristie L. Ebi, ESS, LLC and IPCC Working Group II Technical Support Unit
- Representation of Climate Impacts in Integrated Assessment Models
Michael D. Mastrandrea, Stanford University
- The Social Cost of CO2 and the Optimal Timing of Emissions Reductions under Uncertainty
Chris Hope, Judge Business School, University of Cambridge
- Federal Decision-Making on the Uncertain Impacts of Climate Change: Incremental vs. Non-Incremental Climate Decisions
Steven K. Rose, Electric Power Research Institute
- The Need for a Fresh Approach to Climate Change Economics
Frank Ackerman, Stockholm Environment Institute
Stephen J. DeCanio, University of California, Santa Barbara
Richard B. Howarth, Dartmouth College
Kristen Sheeran, Economics for Equity and the Environment Network
- Uncertainty and the Benefits of Climate Change Policies, Newbold and Daigneault
Stephen C. Newbold, U.S. EPA, National Center for Environmental Economics
Adam Daigneault, U.S. EPA, Climate Change Division
- Keynote Address: Addressing Climate Change through a Risk Management Lens
Gary W. Yohe, Wesleyan University
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.
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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.
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.
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.