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
Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets Into North American Cap-and-Trade Policy
An Offset Quality Initiative White Paper
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This paper aims to provide policymakers with practical recommendations regarding the integration of greenhouse gas (GHG) offsets into emerging regulatory systems. Offsets have an important role to play in controlling the costs associated with regulating and reducing GHGs, and in driving technology transformation in sectors not mandated to reduce their GHG emissions. In order for offsets to deliver on their intended purpose — the achievement of a real and verifiable reduction in global GHG emission levels beyond what would have otherwise occurred —regulatory programs must be designed to ensure the quality and effectiveness of offsets used to meet GHG reduction requirements. Policymakers must also have a clear understanding of both the opportunities and challenges presented by the integration of offsets into GHG emission-reduction systems.
This document represents the consensus of the member organizations of the Offset Quality Initiative: The Climate Trust, Pew Center on Global Climate Change, California Climate Action Registry, Environmental Resources Trust, Greenhouse Gas Management Institute and The Climate Group. The GHG mitigation field is evolving at a rapid pace and will continue to do so over the next several years; this document will be updated over time to reflect any changes in the Offset Quality Initiative’s consensus positions.
The work of the Offset Quality Initiative is generously supported by the Energy Foundation.
The Economic Costs of a Market-based Climate Policy
June 2008 (updated version)
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Effort to develop a mandatory climate policy is accelerating and it seems likely that a national market-based strategy for dealing with climate change is on the near term horizon. Key provisions are likely to include a cap on selected greenhouse gas (GHG) emissions, an institutional framework for creating a nationwide emissions permit market, a welcoming integration of abatement opportunities from external domestic and international sources, and recognition of a broad range of features designed to soften economic impacts or promote economic efficiency. Prompted by a national sense of urgency, businesses, states and regions also are actively engaged in designing and implementing their own variations on these themes. Together, it is clear that there is growing support for a market-based complement to the technology orientation that characterizes current U.S. policy.
Models only provide a simplified view of our economy. In the case of the Lieberman-Warner Climate Security Act (S.2191), models can capture many of the key policy elements (e.g., the impacts of targets, timing, and offsets) but cannot incorporate all of them.
This In-Brief examines some of the models that have been used to assess the economic impacts of the Lieberman-Warner Climate Security Act (as reported out of Committee in December 2007) and puts them in context for consumers of this modeling information.
Download the In-Brief (PDF)
- Primer on Liberman-Warner Climate Security Act (S.2191) - As Reported out of Senate EPW Committee (PDF)
Vicki Arroyo, Director of Domestic Policy Analysis, Pew Center on Global Climate Change
- Insights from Modeling Analyses of the Lieberman-Warner Climate Security Act (S.2191) (PDF)
Janet Peace, Director for Markets & Business Strategy & Senior Economist, Pew Center on Global Climate Change
In this paper:
- Download Full In Brief
- Press Release
- Further Reading: Insights Not Numbers: The Appropriate Use of Economic Models
May 21, 2008
Contact: Tom Steinfeldt, (703) 516-4146
Click here to access the study.
ECONOMIC INSIGHTS OF THE LIEBERMAN-WARNER CLIMATE SECURITY ACT
Review of Six Economic Modeling Analyses Reveals Important Policy Insights
WASHINGTON, DC -- The Pew Center on Global Climate Change today releases a new study that provides critical insights regarding economic analyses of the Lieberman-Warner Climate Security Act (S. 2191). The study analyzes six major economic modeling exercises conducted to assess costs of this legislation. The Pew Center’s analysis puts the modeling results in context to provide a clear understanding of what models can - and cannot - reveal about the costs of climate policy.
The Pew Center examines the following economic modeling analyses of the Lieberman-Warner bill to derive insights about the drivers of key results and to inform effective policies.
- Energy Information Administration
- Clean Air Task Force
- American Council for Capital Formation/National Association of Manufacturers
- Massachusetts Institute of Technology
- Environmental Protection Agency
- CRA International
Key insights drawn from these modeling analyses and outlined in the Pew Center brief include the following:
- Availability of advanced, low-carbon technology is crucial to minimizing the costs of achieving greenhouse gas reductions;
- Flexibility in the timing of greenhouse gas reductions and allowing banking and borrowing of emission allowances lowers costs;
- The more offsets available, the lower the costs;
- Energy efficiency provisions reduce costs; and
- Robust economic growth is still achieved with climate policies in place.
“Stepping back from the details, all of these modeling efforts show the importance of policies that provide flexibility - like banking and offsets - and promote advanced low-carbon technologies and efficiency,” said Pew Center President Eileen Claussen. “This study delivers critical insights and demonstrates that cost-effective approaches to address climate change can be achieved with sensible policies.”
While the models offer valuable insights, they do not tell the complete story. They reveal long-term assumptions are at best only approximations. For example, accurately predicting the availability and cost of technologies 50 years in the future is nearly impossible. The models do not fully represent the Lieberman-Warner bill, often omitting potential cost-savings provisions including certain energy efficiency inducements and the Carbon Market Efficiency Board’s role in regulating allowances. The models also fail to consider the costs of inaction, and any credible analysis finds that unabated climate change will cost far more than reasonable climate policy.
As a companion to this study, a recent Pew Center paper describes the advantages and limitations of economic models for evaluating policy options. Insights Not Numbers: The Appropriate Use of Economic Models explains that economic modeling cannot predict future events or produce precise projections of the consequences of specific policies. Instead, model results are more appropriately used to provide insights into key economic relationships, to explore the impact of alternative policy designs, and to produce ranges of results based on plausible assumptions and reliable data.
For more information about global climate change and the activities of the Pew Center, visit 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 European Union's Emissions Trading System in Perspective
Prepared for the Pew Center on Global Climate Change
A. Denny Ellerman,
Paul L. Joskow
Massachusetts Institute of Technology
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Eileen Claussen, President, Pew Center on Global Climate Change
To meet its obligations to reduce greenhouse gas (GHG) concentrations under the Kyoto Protocol, the European Union (EU) established the first cap-and-trade system for carbon dioxide emissions in the world starting in 2005. Proposed in October 2001, the EU’s Emissions Trading System (EU ETS) was up and running just over three years later. The first three-year trading period (2005-2007)—a trial period before Kyoto’s obligations began—is now complete and, not surprisingly, has been heavily scrutinized. This report examines the development, structure, and performance of the EU-ETS to date, and provides insightful analysis regarding the controversies and lessons emerging from the initial trial phase.
Recognizing their lack of experience with cap and trade and the need to build knowledge and program architecture, EU leaders began by covering only one gas (carbon dioxide) and a limited number of sectors. Once the infrastructure was in place, other GHGs and sectors could be included in subsequent phases of the program, when more significant emissions reductions were needed. As authors Denny Ellerman and Paul Joskow describe, the system has so far worked as it was envisioned—a European-wide carbon price was established, businesses began incorporating this price into their decision-making, and the market infrastructure for a multi-national trading program is now in place. Moreover, despite the condensed time period of the trial phase, some reductions in emissions from the covered sectors were realized.
The development of the EU-ETS has not, however, proceeded without its challenges. The authors explain some of the controversies regarding the early performance of the EU-ETS and describe potential remedies planned for later compliance periods:
- Due to a lack of accurate data in advance of the program, allowances to emitters were overallocated. Now with more accurate emissions data and a centralized cap-setting and reporting process, the emissions cap should be sufficiently binding;
- Concerns about program volatility emerged when initially high allowances prices (driven largely by high global energy costs) dropped precipitously in April 2006 upon the release of more accurate, verified emissions data. Late in the trial phase, there was another sharp decline in allowance price because there were no provisions for banking emissions reductions for use in the second phase of the program. Improved data quality and provisions for unrestricted banking between compliance periods will help moderate price fluctuations in the future;
- Windfall profits by electric power generators that passed along costs (based on market value) of their freely issued allowances resulted in improved understanding of how member country electricity sector regulations affect the market and calls for increased auctioning in subsequent phases of the program.
Interest in developing a national cap-and-trade program in the United States has intensified in recent years. The first comprehensive greenhouse gas reduction bill ever to be reported out of a committee emerged from the Senate Environment and Public Works Committee in December 2007. As debate continues on this landmark legislation, the House of Representatives has signaled its intention to design its own emissions trading program. This report provides an excellent resource for those developing U.S. proposals. As Europe’s experience with the EU-ETS suggests, everything does not have to be perfect at the outset of a cap-and-trade program. We do, however, need to get started and, for this, the EU-ETS has provided valuable lessons for us all.
The Center and the authors would like to thank Robert Stavins and Peter Zapfel for comments and suggestions on earlier drafts. None of them are responsible for the analysis, conclusions or any remaining errors. The views expressed here are solely those of the authors.
The performance of the European Union’s Emissions Trading System (EU ETS) to date cannot be evaluated without recognizing that the first three years from 2005 through 2007 constituted a “trial” period and understanding what this trial period was supposed to accomplish. Its primary goal was to develop the infrastructure and to provide the experience that would enable the successful use of a cap-and-trade system to limit European GHG emissions during a second trading period, 2008-12, corresponding to the first commitment period of the Kyoto Protocol. The trial period was a rehearsal for the later more serious engagement and it was never intended to achieve significant reductions in CO2 emissions in only three years. In light of the speed with which the program was developed, the many sovereign countries involved, the need to develop the necessary data, information dissemination, compliance and market institutions, and the lack of extensive experience with emissions trading in Europe, we think that the system has performed surprisingly well.
Although there have been plenty of rough edges, a transparent and widely accepted price for tradable CO2 emission allowances emerged by January 1, 2005, a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments, the cap-and-trade infrastructure of market institutions, registries, monitoring, reporting and verification is in place, and a significant segment of European industry is incorporating the price of CO2 emissions into their daily production decisions.
The development of the EU ETS and the experience with the trial period provides a number of useful lessons for the U.S. and other countries.
- Suppliers quickly factor the price of emissions allowances into their pricing and output behavior.
- Liquid bilateral markets and public allowance exchanges emerge rapidly and the “law of one price” for allowances with the same attributes prevails.
- The development of efficient allowance markets is facilitated by the frequent dissemination of information about emissions and allowance utilization.
- Allowance price volatility can be dampened by including allowance banking and borrowing and by allocating allowances for longer trading periods.
- The redistributive aspects of the allocation process can be handled without distorting abatement efficiency or competition despite the significant political maneuvering over allowance allocations. However, allocations that are tied to future emissions through investment and closure decisions can distort behavior.
- The interaction between allowance allocation, allowance markets, and the unsettled state of electricity sector liberalization and regulation must be confronted as part of program design to avoid mistakes and unintended consequences. This will be especially important in the U.S. where 50 percent of the electricity is generated with coal.
The EU ETS provides a useful perspective on the problems to be faced in constructing a global GHG emission trading system. In imagining a multinational system, it seems clear that participating nations will retain significant discretion in deciding tradable national emission caps albeit with some negotiation; separate national registries will be maintained with some arrangement for international transfers; and monitoring, reporting and verification procedures will be administered nationally although necessarily subject to some common standard. All of these issues have had to be addressed in the trial period and they continue to present challenges to European policy makers.
The deeper significance of the trial period of the EU ETS may be its explicit status as a work in progress. As such, it is emblematic of all climate change programs, which will surely be changed over the long horizon during which they will remain effective. The trial period demonstrates that everything does not need to be perfect at the beginning. In fact, it provides a reminder that the best can be the enemy of the good. This admonition is especially applicable in an imperfect world where the income and wealth effects of proposed actions are significant and sovereign nations of widely varying economic circumstance and institutional development are involved. The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price and to provide the signal of what constitutes appropriate short-term and long-term measures to limit GHG emissions. In this, the EU has done more with the ETS, despite all its faults, than any other nation or set of nations.
About the Authors
Dr. A. Denny Ellerman
A leading energy economist, Dr. Ellerman is a Senior Lecturer with the Sloan School of Management at the Massachusetts Institute of Technology, where he previously served as the Executive Director of the Center for Energy and Environmental Policy Research and of the Joint Program on the Science and Policy of Global Change. Dr. Ellerman is internationally recognized as an authority on emissions trading, and his current research interests focus on the U.S. and European emissions trading programs and on environmental regulations. He is co-author of the report, The European Union’s Emissions Trading System in Perspective, and he coauthored the well-respected text, Markets for Clean Air: The U.S. Acid Rain Program with MIT Sloan colleagues. Dr. Ellerman has also worked for Charles River Associates, the National Coal Association, the U.S. Department of Energy, and the U.S. Executive Office of the President, and he served as President of the International Association for Energy Economics in 1990.
Dr. Ellerman received his undergraduate education at Princeton University and his Ph.D. in Political Economy and Government from Harvard University. His current research interests focus on emissions trading, climate change policy, and the economics of fuel choice, especially concerning coal and natural gas.
Paul L. Joskow
Paul L. Joskow became President of the Alfred P. Sloan Foundation on January 1, 2008. He is presently on leave from his position as Elizabeth and James Killian Professor of Economics and Management at MIT. He received a BA from Cornell University in 1968 and a PhD in Economics from Yale University in 1972. Professor Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998. He was Director of the MIT Center for Energy and Environmental Policy Research from 1999 through 2007. At MIT he has been engaged in teaching and research in the areas of industrial organization, energy and environmental economics, competition policy, and government regulation of industry for over 35 years. Dr. Joskow has published six books and over 125 articles and papers in these areas. He serves as a Director of Exelon Corporation, as a Director of TransCanada Corporation, and as a Trustee of the Putnam Mutual Funds. He is a member of the Board of Overseers of the Boston Symphony Orchestra. Dr. Joskow is a Fellow of the Econometric Society and the American Academy of Arts and Sciences and a Distinguished Fellow of the Industrial Organization Society.
Insights Not Numbers: The Appropriate Use of Economic Models
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Economic models establish a logical and consistent framework for considering the implications of different policies, and have been extensively used to evaluate the consequences of different policy choices for addressing global climate change. But it is important to understand both the limitations of these models and what insights can be gleaned from their results.
Every model uses its own set of assumptions, definitions, structure, and data, and the results ultimately depend on those attributes and choices. For example, the flexibility of the economy in responding to change or the flexibility of the policy being modeled both have significant implications for any assessment of the costs of a particular policy. Furthermore, there is enormous uncertainty in attempting to predict outcomes that occur in 50 or 100 years, both in terms of technologies that might be available and the costs of using those technologies.
Economic modeling cannot predict future events, nor can it produce precise projections of the consequences of specific policies. Rather, model results are more appropriately used to provide insights into key economic relationships, to explore the impact of alternative policy architectures (such as the inclusion of offset credits or emissions trading in a regulatory program for greenhouse gases), and to produce ranges of results based on plausible assumptions and reliable data.
Related White Papers:
State-Level Economic Impacts of a National Climate Change Policy
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In response to environmental impacts associated with climate change, policies are being crafted to curb the growth in greenhouse gas (GHG) emissions. European nations are already engaged in reducing emissions through the European Union Emissions Trading System (EU-ETS) as a prelude to implementation of the Kyoto Protocol. In the United States, decision-makers at the national level and a large number of state and local governments are interested in developing domestic policies to address GHG emissions. At the national level, a variety of bills have been proposed, with alternative elements including incentives for carbon capture and storage, renewable energy, automobile standards, and international engagement. A consistent element in most of these proposals is the inclusion of a cap-and-trade system that allows the transfer of permits from firms with low-cost GHG controls to firms with higher costs. Accordingly, this report analyzes as a first step, the potential costs of a moderate national cap-and-trade policy that seeks to stabilize emissions at year 2000 levels. The objective of this paper is to inform the debate about types and magnitude of economic impacts that could be expected both at the national and regional level to illustrate insights into alternative policy options and the potential impacts nationally and explicitly at the state level associated with a modest GHG control policy.
Informing Emerging U.S. GHG Policy
The Offset Quality Initiative Side Event
Carbon Forum America
February 26, 2008
The Offset Quality Initiative (OQI) is a partnership of six organizations, including the Pew Center on Global Climate Change. The group, which formed in Fall 2007, promotes effective greenhouse gas offset policy. The other members of OQI are: The Climate Trust; California Climate Action Registry; Environmental Resources Trust; Greenhouse Gas Experts Network; and The Climate Group.
At the Carbon Forum America side event, OQI members explained the group's main objectives:
- To develop and promote consensus policy positions for the optimal integration and treatment of greenhouse gas offsets in current and future state, regional and national climate change policy.
- To educate stakeholders on the opportunities and challenges presented by the integration of greenhouse gas offsets into regulatory and voluntary climate change mitigation strategies.
- To serve as a source of credible information on greenhouse gas offsets based on the diverse collective knowledge and experience of the Offset Quality Initiative members.
- To promote innovation in the greenhouse gas offset market and to provide information and guidance on best practices and policies.
OQI is focused on several important topics, including: key criteria of high quality greenhouse gas offsets; the interaction of voluntary and regulatory greenhouse gas reduction markets; opportunities and challenges presented by various offset project types; and recommended roles for offsets in emerging climate change policy.
What are the potential costs of cutting greenhouse gas emissions? What are the consequences of failing to reduce emissions? How effectively will different policy options achieve climate goals? These questions are frequently raised as the United States and other nations respond to the challenge of climate change.
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. C2ES works to inform this understanding by bringing sound, credible analysis to the discussion of potential costs and benefits of climate change policy.
Any effort to significantly limit greenhouse gas emissions will require changes in economic activity that will likely impose costs on society. The costs of climate change mitigation reflect the magnitude of the emissions reduction, the timing of these reductions, and the means of implementation. But left unaddressed, climate change will also impose costs on society. These costs are likely to increase over time, making it important – economically and environmentally – to take immediate action on climate change.
C2ES’s Economics Program contributes to the analyses of proposed policies that have the potential to reduce greenhouse gas emissions and limit the consequences of a changing climate system. The Economics Program also works to identify what the costs of inaction will be, in an effort to highlight the urgent need for policy action.
Click here to learn more about Economic Modeling
Click here to see analyses of Federal policies to reduce greenhouse gas emissions
Congressional Testimony of Eileen Claussen - Reducing U.S. greenhouse Gas Emissions Cost-Effectively
HON. EILEEN CLAUSSEN, PRESIDENT
PEW CENTER ON GLOBAL CLIMATE CHANGE
Submitted to the United States Senate,
The Environment and Public Works Committee
November 15, 2007
Reducing U.S. greenhouse Gas Emissions Cost-Effectively
Chairman Boxer, Ranking Member Inhofe, and members of the committee, thank you for the opportunity to testify on the most cost-effective means of reducing U.S. greenhouse gas emissions. My name is Eileen Claussen, and I am the President of the Pew Center on Global Climate Change.
The Pew Center on Global Climate Change is 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. Forty-five major companies in the Pew Center’s Business Environmental Leadership Council (BELC), most included in the Fortune 500, work with the Center in these efforts.1
The Pew Center strongly supports reporting the America’s Climate Security Act of 2007 from the committee on the schedule that you have announced, and looks forward to working with you and the rest of the Congress as the bill goes through the process. I would like to discuss several reasons for recommending that you move forward with this bill.
Cap-and-trade is the most cost-effective way of reducing greenhouse gas emissions
Senators, the bad news is that climate change poses real risks to our nation’s security, economy and environment, and that these risks will grow dramatically if we do not begin to reduce our greenhouse gas emissions now.2 The good news is that the market-based mechanisms found in the America’s Climate Security Act of 2007 will allow us to address this problem cost effectively and in a way that enhances U.S. competitiveness.
Unlike most emissions this committee deals with, greenhouse gas emissions are essentially fungible. Greenhouse gases mix quickly throughout the atmosphere, which means that wherever you can reduce a ton of greenhouse gas emissions – whether from a car, a factory, or a power plant; whether in Los Angeles, London, or Lagos – the benefit to the climate is the same.
In most of our other environmental laws, Congress directs EPA to dictate how much of a given pollutant a facility can emit or which pollution control technology to use. We do not have to take that approach with greenhouse gas emissions. Instead, by using a cap-and-trade program, Congress can set the overall greenhouse gas reduction goals and let the emitters decide for themselves how to achieve the environmental goals of the program at least cost. When we used a market-driven approach in the acid rain program, it provided the best environmental result at the lowest overall cost to our economy.3 This does not mean that achieving our climate security goals will be cost-free, just that the cost can be kept as low as possible – and far less than the cost of not acting.
An economy-wide program will be more cost-effective than sector-by-sector programs
The Pew Center supports the proposal to apply the cap-and-trade program to all large sources of greenhouse gas emissions simultaneously. Congress has seen several proposals to cap and trade emissions from power plants only. Similarly, Congress has seen several proposals that address the transportation sector only, for example, by reducing the carbon footprint of transportation fuels. Certainly, such a sector-by-sector approach can work, but it will be more expensive and slower than an economy-wide approach.4
The most cost-effective approach is to bring power plants, factories and transportation together in one market, where all can benefit from the efficiencies and technological breakthroughs available in any sector at a given time. With an economy-wide program, we do not have to await the deployment of a single solution – such as carbon capture and sequestration, for example – to begin cost-effective reductions. The Pew Center’s research with leading companies demonstrates that there are numerous cost-effective and even cost-saving reductions available now from off-the-shelf technologies and fuels.5 This is especially true in reducing non-CO2 emissions from industrial processes, increasing industrial and building energy efficiency, increasing the use of low-carbon fuels, and improving vehicle efficiency.6 In the medium and longer term, steeper reductions will be made possible through deployment of more advanced technologies, such as highly efficient vehicles, improved nuclear power plants, renewable energy combined with enhanced electricity storage capacity, and carbon capture and storage (CCS). An economy wide trading program will draw these technologies into the marketplace when they are ready, reducing the burden on any one sector, reducing the cost to the economy as a whole, and providing the broadest incentive possible for early emission reductions and technology innovation.
The America’s Climate Security Act uses other important measures to lower the cost of greenhouse gas reductions as well. The bill allows companies to offset some of their emissions with reductions from sources not covered by the program. Allowing the use of offsets motivates emission reductions throughout the economy from sources too small or dispersed to be specifically targeted by the program. Companies would also be allowed to use credits from the markets of other countries, thus making use of the global fungibility of greenhouse gases and expanding the scope of the program. Again, the larger the program, the lower the cost. We see opportunities to increase the use of these measures even beyond what is already in the bill.
A greenhouse gas cap-and-trade program will enhance U.S. competitiveness
The America’s Climate Security Act will enhance U.S. competitiveness. Given what the peer-reviewed science tells us about climate change, we must move quickly from our current economy to one in which our greenhouse gas footprint shrinks even as our standard of living increases. That will require a profound worldwide technological revolution. The United States can and should be leading that revolution, and positioning itself to reap the economic benefits associated with decreased dependence on foreign oil and increased export potential of low carbon technology. We currently are not leading, however, and federal R&D subsidies alone will not change that. An appropriate price on greenhouse gas emissions, in combination with “technology push” policies, will.
Some have asserted a false dichotomy between the need for mandatory climate policy on the one hand and support for climate-friendly technology on the other. In fact, a well-designed mandatory climate policy that leverages the power of the market is essential for driving deployment of climate-friendly technology. When combined with subsidies for specific technologies, it is the most cost-effective method of driving deployment. Government would have to spend roughly ten times the amount in incentives alone in order to achieve the same environmental result as a price signal coupled with incentives.7 The America’s Climate Security Act wisely combines mandatory greenhouse gas constraints and technology subsidies.
I would like to mention three other important issues before I conclude: how to deal with transportation, the use of allowance allocation as a tool, and the need for cost certainty and reliability.
Reducing emissions from the transportation sector
Transportation emissions account for roughly one-quarter of total U.S. emissions and are growing rapidly. Reversing that trend is essential, and can only be done by (1) increasing vehicle efficiency, (2) reducing vehicle miles traveled (VMT), and (3) reducing the carbon footprint of transportation fuels. The America’s Climate Security Act would include transportation fuels in the cap-and-trade program, providing a price signal that would promote all three – especially if complemented by the other measures currently being proposed by the White House and Congress to increase vehicle efficiency and promote low carbon fuels, and with VMT-reduction measures, such as those in the Transportation Equity Act.8
Using the allocation process to aid transition
While the use of a well-designed cap-and-trade program ensures the lowest overall cost, many important sectors of the economy will face real transition costs that can and should be dealt with through the allowance allocation process. Allocation, contrary to the impression some stakeholders may be creating, has no effect on the greenhouse gas reductions mandated by the cap. Given this, we should use the allocation process, in the early years of the program, to address the legitimate transition costs some sectors will face as we move to a low-greenhouse gas economy.
Take coal-based electricity, for example. Coal is cheap and plentiful, and the United States is going to use it for the foreseeable future. Even if we did not, China and India would, so rapid development and deployment of climate-friendly technologies is essential. The best hope, at the moment, lies with carbon capture and sequestration, which most experts believe will take at least a decade to deploy throughout the power sector. While we need not wait until then to begin cost-effective reductions, it would be appropriate to allocate initially a significant amount of allowances to this sector to help with transition.9 The bill does this and also appropriately uses bonus allowances and a clean coal technology program funded out of auction proceeds to accelerate CCS deployment and speed and smooth the transition. There is is a similar need for transition assistance in other sectors of the economy, most particularly energy-intensive industries that face significant foreign competition. As the need for transition assistance diminishes, the allocation of free allowances should phase out, which the bill does as well.
In addition, the bill includes provisions to mitigate any effect the program may have in increasing energy prices, especially for low- and middle-income Americans. A significant percentage of the proceeds from the auction have been dedicated to help these consumers and to help states assist their residents.10
Addressing price volatility and cost containment
Some stakeholders fear that, in the early years of the program, the market price of an allowance might be volatile and might swing too high too rapidly. Similarly, concerns have been raised about market liquidity, hoarding of allowances, and manipulations of the market.
In addition to the cap-and-trade itself, which provides for flexibility in meeting the environmental target, this legislation includes powerful cost containment mechanisms, including banking and borrowing. Allowing firms the ability to bank excess allowances or credits for future use helps firms manage the normal swings of the market. Allowing firms access to offset credits further lessens the danger of supply shortages, which in part create this price volatility. The bill also draws from the excellent work of Senators Warner, Landrieu, Graham and Lincoln and the Nicholas Institute at Duke University in establishing a Carbon Market Efficiency Board, which can gauge market activity and step in should unexpected problems arise. We look forward to working with the authors of this bill, Chairman Boxer, and others as the bill moves forward to refine measures to provide additional assurances of a smoothly functioning market, so long as they do not undermine the integrity of the greenhouse gas emissions cap.
In conclusion, the America’s Climate Security Act of 2007 is an excellent foundation for an environmentally effective, cost-effective greenhouse gas reduction program. Continuing to move it through the legislative process will engage important stakeholders whose contributions will improve the bill. We applaud the committee’s work to date, and urge the committee to report the bill.
 For more on the Pew Center, see www.c2es.org.
 For more on the science of climate change and the threat to our environment and economy, see the Pew Center’s extensive body of reports available at www.c2es.org/global-warming-in-depth and the most recent findings of the Intergovernmental Panel on Climate Change at http://www.ipcc.ch/
 For more on our experience with emissions trading programs and on the design of a greenhouse gas reduction program, see Ellerman, Denny A., Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases, Pew Center on Global Climate Change, May 2003, and Nordhaus, R., Designing a Greenhouse Gas Reduction Program for the U.S., Pew Center on Global Climate Change, May 2003.
 The benefits of a wider trading program have been repeatedly demonstrated in all of the credible economic models - including the large number which participate in Stanford’s Energy Modeling Forum. See http://www.stanford.edu/group/EMF/
 For more on the Pew Center’s work with companies on strategies to address climate changes, see http://www.c2es.org/companies_leading_the_way_belc
 For example, 37 of the 45 companies in the Pew Center’s Business Environmental Leadership Council have set voluntary targets, 22 have achieved those targets, and all have done so from a combination of efficiency improvements and process changes. DuPont, for example, has reduced its emissions 65% through a combination of energy efficiency and process change and has saved over $2 billion. See also the proceedings from a workshop co-sponsored by the Pew Center on Global Climate Change and the National Commission on Energy Policy, The 10-50 Solution: Technologies and Policies for a Low-Carbon Future, found at http://www.c2es.org/global-warming-in-depth/workshops_and_conferences/tenfifty/proceedings.cfm and Reilly, John M., Multi-gas Contributors to Global Climate Change: Climate Impacts and Mitigation Costs of Non-CO2 Gases, Pew Center on Global Climate Change, February 2003.
 For more on the benefits of combining R&D and a carbon constraint, see Goulder, L., Induced Technological Change and Climate Policy, Pew Center on Global Climate Change, October 2004.
 For more on policies to reduce emissions in the transportation sector, see Green, David L., Reducing Greenhouse Gas Emissions from U.S. Transportation, Pew Center on Global Climate Change, May 2003.
 For more on the policy and technology options to deal with GHG emissions from coal see the Pew Center’s new Coal Initiative series found at http://www.c2es.org/white_papers/coal_initiative
 For more on on community adjustment and worker transition to climate change policy, see Greenwald, Judith M.; Roberts, Brandon; Reamer, Andrew D.; Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001, and Barrett, Jim, Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001.