Federal

The Center for Climate and Energy Solutions seeks to inform the design and implementation of federal policies that will significantly reduce greenhouse gas emissions. Drawing from its extensive peer-reviewed published works, in-house policy analyses, and tracking of current legislative proposals, the Center provides research, analysis, and recommendations to policymakers in Congress and the Executive Branch. Read More
 

Congressional Testimony of Eileen Claussen - Competitiveness and Climate Policy


Hon. Eileen Claussen, President
Pew Center on Global Climate Change

Submitted to
the Energy and Environment Subcommittee
Energy and Commerce Committee
U. S. House of Representatives

March 18, 2009

Competitiveness and Climate Policy:
Avoiding Leakage of Jobs and
Emissions

 

For a pdf version, please click here.
For a pdf version of Eileen Claussen's oral testimony, please click here.
To read more about this hearing, click
here.
For a Review of Proposed Options for Addressing Industrial Competitiveness Impacts, click here.

 

Mr. Chairman, Mr. Upton, members of the subcommittee, thank you for the opportunity to testify on the topic of competitiveness and climate policy, and avoiding leakage of jobs and 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 an independent non-profit, non-partisan organization dedicated to advancing practical and effective solutions and policies to address global climate change. Our work is informed by our Business Environmental Leadership Council (BELC), a group of 44 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, a coalition of 25 leading businesses and five environmental organizations that have come together to call on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions.

Addressing global climate change presents policy challenges at both the domestic and the international levels, and the issue of competitiveness underscores the very close nexus between the two. The immediate task before this subcommittee, and before the Congress, is developing and enacting a comprehensive domestic program to limit and reduce U.S. greenhouse gas (GHG) emissions. Moving forward with a mandatory program to reduce U.S. emissions in advance of a comprehensive international agreement presents both risks and opportunities. On the one hand, domestic GHG limits may lead to a shift of some energy-intensive production to countries without climate constraints, resulting in “emissions leakage” and posing competitiveness concerns for some domestic industries. On the other hand, a mandatory domestic program in the United States is an essential step towards the development of an effective global climate agreement.

In the long term, a strong multilateral framework ensuring that all major economies contribute their fair share to the global climate effort is, I believe, the most effective means of addressing competitiveness concerns. Achieving such an agreement must be a fundamental objective of U.S. climate policy. In designing a domestic climate program, the question before Congress is what to do in the interim – until an effective global agreement is in place. In considering this question, it is important to distinguish two distinct but closely related policy challenges: how best to encourage strong climate action by other countries, and in particular, by the major emerging economies; and how best to minimize potential competitiveness impacts on U.S. industry. I believe that each of these two objectives is most effectively addressed through a different set of policy responses, and it is important to ensure that our efforts to address one do
not undermine the other.

I will focus today primarily on the second of these challenges: designing transitional policies to minimize potential competitiveness impacts on U.S. industry.1 Our analysis of the underlying issues leads us to conclude that the potential competitiveness impacts of domestic climate policy are modest and are manageable.

In my testimony, I will:

1) present our analysis of the nature and potential magnitude of the competitiveness challenge;

2) discuss a range of options for addressing competitiveness concerns; and

3) outline what we believe would be the most effective approach. This approach would employ output-based emission allocations to vulnerable industries, phased out over time, and other transition assistance to affected workers
and communities.

Understanding Competitiveness Concerns

A first step in considering options to address competitiveness is assessing the potential scope and magnitude of potential competitiveness impacts. It is not the competitiveness of the U.S. economy as a whole that is at issue. (According to an MIT analysis of the Lieberman-Warner Climate Security Act of 2007,2 the cost of meeting the bill’s emission reduction targets in 2050, by when the U.S. economy is projected to triple in size, would result in GDP being 1% less than would otherwise be the case.3) Rather, the concern centers on a relatively narrow segment of the U.S. economy: energy-intensive industries whose goods are traded globally, such as steel, aluminum, cement, paper, glass, and chemicals. As heavy users of energy, these industries will face higher costs as a result of domestic GHG constraints; however, as the prices of their goods are set globally, their ability to pass along these price increases is limited.

Competitiveness impacts can be experienced as a loss in market share to foreign producers, a shift in new investment, or, in extreme cases, the relocation of manufacturing facilities overseas. In assessing the economic consequences of past environmental regulation in the United States, most analyses find little evidence of significant competitive harm to U.S. firms. Many studies conclude that other factors—such as labor costs, the availability of capital, and proximity to raw materials and markets—weigh far more heavily in firms’ location decisions. One comprehensive review—synthesizing dozens of studies of the impact of U.S.environmental regulation on a range of sectors—concluded that while new environmental rules imposed significant costs on regulated industries, they did not appreciably affect patterns of
trade.4

In the case of GHG regulation, the additional cost to firms could include the compliance cost of purchasing allowances to cover direct emissions; indirect compliance costs embedded in higher fuel or electricity prices; further demand-driven price increases for lower-GHG fuels such as natural gas; and the costs of equipment and process changes to abate emissions or reduce energy use.

In gauging the potential impacts of GHG regulation, it is important to distinguish the “competitiveness” effect from the broader economic impact on a given industry or firm. A mandatory climate policy will present costs for U.S. firms regardless of what action is taken by other countries. In the case of energy-intensive industries, one potential impact of pricing carbon could be a decline in demand for their products as consumers substitute less GHG-intensive products. This is distinct, however, from the international “competitiveness” impact of GHG regulation, which is only that portion of the total impact on a firm resulting from an imbalance between stronger GHG constraints within, and weaker GHG constraints outside, the United States.

To empirically quantify the potential magnitude of this competitiveness impact, the Pew Center commissioned an analysis by economists at the Resources for the Future. This work, which we will be publishing shortly, analyzes 20 years of data in order to discern the historical relationship between electricity prices and production, consumption, and employment in more than 400 U.S. manufacturing industries. On that basis, the analysis then projects the potential competitiveness impacts of a U.S. carbon price, assuming no comparable action in other countries. (The analysis assumes a CO2 price of $15 per ton. The Energy Information Administration’s core case analysis of the Lieberman-Warner cap-and-trade bill estimated a 2012 allowance price of $16.88 per ton CO2.)

The analysis finds an average production decline of 1.3 percent across U.S. manufacturing, but also a 0.6 percent decline in consumption, suggesting a competitiveness effect of just 0.7 percent. For energy-intensive industries (those whose energy costs exceed 10 percent of shipment value), the analysis projects that average U.S. output declines about 4
percent. However, consumption declines 3 percent, so that only a 1 percent decline in production (or one-fourth of the total decline) can be attributed to an increase in imports, or a loss of competitiveness. For specific energy-intensive industries, including chemicals, paper, iron and steel, aluminum, cement, and bulk glass, the analysis projects a competitiveness impact ranging from 0.6 percent to 0.9 percent, although within certain subsectors, the impact could be
higher. What this analysis demonstrates very clearly is that most of the projected decline in production stems from a reduction in domestic demand, not an increase in imports. In other words, most of the projected economic impact on energy-intensive industries reflects a move toward less emissions-intensive products—as would be expected from an effective climate change policy—not a movement of jobs and production overseas. At the price level studied, the
projected competitiveness impacts, as well as the broader economic effects on energy-intensive industries, are modest and, in our view, can be readily managed with a range of policy instruments.

Policy Options

In the design of a domestic cap-and-trade system, competitiveness concerns can be addressed in part through a variety of cost-containment measures, such as banking and borrowing and the use of offsets, which can help reduce the costs to all firms, including energyintensive, trade-exposed industries. However, other transitional policies may be needed to
directly address competitiveness concerns in the period preceding the establishment of an effective international framework. Options include: fully or partially exempting potentially vulnerable firms from the cap-and trade system; compensating firms for the costs of GHG regulation through allowance allocation or tax rebates; transition assistance to help firms adopt lower-GHG technologies, and to help communities and workers adjust to changing labor markets; and border measures such as taxes on energy-intensive imports from countries without GHG controls. In addition, a domestic policy could be designed to encourage and anticipate international sectoral agreements establishing the respective obligations of major producing companies within given sectors.

Exclusion from Coverage – One option is to fully or partially exclude vulnerable sectors or industries from coverage under the cap-and-trade program. For instance, under the Lieberman-Warner Climate Security Act of 2008,5 the direct “process” emissions of many energy-intensive industries would not be subject to GHG limits. Exclusions would relieve tradeexposed
industries of any of any requirement to hold emission allowances and thereby eliminate direct regulatory costs, shielding them not only from competitiveness impacts but also from some of the broader economic effects of pricing carbon. However, by limiting the scope of the cap-and-trade system, exclusions would undermine the goal of reducing GHG emissions economy-wide, and would reduce the economic efficiency of a national GHG reduction program.
They also would give exempted industries an economic advantage over nonexempt domestic firms and sectors, including competitors. Moreover, firms whose emissions are exempted would still face the indirect costs of higher energy prices.


Compensation for the Costs of GHG Regulation – Another option is to include these sectors in the cap-and-trade system but compensate them for the costs of GHG regulation. Key design considerations include the scope, form, and means of calculating such compensation, and whether and how it should be phased out. As noted earlier, firms covered by the cap-and-trade system face both direct and indirect costs of regulation. The direct, or compliance, cost is the cost of purchasing any allowances needed to cover direct emissions regulated under the cap. Indirect costs include higher prices for electricity and natural gas (reflecting an embedded carbon price and, in the case of natural gas, rising demand for this less GHG-intensive fuel), and the costs of equipment and process changes to abate emissions or reduce energy use. For energy-intensive industries, the indirect cost of higher energy prices represents a significant portion of the total potential cost.

One form of compensation is providing free emission allowances. In the case of direct emissions, allowances could be granted on the basis of historic emissions (“grandfathering”) and energy-intensive sectors could receive a more generous allocation than other emitters. For instance, energy-intensive industries could receive a full free allocation while others receive allocations for 80 percent of their historic emissions. Over time, the energy-intensive sectors could continue to be treated more generously—for instance, continuing to receive a higher proportion of free allowances as the allocation system transitions to fuller auctioning. Because free allocation provides the same economic incentive to reduce emissions as does an auction, keeping energy-intensive sectors under the cap, but providing free allowances, provides for greater environmental effectiveness and economic efficiency than excluding them. Additional allowances could be provided to compensate for indirect costs. However, as future energy prices cannot be predicted, there is no way of determining in advance whether this allocation matches the firms’ actual costs.

Another form of compensation for direct and/or indirect costs could be tax credits or rebates. One potential source of revenue for such measures is proceeds from the auction of emission allowances. A tax rebate would be a direct payment to compensate a firm for GHG regulatory costs; a tax credit could alternatively offset those costs by reducing a non-GHG
burden such as corporate or payroll taxes, or healthcare or retirement costs.6

Whatever form the compensation takes, one critical issue is the basis for calculating the appropriate level. In the case of direct compliance costs, granting allowances on the basis of historical emissions can effectively penalize early action and reward relatively heavier emitters within an industry. In addition, it does not necessarily guard against emissions leakage or a loss of jobs, as a firm could choose to maximize profits by selling its free allowances and reducing production. There is also the risk that firms will be over-compensated and realize windfall profits.

Alternatively, compensation could be “output-based,” pegged to actual production levels and/or energy consumption. Firms could be compensated in full for direct or indirect costs; or an output-based approach could apply a performance standard (i.e., emissions or energy use per unit of production) to encourage and reward lower GHG intensity production. The Inslee-Doyle Carbon Leakage Prevention Act7 introduced in the 110th Congress would have allocated allowances to compensate for both direct and indirect costs based on a facility’s level of output, adjusted by an “efficiency factor” which could be adjusted over time to provide firms an ongoing incentive to switch to lower-GHG processes and energy sources. The compensation would shield them from regulatory costs, lowering the risk of emissions leakage and competitiveness
impacts, while maintaining an incentive for improved environmental performance and continued operation.

As with the exclusion of trade-exposed sectors from the cap, the remedy provided by these compensation approaches extends beyond any actual competitiveness effect. Whether based on output or historical emissions, most of the proposals offered to date aim to compensate firms for most or all of the increased costs associated with GHG regulation, not just for the impacts they may face due to the asymmetry between GHG constraints within and outside the United States. To limit compensation to competitiveness impacts alone would require in-depth financial knowledge of each firm and/or complex calculations that could be reliably performed only once the impacts have occurred. A drawback of a compensation approach is that the financial resources required—whether drawn from auction revenue or other sources—are not available for other climate- or non-climate-related purposes.

If compensation is provided, one important consideration is how long it should be maintained and at what level. Phasing out the compensation would give firms additional incentive to improve their GHG performance but would also make them more vulnerable to competitiveness impacts. A mandatory program could provide for periodic review of any allowances or other compensation to vulnerable sectors to consider adjusting them on the basis of new information. For instance, if the legislation establishes a specific timetable for moving from free allocation to auctioning, this transition might be slowed for specific industries if there are clear indications of competitiveness impacts. Alternatively, compensation could be phased out or ended if other countries take stronger action or new international agreements are reached.

The review could focus narrowly on the issue of trade-related impacts or it could be a broadbased review also looking at new science, technology, and economic data.


Transition Assistance – Another option is to provide transition assistance to vulnerable firms to help them adopt lower-GHG technologies, and to communities and workers affected by competitiveness impacts. In the case of firms, measures could include tax incentives such as accelerated depreciation to encourage the replacement of inefficient technologies, or tax credits for the development or adoption of lower-GHG alternatives. Firms could also be incentivized to switch to low carbon energy sources, for example through subsidies for purchases or generation of renewable energy.

Where competitiveness impacts are unavoidable, assistance can be provided to both workers and communities. Previous government efforts to help communities adjust to economic changes resulting from national policies provide lessons for shaping similar efforts as part of climate change policy.8 At the level of individual workers, policies such as the Workforce
Investment Act providing income support and retraining to help move workers into new jobs can provide a blueprint for transition programs to assist workers adversely affected by competitiveness imbalances under a climate policy.9


Border Adjustment Measures – Another strategy is to try to equalize GHG-related costs for U.S. and foreign producers by imposing a cost or other requirement on energy-intensive imports from countries with weaker or no GHG constraints. One option is a border tax based on an import’s “embedded” emissions (equal to the compliance costs for a domestic producer of an equivalent good). An alternative approach, described by proponents as more likely to withstand challenge under international trade rules, would instead require that imports be accompanied by allowances for their associated emissions. The Lieberman-Warner bill would have required allowances for energy-intensive imports from countries not determined by an appointed commission to be undertaking “comparable” action to reduce emissions. To avoid driving up
allowance prices for U.S. firms, importers would buy from an unallocated pool of “reserve allowances” at a price set by the government. In the 110th Congress, the Bingaman-Specter bill, the Dingell-Boucher discussion draft, and Chairman Markey’s ICAP bill all adopted variations of this approach.

One major shortcoming of this approach is its limited effectiveness in reducing competitiveness impacts. As the border adjustment measures would apply only to imports to the United States, they would not help “level the playing field” in the larger global market where U.S. producers may face greater competition from foreign producers.

Among the other issues raised by unilateral border measures is their consistency with World Trade Organization (WTO) rules. The legality of a given measure would depend in part on its specific design and on the types of climate policies in place domestically. As such approaches have not been previously employed, there are no definitive rulings, and experts differ in their interpretation of relevant WTO precedents.10 The legal uncertainties ultimately would be resolved only through the adjudication of a WTO challenge, a likely prospect if unilateral border measures were to be applied by the United States or another country.

Trade measures also present significant administrative challenges—in particular, calculating the GHG intensity of imported goods. Would the imported good’s GHG intensity be calculated at the sector, firm, or plant level? Would such an assessment rely on data from the exporting country? In addition, criteria are needed to determine whether a country is meeting a “comparability” or other standard. Under the Lieberman-Warner bill, “comparable action” would have been defined as either a) a percentage reduction in GHGs equivalent to that achieved by the United States, or b) as determined by the commission, “tak[ing] into consideration… the extent to which” a country has implemented measures and deployed state-of-the-art technologies to reduce emissions. A literal application of a “comparability” standard to developing countries—particularly if border requirements are imposed upon or very soon after mandatory domestic limits are put in place—would likely be viewed internationally as inconsistent with the principle of “common but differentiated responsibilities” agreed to by the United States in the UN Framework Convention on Climate Change (UNFCCC).

Another important consideration is the potential impact on trade and international relations. If the United States were to impose border requirements, there is a greater likelihood that it would become the target of similar measures. European policymakers also are weighing the use of border measures and have argued that the emission targets under consideration in the United States are not comparable to those adopted by the European Union. U.S. trade officials and others also have voiced strong concern about the potential for retaliatory trade measures by targeted countries, leading to escalating trade conflicts.11 Proponents argue that the threat of unilateral trade measures would give the United States greater leverage in international climate negotiations. However, there is a significant risk that they would engender more conflict than cooperation, in the end making it more difficult to reach agreements that could more effectively
address competitiveness concerns.


International Sectoral Agreements – All of the preceding options are measures that would be implemented domestically. Another approach that would help reduce emissions within and outside the United States, while addressing competitiveness concerns, is to negotiate international agreements setting GHG standards or other measures within energy-intensive globally-traded sectors. For example, major steel-producing countries could agree on standards
limiting GHGs per ton of steel, which could be differentiated initially according to national circumstances and converge over time. Sectoral agreements could take a number of forms, depending on the specific sectors, and could be negotiated as stand-alone agreements or as part of a comprehensive climate framework.12

Within the domestic context, a purely sector-by-sector approach would sacrifice the broad coverage and economic efficiency of an economy-wide cap-and-trade program. However, sectoral agreements could exist alongside a cap-and-trade program, and the system could be designed to encourage U.S. producers to work toward their establishment. One option would be to provide for a sector’s exclusion from the cap once an international agreement of comparable stringency is in place (although, as noted, diminishing the scope of the cap-and-trade system by exempting one or more sectors would limit its economic efficiency). An alternative is to keep the sectors under the cap but align their obligations under the domestic program and the international sectoral agreement. For instance, a firm’s emissions allowance under the trading system could be based on the GHG standard that is agreed internationally.

In keeping with the principle of “common but differentiated responsibilities,” an international sectoral agreement may not set fully equivalent requirements for all countries, particularly at the outset. In that event, compensation for energy-intensive industries could be maintained at some level and phased out as the requirements for other countries rise to those borne by the United States.



Recommendations: An Allowance-based Approach

Based on our assessment of the available options, the Pew Center believes that Congress should seek to address competitiveness concerns by:

1) strongly encouraging the executive branch to negotiate a new multilateral climate agreement establishing strong, equitable, and verifiable commitments by all major economies;

2) including in domestic legislation incentives for such an agreement, including support for stronger action by major developing countries; and

3) including in cap-and-trade legislation transitional measures to cushion the impact of mandatory GHG limits on energy-intensive trade-exposed industries and the workers and communities they support. These transitional measures should be structured as follows:

  • In the initial phase of a cap-and-trade program, free allowances should be granted to vulnerable industries to compensate them for the costs of GHG regulation. For direct costs, allocations should be based on actual production levels. For indirect costs, allowances should reflect the emitter’s production-based energy consumption, taking into account the GHG intensity of its energy supplies.
  • Based on an analysis of GHG performance within a given sector, allocations should be set initially so that producers with average GHG performance are fully compensated for regulatory costs, while those performing above or below the norm receive allowances whose value is greater or less than the their costs, respectively. This factor should be adjusted over time as an incentive to producers to continually improve their GHG performance.
  • Allowance levels should decline over time, gradually transitioning to full auctioning, although at a slower rate than for other sectors.
  • A review should be conducted periodically to assess whether sectors are experiencing competitiveness impacts and, if warranted, to adjust allowance levels and/or the rate of transition to full auctioning.
  • A portion of allowance auction revenue should be earmarked for programs to assist workers and communities in cases where GHG constraints are demonstrated to have caused dislocation.
  • Transition assistance should be curtailed for a given sector upon entry into force of a multilateral or sectoral agreement establishing reasonable obligations for foreign producers, or upon a Presidential determination that such measures have been instituted domestically.


We believe this approach addresses the transitional competitiveness concerns likely to arise under a mandatory cap-and-trade program, while maintaining the environmental integrity of the program and providing an ongoing incentive for producers to improve their GHG performance. We commend the subcommittee for focusing the attention of Congress on this critical issue, and would be happy to work with you as you develop legislation to address this and other dimensions of the climate challenge.

I thank you for your attention and would be happy to answer your questions.


1 For a discussion of how best to encourage strong climate action by other countries, see the testimony on The Roadmap from Poznan to Copenhagen – Preconditions for Success by Elliot Diringer, Vice President for International Strategies for the Pew Center on Global Climate Change, submitted to the Select Committee on Energy Independence and Global Warming, U.S. House of Representatives, February 4, 2009. (http://www.c2es.org/testimony/diringer/02-04-09)
2 S.2191 of the 110th Congress.
3 Paltsev, Sergey, et al., Assessment of U.S. Cap-and-Trade Proposals, MIT Joint Program on the Science and Policy of Global Change Report 146, Appendix D, February 2008.
4 Jaffe, A.B., S.R. Peterson, P.R. Portney, and R.N. Stavins, Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?, Journal of Economic Literature, Vol. 23, March 1995.
5 S.3036 of the 110th Congress.
6 Houser, Trevor et al., Leveling the Carbon Playing Field: International Competition and US Climate Policy Design, Peterson Institute for International Economics and World Resources Institute, May 2008.
7 H.R. 7146 in the 110th Congress.
8 Greenwald, Judith M., Brandon Roberts, and Andrew D. Reamer, Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001.
9 Barrett, Jim, Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001.
10 For a discussion of WTO-related issues, see Bordoff, Jason E., International Trade Law and the Economics of Climate Policy:Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns, Brookings Institution, June 2008.
11 Remarks of U.S. Trade Representative Susan C. Schwab to U.S. Chamber of Commerce, January 17, 2008.
12 Bodansky, Daniel, International Sectoral Agreements in a Post-2012 Climate Framework, Pew Center on Global Climate Change, May 2007.

Workshop: Assessing the Benefits of Avoided Climate Change

Promoted in Energy Efficiency section: 
0

Hyatt Regency on Capitol Hill, Washington, D.C.
March 16-17, 2009

The U.S. government is considering a range of near-term actions to address the risks of climate change. The Obama administration and key members of Congress intend to make climate legislation a top priority this year. The earliest action, however, may come from federal agencies being pressured by the courts and states to consider limiting CO2 emissions under existing legislative authority. A key element of federal rulemaking is assessing the costs and benefits of proposed policies. While the costs of reducing greenhouse gas emissions have received much attention from analysts and policymakers, far less attention has been directed at quantifying the benefits of such reductions. In spite of remaining uncertainties, the analytical community should offer practical guidance for informing near-term decisions. Drawing from the environmental economics, impacts, vulnerability, and risk assessment communities, this workshop considers what useful insights can be gleaned now about quantifying the benefits of reducing greenhouse gas emissions. The workshop’s objectives are to develop a set of practical recommendations that decision makers can employ in the near-term and to outline a research path to improve decision making tools over time.

PDF version of Agenda

List of Participants 

Speaker Bios

 

Symposium – Assessing the benefits of avoided climate change in government decision making

Opening Remarks
Eileen Claussen, President, Pew Center on Global Climate Change
Video:  WMV     PDF

Keynote Address
Dina Kruger, Director, Climate Change Division, Office of Air and Radiation, U.S. EPA

Panel 1: Perspectives on Government Decision Making for Climate Change
Moderator: Steve Seidel, Vice President for Policy Analysis, Pew Center

  • Martha Roberts, EDF: Incorporating the benefits of climate protection into federal rulemaking
    Video:  WMV     Slides
  • Christopher Pyke, CTG Energetics: A proposal to consider global warming under NEPA
    Video:  WMV     Slides
  • James Lester/Joel Smith, Stratus Consulting: Case studies on government decisions to limit greenhouse gas emissions – California, Australia, United Kingdom
    Video:  WMV     Slides     Paper
  • Paul Watkiss, Paul Watkiss Associates: Social cost of carbon estimates and their use in UK policy
    Video:  WMV     Slides

Panel 2: Challenges to Quantifying Damages from Climate Change
Moderator: Jeremy Richardson, Senior Fellow for Science Policy, Pew Center

  • Mike MacCracken, Climate Institute: Overview of challenges to quantifying impacts
    Video:  WMV     Slides     Paper
  • Kristie Ebi, ESS, LLC: Social vulnerability and risk
    Video:  WMV     Slides     Paper
  • Tony Janetos, Joint Global Change Research Institute: Ecosystems and species
    Video:  WMV     Slides
  • Jon O’Riordan, University of British Columbia: Valuation of natural capital
    Video:  WMV     Slides


Lunch Speaker

Gary Yohe, Wesleyan University: The long view: developing a new decision making framework based on the IPCC’s ‘iterative risk management’ paradigm
Video:  WMV     Slides     Paper

 

Panel 3: The Role of Uncertainty in Assessing the Benefits of Climate Policy
Moderator: Jay Gulledge, Senior Scientist/Science & Impacts Program Manager, Pew Center

  • Brian O’Neill, NCAR: Uncertainty and learning – implications for climate policy
    Video:  WMV     Slides
  • Joel Smith, Stratus Consulting: Dangerous climate change: an update of the IPCC reasons for concern
    Video:  WMV     Slides
  • Michael Mastrandrea, Stanford University: Assessing damages with integrated assessment models
    Video:  WMV     Slides     Paper
  • Chris Hope, University of Cambridge: Social cost of carbon and optimal timing of emissions reductions under uncertainty
    Video:  WMV     Slides     Paper

 

Panel 4: Advances in the Economic Analysis of the Benefits of Climate Policy
Moderator: Liwayway Adkins, Senior Fellow, Economics, Pew Center

  • Steve Rose, EPRI: Federal decision making on the uncertain impacts of climate change: Working with What You Have
    Video:  WMV     Slides     Paper
  • Richard Howarth, E3 Network: The need for a fresh approach to climate change economics
    Video:  WMV     Slides     Paper
  • David Anthoff, ESRI: National decision making on climate change and international equity weights
    Video:  WMV     Slides
  • Steve Newbold, U.S. EPA: Climate response uncertainty and the expected benefits of GHG emissions reductions
    Video:  WMV     Slides     Paper

 

Click here for more information about the workshop, including expert reports and proceedings.

Ministerial Briefing on European Climate Action

Promoted in Energy Efficiency section: 
0

Ministerial Briefing on European Climate Action
Senate Dirksen Building, Room 562
March 17, 2009, 12 - 1:30 pm

Video Available  Watch a video of this event:  Windows Media Player

As Washington debates new efforts to address climate change, many are looking to the experiences of the European Union for lessons to inform U.S. policymaking.  In this high-level briefing, three EU Ministers outline the bloc's climate and energy policies, including recent revisions to the EU Emissions Trading Scheme, and offer insights on the EU's experiences to date.

The New EU Energy and Climate Package
Martin Bursik
Minister for the Environment, Czech Republic (holds current EU Presidency)

Emissions Trading at the Heart of Effective Climate Policy
Stavros Dimas
EU Commissioner for the Environment

Climate Change as an Opportunity
Andreas Carlgren
Minister for the Environment, Sweden (to hold next EU Presidency)

Chaired by
Eileen Claussen
President, Pew Center on Global Climate Change

 

 


Read the Pew Center's summary: Emissions Trading in the European Union: A Brief History

Cap and Trade vs. Taxes

Climate Policy Memo #1: Cap and Trade vs. Taxes

Download this Policy Memo (PDF)

Cap and trade and a carbon tax are two distinct policies aimed at reducing greenhouse gas (GHG) emissions.  Each approach has its vocal supporters.  Those in favor of cap and trade argue that it is the only approach that can guarantee that an environmental objective will be achieved, has been shown to effectively work to protect the environment at lower than expected costs, and is politically more attractive.  Those supporting a carbon tax argue that it is a better approach because it is transparent, minimizes the involvement of government, and avoids the creation of new markets subject to manipulation. This note explores both the fundamental similarities between cap and trade and tax regimes, but also the important differences between them.

 

IMPORTANT SIMILARITIES BETWEEN CAP AND TRADE AND TAXES

Both correct a market failure. Both cap and trade and a tax have as their objective the correction of an existing market failure.  Currently, sources responsible for GHG emissions do not have to pay for the damages they impose on society as a whole. The failure to internalize these costs leads to greater levels of emissions than would be socially optimal.

Both put a price on carbon. By placing a price on carbon, and thus correcting the market failure, both approaches create an incentive to develop and invest in energy-saving technologies.  This will encourage the shift to a lower carbon economy.

Both take advantage of market efficiencies. Unlike direct regulations, both harness market forces to achieve the lowest cost reductions in GHG emissions. 

Both can generate revenue. A tax by definition is designed to raise revenue, but a cap-and-trade system, to the extent that allowances are auctioned, can also raise similar amounts of revenue.  How such revenues are used becomes an important issue in both systems.  Some proposals rebate the revenue directly back to consumers, some use part of the revenues to ease the transition to a low carbon economy (e.g.  for consumers, energy-intensive manufacturers, research development and deployments, etc.) and some combine both approaches. 

Both impose a compliance obligation on a limited number of firms. Depending on who pays the tax or is responsible for holding allowances, the number of firms directly impacted by these systems can be large or small.  Most proposals focus on a limited number of firms with the goal of maximizing emissions coverage and reducing administrative costs.

Both necessitate special provisions to minimize adverse impacts. By putting a price on carbon, both systems raise concerns about adverse impacts on energy-intensive firms and manufacturing states, and on workers and communities that historically have been dependent on fossil fuels.  For example, both could result in large wealth transfers from coal and manufacturing states to other parts of the country.  However, through special tax provisions or the use of allowance value, either can be designed in a way to mitigate adverse impacts on disadvantaged groups. Similarly, both systems would require special provisions to avoid imposing requirements on GHGs that are consumed as feedstocks or to provide credit for reductions that result from capturing and storing carbon or expanding carbon sinks.

Both require monitoring, reporting and verification. Both systems require similar data on emissions, reporting and verification of that data, and enforcement in the event of noncompliance.

 

IMPORTANT DIFFERENCES

Cost certainty v. environmental certainty. By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces.  In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces. 

Compliance flexibility for firms.  A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay.  Under a cap-and-trade system, borrowing, banking and extended compliance periods allow firms the flexibility to make compliance planning decisions on a multi-year basis.

Impact of economic conditions. Changes in economic activity impact a firm’s behavior under either system.  Under a cap-and-trade system, reduced economic growth would lower allowance prices.  Under a tax, government action to lower the amount of the tax, not market forces, would be required to reduce the carbon price seen by firms.   In times of economic expansion, the opposite would be true – under cap and trade, allowance prices would rise based on market forces, but taxes would remain the same unless adjusted through government action.  In this sense, cap and trade can be seen as providing a self-adjusting price, high when the economy is doing well and low when the economy is in a downturn.  A tax in contrast is not self-adjusting.

Linkage to other systems. Ideally, a global price for carbon would develop and allow cost efficiencies to be realized across borders. While we are a long way from a global system, several trading regimes are already operating, expanding, or are planned which could allow international linkages across systems in the future.  Far fewer jurisdictions have either instituted or are considering carbon taxes and the notion of an international carbon tax has been considered but generally rejected as not realistic.

Experiences to date:  Cap and trade has become the cornerstone of successful efforts to achieve low-cost reductions in sulfur dioxide emissions in the United States.  For GHGs, this same approach is also being relied upon in the European Union (EU).  The EU has implemented a GHG cap-and-trade program covering thousands of sources and has created a market with millions of transactions producing a market price for carbon determined through supply and demand.  Following a trial period, during which a number of start-up challenges were encountered (e.g., lack of data, different approaches across Member States), the EU has succeeded in establishing the building blocks for a successful trading regime.  Cap and trade is also being used in three regional trading programs in the United States and Canada.  The use of taxes aimed at reducing GHG emissions has initially been used in several countries, including Norway, Sweden and Germany that are now relying increasingly on emissions trading.  Carbon taxes have also been used in a few local governments in the United States and Canada.   A carbon tax was considered by the Clinton Administration in 1992, but quickly became loaded down with special exemptions, was redirected away from carbon to be a BTU tax to avoid burdening coal, and was ultimately enacted as a few pennies tax on gasoline.

This review of cap and trade and taxes suggests that many of the longstanding myths about these approaches fail to recognize advances in design options aimed at addressing earlier concerns.  While a tax regime sounds simpler in theory, history suggests that special provisions would be added, for example, to avoid adversely impacting specific regions, to exempt feedstocks and to mitigate competitiveness concerns.   While a cap-and-trade regime doesn’t directly provide price certainty, recent proposals include temporal flexibility (e.g., banking, borrowing, and multi-year compliance periods) as well as floor prices and offset provisions that would dampen price volatility.  In the end, history suggests that it is unlikely that a tax would result in a simpler system.  The greater flexibility for firms and greater certainty that environmental objectives will be met appear to be the greatest strengths of a cap-and-trade policy.

Congressional Policy Brief Series
 

This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the views expressed herein are solely those of the Pew Center on Global Climate Change and its staff.

0

Statement: EPA's Proposed National Greenhouse Gas Reporting Rule

-On the occasion of the EPA’s announcement of a proposed rule for a federal greenhouse gas registry-

Statement of Eileen Claussen
President, Pew Center on Global Climate Change


March 10, 2009

Today, the EPA demonstrated its leadership and commitment to take strong, swift action on climate change.  A greenhouse gas (GHG) registry provides the foundation for building a successful and transparent federal program to reduce emissions and protect the climate.

Congress and the Obama Administration have made clear their intentions to push forward with robust action to address climate change. A critical step to successfully reducing U.S. GHG emissions is to have accurate measurements, consistent reporting, and a publicly available database of our emissions. Just as the European Union learned in the trial period of its emissions trading system, accurate and comprehensive emissions accounting is key to the successful start-up of a cap-and-trade program. A well-designed national GHG registry will ensure comprehensive emissions reporting and put the U.S. on the right path toward an effective climate policy. 


Read more about the EPA’s proposed rule for a federal GHG registry.

Climate Policy Hill Briefing on Domestic Offsets

Promoted in Energy Efficiency section: 
0
This Congressional briefing outlines the role and function of domestic offsets in a mandatory GHG cap-and-trade system.

Briefing on Domestic Offsets in a Greenhouse Gas (GHG) Cap-and-Trade System

March 6, 2009


Video  Watch a video of this briefing:  Windows Media Player

Audio Only


The Pew Center held a Congressional briefing on the role and function of domestic offsets in a mandatory GHG cap-and-trade system. Given the importance of offsets as a cost-containment measure in cap-and-trade system design, the intent of this briefing was to show that domestic offsets can be a viable and reliable way of acheiving low-cost GHG emissions reductions.    

Speakers (and topics):

  • Nikki Roy, Vice President for Federal Government Outreach, Pew Center on Global Climate Change (introduction)
  • Janet Peace, Vice President for Markets and Business Strategy, Pew Center on Global Climate Change (moderator; offsets issues and options)
    Presentation
  • Wiley Barbour, Executive Director, Environmental Resources Trust/Winrock (quality offsets)
    Presentation
  • Garth Boyd PhD, PAS; Senior Vice President, Agriculture, Camco (anatomy of an agricultural offsets project)
    Presentation
  • Bill Irving, Chief of the Program Integration Branch, Climate Change Division, Office of Atmospheric Programs, EPA (EPA's analysis of offsets)
    Presentation
     

Briefing Highlights

  • Offsets can significantly reduce the costs of a cap-and-trade program.
  • Offsets standards have proliferated in the absence of guidance from the Federal government. 

Related Materials

Brief on Offsets in a Domestic Cap and Trade Program

More climate change policy briefs

Back to list of Briefing Videos

 

 

-This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the opinions expressed herein are solely those of the presenters.-

CCS Public Workshops

Promoted in Energy Efficiency section: 
0
The Pew Center co-sponsored two East Coast workshops exploring issues related to Carbon Capture and Storage (CCS).

CARBON CAPTURE & SEQUESTRATION PUBLIC WORKSHOPS  

New York City: March 5, 2009
Bloomberg National Headquarters
731 Lexington Avenue, 7th Floor Auditorium
Click for Agenda.

Washington D.C.: March 6, 2009
Rayburn House Office Building, Room 2322
Click for Agenda.

The Pew Center co-sponsored two East Coast workshops exploring issues related to Carbon Capture and Storage (CCS). The events, organized by the Natural Resources Defense Council and Environmental Defense Fund, contributed to the public understanding of and dialogue regarding the important role of CCS in lowering greenhouse gas (GHG) emissions.

CCS is a key technology in the portfolio of low-carbon technologies necessary to achieve significant reductions in global GHG emissions. The process of CCS entails capturing carbon dioxide (CO2) from large stationary sources, such as power plants and refineries, and injecting the captured CO2 into deep underground formations for permanent retention, thereby keeping it out of the atmosphere.

The workshops featured speakers who are leading experts on CCS from academia, industry, finance, government, and the environmental policy field. The speakers provided a comprehensive overview of CCS, including:

  • An explanation of what CCS is and how it works
  • The potential for CCS to provide significant, cost-effective GHG emission reductions
  • The technology behind CCS, real-world experience with this technology, and the scientific/engineering challenges that remain
  • The regulatory framework and economic incentives necessary to facilitate CCS deployment

Click here for event presentations.

Statement: President Obama’s FY 2010 Proposed Budget

- This statement was issued in response to President Obama’s FY 2010 budget proposal. -

Statement of Eileen Claussen
President, Pew Center on Global Climate Change

February 26, 2009

President Obama’s budget contains the key building blocks for creating the clean energy economy we so badly need. It re-emphasizes the President’s support for an economy-wide greenhouse gas cap-and-trade program, sets aggressive but achievable targets for reducing emissions, invests in new low-carbon technologies and helps those families, communities, and businesses that need assistance in transitioning to a low-carbon economy. Most importantly, the budget also recognizes that now is the time to act and calls for a trading system to be up and operating by 2012.

 

Excerpt from the President's budget.

The Administration is developing a comprehensive energy and climate change plan to invest in clean energy, end our addiction to oil, address the global climate crisis, and create new American jobs that cannot be outsourced. After enactment of the Budget, the Administration will work expeditiously with key stakeholders and the Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional government regulations and mandates of the past. Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in FY 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.

 

Statement: President Obama's Address to Congress

- This statement was issued in response to President Obama’s address to Congress on February 24, 2009. -

Statement of Eileen Claussen
President, Pew Center on Global Climate Change

February 25, 2009

President Obama understands that our economic recovery and our energy future are inextricably linked.  By calling upon Congress to send him market-based global warming legislation, the President has clearly signaled that he understands the risks we face from unmitigated climate change.  His talent for explaining tough problems and motivating us to work together to solve them is reason to feel incredibly positive about our ability to succeed in these critically important areas, despite the tough economic challenges we face.

 

This statement also appears in the National Journal's annotated version of the President's address.

 

Excerpt from the President's Address to Congress

But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy.  So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America.  And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.

 

President Obama and Climate Change

Remarks of President Barack Obama
Massachusetts Institute of Technology

October 23, 2009

Excerpt from President Obama’s speech at MIT:

“Everybody in America should have a stake in legislation that can transform our energy system into one that's far more efficient, far cleaner, and provide energy independence for America -- making the best use of resources we have in abundance, everything from figuring out how to use the fossil fuels that inevitably we are going to be using for several decades, things like coal and oil and natural gas; figuring out how we use those as cleanly and efficiently as possible; creating safe nuclear power; sustainable -- sustainably grown biofuels; and then the energy that we can harness from wind and the waves and the sun.  It is a transformation that will be made as swiftly and as carefully as possible, to ensure that we are doing what it takes to grow this economy in the short, medium, and long term.  And I do believe that a consensus is growing to achieve exactly that.”

For text of the speech, click here.

For video of the address, click here.

Related blog post: The Clean Energy Economy of Tomorrow

###

Remarks of President Barack Obama
Weekly Address

May 16, 2009

Excerpt from President Obama’s weekly address:

Chairman Henry Waxman and members of the Energy and Commerce Committee brought together stakeholders from all corners of the country – and every sector of our economy – to reach an historic agreement on comprehensive energy legislation.  It’s another promising sign of progress, as longtime opponents are sitting together, at the same table, to help solve one of America’s most serious challenges.

For the first time, utility companies and corporate leaders are joining, not opposing, environmental advocates and labor leaders to create a new system of clean energy initiatives that will help unleash a new era of growth and prosperity.

It’s a plan that will finally reduce our dangerous dependence on foreign oil and cap the carbon pollution that threatens our health and our climate.  Most important, it’s a plan that will trigger the creation of millions of new jobs for Americans, who will produce the wind turbines and solar panels and develop the alternative fuels to power the future.  Because this we know: the nation that leads in 21st century clean energy is the nation that will lead the 21st century global economy. America can and must be that nation – and this agreement is a major step toward this goal.

 


For full audio of the address, click here.
For video of the address, click here.

###

 

Statement of Eileen Claussen
President, Pew Center on Global Climate Change
on the President's FY 2010 proposed budget

February 26, 2009

President Obama’s budget contains the key building blocks for creating the clean energy economy we so badly need. It re-emphasizes the President’s support for an economy-wide greenhouse gas cap-and-trade program, sets aggressive but achievable targets for reducing emissions, invests in new low-carbon technologies and helps those families, communities, and businesses that need assistance in transitioning to a low-carbon economy. Most importantly, the budget also recognizes that now is the time to act and calls for a trading system to be up and operating by 2012.

 

Excerpt from the President's budget.

The Administration is developing a comprehensive energy and climate change plan to invest in clean energy, end our addiction to oil, address the global climate crisis, and create new American jobs that cannot be outsourced. After enactment of the Budget, the Administration will work expeditiously with key stakeholders and the Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional government regulations and mandates of the past. Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in FY 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.

### 

Statement of Eileen Claussen
President, Pew Center on Global Climate Change
on the President's address to Congress 

February 25, 2009

President Obama understands that our economic recovery and our energy future are inextricably linked.  By calling upon Congress to send him market-based global warming legislation, the President has clearly signaled that he understands the risks we face from unmitigated climate change.  His talent for explaining tough problems and motivating us to work together to solve them is reason to feel incredibly positive about our ability to succeed in these critically important areas, despite the tough economic challenges we face.

 

Excerpt from the President's Address to Congress
February 24, 2009

But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy.  So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America.  And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.

###  

Statement of Eileen Claussen
President, Pew Center on Global Climate Change
on appointment of Todd Stern, Special Envoy on Climate Change

January 26, 2009

Secretary Clinton’s appointment of America’s first special envoy on climate change is another clear and early signal that the Obama administration is determined to address this issue head on.  This new position can help ensure strong and focused engagement at the highest levels as the United States works with other countries to forge a new international climate agreement.  As special envoy, Todd Stern brings the expertise, insight and judgment needed to represent renewed U.S. leadership in the global effort against climate change.  

###

Statement of Eileen Claussen
President, Pew Center on Global Climate Change
on President-Elect Obama's New Energy and Environment Appointments

December 11, 2008

This is a team with a keen interest in addressing climate change, and the talent and skills to get the job done.  With Steven Chu, Carol Browner, Lisa Jackson and Nancy Sutley at the helm, President-Elect Obama's Administration will be well-equipped to tackle the challenge of building a new clean energy future that preserves the climate while revitalizing our economy.   We look forward to working with the new Administration to achieve these goals.

###

On the occasion of President-Elect Barack Obama's Statement to Bi-Partisan Governors' Global Climate Summit

 

November 18, 2008

This is exactly the kind of leadership the country and the world have been waiting for. President-elect Obama's statement makes clear that he's ready to roll up his sleeves and deliver the action that is needed to protect our climate, our economy, and our national security. He is setting the right goals and choosing the right policies. We urge the bipartisan leadership in Congress to work closely with the new president to quickly enact an economy-wide cap-and-trade system.  Doing so will ensure significant reductions in U.S. emissions at the lowest possible cost, and help set the stage for a new international agreement ensuring that all other major economies contribute their fair share as well.

Obama's Remarks

### 

On the occasion of Senator Barack Obama's election to the presidency, the Center released the following statement of Eileen Claussen, President, Pew Center on Global Climate Change

November 5, 2008

President-elect Obama faces an array of urgent challenges when he assumes the Presidency on January 20, but I am confident that he will provide the leadership needed to enact a comprehensive climate policy that significantly reduces U.S. greenhouse gas emissions.  I am equally optimistic that new leadership will provide the impetus we need to forge a strong green energy economy and restore America's standing in the world community, and I look forward with great anticipation to working with the Obama administration to achieve these critical goals.

Syndicate content