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
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Should the costs of regulation be mitigated for any sector of the economy, through the allocation of allowances without cost? Or, should allowances be distributed by means of an auction? If allowances are allocated, what is the criteria for and method of such allocation?
Pew Center Response
Download Response to Question 2 (pdf)
The Pew Center believes that the costs of regulation can be mitigated through the free allocation of many allowances, as well as through other measures, as discussed in the section on “Cost Containment” in the Additional Topics.
Resolving the question of how to allocate emission allowances will be fundamentally an issue of political acceptability. As observed in the successful acid rain trading program and noted in the Pew Center’s previous analytical work (see, e.g., Ellerman et al), there is no appreciable difference in environmental effectiveness in using a free distribution, rather than an auction, to start a program. The environmental benefits accrue from the timing and quantity of reductions – recognizing that a program that starts sooner would require less drastic reductions. In other words, the allocation vs. auction debate is more relevant to political feasibility than environmental outcome. However, there are a number of key considerations and tradeoffs among the various approaches to allocation. The Pew Center does not have a position on the method of allocation, but has led workshops and discussions addressing these many considerations in developing an allocation method. The following response lays out these areas of consideration, and in some cases makes recommendations. It also describes the views of the surveyed corporations on these issues. More detail on the implications of various allocation options can be found in the attached documents (along with a lengthier discussion on the pros and cons of free allocation).
Pew Center Analysis
Covered entities, especially those with significant compliance obligations and those in energy-intensive industries, will bear costs associated with transitioning into a market-based system for emissions allowances. To assist with this transition, a high percentage of allowances (e.g., 90% - 95%) should be allocated at no cost, rather than auctioned, at least in the initial years of a cap-and-trade system. A small initial allowance auction can fund transition assistance and research, development and deployment of climate-friendly technologies. This auction may serve as a price discovery mechanism to give firms an initial idea of the market price for an emissions allowance. Over time, the amount auctioned could increase, as firms successfully transition into the trading system and the associated expenditures decrease. In providing federal funding for technology development, a competitive process, such as a “reverse auction” in which funding is allocated based on emission reduction potential, can reduce program costs. In the early years of the program, the highest priorities for allocation should be transition assistance and technology development; over time the priorities should shift toward rewarding low-emitting technologies and practices.
The choice of allocation approaches may have strong distributional impacts, and thus may be a very contentious decision. For large point sources, allocation can be made either on the basis of historical emissions or against a sector-specific benchmark or set of benchmarks. Power plant allocations, for example, may be made on an input, net output, or gross output basis. The goal of allocation is to encourage the transition to a cleaner, more efficient generation fleet, but to do so in a way that recognizes that players in the industry have different starting points.
If the point of regulation is at the power plant level, policymakers must also decide whether to allocate allowances to non-emitting generators, and whether allocation will be fuel-specific or fuel-neutral. Allocating allowances to non-emitting generation would create incentives for the expansion of these sources, but may increase the burden on emitting generation. Fuel-neutral allocation may promote fuel switching and efficiency, while similarly increasing the burden on higher-emitting generation sources.
Another important issue is whether subsequent allocations should be fixed at the same level, or should be updated over time. The argument for updating is that a fixed allocation may disadvantage new and growing businesses. However, many economists argue that updating is economically inefficient because it encourages emitters to modify their behavior in order to increase future allocations, rather than simply meet the emissions cap at the lowest cost . Updating also creates uncertainty for business decisions as well as emissions outcomes. Ultimately, however, the inefficiencies and behavioral consequences of updating are an empirical question. While preliminary evidence on the Ozone Transport Commission NOX program suggests that behavior is not significantly different in states that update versus those that do not, there is some consensus that the inefficiencies of updating grow as the magnitude of the program grows. (See RGGI Allocation Workshop Summary and Proceedings for more detail on this question.)
A reasonable compromise might be to update over long time periods (e.g., 5 or 10 years), which should not affect economic efficiency significantly and would contribute to a fairer allocation over time.
Another important issue is how to deal with new entrants. Updating automatically does this, but there are other methods that may be useful, especially if updating only occurs infrequently. The simplest is to require new entrants to purchase allowances on the open market. To the extent that allowances are allocated largely to existing sources, this means that new sources would need to purchase allowances from existing sources. Allowances could also be set aside in a “reserve” at a fixed price – this was the approach taken under the U.S. acid rain program. This reserve was never actually used because cheaper allowances were available on the market, but it was an important insurance policy for new entrants. Finally, allowances for new sources could be set aside and given to eligible new sources for free.
A federal cap-and-trade system may either directly allocate allowances, or may “apportion” allowances to the states, which can individually decide how to allocate allowances. (The Regional Greenhouse Gas Initiative does the latter.) Alternatively, the federal government may foster some degree of harmonization by requiring a certain percentage of each state’s allowances go to certain purposes or entities, and then permitting states to allocate the remaining percentage as they wish. The Pew Center believes that it is preferable for the federal government to oversee the allocation process. Allocation is politically very difficult; addressing it at the federal level would save considerable state-by-state trouble and create an uneven playing field. In addition, although difficult, federal-level allocation can enable political solutions, which Congress may be able to utilize to reach agreement .
Some analysts believe that a high level of free allocation will result in windfall gains for allowance recipients. The potential for windfall gains depends, for each economic actor, on the relationships between its compliance obligation, its allowance allocation, and its ability to pass along price increases. While windfall gain may accrue to some sectors that are able to pass along price increases (in excess of cost increases); it will not accrue to all firms within that sector and more importantly will not be available to all sectors. Furthermore, because some firms will experience additional costs, free allocation can serve to minimize this impact while still sending the appropriate signal that emission reductions are valuable. There is disagreement among analysts about the degree to which various sectors and firms are able to pass along price increases, and what level of free allocation may compensate those affected.
Company Perspectives on Design Considerations
Among the companies the Pew Center surveyed, there was little consensus on the method of allocation. Opinions fell into a small number of distinct “camps” based on financial implications of various allocation methodologies.
The electric power utilities hold the strongest views, but these differ significantly, based largely on the relative carbon intensity of their generating fleets, which in turn corresponds to their fuel mix. Power companies with a relatively low-carbon fuel mix prefer allocation based on electricity output. Power companies with relatively high-carbon fuel mix prefer allocation based on historic emissions. Some manufacturing companies agree with the latter approach, based in part on their interests as large power users and depending on the carbon intensity of the generators supplying their electricity. Power companies in both camps indicate a willingness to consider compromise approaches depending on other aspects of a regulatory design package. Some utilities note that a compromise approach might involve beginning with an input-focused allocation that transitions over a period of years toward a more output-based allocation. Another utility points out the challenge and importance of reconciling differences between regions and economies fueled primarily by coal and regions with abundant natural gas.
Allocation is just one aspect of the larger picture in which all design elements will be considered. Some note that allowance distribution could serve as a means for awarding credit for early action. One utility holds that it is better to minimize the cost impacts on power customers in advance – i.e., at the allocation stage – rather than through the recycling of allowances. Another company suggests allocating allowances based on technology “benchmarking,” which would determine a reasonable baseline level that reflects a balance of technologies used across an industry.
Another company suggests that the allocation system can and should be used to encourage the power generation sector to transition from higher carbon-intensity fleet to a lower one. They believe that instead of viewing allocation as a “compensation” issue, it is important to use the allocation process both to create the bridge to a new energy future and to send a message to the power sector of the overall direction Congress wants the industry to take.
One utility makes the important point that allocation is not the driving force on new plant investment decisions – rather, choice of new plants is based on the overall price signal created by the cap and associated flexibility mechanisms. Finally, there were differing opinions among the surveyed companies as to whether the federal or state government should play the role of deciding how much to allocate to individual emitters.
Clarifying Questions 2a
Technology R&D and Incentives
- What level of resources should be devoted to stimulating technology innovation and early deployment?
- What portion, if any, of the revenues from permits or the auction of allowances should be reserved for technology development? If some portion is reserved for this purpose, should that set-aside flow to the federal government with funds spent through the traditional appropriation process? Or should the funds be allocated directly to a non-profit research consortium, chartered by the federal government, which would then administer technology development and deployment projects? Or should there be some combination of these two options?
- What criteria should be used to determine how such funds are spent and which projects are chosen?
- What other mechanisms should be used to promote technology deployment? Options include tax credits, cost-sharing for demonstration projects, assistance to state energy programs, etc.
Pew Center Response
Effective research, innovation, development, and deployment strategies will be critical to enabling a low-carbon energy future. Current levels of federal RD&D need to be significantly increased to reflect parity with other sectors in the U.S. economy (on the basis of RD&D dollars spent per GDP) and with the magnitude of the challenge of enabling a low-carbon energy future. Equally as important, strategies for managing these funds need to be revamped. Current RD&D efforts on low-carbon technologies suffer from a cultural focus on niche markets, inter- and intra-agency “stove-piping,” uncertainty caused by the annual appropriations process and cycle, and detrimental Congressional earmarks on scarce funds. The federal government needs a more integrated approach to RD&D in order to focus the appropriate agencies and resources on critical RD&D needs at appropriate times within a long-term R&D framework. Management modeled on the Defense Advanced Research Projects Administration (DARPA) is needed to instill a culture focused on development and commercialization of these technologies, and forward funding would help reduce the level of uncertainty and detrimental earmarks. Public/private partnerships and government procurement have a key role to play as developers and incubators of technology and to foster “learning by doing”—a critical step in bringing down the cost of low-carbon technologies and increasing deployment. While support for breakthrough technologies is often appealing, experts point out that what often appears to be a breakthrough is indeed the result of years of incremental investment and work. Public/private partnerships are an effective vehicle for enabling sustained incremental improvements in the performance and cost of low-carbon technologies.
Policy-makers should be wary of the dangers of “picking winners” among technologies, but some support to push the likely candidates along can overcome cost barriers that would otherwise be insurmountable . Research has shown that focusing exclusively on technology-push policies (instruments that offer technology funding incentives without motivating a corresponding demand for these technologies) or exclusively on technology-pull policies (mandates that generate demand for advanced technologies without corresponding support for their development) is more expensive than a combination of the two approaches . Opportunities to introduce competition into the incentive process will reduce the costs of the program and avoid picking winners.
A competitive process to distribute incentives will reduce the costs of the program and avoid picking winners. A “reverse auction”, in which bidders compete to provide some technology or service for the lowest cost, would allow reduction projects to compete for these incentives on a level playing field. An auction could specify technology categories as well as offer a broad competition to elicit new, as-yet-unknown technologies. Alternative funding mechanisms include forward funding, technology prizes , tax rebates, guaranteed government purchase agreements (i.e., renewable energy or IGCC-CCS energy), green loans and public-private partnerships.
The private sector is generally a more efficient engine of technological innovation than the government. The private sector is particularly good at identifying and allocating resources to those technologies that have the best potential to become financially self sustaining, since private investment is almost uniquely profit-oriented and return-driven. One example raised by companies is in energy efficiency programs. If the government creates frameworks incentivizing but not directing the private sector (tax credits, cap and trade rules that allow efficiency-based offsets, etc.) and allowing private companies and investors to easily monetize the value of efficiency investments, there is ample evidence that the private sector can achieve these at costs per kilowatt or BTU lower than those for which the government is an intermediary.
When it comes to large-scale, longer-term technologies, companies note that it can be effective to match private investment with public funding in some way, as in the case of existing partnerships for clean coal, nuclear power, and fuel cells. Companies expressing a view favor direct government investment and guidance for early stages of research development – the pre-commercial stages of product life cycle. Where infrastructure and programs already exist and are successful, (e.g., NIST grants or the Department of Energy’s Industrial Technologies Program) these should be used and consistently funded.
Given the relative advantages of the private sector in generating innovation, while it is important to fund federal R&D and deployment activities for certain climate-friendly technologies, it is also important to design a GHG cap-and-trade program to leave the greatest share of the money in private hands, where it will be most efficiently spent, rather than flowing to the federal agencies. For example, a cap-and-trade program that sets a meaningful target and allocates a high percentage of allowances for free to a large number of covered emitters would likely foster a robust private market in allowances. The money in such a market would stay in private hands, without the government acting as middle-man, creating with minimum waste a direct incentive for every company to deploy climate-friendly technologies and practices.
In 2004, the Pew Center conducted a workshop called “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future” , and published recommendations in several technology areas for types and levels of investment needed. Some specific funding recommendations included:
- International coordination to plan, fund, and deploy coal gasification with CCS trial projects that focus on remaining technical issues and with publicly shared results (e.g., adequately addressing remaining uncertainties will likely require four to six projects, at an estimated cost of approximately $5 billion, and an estimated project lifetime of 10 years)
- Establishment of carbon sequestration trial projects in the United States to validate the integrity of geologic storage (e.g., such validation will likely require four such projects at an estimated cost of approximately $1 billion, and an estimated project lifetime of 10 years)
- Reinvent the U.S. electricity grid to facilitate distributed power generation and consumption in ways that make this new model attractive to utilities, and promote energy storage technologies. The estimated price of this upgrade is in the $100 billion range.
Other mechanisms can provide incentives for deployment without direct funding. These include:
- Carbon capture and sequestration: Development of a regulatory system for sequestered carbon, including clarity about state-federal split of jurisdiction, and about which agencies at both levels have jurisdiction. In addition, companies note that public-private partnership in the development of private sector insurance products to cover various liabilities would reduce the financial uncertainty for those in the CO2 chain of custody.
- Renewables: Development of a uniform system to track renewable energy credits in a consistent way across the country and facilitate trading between multiple state programs; utilities and other companies with interest in generation, as well as firms in the investment community, note the value of improvements to the national power grid that facilitate distributed generation as a driver for renewable energy technology.
- Nuclear power: Expansion of scope of U.S. Department of Energy nuclear waste R&D to options beyond Yucca Mountain
- Combined heat and power (CHP) and distributed generation (DG): Support for net metering and incentives for uniform grid interconnection standards at the state level. Development of national test beds for new electricity grid systems.
- End-use efficiency: Promotion of state adoption of building codes. Expansion and tightening of product standards, potentially made tradable between manufacturers.Product standards on emissions will pull technologies into the marketplace by generating demand for them, and can complement a downstream cap-and-trade program by capturing emissions that would not be covered in a large-source system. Combining end-use standards with large-source emissions trading and funding for technology R&D can allow all sectors of the economy to play a role in reducing emissions in a cost-effective way.
Clarifying Questions 2b
- What portion of the overall allowance pool should be dedicated to adaptation research or adaptation-related activities?
- How should these allowances or funds be administered?
- What is the appropriate division between federal vs. regional, state, and local initiatives?
Pew Center Response
The Pew Center recommends a national adaptation strategy that would assess the range of needs and provide guidelines or standards for infrastructure planning, as well as reform existing policies that promote maladaptive behavior. In addition to the needs outlined in this strategy, funding should be provided for the development of early-warning systems for heat waves and other related threats, enhanced monitoring of infectious diseases, and evaluations of the implications of climate change for disaster management. Support should also be given for efforts at local, state, and regional levels, which is where much of the adaptation measures will be taken. Indeed, because we are already observing effects of climate change (sea-level rise, increased storm intensity, ecosystem impacts), the funding needs for adaptation will grow substantially over time – from funding research and planning to supporting on-the-ground changes in infrastructure and response.
Clarifying Questions 2c
- What portion of the overall allocation pool should be reserved to assist consumers?
- Should funds from the sale of permits or allowances be targeted primarily to low-income consumers, or should they be more widely distributed to benefit all consumers?
Pew Center Response
Initially, some portion of auction funds should be used for transition program for affected workers and communities, end-use efficiency investments, and otherwise addressing increased consumer costs as needed.
An earlier Pew Center report, Worker Transition & Global Climate Change , indicated that for the average non-supervisory worker in a goods-producing sector (mining, construction, and manufacturing) who does not find a job until having completed two years of training, the total cost of a transition program would be about $106,000 per worker in 2010.
A separate report, Community Adjustment to Climate Change Policy , concluded that that a new federal adjustment program for at-risk communities should be part of U.S. climate change policy. The report recommended that the U.S. government take the following actions:
- Designate and fund the Economic Development Administration (E.D.A.) of the U.S. Department of Commerce to design and implement an economic adjustment program for communities;
- Identify and assist communities that are particularly dependent on energy-producing and energy-intensive sectors before dislocations occur;
- Leverage and integrate additional resources by involving multiple federal agencies and state and local governments through federal and regional task forces; and
- Be flexible in addressing community needs by supporting locally determined, comprehensive strategies for five to seven years after the implementation of new climate policies.
While the amount of resources required for program implementation is difficult to determine, the authors suggested that an appropriate federal commitment might be $550 million ($50 million for planning, $500 million for implementation), and that resources be allocated so that a community has five to seven years to pursue adjustment.
Note that, while transition programs are not formally part of the RGGI allocation process, the program does set aside 25% of the allowances for energy efficiency and strategic energy investments.
Clarifying Questions 2d:
- What portion of the allocation pool should be reserved for the early reduction credit program and the offset pilot program?
- Are other set-aside programs needed?
Pew Center Response
The Pew Center believes early reduction credit and offsets need not be treated as set-aside programs, but rather as cost-containing flexibility mechanisms. Early reduction credit provides temporal flexibility, while offsets may provide geographic and sectoral flexibility to covered entities, and will be evaluated as part of the overall legislative package.
The Pew Center and nearly every company surveyed by the Center feel that credit or recognition should be given for GHG emission reductions achieved before the program becomes mandatory. The system should be designed so that the many companies that have voluntarily reduced their GHG emissions (as urged by the last three presidents) will not be implicitly penalized for doing so. Without such credit, companies that have taken early action could face higher costs for future emissions reductions than companies that did not pursue early voluntary reductions and thus have more “low hanging fruit” to harvest – therefore putting the early actors at a competitive disadvantage.
Credit should be provided not only to companies that registered their reductions under the U.S. Department of Energy’s Voluntary Reporting of Greenhouse Gases Program (established under section 1605(b) of the Energy Policy Act of 1992), but also to those conforming to U.S. EPA Climate Leaders guidelines, the reporting protocol developed by the World Business Council on Sustainable Development and the World Resources Institute, the protocol developed by the World Economic Forum, and equivalent state and private registries, such as the California Climate Action Registry. The test should be whether the reductions were real and verifiable.
Note that the establishment of a “set-aside” program is by no means the only way to provide recognition of early action. Companies could be directly allocated allowances based on their registered emissions reduction. Some companies have suggested that covered emitters be allocated allowances as a function of their “baseline” emissions levels – the default baseline level being the amount emitted during a given year (or period of years). Emitters who could document beginning their emission reductions earlier than the default baseline year (or years) could move their baseline to that earlier period, leading to their being allocated a greater number of allowances. Such a program could either use set-aside credits or direct allowance allocation.
Offsets are generally defined as out-of-system GHG reductions achieved by non-covered entities. Examples include greenhouse sequestration projects or verifiable credits from the programs of other countries with capped emissions. The use of offsets to meet allowance submission requirements should not be restricted, as long as the offsets reflect real, measurable, and verifiable reductions. In general, offset programs have significant benefits, because they provide flexibility in the geographic and sectoral location of emissions reductions. Inclusion of an offset program expands incentives for emissions reductions beyond those entities covered by the cap. These reductions opportunities will lower the overall cost of program compliance, and motivate a continuous search for low-cost, verifiable reduction opportunities.
Most companies note that offsets are a fundamental tool to efficiently lower the cost of emissions reductions both for firms and for the economy as a whole. They are also a critical market-based mechanism for directing investment to promising technologies and approaches for energy efficiency, low or no-carbon energy, low GHG manufacturing, and carbon sequestration. Offsets specifically expand the scope of the program and serve to unleash the power of the market to stimulate innovation and cost-effectively reduce emissions. One company notes that it will take decades to transition capital stock of power generating plants to low carbon sources, so there is a critical need for offsets as a way of cutting net emissions affordably in the short and medium term. Several companies note that the very function of a market-based system that allows offsets with firm rules regarding verifiability and liability for actual reductions will by its nature favor sources of offsets (all the way down to the specific project level) that are real and verifiable, and steer investment away from projects for which the expected reductions must be discounted due to risk factors (technical, commercial, political, etc.)
Regarding the special case of carbon sequestration, a broad “results-based” program — which provides rewards to project developers in proportion to the amount of additional carbon sequestered — has the potential to improve the cost-effectiveness of a national GHG mitigation program. A results-based program is also likely to result in more innovative solutions than “practice-based” approaches – approaches that give credit for certain practices without verifying the amount of carbon sequestered by each project. Nevertheless, some observers believe the government—in cooperation with researchers, landowners, and project developers—may be able to develop project-measurement and monitoring methods that are sufficiently accurate and reproducible to protect the environmental integrity of a large-scale program that allocates rewards on the basis of evaluations of individual projects.
The following would be needed to provide such integrity:
- A description of accepted practices for sampling and measuring carbon stocks at the project site;
- Methods to develop reference cases or baselines against which observed changes in carbon levels can be compared. Several different approaches to reference case development may be needed to accommodate the wide range of potential activities and settings.
- Methods to estimate or address the leakage effects, including permanence, geographical, and trade-offs among different GHGs;
- Program methodologies designed to provide results that are reproducible by competent, independently-operating evaluators.
In general, offset programs have significant benefits, because they provide flexibility in the geographic and sectoral location of emissions reductions. Inclusion of an offset program expands incentives for emissions reductions beyond those entities covered by the cap. These reduction opportunities will lower the overall cost of program compliance, and motivate a continuous search for low-cost, verifiable reduction opportunities.
In order to verify emission reductions that are fungible with reductions made within the capped sectors, a robust system of measurement and verification is required. The Clean Development Mechanism in the Kyoto Protocol initially provided for a project-by-project review of proposed offsets that presents significant burden and uncertainty for entities seeking offsets. The Pew Center prefers the “standards” approach to offsets taken by the northeast Regional Greenhouse Gas Initiative (RGGI). RGGI’s standards approach seeks to balance reduction verification with regulatory burden. Rather than reviewing projects one at a time, making judgments as to whether the project baseline is appropriate, whether project reductions are additional and real, etc., standards are set for a specific category of offsets, and project applications are assessed against that standard. This approach has two benefits: it makes program administration easier and project approvals more predictable, thus benefiting governments, environmental advocates and offset project developers by lowering the risk premium for such reductions. In the case of RGGI, the program is starting with the following offset categories: natural gas, heating oil, and propane efficiency; landfill gas capture and combustion; methane capture from animal operations; forestation of non-forested land; reductions of sulfur hexafluoride (SF6) emissions from electricity transmission & distribution equipment; and reductions in fugitive emissions from natural gas transmission and distribution systems. RGGI expects to add project categories over time .
The RGGI offset categories are not necessarily the right categories for a national program; they make sense for RGGI because RGGI only covered power plants. Offsets should be in source categories not covered by the cap-and-trade program; therefore, once the scope of the trading program is determined, one can evaluate which offsets are appropriate.
Clarifying Questions 2e
Special considerations for fossil-fuel producers?
- Would some upstream fossil fuel producers be unable to pass the cost of purchasing permits or allowances through in fuel prices if they are the regulated entity?
- Is there a sufficient policy rationale for addressing these costs to justify the complexity of setting up and administering an allocation system for these entities?
- What other options exist to address the inability of fossil fuel producers to pass through these costs?
Clarifying Questions 2f
Allocations for downstream electric generators?
- Should electricity generators be included in the allocation if they are not regulated? (Clarification: We mean to ask if an electric generator should be included in the allocation if the greenhouse gas regulation occurs at a point of regulation that is upstream or downstream from the generator, but not the generator itself.)
- What portion of the total allocation should be granted to the electric power sector? Should it be based on the industry’s share of greenhouse gas emissions or some other factor?
- Should generators in competitive and cost-of-service markets be treated differently under an allocation scheme?
- How should permits or allowances be distributed within the electric sector? Should it be based on historic emissions? Electricity output? Heat input?
Pew Center Response
The Pew Center disagrees with the white paper’s assertion that “All told, these costs would be offset completely by an allocation of roughly 5 to 10 percent of the total permit or allowance pool to fossil fuel producers,” and would support a much larger free allocation, as described at the beginning of the response to Question 2.
The Pew Center supports allocating most allowances at the same point that regulation takes places in order to compensate those who are required to comply.
Power companies with a relatively low-carbon fuel mix prefer allocation based on electricity output. Power companies with a relatively high-carbon fuel mix prefer allocation based on historic emissions. Some manufacturing companies agree with the latter approach, based in part on their interests as large power users and depending on the carbon intensity of the generators supplying their electricity. Power companies in both camps indicate a willingness to consider compromise approaches depending on other aspects of a regulatory design package. They also generally agree that the most critical goal in reducing power sector GHG emissions in the medium and long term is to facilitate new plant investment in low-carbon and no-net-carbon technology, and many agree that the system should aim to phase out the highest-carbon plants in the generating fleet.
One utility notes that a compromise approach might involve beginning with a relatively input-focused allocation that transitions over a period of years toward a more output-based allocation. This sort of approach is one under consideration by a number of industry players. Another utility points out the importance of fairly reconciling differences between regions and economies dependent on coal and regions with abundant natural gas.
Clarifying Questions 2g
Allocations for energy-intensive industries?
- Is there a sufficient policy rationale to have an allocation to selected energy-intensive industries? What industries should be included in the allocation?
- What portion of the overall allocation framework should be reserved for these industries?
- What are the appropriate metrics for determining allocations across different industries?
Pew Center Response
Allocation as a policy vehicle can serve multiple purposes – reducing costs, motivating and compensating early action, addressing transition issues, etc. However, it will also likely be the most contentious element of the trading system development. Implementation may be made more straightforward by using a consistent rule for allocation across all sectors. On the other hand, sectoral tailoring may be necessary to address concerns about global competitiveness. Allowance allocation may be a particularly effective way of accounting for the relative price insensitivity of different sectors.
For vulnerable stationary sources that face intense competition that could lead to offshoring (and even higher GHG emissions), allowances can be provided to help ease the transition of capital stock to newer, more efficient technologies and cleaner fuels.
In transportation, while there is no clear consensus on how to reduce emissions from private vehicles, many observers believe that demand from U.S. private vehicle drivers is inelastic in the short term, i.e., that vehicle drivers will be willing to pay a very high price for gasoline without significantly modifying their travel behavior (with the exception of short term reaction to dramatic price spikes) or vehicle preferences. One serious negative effect of this price inelasticity is that if vehicle drivers are essentially included in a national cap-and-trade program — for example, by requiring allowance submission by the importers and refiners of petroleum products burned for transportation — they might bid the emissions allowance prices very high, to the detriment of the more price-sensitive manufacturing sector. As is the case with any potential damage to certain industries, allowance allocation might be a mechanism to make whole those requiring relief — and to do so in a way that changes over time to increase pressure for those industries to reduce emission at a pace they can afford.
Clarifying Questions 2h
Allocations to other industries/entities?
- What other industries/entities (e.g. agriculture, small businesses, etc.) should be considered in the allocation pool?
- What should be the basis for their share of the total allocation as well as for the distribution among such industries/entities?
Pew Center Response
Please see response to Question 2g.
 For example, if allowances are distributed per kwh of generation, that would provide an incentive to increase generation, lowering electricity prices and encouraging fuel switching and plant efficiency over end-use efficiency. Some argue that, if allowances are allocated based on average emission rates, updating would not encourage generators with high emissions rates to generate more because they would still have to buy additional allowances to cover their incremental emissions.
 Further analysis on allocation can be found in Nordhuas, R. 2003. Designing A Mandatory Greenhouse Gas Reduction Program for the United States. Arlington, VA: Pew Center on Global Climate Change, pgs. 27 – 29.
 “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future”. Washington DC, March 25-26, 2004.
 Alic, J.; D. Mowery; E. Rubin. 2003. U.S. Technology and Innovation Policies: Lessons for Climate Change. Arlington, VA: Pew Center on Global Climate Change. Goulder, L. 2004. Induced Technological Change and Climate Policy. Arlington, VA: Pew Center on Global Climate Change.
A technology prize grants a monetary award for a specific goal in R&D to spur innovative step-changes in technologies. The best-known example has been the 2004 “ANSARI X PRIZE,” which was awarded for the first successful private space flight.
 “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future”. Washington DC, March 25-26, 2004.
 Further information on offsets can be found in “Summary of RGGI Stakeholder Workshop on Greenhouse Gas Offsets”, accessed at http://www.rggi.org/docs/offsets_workshopsummary.pdf.
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Question 1: Who is regulated and where?
Clarifying Question 1a
Is the objective of building a fair, simple, and rational greenhouse gas program best served by an economy-wide approach, or by limiting the program to a few sectors of the economy?
Pew Center Response
Download Response to Question 1 (pdf)
The Pew Center’s responses to these questions draw from two sources:
- An extensive body of analysis, conference and workshop proceedings, and other work undertaken by the Pew Center from 1998 to the present with input from the Center’s Business Environmental Leadership Council (BELC) , leading scholars, policymakers, and stakeholder groups. This work provides the foundation for the Pew Center’s positions on these design questions. Documentation of this work is available at the Pew Center website.
- Opinions expressed to the Pew Center in dozens of hours of discussion over several years with over 30 large corporations regarding design elements of a greenhouse gas (GHG) cap-and-trade program. The companies include several large utilities as well as companies in other sectors, ranging from primary fuels to manufacturing to retail. Although the Pew Center and the companies with which the Center has discussed design elements agree on the broad outlines of a cap-and-trade program, individual company opinions may or may not agree with the Center’s positions on particular issues.
As reflected in the Center’s 15-point Agenda for Climate Action, the Pew Center believes that mandatory GHG mitigation measures must cover the economy as a whole, equitably spreading responsibility for reducing emissions among large emitters, the transportation sector, and households. The companies surveyed unanimously supported this position.
Because emissions from electricity generation and transportation make up approximately 40% and 30% of U.S. GHG emissions respectively, it is critical to address these sectors sooner rather than later. However, these emissions need not be covered through the same system.
Large stationary sources should be addressed through a cap-and-trade program . A cap on emissions would send an economy-wide signal favoring reductions, and emissions trading would ensure that reductions are achieved at the lowest cost possible. Such a program should cover all GHGs in all major emitting sectors and include all measurable, verifiable reductions and offset measures, without restrictions on trading. An absolute cap for the national program should be set to achieve a modest level of emission reductions and announced sufficiently far in advance to allow for planning (e.g., a return to current levels within a five- to ten-year period). Further reductions should be phased in over time as new technologies come online and capital stock turns over. Because individual sectors have different sensitivities to the price of carbon and are growing at different rates, sector-specific emission limits or allowance allocations within the overall cap could be established.
At the end of a year, each emitter would be required to surrender allowances equal to its emissions. Emitters whose cost of abating emissions was lower than the allowance price could sell allowances or “bank” them for future use. Emitters whose cost of reducing emissions was more than the price of an allowance could buy allowances. This flexibility would allow for the most cost-effective emissions reductions.
The transportation sector is difficult to incorporate into a downstream cap-and-trade program, and should be addressed through requirements on vehicle manufacturers, for example by converting the Corporate Average Fuel Economy (CAFE) program into strengthened, tradable corporate average CO2 (or GHG) standards. Average fuel economy standards under the current CAFE program could be replaced by corporate average CO2 emission standards for each manufacturer’s combined sales of cars and light trucks. A manufacturer that “overachieves” (whose average emissions are below the standard) in a given year would earn allowances based on the reduction in projected lifetime emissions from vehicles produced in that year. These allowances could be banked, sold to other manufacturers or sold into the broader, economy-wide GHG cap-and-trade program. A manufacturer that does not meet its CO2 standard would purchase allowances to cover its shortfall.
In order not to penalize any vehicle manufacturer at the start, efforts of those who invested early and exceeded standards would be recognized (for example, through credit allocation) with adequate time provided for other companies to catch up, recognizing the time needed to develop and market new vehicles. Concerns about a lack of price-responsiveness within the transportation sector driving up costs of allowances for stationary sources could be addressed by keeping this program separate from the stationary source cap-and-trade program, or by requiring a certain amount of reductions from within the sector.
Since the energy services required by residential, commercial and industrial buildings produce approximately 43% of U.S. CO2 emissions , a comprehensive climate program must address this sector. Measures such as upgraded building codes and appliance efficiency standards are an important complement to a large-source cap-and-trade program. Incentives for technologies such as combined heat and power could move the country toward net zero-energy buildings.
While it is important to cover all major emitters, policies may address some sectors first – for example, by implementing cap-and-trade for the electric power sector before other sectors. Some of the utilities surveyed indicate a willingness to consider such an approach, provided the design of regulations is sensible and fair, in exchange for the regulatory certainty that a program would provide. Similarly, some companies state that, although GHG legislation ultimately needs to cover the economy as a whole, a cap-and-trade program initially needs to be as straightforward and easy to implement as possible. At least two major utilities, however, say they oppose a bill that excludes buildings and transportation. They state that the program otherwise would create a distortion that moves electricity generation away from the sector most able to make low-cost reductions to captive generation by large electricity users. Almost all the utilities note they have extensive experience and internal capacity gained over many years of compliance with other air regulations and, in many cases, are also experienced in emissions trading of other air pollutants, so they are well prepared to work within a GHG cap and trade system.
Finally, while the objective is to build “a fair, simple, and rational” program, it is important to recognize possible tensions between “fair” and “simple.” The Pew Center and all of the companies with which we have discussed design elements agree that fairness calls for all sectors to bear a fair share of the emissions reduction burden. However, implementing a cap and trade bill for large emitters could be a simpler first step than covering other sectors in the same bill. Establishing a large emitter cap and a U.S. GHG trading market could provide a simple, effective platform for integrating transportation, buildings, and other sectors into a GHG regime over time, rather than undertake measures for all sectors simultaneously.
Clarifying Question 1b
What is the most effective place in the chain of activities to regulate greenhouse gas emissions, both from the perspective of administrative simplicity and program effectiveness?
Pew Center Response
The Pew Center and most of the companies surveyed believe that allowance submission should be required “downstream” at the point of emission from large stationary sources, rather than “upstream” (e.g., on producers of coal, oil, and natural gas). To many, a program that applies a cap and trade to upstream producers functions for all practical purposes like a carbon tax, rather than a robust market. Moreover, some research suggests that carbon taxes must be very high and continuous to motivate a significant market response. It is more useful to apply regulation to those in a position to alter the behavior that results in emissions, rather than to apply a tax on firms that have no technology or process options to reduce emissions.
Regarding the special case of transportation emissions, the Pew Center recommends a focus on vehicles – changing the CAFE standard to a tradable emissions approach, as discussed in response to the Question 1a.
 The BELC is the largest U.S. based association of corporations focused on addressing the challenges of climate change, with forty-one members representing $2 trillion in market capitalization and over 3 million employees.
See also: Claussen, E., and R. Fri, co-chairs. 2004. A Climate Policy Framework: Balancing Policy and Politics. Ed. J. Riggs. Report of an Aspen Institute Climate Change Policy Dialogue, November 14-17, 2003. Washington DC: The Aspen Institute.
Nordhaus, R., and K. Danish. 2003. Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., Arlington, VA: Pew Center on Global Climate Change.
 Brown, M., Southworth, F., Stovall, T. 2005. Towards a Climate-Friendly Built Environment, Arlington, VA: Pew Center on Global Climate Change.
The Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
In February 2006, Senate Energy and Natural Resources Committee Chairman Sen. Pete V. Domenici (R - New Mexico) and top Democrat Sen. Jeff Bingaman (D - New Mexico) issued a white paper on Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System, which posed several detailed questions about the design of a GHG cap-and-trade system.
The committee invited all interested parties to respond to the questions by March 13. Read a summary of our response below and the full response using the navigation bar in the top right corner of this page. You may also download the entire response (pdf) or sections of the response below.
Selected respondents were invited to attend the Senate Energy and Natural Resources Committee's conference-style hearing, or "Climate Conference", on April 4. Read Pew Center President Eileen Claussen's opening statement given at the Climate Conference. Read also Eileen Claussen's statement on the event of the Climate Conference.
Summary of Response to "Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System" from Eileen Claussen, President, Center for Climate and Energy Solutions
Pew Center applauds the Senate Energy Committee for its continued efforts to address the critical issue of climate change. The Center is responding to all four main questions, and submitting additional information on cost containment and recent climate science. Responses draw from an extensive body of analysis, conference and workshop proceedings undertaken by the Center with input from the Center’s Business Environmental Leadership Council, scholars, policymakers, and stakeholders; as well as opinions expressed to the Center in discussions with over 30 large corporations. Please note that the Center and most companies surveyed believe that, rather than focusing on any one design element in isolation, any bill must be evaluated as a whole, especially in minimizing the costs to covered entities and the economy.
1. Point of Regulation: Ultimately mandatory GHG mitigation measures should cover the economy as a whole, equitably spreading responsibility among large emitters, the transportation sector, and households. For large stationary sources, the submission of allowances would best be required “downstream” at the point of emission, rather than “upstream.” For the transportation sector, the Center recommends an approach that would cover vehicle manufacturers through use of tradable vehicle GHG emission standards.
2. Allowance Allocation: To assist with the transition to GHG regulation, a high percentage of allowances (e.g., 90% - 95%) should be allocated at no cost, rather than auctioned, at least in the initial years of a cap-and-trade system. A small initial auction can provide funds for transition assistance and technology deployment. Over time, the amount auctioned could increase. In providing federal funding for technology development, a competitive process, such as a “reverse auction,” allocating funding on the basis of emission reduction potential, can minimize costs. In the early years of the program, the highest priorities for allocation should be transition assistance and technology development; over time the priorities should shift toward rewarding low-emitting technologies and practices. Offsets are critical for minimizing program costs. Use of offsets to meet allowance submission requirements should not be restricted, as long as the offsets meet reasonable standards for real, verifiable emission reductions. Early action credit is important and could be provided by allowing emitters who document emission reductions earlier than the default baseline year to use an earlier baseline, resulting in a higher allowance allocation.
3. Linkage: A U.S. GHG program should be integrated with systems around the world. This is both environmentally and economically important. Linkage will minimize costs while expanding GHG mitigation and technology transfer opportunities. Use of a low safety valve will greatly complicate such linkage and minimize the incentive for technology transfer and innovation.
4. Encouraging Comparable Action: Different policies are needed to address two distinct but related objectives: (1) achieving adequate action by all major emitting countries, and (2) protecting U.S. firms in energy-intensive industries whose goods are traded internationally against competitiveness impacts. The first is best achieved through multilateral commitments; the second through overall cost containment and targeted support for the vulnerable sectors.
Cost Containment: A “safety valve” is just one cost containment method. Costs to regulated entities can also be minimized through offsets, allocation, linkage, etc.
Climate Science: The evidence of globally-distributed climate change impacts is mounting.
Download Sections of Our Response (all pdf)
Question 1: Point of Regulation
Question 2: Allowance Allocation
Question 3: Linkage
Question 4: Encouraging Comparable Action
Additional Topics: Cost Containment & Climate Science
Additional Topics: Cost Containment Chart
Agenda for Climate Action
Prepared by the Pew Center on Global Climate Change
Download report (pdf)
Eileen Claussen, President, Pew Center on Global Climate Change
Over the past seven years, the Pew Center has published more than 60 reports on the science, economics, solutions, and policy options related to global climate change. Over that time, the scientific consensus on this issue has only strengthened, but there is, as yet, no consensus on the appropriate portfolio of policies that are required to address global climate change successfully. This Agenda for Climate Action is C2ES’s attempt to fill that gap. It takes a comprehensive look at a suite of climate, energy, and technology policies that could provide meaningful reductions in greenhouse gas emissions throughout the economy.
This report finds six areas in which the U.S. must take action: (I) science and technology research, (II) market-based emissions management, (III) emissions reductions in key sectors, (IV) energy production and use, (V) adaptation, and (VI) international engagement. In the areas of science and technology research, we call for increased stable funding for both, along with innovative approaches to distribute funds efficiently. We propose a mandatory GHG reporting system, which can form the basis for tracking voluntary reductions, accompanied by a large-source, economy-wide cap-and-trade program for greenhouse gases. This combination of technology investment and market development will provide for the most cost-effective reductions in greenhouse gases, as well as create a market for GHG-reducing technologies.
While these broader efforts are critical, sector-specific actions are also needed. To address emissions from the transportation sector, we propose converting the struggling Corporate Average Fuel Economy (CAFE) program into a more ambitious but tradable GHG standard, along with increased support for low-emission vehicles and fuels. For the industrial sector, we encourage greater outreach and incentives for improvements in process efficiency and the manufacture of low-GHG products. In the agriculture sector, biological sequestration programs in Farm Bill legislation must receive proper funding and prioritization. Because energy is at the heart of this issue, we tackle this sector separately, making recommendations for each major energy source. To enable continued use of coal in a climate-friendly manner, we promote aggressive research and development on carbon separation and capture technologies, development of a regulatory framework for geologic sequestration, and advanced generation coal plants. Natural gas is an important transition fuel, and we support the expansion of natural gas transportation infrastructure and production. We propose extending incentives for renewable fuels and electricity generation, an increased focus on biomass, and federal-level support for renewable credit-trading programs. We also support continued use of nuclear power generation, pending resolution of issues such as safety and waste storage. There are vast opportunities for improving efficiency on an economy-wide basis, so we promote improved efficiency in electricity production (through distributed generation, combined heat and power technologies), in electricity transmission (through test beds for an advanced grid), and during energy use (through building codes, product standards, and manufacturing process improvements).
Because none of these efforts will fully prevent all potential effects of climate change (indeed, many impacts are already being observed), we propose the development of a national adaptation strategy and the funding of early warning systems. Last but not least, while the Agenda focuses on domestic actions, it argues for greater participation by the U.S. in international negotiations to engage all major emitters in a global solution.
Despite the specificity of many of the steps included here, there is still much room for ongoing refinement and elaboration of these recommendations. While we have consulted with many stakeholders in the development of this report, we look forward to building upon the suggestions described here through further outreach and consultation.
This report follows the publication of International Climate Efforts Beyond 2012: Report of the Climate Dialogue at Pocantico, an examination of options for advancing the international climate effort post-2012. Taken together, these two documents offer a promising path forward for the U.S. and the world in tackling global climate change.
Climate change is one of the most complex issues that the world will face in this century. Concentrations of greenhouse gases in the atmosphere have already reached levels unprecedented for hundreds of thousands of years, causing changes not only in global temperature, but also in observable impacts throughout the world, and these changes are happening more quickly than expected. The broad consensus of established scientific experts both internationally and domestically is that most of the warming in recent decades can be attributed to human activities. In addition, the rate and severity of these changes will increase without significant steps to reduce greenhouse gas emissions (GHGs). Stabilizing greenhouse gas concentrations will require a fundamental shift in our energy system, but this transition will have other benefits as well, including improved competitiveness, security, air quality, public health, and job creation. This transition will not be easy, but it is crucial to begin now.
This Agenda is the Pew Center's attempt to develop and articulate a responsible course of action for addressing climate change. It identifies fifteen actions that should be started now, including U.S. domestic reductions and engagement in the international negotiation process. It includes both broad and specific policies, combining recommendations on technology development, scientific research, energy supply, economy-wide markets, and adaptation with critical steps that can be taken in key sectors. While reductions across sectors and sources of emissions are key, these steps are not likely to happen simultaneously, nor without costs. However, these recommendations have been designed to be both cost-effective and comprehensive.
Invest in science and technology research.
1. Ensure a robust research program though the Climate Change Science Program.
2. Offer long-term, stable funds—in the form of a reverse auction—to GHG-related technology research and development.
Establish mandatory limits on greenhouse gas emissions and harness market mechanisms for economy-wide reductions.
3. Create a mandatory GHG reporting system as a basis for an economy-wide emissions trading program.
4. Implement a large-source, economy-wide cap-and-trade program for greenhouse gases.
Stimulate innovation across key economic sectors.
5. Transportation: Convert the Corporate Average Fuel Economy (CAFE) program into strengthened, tradable corporate average emissions standards. Support biofuels, hydrogen, and other low-GHG fuel alternatives.
6. Manufacturing: Provide outreach and incentives to manufacturers for improvements in industrial efficiency and low-GHG technologies, and support the production of low-GHG products.
7. Agriculture: Raise the priority and funding levels for Farm Bill programs and other federal initiatives on carbon sequestration.
Drive the energy system toward greater efficiency, lower-carbon fuels and carbon capture technologies.
8. Coal and Carbon Sequestration: Provide funding for tests of geologic carbon sequestration and for research, development and demonstration (RD&D) projects on separation and capture technologies, in combination with advanced generation coal plants. Establish an appropriate regulatory framework for carbon storage.
9. Natural Gas: Expand natural gas transportation infrastructure and production.
10. Renewables: Significantly “ramp up” renewables for electricity and fuels, including an extension and expansion of the production tax credit, a uniform system for tracking renewable energy credits, and increased emphasis on biomass.
11. Nuclear Power: Provide opportunities for nuclear power to play a continuing role in a future low-carbon electricity sector.
12. Efficient Energy Production and Distribution: Support the development and use of combined heat and power installations, distributed generation technologies, and test beds for an upgraded electricity grid.
13. Efficient Energy Usage: Reduce energy consumption through policies that spur efficiency, including appliance and equipment standards, building R&D and codes, and consumer education.
Begin now to adapt to the inevitable consequences of climate change.
14. Develop a national adaptation strategy through the Climate Change Science Program and Climate Change Technology Program, and fund development of early-warning systems for related threats.
Engage in negotiations to strengthen the international climate effort.
15. Review options for a new or modified agreement to ensure fair and timely action by all major emitting countries, and participate in negotiations to establish binding climate commitments consistent with domestic interests.
These fifteen recommendations are not the only means of achieving a lower-carbon future, but taken together, they would chart a climate-friendly path for the U.S.. Putting the Agenda into practice will take political will and policy action. All recommendations require government leadership, private sector commitment and time. Nonetheless, the details of specific recommendations in this Agenda are less critical than the compelling need to get started. Further delay will only make the challenge before us more daunting and costly.
Agenda for Climate Action
February 8, 2006
National Press Club, Washington, DC
Remarks made by business representatives at the release:
Group Climate Change Adviser
Shell International Limited (pdf)
Director for Federal, Governmental and Regulatory Relations
PG&E Corporation (pdf)
Western Hemisphere Health, Safety, Security, and Environment Director
Vice President of Federal Affairs and Environmental Safety
Vice President, Environmental Health and Safety
Holcim (US) Inc. (pdf)
Vice President, Government Relations
Whirlpool Corporation (pdf)
Supporting statements: Agenda for Climate Action
The Pew Agenda is an example of the kind of big picture, integrated thinking that is needed to tackle the climate issue. We're pleased that the Agenda makes the point that climate solutions should be market based while covering all parts of the economy and resolving regulatory uncertainty. These are all vital as the utility industry prepares to build the next generation of power plants needed by our growing economy.
James E. Rogers, Chairman, President, and Chief Executive Officer
The changes needed in our energy infrastructure to meet future demand and respond to climate change will not happen by chance - a clear, long term framework will give business the necessary incentive and confidence to invest further.
John D. Hofmeister, President and US Country Chair
Shell Oil Company
Holcim is pleased with the leadership that the Pew Center has taken with regard to greenhouse gas reduction policies and the depth of research that comprises the foundation of this report. Importantly, the Pew Center recognizes the necessity of market-based solutions and that various sector needs must be taken into consideration if we are to have consensus in what must be done to contain and ultimately reduce the generation of greenhouse gases.
Patrick Dolberg, President & Chief Executive Officer
Holcim (US) Inc.
Through its association with the Pew Center, Alcan has identified another avenue through which to actively address climate change and its effects on the long-term sustainability of the Company. This report sends a clear message, calling on all stakeholders to broaden their investment in tackling the economic, social, and environmental issues that climate change presents.”
Daniel Gagnier, Senior Vice President, Corporate and External Affairs
Intel supports Pew's efforts to advance the national discussion on climate change by proposing options that merit careful consideration. Intel agrees that climate change is a serious issue, and has been actively working to mitigate its own climate impact through aggressive programs to reduce energy consumption and emissions of global warming compounds.
Dane Parker, General Manager of Environmental Health and Safety
February 8, 2006
Contact: Katie Mandes, (703) 516-0606
PEW CENTER ON GLOBAL CLIMATE CHANGE RELEASES FIRST COMPREHENSIVE APPROACH TO CLIMATE CHANGE
All Sectors Must Share in Solution
WASHINGTON, D.C. – The Pew Center on Global Climate Change released the first comprehensive plan to reduce greenhouse gas emissions in the United States. The Agenda for Climate Action identifies both broad and specific policies, combining recommendations on economy-wide mandatory emissions cuts, technology development, scientific research, energy supply, and adaptation with critical steps that can be taken in key sectors. The report is the culmination of a two-year effort that articulates a pragmatic course of action across all areas of the economy.
The report calls for a combination of technology and policy and urges action in six key areas: (1) science and technology, (2) market-based programs, (3) sectoral emissions, (4) energy production and use, (5) adaptation, and (6) international engagement. Within these six areas, the Agenda outlines fifteen specific recommendations that should be started now, including U.S. domestic reductions and engagement in the international negotiation process. All the recommendations are capable of implementation in the near-term.
The report concludes that there is no single technology fix, no single policy instrument, and no single sector that can solve this problem on its own. Rather, a combination of technology investment and market development will provide for the most cost-effective reductions in greenhouse gases, and will create a thriving market for GHG-reducing technologies. To address climate change without placing the burden on any one group, the report urges actions throughout the economy.
“Some believe the answer to addressing climate change lies in technology incentives. Others say limiting emissions is the only answer. We need both,” said Eileen Claussen, President of the Pew Center.
Emissions in the United States continue to rise at an alarming rate. U.S. carbon dioxide emissions have grown by more than 18% since 1990, and the Department of Energy now projects that they will increase by another 37% by 2030.
Joining the Pew Center at the announcement were representatives from the energy and manufacturing sectors. Speaking at the release were: David Hone, Group Climate Change Adviser, Shell International Limited; Melissa Lavinson, Director, Federal Environmental Affairs and Corporate Responsibility, PG&E Corporation; Bill Gerwing, Western Hemisphere Health, Safety, Security, and Environment Director, BP; John Stowell, Vice President, Environmental Strategy, Federal Affairs and Sustainability, Cinergy Corp., Ruksana Mirza, Vice President, Environmental Affairs, Holcim (US) Inc.; and Tom Catania, Vice President, Government Relations, Whirlpool Corporation.
While actions are needed across all sectors, some steps will have a more significant, far-reaching impact on emissions than others and must be undertaken as soon as possible.
- A program to cap emissions from large sources and allow for emissions trading will send a signal to curb releases of greenhouse gases while promoting a market for new technologies.
- Transportation is responsible for roughly one-third of our greenhouse gas emissions, and this report addresses this sector through tradable emissions standards for vehicles.
- Because energy is at the core of the climate change problem, the report makes several recommendations in this area: calling for increased efficiency in buildings and products, as well as in electricity generation and distribution. Incentives and a nationwide platform to track and trade renewable energy credits are recommended to support increased renewable power. In recognition of the key role that coal plays in U.S. energy supply, the report calls for the capture and sequestration of carbon that results from burning coal. Nuclear power currently provides a substantial amount of non-emitting electricity, and is therefore important to keep in the generation mix. The report recommends support for advanced generation of nuclear power, while noting that issues such as safety and waste disposal must also be addressed.
- While most of the recommendations focus on mitigation efforts, the report acknowledges that some impacts are inevitable and are already being seen. As a result, it proposes development of a national adaptation strategy to plan for a climate-changing world.
- Finally, despite the importance of efforts by individual countries on this issue, climate change cannot be addressed without engagement of the broader international community. The report recommends that the U.S. participate in international negotiations aimed at curbing global greenhouse gas emissions by all major emitting countries.
Other recommendations include: long-term stable research funding, incentives for low-carbon fuels and consumer products, funding for biological sequestration, expanding the natural gas supply and distribution network, and a mandatory greenhouse gas reporting program that can provide a stepping stone to economy-wide emissions trading.
The full text of this and other Pew Center reports is available at http://www.c2es.org.
The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
In a major address before the UN Security Council on February 6, 2006, Senator Richard G. Lugar (R-Indiana), Chairman of the U.S. Senate Foreign Relations Committee, called for the United States to return to negotiations under the Framework Convention on Climate Change to achieve a comprehensive international approach to global warming. He said a "roadmap to this outcome" is contained in the recent report of the Climate Dialogue at Pocantico convened by the Center.
Excerpt from Senator Lugar's address:
"...[Fossil fuel] dependence also presents huge risks to the global environment. With this in mind, I have urged the Bush Administration and my colleagues in Congress to return to a leadership role on the issue of climate change. I have advocated that the United States must be open to multi-lateral forums that attempt to achieve global solutions to the problem of greenhouse gases. Climate change could bring drought, famine, disease, mass migration, and rising sea levels threatening coasts and economies worldwide, all of which could lead to political conflict and instability. This problem cannot be solved without international cooperation.
The time is ripe for bold action by the international community because much has changed since talks first began in 1992 on what became the Kyoto treaty. For one, China and India, who won exemptions from the treaty’s emission-cutting requirements, have enjoyed rapid growth. They are now much greater sources of greenhouse gases than anticipated, but also far stronger economies, more integrated into the global system.
Our scientific understanding of climate change has also advanced significantly. We have better computer models, more measurements and more evidence -- from the shrinking polar caps to expanding tropical disease zones for plants and humans -- that the problem is real and is caused by man-made emissions of greenhouse gases, including carbon dioxide from fossil fuels.
Most importantly, thanks to new technology, we can control many greenhouse gases with proactive, pro-growth solutions, not just draconian limitations on economic activity. Industry and government alike recognize that progress on climate change can go hand in hand with progress on energy security, air pollution, and technology development.
A roadmap to this outcome is contained in a recent report from the Center, a non-partisan organization, which assembled representatives from China, India and other countries and from global industrial companies, as well as from the U.S. Senate Foreign Relations Committee staff. This diverse group agreed on the need for fresh approaches beyond Kyoto. They said the U.S. must engage all the major economies at once, including India and China, because experience has shown that countries will not move unless they can be sure their counterparts are moving with them.
The United States, the world’s richest country and the largest emitter of greenhouse gases, should seize this moment to make a new beginning by returning to international negotiations in a leadership role under the Framework Convention on Climate Change. I believe that the United States is prepared to do that. Our friends and allies should embrace this opportunity to achieve a comprehensive international approach to global warming...."
Full text of Senator Lugar's address to the Security Council
More on the report of the Climate Dialogue at Pocantico
Additional resources on international climate policy, including text of the Sense of the Senate resolution, S. Res. 312 (pdf), proposed by Senator Lugar with Senator Joseph R. Biden, Jr. (D-Delaware), calling for U.S. participation in international negotiations under the Framework Convention on Climate Change
As of August 2014, 221 bills focusing specifically on climate change had been introduced in the 113th Congress (2013-2014). Many more bills touch on energy, environment, transportation, agriculture and other areas that could have an impact on or be affected by climate change. The list below, however, contains for the most part only those bills whose authors explicitly reference climate change or related terms, such as greenhouse gases (GHG) or carbon dioxide. (For brevity, all legislative proposals, including resolutions and amendments, are referred to here as "bills.") The list includes 134 bills that are intended to advance climate action, as well as 87 bills that would hinder climate action, 56 of which would curb EPA’s ability to regulate greenhouse gas emissions from power plants.
Though they do not specifically mention climate change, this list also includes those bills dealing with the impact of Hurricane Sandy that have been signed into law. The list also includes Public Law 113-89, which reverses many of the provisions of the Flood Insurance Reform Act of 2012, and was enacted into law despite being opposed by climate action and taxpayer advocates.
In addition, the list includes the Shaheen-Portman and McKinley-Welch energy efficiency bills. Shaheen-Portman enjoyed bipartisan support and had been considered the best prospect for enactment among energy bills in this Congress. In May 2014, however, the bill fell five votes short of the 60 needed to bring the bill to a final vote in the Senate – a casualty of disagreements over whether to consider the approval of the Keystone XL pipeline and prohibition of EPA’s carbon dioxide regulations as amendments to the energy efficiency bill.
The bills, resolutions, and amendments of the 113th Congress dealing with climate change are divided into the following categories:
- Climate Change Adaptation
- Clean Energy
- Energy Efficiency
- Natural Gas
- Other Greenhouse Gases
- Other Climate Action
- Renewable Fuel Standard
- Pricing Carbon
- Carbon Capture and Storage or Enhanced Oil Recovery
- Elimination of Tax Credit for Carbon Capture and Storage
- Keystone XL
- Curbing Climate Action
- National Flood Insurance Program
Two proposals for mandatory programs on greenhouse gases have recently been discussed in the Senate. Their targets and likely effects are discussed here along with projections for the Kyoto Protocol and the existing Bush Administration Climate Change Plan, two commonly discussed alternative approaches. Senator Bingaman has offered a proposal based on recommendations made by the National Commission on Energy Policy. (See Summary of Bingaman Climate and Economy Insurance Act of 2005.) Senators McCain and Lieberman reintroduced a modified version of their Climate Stewardship Act. (See Summary of McCain-Lieberman Climate Stewardship and Innovation Act of 2005.) A cornerstone of both proposals is an economy-wide tradeable permits system, which imposes mandatory targets for large emitters and a market based system for meeting those targets. Such a system was used by the Clean Air Act to deal with acid rain, and is central to the Kyoto Protocol. It is, however, not part of President Bush’s Climate Initiative, which relies on voluntary action and nonbinding targets.
Senator Bingaman’s proposal differs from previous proposals that sought to impose mandatory targets in two distinct areas. First, absolute emission reduction targets are set based on emissions intensity – emissions per million dollars of GDP. Initially the goal is to reduce emissions intensity by 2.4% per year until 2019, after which the target becomes more stringent and increases to 2.8%. Despite this reduction in intensity, absolute emissions would actually grow. The Climate Initiative proposed by President Bush also set an intensity target but did not translate this target into an absolute level of mandatory reductions. (See Analysis of President Bush's Climate Change Plan.) The McCain-Lieberman proposal, in contrast, has sought to stabilize emissions at a specific level – as such it requires a greater scale of reduction as our economy continues to grow. The second significantly different element in the Bingaman proposal is a “safety value”, or price cap on the cost of greenhouse gas permits. A cost (or price) cap ensures that large emitters with targets will not have to pay more than some specified price for permits. Bingaman’s proposal sets the price cap at $7/TCO2 initially but increases this cap by 5% nominally each year (assuming a 2% rate of inflation, this implies that the price would only rise by 3% in real terms). As a point of reference, permits in the European greenhouse gas market have been trading during the summer of 2005 for over $25 USD/TCO2. A price cap gives emitters with targets some assurance about the cost of compliance but like a tax, does not ensure any specific level of reduction will occur. The EIA projects that allowance prices would reach the safety valve by 2016, causing emissions to exceed the cap after this time.
Balancing the cost of a new policy while ensuring that sufficient reductions occur to address the issue is crucial for the selection of the appropriate climate policy approach for the U.S.. The various climate policy proposals that have come forward to date have a wide range in cost, but also considerable differences in the resulting emissions reductions. The following table compares and contrasts the significant elements of current proposals that include targets - the Climate and Economy Insurance Act (proposed by Bingaman), the Climate Stewardship and Innovation Act (proposed by McCain and Lieberman), the Bush Climate Initiative, and the Kyoto Protocol. More detailed descriptions of these proposals as well as economic modeling cost projections are available on our website.
Climate Policy Proposal Comparison
Program Element/Result [i]
Bingaman Proposal [ii]
Climate Stewardship and Innovation Act
Climate Initiative Bush Administration[v]
Mandatory / Voluntary
Absolute based on 2.4% intensity improvement 2010-2018, after 2019 target increases stringency to 2.8%
Absolute emissions 2000 emissions level after 2010
7% below 1990 levels by 2012
Intensity target goal 18% reduction by 2012
Offsetting Emissions Allowed for Compliance
Not to exceed 3%
not to exceed 15% of allowance allocation
no limits specified through Kyoto, though implementing countries have discretion
Yes - $7
(12% above 2010 levels in 2020)
(12% above 2000 levels by 2012)
EIA Estimated Emissions Reductions 2025
EIA Estimated Permit Price 2025 ($/TCO2)[x]
EIA Estimated Impact on real GDP
($135 billion in 2020)
[i] This table compares EIA’s analysis of only the greenhouse gas-trading program contained in each policy options. It does not include other policy elements, like technology incentives, that may be contained in each proposal
[ii] As modeled by EIA in Impacts of Modeled Recommendations of the National Commission on Energy Policy, April 2005, for the Cap and Trade component of the NCEP proposal.
[iii] Because the bill does not change the significant provisions related to carbon limits, this review summarizes the analysis of the previous McCain-Lieberman proposal as voted on in the U.S. Senate on October 30, 2003, Amendment 2028: The Climate Stewardship Act of 2000. A summary of the bill is available at http://wwww.c2es.org/federal/analysis/congress/108/summary-lieberman-mccain-climate-stewardship-act-2003. Results are from EIA’s (2004), assessment of http://www.eia.doe.gov/oiaf/analysispaper/sacsa/pdf/s139amend_analysis.
[iv] Described and analyzed by EIA (1998), Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, Report SR/OIAF/98-03, available at http://www.eia.doe.gov/oiaf/kyoto/pdf/sroiaf9803.pdf. Reduction and price estimates are taken from the “1990-3%” scenario and are based on an auction approach for GHG permits with revenue recycling through tax policy.
[v] As announced on February 14, 2004, available at www.whitehouse.gov/news/releases/2002/02/climatechange.html
[vi] The Bingaman (NCEP) proposal calculates the target level of reductions in terms of emissions intensity based on expected future GDP growth; this target, however, is translated into an absolute emission target but because it is based on a growing economy the target grows over time. Should GDP differ from the forecasted level, the target is not affected. Utilization of the safety valve, in addition, will result in emissions above the target level of emissions reductions.
[vii] Assuming that the U.S. could meet some of its target through the use of biological sinks, the numbers represented here are those associated with EIA’s modeling of 3% below 1990 emission levels.
[viii] Estimated emission reductions have been adjusted to reflect a consistent baseline using EIA’s AEO2005 baseline assumptions. Adjustments are based on predicted percentage change applied to AEO2005 baseline levels. For example, EIA analysis suggested that McCain Lieberman reductions in 2025 would be 7,997 (-22%) million metric tonnes carbon dioxide equivalent (MMTCO2e) below their AEO2003 base case level of emissions. Utilizing the lower AEO2005 emissions baseline and assuming that a reduction of 22% implies emissions are reduced by approximately 2,180 MMTCO2e.
[ix] To convert from MTCO2 to MTC divide by 3.67.
[x] All dollars converted to $2004 constant dollars utilizing CPI.
[xi]The safety-valve permit price rises from $6.26 per metric ton in 2010 to 8.73 in 2025 (in 2004 dollars).
[xiii] Table 29 Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, Report SR/OIAF/98-03. Assuming revenue recycled through an income tax rebate.
H.R.6 E.N.R.: The Energy Policy Act of 2005, as enacted (also referred to as Public Law 109-190) is intended primarily to increase the supply of energy, largely by providing subsidies, but also by setting standards that would increase the use of certain types of energy and energy-saving technologies. The energy sources and technologies promoted by the law include some that are climate-friendly and some whose use will result in large emissions of carbon dioxide (CO2). Among the provisions of the law specifically mentioning greenhouse gases (GHGs) are those that promote the deployment of GHG-intensity-reducing technologies, both domestically and in developing countries; authorize programs to promote the development and deployment of technologies that would capture and sequester CO2 emissions; and commission a National Academy of Sciences study of fuel cell technologies. Among the provisions that do not specifically mention GHGs, but would nevertheless promote climate-friendly technologies and activities are provisions that:
- Establish a national biofuel standard mostly in the form of ethanol for gasoline. This will increase the biofuels from 4 billion gallons per year in 2006 to 7.5 billion gallons per year in 2012.
- Increase the requirement for the purchase of renewable power by the federal government to 3% in 2007 and 7.5% in 2013.
- Establish new efficiency standards for 15 new commercial and residential products.
- Extend, through the end of 2007, the renewable electricity production credit of 1.9¢ per kWh during the first ten years of operation.
- Create a new tax credit for residential investments in solar power and fuel cell systems of 30% at an estimated $31 million.
- Increase the credit for commercial solar installations from 10% to 30% for two years at an estimated $222 million.
- Provide for investment tax credits for improving residential energy efficiency at an estimated $556 million.
- Allow for deductions for commercial buildings that cut their energy consumption by 50% for an estimated $243 million.
- Provide credits to manufacturers of energy efficient appliances ($180 million) and for building contractors that meet certain efficiency standards ($28 million).
- Offer tax incentives for the purchase of alternative fuel vehicles beginning in 2006 for an estimated cost of $874 million.
- Provide a 30% credit to alternative refueling installations at both residential and commercial properties.
- Authorize a $200 million annual clean coal initiative to go primarily towards coal gasification projects.
- Create three new investment tax credits for clean coal facilities with an expenditure cap of $1.612 billion. (20% for industrial gasification projects, 20% for IGCC, 15% for other electricity producing projects)
- Authorize a $1.25 billion fund for the Next Generation Nuclear Plant at Idaho National Laboratory to produce both electricity and/or hydrogen.
- Provide a tax credit of 1.8¢ per kWh for new nuclear power facilities during their first eight years of operation.
- Provide financial support for to up to six new nuclear power reactors in case of unforeseen construction delays.
Action: 8/8/05: Signed into law as Public Law 109-190.
The Climate Stewardship and Innovation Act of 2005 (S.1151) introduced by Senators John McCain (R-AZ) and Joseph I. Lieberman (D-CT), would limit, from 2010 on, the total greenhouse gases (GHG) emitted by the U.S. electricity generation, transportation, industrial, and commercial sectors to the amount emitted in 2000. The affected sectors represented approximately 85% of the overall U.S. emissions in the year 2000. The bill also would provide for the trading of GHG emission allowances and reductions.
Target: The bill would cap the 2010 aggregate emissions level for the covered sectors at the 2000 level. The bill's emissions limits would not apply to the direct emissions of the agricultural and the residential sectors. Certain subsectors would be exempt if U.S. Environmental Protection Agency (EPA) determined that it was not feasible to measure their GHG emissions. The U.S. Department of Commerce would biennially re-evaluate the level of allowances to determine whether it was consistent with the objective of the United Nation’s Framework Convention on Climate Change of stabilizing GHG emissions at a level that will prevent dangerous anthropogenic interference with the climate system.
Allowances: An entity that was in a covered sector, or that produced or imported synthetic GHGs, would be subject to the requirements of this bill if it (a) owned at least one facility that annually emitted more than 10,000 metric tons of GHGs (measured in units of carbon dioxide equivalents – MTCO2E); (b) produced or imported petroleum products used for transportation that, when combusted, would emit more than 10,000 MTCO2E; or (c) produced or imported HFC, PFC and SF6 that, when used, would emit more than 10,000 MTCO2E. Each covered entity would be required to submit to the EPA one tradeable allowance for each MTCO2E directly emitted. Each petroleum refiner or importer would be required to submit an allowance for each unit of petroleum product sold that, when combusted, would emit one MTCO2E. Each producer or importer of HFC, PFC, and SF6 would be required to submit an allowance for each unit sold that, when used, would emit one MTCO2E. The EPA would determine the method of calculating the amount of GHG emissions associated with combustion of petroleum products and use of HFC, PFC, and SF6.
Allocation of Allowances: The Commerce Department would determine the amount of allowances to be given away or "grandfathered" to covered entities and the amount to be given to the Climate Change Credit Corporation established by the bill. The Commerce Department's determination would be subject to a number of allocation factors identified in the bill. The Corporation would use proceeds from the sale of allowances to reduce energy costs of consumers, assist disproportionately affected workers, help low income communities and individuals, disseminate technological solutions to climate change, and aid fish and wildlife in adapting and mitigating the impacts of climate change.
Flexibility Mechanisms: Covered entities would have flexibility in acquiring their allowances. In addition to the allowances grandfathered to them, covered entities could trade with other covered entities to acquire additional allowances, if necessary. Also, any entity would be allowed to satisfy up to 15% of its total allowance requirements by submitting (a) tradeable allowances from another nation's market in GHGs; (b) a net increase in sequestration registered with the National Greenhouse Gas Database established by the bill; (c) a GHG emission reduction by a non-covered entity registered with the Database; and (d) allowances borrowed against future reductions (as described below). A covered entity that agreed to emit no more than its 1990 levels by 2010 would be allowed meet up to 20% of its requirement through (a) international credits, (b) sequestration, and (c) registered reductions, but not (d) borrowed credits. An entity planning to make capital investments or deploy technologies within the next 5 years would be allowed to borrow against the expected GHG emission reductions to meet current year requirements. The loan would include a 10 percent interest rate.
National Greenhouse Gas Database: The EPA Administrator would be required to implement a comprehensive system for GHG reporting, inventorying, and reductions registrations. Covered entities would be required to report their GHG emissions and non-covered entities would be allowed to register GHG emission reductions and sequestration. The National Greenhouse Gas Database would be, to the maximum extent possible, complete, transparent, accurate, and designed to minimize costs incurred by entities in measuring and reporting emissions. The Commerce Department, within one year of enactment, would be required to establish, by rule, measurement and verification standards and standards to ensure a consistent and accurate record of GHG emissions, emissions reductions, sequestration, and atmospheric concentrations for use in the registry.
Penalty: Any covered entity not meeting its emissions limits would be fined for each ton of GHGs over the limit at the rate of three times the market value of a ton of GHG.
Research: The bill would establish a scholarship program at the National Science Foundation for students studying climate change. The bill would also require the Commerce Department to report on technology transfer and on the impact of the Kyoto Protocol on the U.S. industrial competitiveness and international scientific cooperation.
The bill also would make changes to the U.S. Global Change Research Program, establish an abrupt climate change research program at the Commerce Department, and establish a program at the National Institute of Standards and Technology in the areas of standards and measurement technologies.
Innovation: The bill would rename the Technology Administration, within the Commerce Department, the Innovation Administration. The responsibilities of the Commerce Department would be expanded to include the development of climate change innovation policies. The bill would establish a variety of programs and studies focused on fostering climate change innovation ranging from grade school education and university programs to technology transfer and patents.
The bill would establish additional research and demonstration programs for cleaner transportation, retooling of vehicle manufactures for advanced low-GHG-emitting vehicles, energy efficiency, and managing and monitoring agricultural and geological sequestration, among other concerns.
Technology: Revenues generated from the sale of allowances granted to the Climate Change Credit Corporation (see above) would be used to promote three different aspects of technology innovation and deployment: (1) first-of-a-kind engineering, (2) construction of the first generation of facilities that use substantially new technology, and (3) the marketing and procurement of low/no-GHG-emitting power or low-GHG-producing products. Projects for first-of-a-kind engineering and construction support would be selected according to the extent to which they reduce greenhouse gas emissions, are a substantially new technology, and attain cost effectiveness and economic competitiveness, among other criteria. The construction loan program for new facilities that meet the criteria would include at most three advanced coal power-generating facilities that combine Integrated Gasification Combined Cycle (IGCC) and carbon capture technologies with geological storage of greenhouse gases; three nuclear reactors (one of each new certified design); three large-scale biofuels facilities that maximize cellulosic biomass use; and three large-scale solar power facilities, and would be open to other unspecified technologies meeting the environmental and economic criteria.
Funding provided for first-of-a-kind engineering would be reimbursed to the Climate Change Credit Corporation by facilities that made subsequent use of the engineering and design supported by this program. Financial support for construction would be in the form of secured loans or loan guarantees that would be paid back to the Corporation. The reimbursed funds could be placed in a revolving fund to continue these programs as long as the Corporation deemed appropriate. Support for the marketing and procurement of low/no-emitting end products would be funded directly from the proceeds earned by auctioning 50% of the Corporation’s allowances. This program would be designed to evolve as innovation and technology moved forward.
For more information, see our Comparison of Climate Policy Proposals.