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Assessment of EIA Analysis of the Climate Stewardship Act

See Summary for a quick overview of the EIA analysis.

Introduction

On July 3, 2003 the Energy Information Administration (EIA) of the U.S. Department of Energy released its economic analysis of Senate Bill 139: the Climate Stewardship Act of 2003. This bill was introduced by Senators John McCain and Joseph Lieberman on January 9, 2003. S.139 represents the first economy-wide “cap-and-trade” bill that reduces greenhouse gas (GHG) emissions primarily through limiting the amount of emissions from key economic sectors and providing flexibility in obtaining GHG reductions through emissions trading and sequestration (or storage) of carbon. The program would apply to greenhouse gas emissions from major sectors – electric utilities, transportation, and industry-- covering roughly 80% of U.S. emissions.

This analysis discusses key features of EIA’s National Energy Modeling System (NEMS) model and relevant assumptions used by EIA in analyzing the costs of S.139. Modeling an economy-wide greenhouse gas trading program presents real challenges. Model results can provide important insights regarding policy design features and their implications for costs but should not be viewed as definitive predictions of future costs. Historically, advance projections of costs of many environmental programs – particularly market-based programs such as the SO2 acid rain trading program – have been much higher than the actual costs of implemented programs. Consumers of any modeling results should understand how model structure, inputs, and assumptions drive the results – which in this case focus only on the costs, but not the benefits, of climate change policy. (For more information on key drivers of cost estimates in modeling, see An Introduction to the Economics of Climate Change Policy.

EIA’s analysis of S.139 using its (NEMS) model is just one of a number of efforts by a range of organizations to model S.139. In addition to the EIA analysis, both MIT and NRDC have released their own review of the potential costs of S.139, and these results are compared with EIA’s below. In addition, the Center is working with Dr. Dale Jorgenson of Harvard University and his colleagues to evaluate possible costs of the bill.

The Center's Director of Policy Analysis, Vicki Arroyo, served as a peer reviewer on the EIA effort. She and other reviewers provided input to EIA, and while some of those comments have been reflected in their analysis (e.g., deleting a side case with zero offsets and including one with a higher limit on offsets), many were not addressed. The discussion below reflects comments submitted during the review process and notes how the cumulative effect of many factors – both structural features of NEMS and assumed inputs – serves to drive the projected costs higher than what they are likely to be.

Characterization of the EIA NEMS Model

As a macro-energy model, NEMS is a useful tool to analyze an economy-wide greenhouse gas trading program. Macro-energy models solve for the most promising solutions to achieving reductions in greenhouse gas emissions, and program costs are calculated from the economy-wide impacts of higher fossil fuel prices, altered productivity, and changing competitive advantages of firms and sectors. However, the trade-off is that macro-energy models lose detail on new technologies, characteristics of individual sectors and opportunities for energy efficiency. As a result, they often miss available opportunities to minimize program costs.

EIA’s NEMS model is considered a conservative macro-energy model and has often produced cost projections in the top quarter of modeling comparisons (for example, in the Energy Modeling Forum’s modeling comparison of the U.S. and the Kyoto Protocol). 1 Some NEMS features yielding higher projected costs are listed below.

Substitution by Firms and Consumers

  • NEMS aggregates all non-energy sectors and thus ignores opportunities for process improvements and substituting energy and material inputs.
  • NEMS assumes a “putty-clay” formation of capital investments; that is, there is complete flexibility before investment in energy capital and no flexibility once that facility has been built. This is important in shorter-term reductions where capital is assumed to be retired rather than retrofitted.
  • NEMS assumes a starting point of full and efficient employment of capital and labor; thus there are no existing low-cost opportunities for energy efficiency.
  • NEMS allows increased use of existing or new energy technologies into the energy mix, however, these opportunities are limited by specific resource and infrastructure constraints. If a technology requires a regulatory change to realize its potential, NEMS will not include it.

Technological Change

  • NEMS only chooses from a predetermined menu of technologies; thus while these technologies may improve with greater market penetration, no new technologies beyond the existing set can be used.

Inclusion of Benefits of Climate Change Policies

  • NEMS does not consider the benefits of policy in terms of avoided climate change impacts.
  • NEMS does not consider ancillary benefits of reducing local air pollution, addressing energy security etc.

Baseline Estimates of Population, GDP, Energy Use and Hence Emissions

  • NEMS projects strong economic growth for the U.S.
  • NEMS projects continued rapid expansion of carbon-intensive sources, especially electricity from coal and petroleum-based transportation.
  • NEMS includes military and bunker (aircraft and shipping) emissions, thus raising the baseline of projected “business-as-usual” (BAU) emissions.
  • NEMS has a pessimistic projection on the available supply (low) and price (high) of North American natural gas; this heavily influences cost projections as natural gas is a major transition fuel to a lower carbon economy.

Policy Regime Considered

  • The discussion of EIA’s assumptions below details the treatment of important variables including the extent of international emissions trading, inclusion of non-CO2 GHGs, use of sequestration, and methods of revenue recycling to lessen impacts on specific user groups or sectors. All of these mechanisms can reduce the cost impacts of reducing greenhouse gas emissions

Key Parameters of McCain-Lieberman S.139

The key characteristics of the S.139 GHG cap-and-trade program are:

  • All six greenhouse gases (GHGs) are covered, including emissions from the electricity, industrial and transportation sectors.
  • Covered entities for the transportation sector are upstream fuel producers/importers, while covered entities in the electricity and industrial sectors are all downstream firms responsible for more than 10,000 tons of carbon equivalent (TCE) per year.
  • Prescribed targets are Phase 1 -- year 2000 emission levels by 2010, and Phase 2 -- year 1990 emission levels by 2016.
  • The assumed “business as usual” or “base case” (without policy) specified in the bill is based on EPA’s U.S. Climate Action Report.
  • Flexibility mechanisms (international emission trading, carbon sequestration and reduction opportunities in non-covered sectors) are permitted for 15% of an entity’s required emissions allowances through 2010, declining to 10% through 2016.

    For international emission trading, the bill specifies that only pre-certified programs (e.g., the EU emissions trading scheme) can sell permits to the U.S.
  • Early action credits – firms that pursue early emissions reductions can use flexibility mechanisms to meet 20% of required reductions through 2016.
  • Banking of credits is permitted, allowing for early over-compliance to generate credits for use later in the program
  • Method of permit allocation is unspecified in the bill.
  • While the bill allows for revenue recycling via a Climate Change Credit Corporation, the methodology and amount is unspecified.

Reference Case

The first driver of the costs of reductions is the assumed “business as usual” or “base” case – that is, what emissions would have been in the absence of S.139.

The base case in NEMS assumes strong economic growth (3% per year, despite continuing economic uncertainty), and a continued reliance on fossil fuels with high carbon emissions. In particular, a significant increase of coal for electricity production is forecast, with generation from coal predicted to rise by 32% by 2025 relative to year 2000. In addition, continued expansion of transportation is expected, with petroleum consumption rising by 46% by 2025 relative to year 2000. Additional emissions increases are expected in the industrial, commercial and residential sectors. Despite these high baselines, electricity and fuel prices remain low in the base case, further exaggerating the relative impact of S.139 when costs are imposed.

The future supply -- and hence price -- of natural gas is a crucial component of the costs of controlling GHGs since natural gas is expected to be the primary transition fuel to a lower carbon economy. EIA assumes a tight supply under increased demand for natural gas in their 2003 Annual Energy Outlook, yet in its analysis of S.139, these estimates have been revised to be even higher based on the short-term indications from EIA’s recent Monthly Energy Reviews. This assumption represents a very pessimistic long-term assessment of North American natural gas resources, especially regarding the price level at which new “back-stop” natural gas resources would become available – e.g., from Northern Canada and Alaska, deep water in the Gulf of Mexico, and unconventional gas resources.

In addition, no new policy measures -- including those aimed at reducing local air pollution, improving energy security, developing new technology, promoting hydrogen, or liberalizing the electricity market -- are included in EIA’s analysis. Enactment of these complementary policies is likely to reduce the costs of controlling greenhouse gas emissions over the time period studied (to 2025).

EIA’s Primary Analysis of S.139

In EIA’s primary analysis run of S.139, a number of additional input assumptions drive up the costs of controlling GHGs under this bill. These can be divided into two main categories:

Input data and use of flexibility mechanisms for lower cost reductions:

  • A conservative assessment of available international emissions trading, due to the bill’s requirement only to trade with certified programs, hence excluding bilateral CDM opportunities.
  • High discounting of international and sequestration offsets.
  • Pessimistic assumptions of early action by firms, and hence very limited use of the increased 20% allowance for flexibility mechanisms (the equivalent assumption being employed is that only 1/5th of firms take early action).
  • Lack of inclusion of certain non-CO2 GHGs, especially methane from natural gas systems and smaller landfills.
  • Lack of inclusion of CO2 emissions from non-energy sources.
  • Use of EIA’s CO2 emissions from fossil fuel combustion rather than EPA’s estimates (as specified in S.139), resulting in a greater required reduction to meet target levels.

Technology penetration and energy efficiency opportunities:

  • Lack of foresight in the residential and commercial sectors despite publicity surrounding GHG reduction policies that would accompany debate over and passage of S.139.
  • Limited and constrained use of key technologies that require institutional and regulatory changes, especially combined heat and power (CHP), distributed generation (DG), buildings integrated photo-voltaics (BIPV), and wind.
  • Lack of consideration of efficiency step changes (e.g., widespread penetration of hybrid vehicles) in the transportation sector, and resulting small improvements in efficiency despite a large price signal (for example, an average efficiency increase of only 1.3 mpg is projected by 2025, to only 21.8 mpg).
  • Projected low level of energy efficiency improvements of products in the commercial and residential sectors resulting from the program. This lack of significant efficiency improvement is despite a significant price signal and is not well-supported by this analysis.
  • These factors combine to give extremely low levels of end-use energy efficiency in all sectors despite a significant and sustained price signal.

As a result of the above assumptions, the majority of emission reductions in this analysis come from anticipated fuel switching in the electricity sector. This leads to higher prices, premature reduction of existing energy equipment, and hence higher costs of the bill.

EIA Sensitivity Analyses of S.139

The report details a number of sensitivity cases in addition to the primary case. Many of these cases were specified by the Senators directing EIA to undertake the analysis. In some cases undertaken by EIA, the specified cases diverged from the recommendations of the reviewers.

  • A further tightening of natural gas supply resulting in even higher costs, despite the reference case already having higher natural gas prices than EIA’s AEO 2003. Given the huge uncertainties over longer term natural gas supply, a lower natural gas price case should have been included.
  • Prohibiting inclusion of both geological sequestration and advanced nuclear technologies. While both technologies are permitted under the bill itself, EIA was directed to exclude both options. Combined with tight natural gas supply and other technology restrictions, this assumption serves to dramatically drive up projected costs.
  • Zero banking of credits despite its availability under the bill and experience of cost reductions from banking under the SO2 acid rain program.
  • While EIA did include a high technology case, it only considers improvements in consumer products and electricity technologies, but does not cover advances in the natural gas production and distribution industries nor does it include a range of potentially significant new technologies (e.g., IGCC with sequestration). In addition, the improved technologies are also assumed to be available in a high tech reference case rather than be induced by the climate policy. One would expect additional technological change to be induced given the sustained price signals that EIA calculates for this bill.
  • Finally, the sensitivity case on increased use of offsets or flexibility mechanisms (e.g., participation of non-covered sectors, international trading, and sequestration) is very illustrative. Increasing the allowable offsets to 50% of required reductions shows the significant cost reductions from allowing greater flexibility in meeting the target. ($64/tC [$17/tCO2] and $174/tC [$47/tCO2] if 50% flexibility is allowed in years 2010 and 2025 vs. $79/tC [$22/tCO2] and $221/tC [$60/tCO2] under the bill’s current caps).
  • However, in the additional sensitivity case with international trading prices assumed to be halved, the bill’s cap on offsets results in most offset reductions coming from domestic non-CO2 and sequestration sources.

Discussion of Results

The cost projections generated by the EIA analysis reflect the input assumptions and model structure of NEMS, and hence are higher than costs are likely to be under the bill as proposed.

Impacts on GDP are reported at a loss of 0.4% by 2025. EIA also reports a higher loss in “real GDP” (down to 0.7% in 2015 before converging with “potential GDP” at 0.4% loss by 2025). This reflects EIA’s assumptions regarding imperfect responses in interest rates and other macro-economic variables. However, this compounded loss in GDP represents only a very small change in annual economic growth rates. The S.139 program would only reduce annual GDP growth in 2001-2025 from 3.04% to 3.02%. That is, rather than growing at 3.04% through 2025, curtailing greenhouse gases under this legislation will result in the economy growing slightly less – at 3.02%. As EIA notes in the Executive Summary, “…other factors that drive the U.S. economy, such as labor force and productivity growth are likely to play a larger role than decisions regarding the enactment of S. 139 in determining the size of the U.S. economy in 2025.”

Specific sectoral impacts are projected to be more pronounced, reflecting the presumed high baseline. The restrictions on natural gas supply, the low level of energy efficiency improvements in the face of sustained price signals (especially in transportation), and low penetration of key technologies that require institutional and regulatory changes for full market penetration, mean that the overwhelming reductions come from fuel and technology switching in the electricity supply industry. As a result, the energy price increases are expected to be significant: e.g., by 2025 prices are projected to increase 27% for petroleum, 46% for natural gas (above an already high base gas price), 475% for coal (because coal is currently very cheap and has more carbon content), and 46% for electricity. In contrast, the MIT analysis of S.139 has far more efficiency improvements, significantly more coal use coupled with carbon sequestration and accelerated penetration of alternative energy supply technologies, including distributed generation and combined heat and power plants. MIT results anticipate a falling price for natural gas under GHG reductions, as higher efficiency and use of alternative fuels weakens demand for natural gas.

Comparison to Other Analyses

Although additional analyses of S.139 are forthcoming, results of EIA’s NEMS runs can be compared with the previously released MIT study (using their EPPA model). As discussed above, a number of different input assumptions in the MIT analysis lead to different principal paths for greenhouse gas reductions, resulting in very different carbon prices and economic impacts. This is illustrated in the table below. Also shown are the results from an analysis for NRDC by the Tellus Institute, which adapts the NEMS model using a more optimistic assessment of opportunities for energy efficiency and the diffusion of lower carbon technologies. In addition, the NRDC analysis includes complementary policies, such as mandatory improvements in vehicle fuel efficiency, controls on local air pollutants and easing of regulatory restrictions that limit combined heat and power technologies.

 EIAMIT

MIT
(phase 1 only)

NRDC
Carbon Price in $/tC [$/tCO2]201079 [22]62 [17]31 [9]29 [8]
2015119 [32]81 [22]40 [11]66 [18]
2020178 [49]103 [28]52 [14]81 [22]
Welfare % cost2010-0.30%-0.07%-0.02%-
2015-0.70%-0.09%-0.02%-
2020-0.40%-0.11%-0.02%-
Total Welfare cost (billion $)2010-26.9-6.1-1.7-
2015-72.8-9.1-2.0-
2020-48.6-13.1-2.4-
Cost per Household ($)2010228521553
20155927517-124
202038310319-379

Notes:
The table shows carbon prices, welfare costs and costs per household.
All prices are in $2001.
MIT refers to scenario #9 in that analysis.
Welfare in this case measures lost consumption (or income) by consumers (as leisure effects are ignored). The NRDC analysis does not derive costs per household from overall welfare impacts, instead simply reporting net resource cost changes. Consumption is the major component of GDP (the other components being investment, government expenditures and imports/exports balance). Welfare is a good measure of actual impact on the population.
In year 2000, US GDP was around $10 trillion with consumption at $6.3 trillion.
In year 2000, there were 108 million households in the US with a median income of $41,000, by 2020, there is projected to be 127 million households with a median income of $61,000.

MIT’s analysis of S.139 finds carbon prices to be significantly less for both phases of the bill, including offsets. This reduced impact is even smaller when the model calculates the effects of higher energy prices on overall economic performance and on an individual household basis. Note that if only Phase 1 of S.139 is enacted, the anticipated economic impacts are very small. NRDC’s emphasis on greatly improved energy efficient technologies leads to net benefits from S.139.

Conclusion

The EIA analysis represents an ambitious attempt to provide insights into possible costs related to S.139; however, it should be thought of as an upper bound of likely costs. A more technologically rich and flexible model accompanied by more realistic assumptions regarding modeling inputs would yield lower cost projections.

 


1 See Weyant J. (ed) 1999, The Costs of the Kyoto Protocol: A Multi-Model Evaluation, Special Issue of the Energy Journal

Summary of EIA Analysis of the Climate Stewardship Act

On July 3, 2003, EIA released an economic analysis of S. 139: the Climate Stewardship Act introduced by Senators John McCain and Joe Lieberman. The EIA analysis was undertaken at the request of Senator James Inhofe, with additional analyses requested by the bill’s sponsors.

The Center has examined the EIA analysis and believes that the model’s structure, combined with unrealistic input assumptions, results in unrealistically high cost projections. Key factors driving up the costs in the EIA analysis include:
Structural issues with EIA’s model, including inflexibility in altering existing equipment (capital stock), limited ability to consider improvements in technology driven by regulatory changes, and lack of existing low-cost energy efficiency opportunities.

Assumptions regarding natural gas supply (low) and price (high), relatively high expectations for “business as usual” emissions growth (including presumed rapid expansion of coal-powered electricity), and limited energy conservation measures even with a sustained price signal.

Additional sensitivity cases (many pre-determined by the requests of the Senators soliciting EIA’s analysis) that also generally serve to drive up projected costs. These include cases with even higher natural gas prices and cases limiting certain advanced low-emitting technologies for the generation of electricity.
A more technologically rich and flexible model accompanied by more realistic assumptions regarding modeling inputs would yield lower cost projections.

See our full Assessment of EIA Analysis of the Climate Stewardship Act.

A Vision for a Climate-Friendly Future

A Vision for a Climate-Friendly Future

Remarks by Eileen Claussen
President, Pew Center on Global Cliamte Change

Air & Waste Management Association Annual Conference and Exhibition

June 23, 2003

Thank you very much.  It is a pleasure to be here in San Diego.  And I thank the Air & Waste Management Association for inviting me here today. 

While looking at the website for this conference, I was surprised to see that the plenary presentation this morning coincides with a recreational opportunity for attendees at the-- conference -- that is, a visit to several of San Diego’s historical sites that is billed as the “step back in time tour.”  Let me say, first, that I appreciate the fact that so many of you opted out of that event, preferring to remain in the here and now. 

In my speech today I intend to offer a tour of both the past and the future. I want to talk about the need for a vision of what the world might look like 50 years from now -- what the world must look like -- if we finally accept our responsibility to protect the global climate. And I want to talk about how the lessons from the past can help us get there.

Let me start with a brief “step back in time tour” of my own,  and reflect for a minute on some advice that I was given when I was working on waste management issues back in the 1970’s.  I can clearly remember being berated by a vice president of a major US corporation for my foolish ideas on reuse and recycling.  After the critique was over, the VP went on to offer me some counseling.  “Eileen,” he said, “be careful that you don’t try to become a monument.  Monuments attract pigeons.”  Well, I didn’t listen to that advice, and while the pigeons are sometimes a problem, I would be delighted if pigeons were all I had to worry about. 

Unfortunately, what I do worry about is whether we have what it takes to create the vision of where we need to be, and then achieve it – whether we are all willing to take the risk of becoming monuments.  Because the task at hand is not an easy one:  we must wean ourselves away from our reliance on fossil fuels, and begin in earnest to develop the technologies and the alternative energy sources that will help us achieve real and steady reductions in worldwide emissions of the greenhouse gases that cause climate change. 

There are a lot of good things happening right now.  Individuals, companies and governments are taking important and worthwhile steps to address this problem, and I want to talk with you a little bit about what they are doing.  But what is happening now is not nearly enough.  And the priority looking ahead must be to marry a long-term vision of a climate-friendly future with the short-term strategies that will get us there.

In this, we must remember the words of Eleanor Roosevelt: “The future is literally in our hands to mold as we like. But we cannot wait until tomorrow. Tomorrow is now.”

Of course, the reason we are having this discussion -- and the reason I am laying out this vision -- is that we have a real problem.  The earth’s climate is undergoing important and potentially hazardous changes, and human activities are largely to blame.  Of this there is no doubt.  Even our President (previously referred to as skeptic-in-chief), revised his prior assumptions after he assigned a committee of the National Academy of Sciences to look into the matter -- and they came back to him reporting that, and I quote "GHG's are accumulating in Earth's atmosphere as a result of human activities, causing surface air temperatures and subsurface ocean  temperatures to rise.  Temperatures are, in fact rising.  The changes observed over the last several decades are likely mostly due to human activities."  The report goes on to say that we can't exclude the possibility that natural variability has contributed as well  -- but the main point remains - the earth is warming, and humans must accept some responsibility for that warming.

How significant is this warming trend?  The earth’s temperature has always fluctuated, but ordinarily these shifts have occurred over the course of centuries or millennia, not decades.  Over the last century, we have seen a one-degree increase in global temperatures.  And the increase appears to be accelerating.  The 1990s were the hottest decade on record.  The last five years were among the seven hottest on record.  Scientists project that over the next century, average global temperature will rise between two and ten degrees Fahrenheit.  The higher-end figure of ten degrees would be the largest swing in global temperature since the end of the last ice age 12,000 years ago. 

What will be the effects of this warming?  In the short term, there will be both winners and losers as farms and forests, for example, become more productive at some latitudes, but less productive at others.  In the long term, though, any possible benefits from global warming will likely be far outweighed by the costs -- and the consequences may be irreversible.  Consequences such as increased flooding and increased drought, as well as extended heat waves, more powerful storms, and other extreme weather events.  And I have not even mentioned the problem of rising sea level, which has potentially far-reaching effects on coastal areas throughout the world.

Global warming, in other words, is not an idle concern.  Unfortunately, however, it is a concern that has become overly politicized and polarized, and the main reason for this is that addressing this issue effectively requires us to change.  There is no way around it.  Responding to climate change will fundamentally alter the way we meet many of our most basic needs. 

But a lot of people don't like change; change is hard, it requires effort, and it makes things, well…different.  Many would rather keep the status quo.  Those who are against the changes that are needed, argue that they would imperil our economy and our way of life.  But let me tell you something: those who oppose practical steps to deal with the issue of climate change are misguided, because we can address this issue effectively while still growing our economy. In fact, if we fail to address it, the costs are likely to be greater.  Our emissions will have grown; the amounts we will have to reduce will be greater; the time available to make these reductions will be shorter; and the costs for damage control and remediation will increase.   In making this argument I am not suggesting that taking the necessary steps will be either free or easy.  But I believe strongly that with a long-term vision of where we want to go, we can design reasonable, cost-effective strategies to get us there -- one step, one decade at a time. 

Looking 50 years ahead, the questions then become: How will we power our economy?  How will the nations of the world -- developing and industrialized countries alike -- achieve reductions in their greenhouse gas emissions while at the same time achieving their goals for growth?  And, at a more every-day level, how will we get to work?  What kind of office buildings will we work in?  What kind of cars and trucks will we drive?  And, if we plug in our hot tubs, our refrigerators, and our TVs and computers, where will the power come from? 

This isn’t the Jetsons of cartoon fame that I am talking about -- with people rocketing around in space cars and taking ultra-sonic showers.  Rather, it is real life.  And there are real changes that need to happen -- and that can happen -- if we give this issue the attention it so desperately deserves. 

And now, if you will permit me, I would like to give you a second little “step back in time tour.”  The location isn’t San Diego in 2003 but Montreal in 1987.  That was the place and the time, as all of you know, when the nations of the world stepped up to the challenge of ozone depletion and negotiated a treaty, The Montreal Protocol, to begin to phase out the production and use of ozone-depleting chemicals. 

In the years leading up to 1987, there was a great deal of skepticism about whether the depletion of the ozone layer was indeed a problem -- and, more importantly, whether it was a problem we could solve.  At first, many people denied that the problem existed, but then the argument shifted to one where many in industry said that replacing the CFCs that were causing the problem was impossible, particularly in the short term. These chemicals, it was said, are in such wide use in everything from refrigerators to aerosol antiperspirants that there is no way that society is going to be able to do without them.  But then governments began to work seriously on a framework for action, and industry initiated a major effort to work on alternative chemicals and processes.  Soon it became clear that we could develop less harmful substitutes.  The Montreal Protocol was agreed and then strengthened over time as industry became more and more comfortable with alternatives.  And the rest is history.  

I tell this story because it is about reaching for a vision that might not seem immediately attainable but that can indeed become reality with a lot of hard work and imagination.  Fast forward to today, and you see that getting rid of CFCs has not stood in the way of our ability to keep our yogurt cold or our ability (indeed, our need) to use antiperspirant -- and for that we can all be very thankful.  We were able to change to protect the planet.  And, today, we need to start thinking about the changes we have to make in order to protect the climate. 

Do we have a climate-friendly vision for the future?  I believe we have some of the pieces, but are far from having a complete vision.  Let’s look at what the Bush Administration has offered.  It seems to consist of three parts:  a greenhouse gas intensity target for the next decade; a strategy of voluntary measures to achieve that target; and a set of research efforts to assist in bringing about long-term technological change. 

There are a number of fundamental problems with this approach.  First, rather than establishing an absolute target for emission reductions – as many of the companies we are working with at the Pew Center have done and as the international community has done with the Kyoto Protocol, the Bush administration’s climate strategy sets a voluntary “greenhouse gas intensity” target for the nation.  The idea is to reduce the ratio of greenhouse gas emissions to U.S. economic output, or GDP.  But the biggest problem with the White House target – an 18 percent reduction in greenhouse gas intensity by 2012 – is that it would allow actual emissions to grow by 12 percent over the same period.

What’s more, the Administration’s strategy relies entirely on voluntary measures.  This despite the fact that U.S. climate policy has consisted primarily of voluntary measures for more than a decade.  And what have these voluntary measures achieved?  As of 2001, U.S. greenhouse gas emissions were up 12 percent over their 1991 levels. 

And, finally, while the Administration is putting significant effort into long-term research and development, it is not tied to specific longer term emission reduction goals. It is absolutely clear that technological research and development must be a critical element in any vision of a climate-friendly future.  It is also clear that without a specific, binding target that creates the demand for these new technologies, we are unlikely to succeed in our efforts to protect the global climate. 
   
We can do better than that.  We have to do better than that.  In the months and years ahead, we as a nation need to think more seriously about the short- and long-term steps we should be taking to reduce our contribution to climate change.  

And we can learn from many of the promising activities that are taking place all around us starting with the efforts of the members of the Pew Center’s Business Environmental Leadership Council.   The council’s 38 members represent nearly 2.5 million employees and have combined revenues of $855 billion.  They include mostly Fortune 500 firms, and they are committed to economically viable climate solutions.  What are they doing?  

  • Alcoa, for example, is developing a new technology for smelting aluminum that, if successful, will allow the company to reduce its greenhouse gas emissions to half their 1990 levels over the next nine years.  
  • Similarly, Shell recently met its target to reduce greenhouse gas emissions by 10 percent from 1990 levels -- and it did this in part by revamping its disposal of the waste gases resulting from oil and gas production. Shell also is planning a long-term transition into the renewable energy market, having invested $1 billion in renewables to date.
  • Shell is not the only company we are working with that is venturing into new markets or shifting its business focus.  ABB is a $25 billion Swiss business-to-business supplier that has divested itself of traditional, large-scale power generation businesses.  Instead, the company now supplies distributed energy solutions, such as combined heat and power technology, fuel cells, microturbines, and wind power plants.  
  • And then there is the case of Air Products and Chemicals, Inc., which entered into an agreement to provide the waste stream from one of its chemical plants for use as a fuel source for a neighboring company.  Air Products and Chemicals also has numerous operations that recover hydrogen molecules and other waste gases from the industrial processes of other companies.  Not only are these waste gases used as a fuel source for cogeneration plants, but the recovery of hydrogen reduces the need for natural gas to create hydrogen anew -- creating a double climate benefit.

All of these are important developments—and they show how increasing numbers of leading companies see a clear business interest both in reducing their emissions and in helping to shape a climate-friendly future. 

Even more encouraging is the fact that elected leaders in the states are working to shape that future now -- and they are doing it, in part, by recognizing that climate change is an air and waste management issue.

  • Massachusetts, for example, has established a multi-pollutant cap requiring six older power plants to reduce their CO2 emissions by 10 percent. 
  • In neighboring New Hampshire, lawmakers have adopted a similar, multi-pollutant approach in an effort to require the state’s three fossil fuel-fired power plants to stabilize their CO2 emissions at 1990 levels.  
  • Elsewhere, states have developed innovative waste management programs that will protect the climate.  These include a mandatory statewide recycling program in New Jersey that helped the state avoid 8.7 million tons of greenhouse gas emissions from 1990 to 1995; and a program in Missouri that provides financing for a project to capture methane from a 70-acre sanitary landfill for use as fuel for the boilers of a local high school. 

That is what I call vision.  And it is a quality that is desperately needed as the United States sets out in the years ahead to reduce greenhouse gas emissions nationwide.  Clearly, we have a ways to go.  How far?  Well, right now, we have a national climate strategy that says it is fine and good for our emissions to continue to grow.  So obviously the road ahead is a rather long and probably a winding one.  But first we must decide what the future should look like.

Let's take a look at a  couple of specific sectors, the power sector and the transportation sector -- which together account for about 2/3 of our nation's energy use.

How do we envision the power sector?  With no silver bullet on the horizon, we can  expect a future with greater use of natural gas (if we can increase supply and meet our infrastructure needs); with a steadily increasing use of renewables (and the progress of wind energy over the last decade should give us a glimmer of hope); with an increased emphasis on distributed generation and combined heat and power; with nuclear at least maintaining its current level of electric generation; and finally with coal, if we are able to master carbon capture and sequestration and make it economically viable.  

Meeting the challenge of the transportation sector will not be easy, but the rewards will yield energy security dividends as well as environmental ones. If we start now by investing and deploying  existing technologies and investments, it is possible to reduce carbon emissions by about 20 to 25% by 2015 and 45 to 50% by 2030, compared to business as usual.    The transportation sector is a perfect example of the need for both short and longer-term efforts.  It typically takes 10-15 years to turnover a vehicle fleet, so if we start making new vehicles more efficient today,  it will take more than a decade for these efficiency gains to be realized in all vehicles on the road.  At the same time we should be working toward the low-carbon transportation future that we ultimately need, with advanced hybrids, advanced diesel, hydrogen fuel cells and the infrastructure that will be needed to support hydrogen. 

But simply having a vision gets you nowhere.  You have to be able to achieve it.  Starting right now, we have to identify the steps necessary to transition to a new, climate-friendly economy.  We know that there are short-term strategies that significantly reduce greenhouse gas emissions without radical changes in technologies or lifestyles.  These are the low-hanging fruit in the effort to create a climate-friendly future: the efficiency and management improvements that will save money and reduce emissions.    And we have a vision of our longer-term needs.    But most important, we know that we cannot achieve our vision for the future, or even take advantage of the myriad of shorter-term improvements that are environmentally and economically advantageous without a strong national policy. 


This policy must be focused on four specific areas: 

  • One: We need to create a system where reporting and disclosure of greenhouse gas emissions becomes the rule -- at the very least, for major sources -- and where companies that are acting now to reduce their emissions are assured of credit under future mandatory regimes.
  • Two: We need to use a combination of standards, tax credits and other incentives to expand the use of energy-efficient motor vehicles, appliances and buildings; renewable energy; and alternative fuels and technologies.  We need to send the market the right signals in order for change to happen.
  • Three: We need to expand our natural gas supply and infrastructure and promote advanced coal technologies with carbon capture and disposal.
  • And four: We need to adopt a comprehensive national strategy that couples mandatory reductions in emissions with flexible, market-based approaches such as emissions trading.

Just last month, the Pew Center released a report taking a detailed look at six diverse emissions trading programs.  The aim was to draw general lessons for the development of trading programs for greenhouse gases.  And the conclusion?  A so-called “cap-and-trade” program -- which couples trading with a mandatory goal for reducing emissions -- would be an especially attractive way of reducing the U.S. contribution to climate change. Among the reasons: trading allows for greater efficiency than other approaches, given that the cost of reducing emissions varies widely by source.

Of course, we already know how a market-based strategy such as trading can contribute to environmental progress.  We have seen it happen.  The year in this case was 1990, and the place was Washington, D.C., where lawmakers, as part of the Clean Air Act Amendments passed that year, set out to mandate significant reductions in emissions of sulfur dioxide and nitrogen oxides from electric utilities.  The results of this program are clear – the goals have been met, and the costs have been far less than anticipated.  

The same kind of cap-and-trade system can achieve the same kind of progress in our effort to protect the climate.  It is this kind of system, in fact, that is at the heart of national climate change legislation introduced earlier this year by Senators Joe Lieberman and John McCain.  This landmark measure for the first time brings together several features that would be critical to the success of a national climate change strategy.  The bill would establish ambitious and binding targets for reducing U.S. greenhouse gas emissions.  Equally important, it would provide companies with the flexibility to reduce emissions as cost-effectively as possible – thanks to the creation of a rigorous nationwide system allowing emissions trading, the provision of credit for carbon storage, and the ability to use credits earned abroad  Last but not least, the bill would recognize those reductions that are being made now by the companies that are taking the lead on this issue and provide additional flexibility for these early actors. 

Of course, the Lieberman-McCain measure has no real chance of becoming law any time soon. But it does give us a starting place on the policy vision that we so desperately need. 

As we begin building a workable strategy to reduce U.S. emissions, we can at the same time begin demonstrating leadership internationally. As the producer of fully one-fourth of worldwide greenhouse gas emissions, we have to show the world, first, that we are stepping up to this problem domestically, and, second, that we can contribute in important and substantive ways to the development of a global framework for action. 

Despite the Bush administration’s rejection of the Kyoto Protocol, it is in the United States’ best interests to forge an effective, long-term international climate agreement – one ensuring that all major emitting countries do their fair share to meet this challenge.  Whether you support it or not, the Kyoto Protocol is a reasonable first step and provides an important framework for the continuing evolution of the world’s energy mix. 

But in the same way that the United States should be guided by a long-term vision as it works domestically to protect the climate, so too must the global community be looking beyond Kyoto.  Because an agreement that’s going to work – an agreement that can bring in not only the United States, but developing countries as well – will in all likelihood be something other than Kyoto.  And it’s going to take some time to get there.

The more immediate challenge, though, is here at home.  And the longer U.S. policy makers wait to address the climate issue in a serious way, the greater the risk to the climate and to America’s standing in the world. 

A “step back in time” is important for learning what works.  But Eleanor  Roosevelt was right: “Tomorrow is now.”  And we need right now to be shaping a vision of a better tomorrow for our climate, for our economy, and for all of us. We need to get on with solutions.

Thank you very much. 

Legislation in the 107th Congress Related to Global Climate Change

During the 107th Congress (2001-2002), nearly 70 bills, resolutions, and amendments specifically addressing global climate change and greenhouse gas (GHG) emissions were introduced. The proposals ranged from GHG emission limits to carbon sequestration. Additional measures focused on decreasing America's dependency on foreign oil by increasing the use of renewable energy resources.

The bills, resolutions, and amendments specifically addressing global climate change and GHG emissions introduced in the 107th Congress are listed here in the following categories:

Full list of Bills:

GHG Emission Limits

S.556: The Clean Power Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from electric powerplants. CO2 emissions are reduced to 1990 levels by 2008 (as reported by committee). Sponsor: Sen. James M. Jeffords (I-VT) (22 cosponsors) - Action: 6/27/2002 Reported favorably by the Senate Environment and Public Works Committee with an amendment in the nature of a substitute by a vote of 10 - 9.

S.1131: The Clean Power Plant and Modernization Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from electric powerplants.
Sponsor: Sen. Patrick J. Leahy (D-VT)

S.3135: The Clean Air Planning Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from electric powerplants. CO2 emissions are stabilized at 2005 levels by 2008 and reduced to 2001 levels by 2012.
Sponsor: Sen. Thomas R. Carper (D-DE) (3 cosponsors)

H.R.1256: The Clean Smokestacks Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from electric powerplants. CO2 emissions are reduced to 1990 levels by 2007.(House companion of S.556.)
Sponsor: Rep. Henry A. Waxman (D-CA) (133 cosponsors)

H.R.1335: The Clean Power Plant Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from electric powerplants.
Sponsor: Rep. Thomas H. Allen (D-ME) (22 cosponsors)

H.R.2116: The Great Smoky Mountains Clean Air Act, which requires reductions of CO2, SO2, NOX, and mercury emissions from Tennessee Valley Authority electric powerplants.
Sponsor: Rep. Charles H. Taylor (R-NC) (2 cosponsors)

H.Res.117: A House resolution which expresses the sense of Congress that the United States should develop, promote, and implement policies to reduce emissions of fossil fuel generated carbon dioxide with the goal of achieving stabilization of greenhouse gas emissions in the United States at the 1990 level by the year 2010.
Sponsor: Rep. Barbara Lee (D-CA) (66 cosponsors)

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GHG Emission Reporting

S.1333: The Renewable Energy and Energy Efficiency Investment Act of 2001, which, among other things, requires electricity generators to disclose their carbon dioxide emissions to potential consumers.
Sponsor: Sen. James M. Jeffords (I-VT) (5 cosponsors)

S.1716: The Global Climate Change Act of 2001, which, among other things, establishes a mandatory greenhouse gas reporting and disclosure program.
Sponsor: Sen. John F. Kerry (D-MA) (4 cosponsors)

S.1766: The Energy Policy Act of 2002, which, as part of a comprehensive energy bill, establishes a mandatory greenhouse gas reporting and disclosure program. (Also includes the main provisions of S.1008, which requires development of a U.S. Climate Change Response Strategy.)
Sponsor: Sen. Thomas A. Daschle (D-SD) (6 cosponsors)

S.1781: The Emission Reductions Incentive Act of 2001, which establishes a voluntary registry of greenhouse gas emissions reductions.
Sponsor: Sen. John McCain (R-AZ) (1 cosponsor)

S.1870: A bill to amend the Clean Air Act to establish an inventory, registry, and information system of U.S. greenhouse gas emissions to inform the public and private sector concerning, and encourage voluntary reductions in, greenhouse emissions.
Sponsor: Sen. Jon Corzine (D-NJ) (2 cosponsors)

S.2815: The Clear Skies Act, which requires reductions of SO2, NOX, and mercury emissions from electric powerplants, but not of CO2 emissions. Would exempt certain powerplants from the existing requirement that powerplants report their CO2 emissions.
Sponsor: Sen. Bob Smith (R-NH) (by request of the Bush Administration)

S.Amdt.2917 to S.517: The Energy Policy Act of 2002, which includes Title X, establishing a National Climate Change Policy (see S.1008 under National Climate Change Strategy) and expressing the Sense of the Congress on international climate change negotations (see S.1401 under International Climate Change Negotiations), Title XI, establishing a National Greenhouse Gas Registry (see S.Amdt.3239 under Greenhouse Gas Reporting), and Title XIII on Climate Change Science and Technology (including carbon sequestration research).
Sponsor: Sen. Thomas A Daschle (D-SD) (1 cosponsor) – Action: 4/25/2002: Passed by the Senate by a vote of 88 – 11 and redesignated as H.R.4.

H.R.3037: The Renewable Energy and Energy Efficiency Investment Act of 2001, which, among other things, requires electricity generators to disclose their carbon dioxide emissions to potential consumers.
Sponsor: Rep. Frank Pallone (D-NJ) (10 cosponsors)

S.Amdt.3146 to S.Amdt.2917: An amendment to the Energy Policy Act of 2002 revising Title XI, establishing the National Greenhouse Gas Registry. As amended by Sen. Hagel on 4/24/2002, the amendment allows entities to report voluntarily their greenhouse gas (GHG) emissions and emission reductions to a federal database and registry. If, five years after enactment, less than 60% of U.S. anthropogenic GHG emissions have been reported voluntarily, reporting is required of large U.S. GHG emitters. The amendment also encourages future Congresses to consider registered reductions as applicable towards future GHG reduction requirements.
Sponsor: Sen. Chuck Hagel (R-NE)

S.Amdt.3239 to S.Amdt.2917: An amendment to the Energy Policy Act of 2002 revising Title XI, establishing the National Greenhouse Gas Registry. As amended by Sen. Brownback on 4/24/2002, the amendment allows entities to report voluntarily their greenhouse gas (GHG) emissions and emission reductions to a federal database and registry. If, five years after enactment, less than 60% of U.S. anthropogenic GHG emissions have been reported voluntarily, reporting is required of large U.S. GHG emitters. The amendment also encourages future Congresses to consider registered reductions as applicable towards future GHG reduction requirements.
Sponsor: Sen. Sam Brownback (R-KS) (3 cosponsors) – Action: 4/25/2002: Accepted by the Senate by voice vote as an amendment to the Energy Policy Act of 2002, which was then passed by the Senate by a vote of 88 – 11 and redesignated as H.R.4. (See S.Amdt.2917 and H.R.4 under Energy Policy.)

H.R.4611: National Greenhouse Gas Emissions Inventory Act of 2002, which requires reporting and disclosure by entities responsible for large GHG emissions.
Sponsor: Rep. John W. Olver (D-MA) (6 cosponsors)

H.R.5266: The Clear Skies Act, which requires reductions of SO2, NOX, and mercury emissions from electric powerplants, but not of CO2 emissions. Would exempt certain powerplants from the existing requirement that powerplants report their CO2 emissions.
Sponsor: Rep. Joe Barton (R-TX) (by request of the Bush Administration) (1 cosponsor)

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International Negotiations

H.R.1646: The Foreign Relations Authorization Act, Fiscal Years 2002 and 2003, which includes a Sense of the Congress Resolution urging the U.S. to continue participation in international negotiations with the objective of completing the rules and guidelines for the Kyoto Protocol.
Sponsor: Rep. Henry J. Hyde (R-IL) (1 cosponsor) Action: 5/2/2001: The amendment that included the Kyoto resolution was offered by Rep. Robert Menendez (D-NJ) during markup in the House International Relations Committee and agreed to by a vote of 23 - 20. 5/16/2001: The bill, including the resolution, passed the House by a vote of 352 - 73. 9/30/2002: After conference with the Senate, during which the Menendez Amendment was removed, H.R.1646 became Public Law No: 107-228. (For more on the Menendez Amendment, see S.1401 below.)

H.R.2782: The Corporate Code of Conduct Act, which requires U.S. nationals that employ more than 20 persons in a foreign country to implement a Corporate Code of Conduct, which includes compliance with internationally recognized environmental standards relating to the mitigation of global climate change.
Sponsor: Rep. Cynthia A. McKinney (D-GA) (25 cosponsors)

S.1401: The Foreign Relations Authorization Act, Fiscal Years 2002 and 2003, which includes a Sense of the Congress Resolution urging the U.S. to participate in international negotiations, including putting forth a proposal at the meeting of the Conference of the Parties, with the objective of securing U.S. participation in a revised Kyoto Protocol or other future binding climate change agreements.
Sponsor: Sen. Joseph R. Biden, Jr. (D-DE) Action: 8/1/2001: The amendment that included the resolution was offered by Sen. John F. Kerry (D-MA) during markup in the Senate Foreign Relations Committee and agreed to by a vote of 19 - 0. The Committee then passed the bill. 2/15/2002: The Kerry resolution was included in Title X of the Energy Policy Act of 2002 (see S.Amdt.2917 under Energy Policy). 4/25/2002: The Energy Policy Act, with an amended version of the Kerry resolution, passed the Senate by a vote of 88 – 11 and was redesignated H.R.4.

S.Res.311: A resolution expressing the Sense of the Senate that, among other things, both at the World Summit on Sustainable Development and in other appropriate fora, the United States should re-engage in the negotiation of binding international agreements to address global climate change consistent with (A) U.S. commitments under the U.N. Framework Convention on Climate Change; (B) the findings of the Third Assessment Report of the Intergovernmental Panel on Climate Change; and (C) the Sense of Congress on Climate Change approved by the Senate as part of the National Energy Policy Act of 2002 (see S.1401 above).
Sponsor: Sen. John F. Kerry (D-MA) (12 cosponsors)

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Climate-Friendly Technology R&D

S.389: The National Energy Security Act, which includes provisions of S.60, establishing carbon emission standards that clean coal facilities must meet in order to be eligible for a tax credit.
Sponsor: Sen. Frank H. Murkowski (R-AK) (20 cosponsors)

S.597: The Comprehensive and Balanced Energy Policy Act, which includes a title establishing a commission to study measures to achieve stabilization of greenhouse gas emissions in the United States at the 1990 level by 2010 and below the 1990 level by 2020.
Sponsor: Sen. Jeff Bingaman (D-NM) (17 cosponsors)

S.1008: The Climate Change Strategy and Technology Innovation Act, which requires development of a U.S. Climate Change Response Strategy with the goal of stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system; establishes a research and development program toward the goal of stabilization of greenhouse gas concentrations; and establishes the National Office of Climate Change Response within the Executive Office of the President.
Sponsor: Sen. Robert C. Byrd (D-WV) (10 cosponsors) – Action: 8/2/2001: Reported favorably with amendments by the Senate Governmental Affairs Committee by voice vote. 2/15/2002: Included in S.Amdt.2917 (the Energy Policy Act of 2002) as Title X. 4/23/2002: Title X of S.Amdt.2917 modified by S.Amdt.3232 by voice vote of the Senate. 4/25/2002: S.Amdt.2917, including the amended Title X, passed by the Senate by a vote of 88 – 11 and redesignated as H.R.4. (See S.Amdt.2917 and H.R.4 under Energy Policy.)

S.1293: The Climate Change Tax Amendments, which create tax incentives for facilities (e.g., coal-fired power plants) that (a) replace existing facilities; (b) reduce, avoid, or sequester greenhouse gas emissions on a per unit of output basis compared to the replaced facilites; and (c) use the same type of fuel as the replaced facilities.
Sponsor: Sen. Larry E. Craig (R-ID) (1 cosponsor)

S.1294: The Climate Change Risk Management Act, which requires development and implementation of a national strategy to manage the risks posed by potential climate change; reforms the voluntary reporting program established by section 1605(b) of the Energy Policy Act of 1992; and promotes technology research and dissemination.
Sponsor: Sen Frank H. Murkowski (R-AK) (5 cosponsors)

S.Amdt.3187 to S.Amdt.2917: Amendment to the Energy Policy Act of 2002, which promotes greenhouse gas reduction through the increased use of recovered material in federally funded projects involving procurement of cement or concrete.
Sponsor: Sen. Robert C. Byrd (D-WV) – Action: 4/24/2002: Agreed to by the Senate by voice vote. 4/25/2001: S.Amdt.2917 passed the Senate by a vote of 88 – 11 and was redesignated as H.R.4. (See S.Amdt.2917 and H.R.4 under Energy Policy.)

S.Amdt.3232 to S.Amdt.2917: An amendment to the Energy Policy Act of 2002, revising Title X, establishing the National Climate Change Policy, based on S.1008 (see above).
Sponsor: Sen. Jeff Bingaman (D-NM) (8 cosponsors) – Action: 4/23/2002: Accepted by the Senate by voice vote. 4/25/2002: S.Amdt.2917, including S.Amdt.3232, passed by the Senate by a vote of 88 – 11 and redesignated as H.R.4. (See S.Amdt.2917 and H.R.4 under Energy Policy.)

H.R.4: The Securing America's Future Energy (SAFE) Act. The version of the bill passed by the House includes provisions of H.R.2587, which promotes advanced clean coal technologies by, among other things, promoting demonstration of technologies that capture, separate, reuse or dispose of carbon dioxide, and establishing carbon emission standards that clean coal facilities must meet in order to be eligible for a tax credit. Also includes provisions of H.R.2460, which requires the Department of Energy to investigate carbon and greenhouse gas mitigation and sequestration technologies. For the version passed by the Senate, see S.Amdt.2917 above.
Sponsor: Rep. W.J. Tauzin (R-LA) (3 cosponsors)

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Federal Budget and Appropriations

S.Amdt.249 to H.Con.Res.83: An amendment to the Budget Resolution, FY 2002, that adds $4.5 billion to the federal budget for climate change measures.
Sponsor: Sen. John F. Kerry (D-MA) (13 cosponsors) - Action: 4/6/2001: Agreed to by the Senate by voice vote.

S.Amdt.257 to H.Con.Res.83: An amendment to the Budget Resolution, FY 2002, that adds $50 billion to the federal budget to increase general environmental and natural resource funding, including for climate change measures.
Sponsor: Sen. Jon Corzine (D-NJ) (15 cosponsors) - Action: 4/5/2001: Not agreed to by the Senate by a vote of 46 - 54.

S.Amdt.346 to H.Con.Res.83: An amendment to the Budget Resolution, FY 2002, that adds $450 million to the federal budget to increase general environmental and natural resource funding, including for climate change measures.
Sponsor: Sen. Frank H. Murkowski (R-AK) (1 cosponsor) - Action: 4/5/2001: Agreed to by the Senate by voice vote.

(Eight appropriations bills for fiscal year (FY) 2001 contained a restriction on funds for implementation of the Kyoto Protocol. The Bush Administration requested a continuation of the restriction for the same eight appropriations bills in FY 2002. Nevertheless, as shown here, none of the FY 2002 appropriations bills included the restriction.)

H.R.2217: The Interior Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. The version of the bill passed by the Senate included a provision prohibiting the use of funds for implementation of the Kyoto Protocol. The version passed by the House did not. The restriction was removed in conference.
Sponsor: Rep. Joe Skeen (R-NM) Action: 11/5/2001: Became Public Law No: 107-63.

H.R.2299: The Transportation Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. The version of the bill passed by the House included a provision prohibiting the use of funds for implementation of the Kyoto Protocol. (H.Amdt.118 was introduced to remove the restriction, but then withdrawn.) The version passed by the Senate did not include the restriction. The restriction was removed in conference.
Sponsor: Rep. Harold Rogers (R-KY) -- Action: 12/18/2001: Became Public Law No: 107-87.

H.R.2311: The Energy and Water Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. None of the earlier versions of the FY 2002 bill included the restriction.
Sponsor: Rep. Sonny Callahan (R-AL) Action: 11/12/2001: Became Public Law No: 107-66.

H.R.2330: The Agriculture Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. When introduced, both the House bill and its Senate companion (S.1191) prohibited the use of funds for implementation of the Kyoto Protocol. The House prohibition was struck by H.Amdt.165. The Senate prohibition was struck by S.Amdt.1997.
Sponsor: Rep. Henry Bonilla (R-TX) -- Action: 11/28/2001: Became Public Law No: 107-76.

H.R.2500: The Commerce, Justice, State Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. The version of the bill reported by the House Appropriations Committee prohibited the use of funds for implementation of the Kyoto Protocol. The prohibition was struck by H.Amdt.184. None of the Senate versions of the FY 2002 bill included the restriction.
Sponsor: Rep. Frank R. Wolf (R-VA) - Action: 11/28/2001: Became Public Law No: 107-77.

H.R.2506: The Foreign Operations Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. The version of the bill reported by the House Appropriations Committee prohibited the use of funds for implementation of the Kyoto Protocol. The prohibition was struck by H.Res. 199. None of the Senate versions of the FY 2002 bill included the restriction.
Sponsor: Rep. Jim Kolbe (R-AZ) - Action: 1/10/2002: Became Public Law No: 107-115.

H.R.2590: The Treasury-Postal Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. None of the previous versions of the FY 2002 bill contained the restriction.
Sponsor: Rep. Ernest J. Istook, Jr. (R-OK) - Action: 11/12/2001: Became Public Law No: 107-67.

H.R.2620: The Veterans Affairs and Housing and Urban Development Appropriations Act, FY 2002, which, as enacted, does not contain any restriction on funds for implementation of the Kyoto Protocol. None of the previous versions of the FY 2002 bill contained the restriction.
Sponsor: Rep. James T. Walsh (R-NY) - Action: 11/26/2001: Became Public Law No: 107-73.

H.Amdt.118 to H.R.2299: An amendment to the Transportation Appropriations Bill, FY 2002, which provides that the bill’s limitations applicable to the Kyoto Protocol do not apply to activities that are otherwise authorized by law.
Sponsor: Rep. John W. Olver (D-MA) - Action: 6/26/2001: By unanimous consent, the amendment was withdrawn.

H.Amdt.165 to H.R.2330: An amendment to the Agriculture Appropriations Bill, FY 2002, to strike section 726 from the bill. Section 726 prohibits use of funds for implementation of the Kyoto Protocol.
Sponsor: Rep. John W. Olver (D-MA) (1 cosponsor) - Action: 7/11/2001: Agreed to by the House by voice vote.

H.Amdt.184 to H.R.2500: An amendment to the Commerce-Justice-State Appropriations Bill, FY 2002, to strike section 623 from the bill. Section 623 prohibits the use of funds for implementation of the Kyoto Protocol.
Sponsor: Rep. John W. Olver (D-MA) (1 cosponsor) – Action: 7/18/2001: Agreed to by the House by voice vote.

H.Amdt. 226 to H.R. 2506: An amendment to the Foreign Operations Appropriations Bill, FY 2002, to prohibit financial assistance from the U.S. Ex-Im bank for projects that contribute to global warming, which are described as limited recourse projects or long-term programs involving oil and gas field development, a thermal powerplant, or a petrochemical plant or refinery.
Sponsor: Rep. Dennis J. Kucinich (D-OH) – Action: 7/24/2001: By unanimous consent, the amendment was withdrawn.

H.Res.199: A House Rule governing consideration of H.R.2506, the Foreign Operations Appropriations Bill, FY 2002, which includes a provision striking section 566 from H.R.2506. Section 566 prohibits use of funds for implementation of the Kyoto Protocol.
Sponsor: Rep. Lincoln Diaz-Balart (R-FL) – Action: 7/19/2001: Agreed to by the House by voice vote.

S.Amdt.1997 to H.R.2330: A Senate amendment to the Agriculture Appropriations Act, FY 2002, to strike a limitation relating to the Kyoto Protocol.
Sponsor: Sen. Herb Kohl (D-WI) -- Action: 10/25/2001: Agreed to by the Senate by unanimous consent.

S.2779: The Foreign Operations Appropriations Act, FY 2003, which, among other things, appropriates $15,100,000 for International Conservation Programs and the International Panel on Climate Change/United Nations Framework Convention on Climate Change; and appropriates $175,000,000 to support policies and programs in developing countries, countries in transition and other partner countries that directly (1) promote energy conservation and efficiency and clean energy programs; (2) measure, monitor, and reduce greenhouse gas emissions; (3) increase carbon sequestration; and (4) enhance climate change mitigation and adaptation programs. The Act also requires a report to Congress on (1) federal FY 2003 climate change expenditures; and (2) FY 2002, 2003 and 2004 United States Agency for International Development funds associated with climate change.
Sponsor: Sen. Patrick J. Leahy (D-VT) - Action: 7/18/2002: Reported out of the Senate Appropriations Committee.

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Agriculture and Carbon Sequestration

S.130: The Food Security and Land Stewardship Act, which establishes a flexible fallow program under which, among other things, a producer may get credit for conservation uses of the set-aside acreage, including carbon sequestration.
Sponsor: Sen. Tim Johnson (D-SD)

S.765: The Carbon Sequestration Investment Tax Credit Act, which creates a carbon sequestration investment tax credit.
Sponsor: Sen. Sam Brownback (R-KS) (3 cosponsors)

S.769: The International Carbon Conservation Act, which establishes a carbon sequestration program and an implementing panel within the Department of Commerce to enhance international conservation, promote carbon sequestration, and encourage voluntary efforts on the issue of global climate change.
Sponsor: Sen. Sam Brownback (R-KS) (5 cosponsors)

S.785: The Carbon Conservation Incentive Act, which requires the Department of Agriculture to allow land to be enrolled in a program that promotes carbon sequestration.
Sponsor: Sen. Sam Brownback (R-KS) (2 cosponsors)

S.820: The Forest Resources for the Environment and the Economy Act, which requires the Department of Agriculture to assess opportunities to increase carbon storage on national forests and to facilitate voluntary, accurate reporting of forest projects that reduce atmospheric carbon dioxide concentrations.
Sponsor: Sen. Ron Wyden (D-OR) (1 cosponsor)

S.932: The Conservation Security Act, which promotes, as part of a conservation security program, the reduction of greenhouse gas emissions and the enhancement of carbon sequestration.
Sponsor: Sen. Tom Harkin (D-IA) (19 cosponsors)

S.1255: The Carbon Sequestration and Reporting Act, which establishes a Carbon Advisory Council to advise on reporting guidelines for greenhouse gas sequestration from soil carbon and forest management actions; authorizes the Department of Agriculture to enter into cooperative agreements for forest carbon activities on private, State, and Indian lands; and includes provisions of S.785 to require the Department of Agriculture to allow land to be enrolled in a carbon sequestration program.
Sponsor: Sen. Ron Wyden (D-OR) (1 cosponsor)

S.1571: The Farm and Ranch Equity Act of 2001, which, among other things, establishes a carbon sequestration demonstration program.
Sponsor: Sen. Richard G. Lugar (R-IN) (4 cosponsors)

S.1727: The Conservation Assistance and Regional Equity Act, which among other things, establishes a Conservation Security Program that promotes carbon sequestration on agricultural lands.
Sponsor: Sen. Harry M. Reid (D-NV) (11 cosponsors)

S.1731: The Agriculture, Conservation, and Rural Enhancement Act of 2001, which, in reauthorizing the Farm Bill, provides payments for farmers for practicing carbon sequestration and funds research into carbon sequestration. Also supports renewable energy and energy efficiency in agricultural operations.
Sponsor: Sen. Tom Harkin (D-IA) Action: 11/27/2001: Passed by the Senate Agriculture Committee by voice vote. 2/13/2002: Passed by the Senate by a vote of 58 – 40, and redesignated as H.R.2646. (See H.R.2646 below.)

S.Amdt.2546 to S.1731: An amendment to the Farm Bill to promote forest carbon sequestration and carbon trading by farmer-owned cooperatives.
Sponsor: Sen. Ron Wyden (D-OR) (2 cosponsors) Action: 12/13/2001: Agreed to by the Senate by voice vote.

S.Amdt.3209 to S.Amdt.2917: An amendment to the Energy Policy Act of 2002 establishing carbon storage accounting models to help landowners quantify carbon release and sequestration from various resource uses.
Sponsor: Sen. Paul David Wellstone (D-MN) – Action: 4/25/2002: Agreed to by the Senate by voice vote, and included in S.Amdt.2917 as passed by the Senate by a vote of 88 – 11 and redesignated as H.R.4.

H.R.1949: The Conservation Security Act, which promotes, as part of a conservation security program, the reduction of greenhouse gas emissions and the enhancement of carbon sequestration. (House companion of S.932.)
Sponsor: Rep. John R. Thune (R-SD) (38 cosponsors)

H.R.2542: The American Farmland Stewardship Act, which establishes a Farmland Stewardship Program, under which, among other things, farmers may receive payment for activities that reduce greenhouse emissions and enhance carbon sequestration.
Sponsor: Rep. Adam Putnam (R-FL)

H.R.2646: The Farm Security Act, which reauthorizes the Farm Bill. In the version passed by the House, reauthorizes carbon cycle research and promotes carbon sequestration in forests. In the version passed by the Senate (see S.1731 above), provides payments for farmers for practicing carbon sequestration and funds research into carbon sequestration. The enacted law incorporate the House and Senate carbon sequestration provisions, except that payment for the practice of carbon sequestration is not explicitly provided for. The enacted law also incorporates the Senate bill’s support for renewable energy and energy efficiency on agricultural lands.
Sponsor: Rep. Larry Combest (R-TX) (1 cosponsor) Action: 8/2/2001: Reported by the House Agriculture Committee. 10/5/01: Passed by the House by a vote of 291 - 120. 2/13/2002: Senate version passed by the Senate by a vote of 58 – 40. 5/13/2002: Became Public Law No: 107-171.

S.892: The Clean and Renewable Fuels Act, which phases out the use of methyl tertiary butyl ether (MTBE) in fuel to promote the use of renewable fuels, and requires a report on the resulting greenhouse gas emission reductions.
Sponsor: Sen. Tom Harkin (D-IA) (1 cosponsor)

S.1071: The Biofuels Air Quality Act, which promotes use of renewable fuels by, among other things, requiring consideration of the extent to which a proposed project under the congestion mitigation and air quality improvement program reduces atmospheric carbon emissions.
Sponsor: Sen. Christopher S. Bond (R-MO) (1 cosponsor)

H.R. 2088: The Biofuels Air Quality Act, which promotes use of renewable fuels by, among other things, requiring consideration of the extent to which a proposed project under the congestion mitigation and air quality improvement program reduces atmospheric carbon emissions. (House companion of S. 1071.)
Sponsor: Rep. John M. Shimkus (R-IL) (39 cosponsors)

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Legislation in the 106th Congress Related to Global Climate Change

In the 106th Congress, nearly thirty legislative proposals were introduced specifically addressing global climate change. The bills, resolutions and amendments focused on the following categories:  

  • credit for early action to reduce GHG emissions;
  • research into climate change and technologies for reducing GHG emissions;
  • voluntary GHG reductions;
  • GHG emissions reductions from power plants;
  • automotive fuel efficiency;
  • carbon sequestration and the use of biomass; and
  • tax incentives for energy efficiency and technologies for reducing GHG emissions.

 

GHG Emission Limits

Several bills were introduced in the 106th Congress to control power plant emissions of CO2, as well as three other power plant pollutants — nitrogen oxides, sulfur dioxide, and mercury. Many of the bills would allow for trading of CO2 emission credits across firms. In addition, Sen. Robert C. Smith (R-NH), Chairman of the Senate Environment and Public Works Committee, held hearings on the power plant four-pollutant approach.

Legislation to provide marketable credits for early GHG reductions was first introduced in 1998 and reintroduced in 1999 by the late Sen. John H. Chafee (R-RI), Sen. Connie Mack (R-FL), and Sen. Joe Lieberman (D-CT). Representatives Rick Lazio (R-NY) and Calvin Dooley (D-CA) introduced a similar bill in the House. Under the bills, credits would be issued to businesses and other entities for GHG emission reductions made before the effective date of a future domestic GHG reduction program — thus creating an incentive for early action. The credits, which would be used to comply with such a program, would also have value to companies in a domestic or global GHG market.

S.547: Credit for Voluntary Reductions Act, by Sen. John H. Chafee (R-RI), Sen. Connie Mack (R-FL), and Sen. Joseph I. Lieberman (D-CT)

S.1369: Clean Energy Act, by Sen. Jim M. Jeffords (R-VT)

S.1949: Clean Power Plant and Modernization Act, by Sen. Patrick J. Leahy (D-VT)

H.R.2221: Small Business, Family Farms, and Constitutional Protection Act, by Rep. David McIntosh (R-IN) and Rep. Joseph Knollenberg (R-MI)

H.R.2520: Credit for Voluntary Actions Act, by Rep. Rick Lazio (R-NY) and Rep. Calvin Dooley (D-CA)

H.R.2569: Fair Energy Competition Act, by Rep. Frank Pallone, Jr. (D-NJ)

H.R.2645: Electricity Consumer, Worker and Environmental Protection Act, by Rep. Dennis J. Kucinich (D-OH)

H.R.2900: Clean Smokestacks Act, by Rep. Henry A. Waxman (D-CA)

H.R.2980: Clean Power Plant Act, by Rep. Thomas H. Allen (D-ME)

H.R.4859: Great Smoky Mountains Clean Air Act, by Rep. Charles H. Taylor (R-NC)

 

Climate-Friendly Technology

Energy efficiency has been the focus of much effort in the United States since the 1970s. This effort would be built upon by dozens of bills introduced in the 106th Congress. Three bills merit particular attention. Sen. Thomas A. Daschle (D-SD) introduced a bill which would create tax incentives to promote the use of energy efficient technologies and renewable power generation. Sen. Robert C. Smith (R-NH) introduced a bill to create tax incentives for energy efficient buildings. Sen. Larry E. Craig (R-ID) introduced a bill to provide a research and development tax credit to companies that reduce GHG emissions.

Additionally, Sen. Frank Murkowski (R-AK), chairman of the Senate Energy and Natural Resources Committee and Rep. Joe Barton (R-TX) introduced bills in the 106th Congress to promote research on climate science and technologies and expand and consolidate the existing voluntary reporting system managed by the Department of Energy. Sen. McCain (R-AZ) held hearings on climate change science as Chairman of the Senate's Commerce, Science, and Transportation Committee, and introduced a bill to establish a new scientific commission to assess changes in global climate patterns and to conduct scientific studies.

S.882: Energy and Climate Policy Act, by Se. Frank H. Murkowski (R-AK)

S.1776: Climate Change Energy Policy Response Act, by Sen. Larry Craig (R-ID) 

S.1777: Climate Change Tax Amendments of 1999, by Sen. Larry E. Craig (R-ID)

S.1833: Energy Security Tax Act, by Sen. Thomas A. Daschle (D-SD)

S.2718: Energy Efficient Buildings Incentive Act, by Sen. Robert C. Smith (R-NH)

S.3237: the International Climate Change Science Commission Act, by Sen. John McCain (R-AZ)

H.R.3384: Energy and Climate Policy Act, by Rep. Joe Barton (R-TX)

H.R.3385: To strengthen provisions in the Federal Non-nuclear Energy Research and Development Act of 1974 with respect to potential Climate Change, by Rep. Joe Barton (R-TX)

 

Transportation Emissions

Automotive fuel economy has been regulated at the federal level through the establishment of a Corporate Average Fuel Economy (CAFE) standard. However, since 1995, Congress has included language in the annual Transportation Department Appropriations Act effectively preventing changes to the CAFE standard. During the 106th Congress, environmental advocacy groups named the removal of the "CAFE freeze rider" as one of their top climate change priorities. An amendment by Sen. Slade Gorton (R-WA) to remove the rider failed 55-40 in 1999. In 2000, rather than take up a similar amendment, Congress directed the National Academy of Sciences to report by July 2001 on several matters intended to refine Congress's understanding of the issue in time for debate over the FY 2002 Transportation Department Appropriations Act.

 

Agriculture and Carbon Sequestration

Several bills were introduced in the 106th Congress to reduce the atmospheric levels of CO2 by promoting the sequestration — or storage — of carbon through soil management. Bills were also introduced to advance the use of biomass as a fuel.

Senators Pat Roberts (R-KS) and Sam Brownback (R-KS) each introduced legislation in the 106th Congress intended to promote soil sequestration of carbon. Sen. Roberts' bill encouraged carbon sequestration use and research, and required the implications of the Kyoto Protocol on the farm economy to be analyzed under various scenarios — including with the use of carbon sinks and market mechanisms. Sen. Brownback introduced two bills; one to require the U.S. Department of Agriculture (USDA) to establish a domestic carbon sequestration program, and a second to establish international conservation projects and rewarding voluntary carbon storage.

Sen. Tom Harkin (D-IA), the ranking Democrat on the Senate Agriculture Committee, introduced a bill which among other things would base payments to farmers on "the extent to which the [farmer's] conservation security plan incorporates practices that optimize carbon sequestration and minimize greenhouse gas emissions." Sen. Ron Wyden (D-OR) introduced a bill to assess opportunities for increased carbon storage in national forests.

As mentioned, legislation was also introduced to promote the use of biomass as a fuel. Sen. Richard G. Lugar (R-IN), Chairman of the Senate Agriculture Committee, introduced a bill to provide federal grants for biomass-related activites, including "research on accurate measurement and analysis of carbon sequestration and carbon cycling in relation to biobased industrial products and feedstocks."

S.935: National Sustainable Fuels and Chemicals Act, by Sen. Richard G. Lugar (R-IN)

S.1066: The Carbon Cycle and Agricultural Best Practices Research Act, by Sen. Pat Roberts (R-KS)

S.1457: Forest Resources for the Environment and Economy Act, by Sen. Ron Wyden (D-OR)

S.1945: Biofuels Air Quality Act, by Sen. Christopher S. Bond (R-MO)

S.2540: Domestic Carbon Storage Incentive Act, by Sen. Sam Brownback (R-KS)

S.2818: Food Security and Land Stewardship Act, by Sen. Tim Johnson (D-SD)

S.2982: International Carbon Sequestration Incentive Act, by Sen. Sam Brownback (R-KS)

S.3260: Conservation Security Act, by Sen. Tom Harkin (D-IA) 

H.R.2788: Biofuels Air Quality Act, by Rep. John M. Shimkus (R-IL)

Climate-Friendly Energy Policy: Options For The Near Term


In Brief, Number 5

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The majority of U.S. greenhouse gas (GHG) emissions—84 percent—are in the form of carbon dioxide (CO2), resulting almost entirely from the combustion of fossil fuels. As a result, energy policies that reduce fossil fuel use will reduce GHG emissions. Fossil fuel use can be reduced by: (1) deploying technologies that increase energy efficiency (e.g., more efficient power plants, cars, and appliances) and (2) employing non-fossil fueled energy sources (e.g., solar, wind, geothermal, biomass, hydroelectric, nuclear energy, or renewables-based hydrogen). CO2 emissions also can be reduced by shifting from high-carbon to lower-carbon fuels (e.g., shifting from coal to natural gas in the electricity sector), and by employing carbon capture and sequestration technologies.

A “climate-friendly” energy policy can advance climate objectives while serving energy policy goals. However, a climate-friendly energy policy is not a substitute for climate policy. More significant GHG emissions reductions would be necessary in order to address climate change than can be justified solely on the basis of traditional energy policy objectives. The energy policy options outlined in this brief represent sensible and important first steps in U.S. efforts to reduce GHG emissions.

 

Introduction

Energy use and climate change are inextricably linked. The majority of U.S. greenhouse gas (GHG) emissions—84 percent—are in the form of carbon dioxide (CO2), resulting almost entirely from the combustion of fossil fuels.1  Choices made today in the current national energy policy debate will directly impact U.S. greenhouse gas emissions far into the future. Decision-makers face the challenge of crafting policies that allow the United States to meet its energy needs while acting responsibly to reduce GHG emissions.

Often, these objectives are thought of as competing goals—that energy policy and energy security issues are in conflict with environmental objectives and vice versa. In reality, there is a substantial convergence between the goals of energy policy and climate policy, and many feasible and beneficial policies from supply and security perspectives can also reduce future U.S. greenhouse gas emissions. This brief considers near-term energy policies that can be adopted in the context of the energy policy debate, short of adopting a GHG reduction program now, to best position the United States to reduce GHG emissions and to implement future climate change policies. These options make up a “climate-friendly energy policy.” This brief is drawn from a Pew Center report: Designing a Climate-friendly Energy Policy: Options for the Near Term.2

It is important to note that a climate-friendly energy policy is not a substitute for a mandatory climate policy. More significant GHG emissions reductions would be necessary in order to address climate change than can be justified solely on the basis of traditional energy policy objectives. A previous Pew Center policy brief outlines potential programs aimed specifically at GHG abatement,3  and Pew Center reports discuss options for designing a mandatory U.S. GHG reduction program4  and reducing GHG emissions from U.S. transportation.5

The Link Between Energy and Climate

Because the vast majority of GHG emissions are in the form of CO2 resulting from fossil fuel combustion, energy policies that reduce fossil fuel use will reduce GHG emissions.6  Fossil fuel use can be reduced by: (1) deploying technologies that increase energy efficiency (e.g., more efficient power plants, cars, and appliances) and (2) employing non-fossil fueled energy sources (e.g., solar, wind, geothermal, biomass7, hydroelectric, nuclear energy, or renewables-based hydrogen). CO2 emissions also can be reduced by shifting from high-carbon to lower-carbon fuels (e.g., shifting from coal to natural gas in the electricity production sector), and by employing carbon capture and sequestration technologies. Conversely, energy policies that increase fossil fuel consumption, discourage or miss opportunities for efficiency improvements, and expand reliance on high-carbon fuels will increase CO2 emissions and thereby exacerbate climate change.

Given this close relationship between energy use and GHG emissions, near-term energy policy choices have significant future implications for climate change. Climate-friendly energy policies fall into one of three general categories—policies that: 

(1) Reduce GHG emissions now;

(2) Promote technology advancement or infrastructure development that will reduce the costs of achieving GHG emissions reductions in the future; and

(3) Minimize the amount of new capital investment in assets that would be substantially devalued (or “stranded”) if a GHG program were implemented.

Energy Policy Context

A discrete and unified U.S. energy policy does not exist. Rather, policies affecting energy production and use in the United States have many sources and take a multitude of forms. For example, while this brief focuses primarily on federal energy policies, state and local governments also play a key role in regulating energy-related activities. In addition, while there are federal policies aimed directly at achieving energy objectives, there are also federal policies aimed at achieving other objectives—ranging from environmental protection to easing traffic congestion—that have indirect but nevertheless substantial impacts on energy production and use. Finally, even those policies aimed squarely at achieving energy-related objectives are shaped by other policy concerns, such as labor and foreign policy issues. Energy policy, in short, operates in multiple dimensions.

Historically, most major shifts in U.S. energy policy have been triggered by interruptions, and subsequent price increases, in crude oil supply. Such events occurred in 1973 (Arab oil embargo), 1979–80 (triggered by the Iranian revolution), and 1990 (associated with the Persian Gulf War). The policy prescriptions for reducing supply vulnerability have included increasing U.S. production of conventional and alternative fuels, emphasizing market forces, reducing demand through efficiency measures, establishing and maintaining the strategic petroleum reserve (SPR),8  and maintaining international arrangements under the International Energy Program (IEP) to coordinate petroleum stock drawdowns. Over the years, the United States has reduced its vulnerability to a physical interruption of crude oil supplies but economic vulnerability remains. U.S. oil imports continue to grow, and the OPEC countries continue to be the source of significant oil imports, leaving the transportation sector in particular—and the economy in general—exposed to supply and price risk.

Today’s energy policy debate confronts a mixture of old and new issues. The United States remains vulnerable to concerted action by oil-producing nations to curtail production and increase prices. Conflicts in Central Asia and the Middle East have brought fuel supply concerns again to the fore. Moreover, the events of September 11, 2001, have given rise to a new energy policy priority: Securing domestic energy facilities from terrorist attack. In addition, sharply increased rates of U.S. economic growth in the late 1990s exposed energy supply shortages, as well as transportation and transmission bottlenecks. The deregulation of the electric power industry in some states has created regulatory idiosyncrasies that have sharply increased prices of electricity in some regions.9  Furthermore, current U.S. energy policy is much more market-oriented, less focused on cost-based price regulation, and more focused on environmental regulation than it was in the 1970s.

Current U.S. Energy Picture

The United States supplies about three-quarters of its energy needs from domestic sources. The nation has ample sources of coal and, indeed, is a modest coal exporter. The United States also supplies about 84 percent of its own natural gas; imports, mostly from Canada, account for about 16 percent of U.S. natural gas consumption.10 Oil presents a very different picture, however. The United States imported about 55 percent of the petroleum it consumed in 2001, and imports are projected to increase.11

The United States consumes a tremendous amount of energy each year, at considerable expense. In 2001, it consumed about 97 quadrillion British Thermal Units (or “quads”) of energy, at a cost of nearly $700 billion.12 Figure 1 indicates end uses of energy by sector, with the primary energy13 used for electricity generation allocated to each sector in proportion to its electricity consumption.

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The bulk of U.S. primary energy comes from fossil fuels. Fossil fuels provided 86 percent of U.S. primary energy in 2001.14 (See Figure 2.) Non-fossil sources provided the remaining 14 percent, of which nuclear energy represented approximately 8 percent and renewable energy resources accounted for approximately 6 percent (about 40 percent of the renewable energy is hydropower). The amount of energy provided by nuclear sources is expected to increase slightly over the next few decades, but DOE does not anticipate any new nuclear facilities being built in the United States during that period.15 Hydropower output is expected to be static. Other renewable sources (biomass, wood, municipal solid waste, ethanol, geothermal, wind, and solar) now supply only 3.4 percent of total U.S. energy consumption and only 2.1 percent of total U.S. electricity generation.16 DOE projects slow growth for non-hydro renewables because of the relatively lower costs of fossil fuels for electricity generation, and because less capital-intensive natural gas technologies have an advantage in competitive electricity markets over coal and baseload renewables for new capacity.17

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Current Greenhouse Gas Emissions Picture

Greenhouse gas emissions from U.S. energy use and production are primarily CO2 emissions from the combustion of fossil fuels in the electricity generation, buildings, industrial processes, and transportation sectors.18 (See Figure 3.) CO2 from fossil fuel combustion accounts for 82 percent of total U.S. GHG emissions.19  Figure 4 shows U.S. CO2 emissions broken down by fuel source. 

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One way to view the broad relationship between energy use and CO2 missions is to examine shifts in two indices: energy intensity (measured by energy used per dollar of gross domestic product (GDP) created) and carbon intensity (measured by CO2 emissions per dollar of GDP created). The first value indicates the economy’s overall energy efficiency, while the second is a function of the fuel mix and generation technologies used to meet the nation’s energy needs. With regard to fuel mix, it is important to understand that different types of fossil fuels have different levels of carbon content. (See Figure 5.) Both energy intensity and carbon intensity are influenced by energy policy choices.

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As the U.S. economy has grown, CO2 emissions have increased, although at a slower rate than conventional measures of economic output. During the 1990s, the divergence between CO2 and GDP growth was primarily a result of lower energy intensity. From 1990 to 2001, GDP grew by about 2.9 percent per year, while CO2 from energy grew by about 1.3 percent per year, i.e., CO2 grew at about half the rate of GDP. Energy use per dollar of GDP fell by 1.7 percent per year, while CO2 emissions per unit of energy consumed have remained at roughly the 1990 level.20  This decrease in the U.S. economy’s energy intensity since the early 1990s has resulted in large part from an increase in non-energy-intensive economic sectors (e.g., computer equipment and semiconductor manufacturing) relative to traditional energy-intensive manufacturing industries (e.g., steelmaking), as well as from energy efficiency improvements.21

The primary CO2 growth components during the 1990s were electricity generation and transportation. CO2 emissions from the electric power sector grew by 24 percent between 1990 and 2001, and CO2 emissions from transportation increased 19 percent during this period.22 The demand for electricity has grown with the U.S. economy and with substantial increases in the market penetration of electricity-consuming electronic equipment, consumer appliances, and manufacturing technologies. In the transportation sector, an increasing proportion of vehicles on the road (e.g., minivans, sport utility vehicles, and light trucks) are not subject to the passenger car Corporate Average Fuel Economy (CAFE) standards, but instead are subject to the significantly less stringent “light-duty truck” CAFE standards. CAFE standards established in 1975 required new passenger car fuel economy to reach 27.5 mpg in 1985, where the standard remains today. Less was required of light trucks; standards set by the U.S. Department of Transportation increased to 20.5 mpg in 1987 and stand at 20.7 mpg today.23  The actual fuel economy of new passenger cars and light trucks has closely followed the standards, and has not increased since 1988; indeed, today’s combined fleet of passenger cars and light trucks gets fewer mpg than the vehicles sold fifteen years ago because of the growth in the proportion of light trucks in the fleet.24  Finally, all vehicles are being driven more miles as a result of relatively low gasoline prices and land-use patterns characterized by sprawl.

Economic Analysis of Energy Policy

The body of economic work on energy and climate change contains several important themes to be considered in any effort that aims to identify “climate friendly” energy policies. These key themes include:

  • Energy use in the U.S. economy is largely a function of the current equipment (or “capital stock”) used to extract, produce, convert, and use energy (e.g., machinery used in longwall coal mining, technology used to explore for and produce oil and natural gas, boilers and turbines used to convert fossil fuel to electric power, and automobiles and trucks used to transport people and goods).
  • New energy technologies usually take time to develop, mature, and find broad acceptance in the market.
  • The market penetration of improved equipment reflects economic behavior, not just technological potential.
  • Energy or fuel prices can play a substantial role in energy use and emissions outcomes, apart from long-run technology choices.
  • To the extent that policy actions alter the market supply or demand of specific fuels or energy types, such policies can change energy prices. As a consequence, future energy use decisions would be based on a new set of prices, which may affect the expected level and cost of eventual emissions reductions.
  • Expectations regarding future prices, technologies, and policies can play a large role in shaping current investment decisions. Thus, the form and direction of policy enacted in the near term can encourage market participants to alter longer-term decisions even before regulatory compliance deadlines or other milestones occur.
  • It is critical to assess the impact of today’s energy policy choices in terms of the future cost of pursuing future GHG reduction policies.

 

Policy Objectives

While U.S. energy policy has many sources, forms, and influences, it is nevertheless possible to identify four traditional objectives on which U.S. energy policy has focused: 

  1. a secure, plentiful, and diverse primary energy supply; 
  2. a robust, reliable infrastructure for energy conversion and delivery; 
  3. affordable and stable energy prices; and 
  4. environmentally sustainable energy production and use.

The policy options considered in this brief serve one or more of these objectives.

Climate-friendly energy policies fall into one of three general categories—policies that: 

  1. reduce GHG emissions now; 
  2. promote technology advancement or infrastructure development that will reduce the costs of achieving GHG emissions reductions in the future; and 
  3. minimize the amount of new capital investment in assets that would be substantially devalued (or “stranded”) if a GHG program were implemented. 

Using the criteria outlined above, the following elements of a climate-friendly energy policy have been identified:

Fossil Fuels 

Expand natural gas transportation infrastructure. Encouraging expansion of the natural gas transportation system in North America through, for example, rate incentives, streamlined permitting for pipeline and liquefied natural gas (LNG) facilities, and expedited approvals needed for construction of an Alaska natural gas pipeline, will increase the delivery capability for natural gas and lower the price of the delivered product. This will facilitate the use of gas as a substitute for coal in electricity production and thus reduce GHG emissions. 

Increase natural gas production. Encouraging increased production of natural gas in North America through, for example, tax incentives, royalty relief, and access to public land for resource development will lower the price and increase the availability of natural gas. This will, in turn, permit the use of gas as a substitute for coal in electricity production and thus reduce GHG emissions.

Electricity 

Encourage deployment of efficient electricity production technologies
. Encouraging developers of new generation capacity to employ very efficient generation technologies—with tools such as tax incentives for combined heat and power and high-efficiency distributed generation—can significantly increase the amount of useful energy gleaned from fuels, and thus reduce both energy costs and emissions. Moreover, support for repowering existing plants with technology that improves the efficiency of electricity generation can reduce electricity prices and reduce fuel consumption per kilowatt-hour (kWh), with corresponding GHG reduction benefits. Conversely, policies that discourage such investments in improved efficiency, and instead result only in energy-consuming pollution control retrofits (e.g., scrubbers to reduce conventional air pollutants), may be counterproductive from a climate perspective. Incentives for investment in advanced technologies such as carbon capture and sequestration would allow future use of coal resources without net GHG emissions.

Maintain role for nuclear and hydroelectric power. Policies that allow the safe continued use of nuclear power plants—such as granting license extensions, approving plant upratings where warranted, and finding new solutions to the nuclear waste problem—preserve diversity of energy supply, may reduce electricity prices, and avoid very substantial coal consumption for electricity generation. Likewise, maintaining or expanding hydroelectric capacity in a way that protects natural resources provides low-cost electricity without GHG emissions.

Encourage development of renewable energy resources. Policies that encourage the development of renewable energy resources—such as production tax credits, a renewable portfolio standard, electricity transmission policies that do not discriminate against intermittent renewable resources such as solar and wind, and net metering for small distributed renewable resources—can help diversify our energy portfolio and are environmentally attractive. Wind, solar, geothermal, and hydropower generation produce no GHG emissions, and use of biomass produces no net GHG emissions.

Buildings End-Use Efficiency

Promote use of efficient technologies and green design in buildings. Policies that require increased efficiency of energy end-use (such as building codes or appliance efficiency standards), and policies that encourage use of highly efficient equipment and technologies (such as tax incentives, product efficiency labeling, and Energy Star™ programs) can significantly reduce energy consumption, consumer operating costs over a product’s or building’s lifecycle, the need for investment in new power plants, and emissions related to energy use.

Industrial End-Use Efficiency

Promote the use of more efficient processes and technologies in industry. Policies that provide incentives for investment in efficient processes and combined heat and power technologies, expand coverage of efficiency standards to standard-design industrial equipment, and provide more information on efficient technologies to industrial consumers can lead to further emissions reductions in the industrial sector.

Transportation

Enhance end-use efficiency of automobiles and light trucks. Regulatory and tax policies—such as more stringent CAFE standards, reforms to the “gas guzzler” tax, efficiency standards for tires, and tax or other incentives for the purchase of highly efficient hybrid vehicles—can significantly reduce fuel consumption per mile, thus reducing oil consumption and mitigating reliance on oil imports. Very significant energy and climate policy benefits can be gained in this area. According to a recent National Research Council study, if lead times are long enough, automakers can produce substantially more fuel-efficient vehicles without increasing net consumer costs or compromising safety.25 Moreover, fundamental redesigns such as hybrid vehicles (already commercially available in some Honda and Toyota vehicles) and fuel-cell vehicles offer important additional benefits.

Research and Development

Promote research and development on efficient electricity production technologies. Federal funding or tax incentives for R&D on improving the efficiency of the electricity generation process, regardless of fuel source, can provide options to reduce future energy prices and reduce future fuel consumption per kWh, with corresponding GHG benefits.

Promote research and development on efficient end-use technologies. Federal funding or tax incentives for R&D on improving transportation, building, and industrial end-use efficiency can provide options to reduce future energy costs to consumers and to reduce future energy consumption, with corresponding GHG benefits. Support for R&D is particularly important in areas where fundamental changes are possible, such as the widespread use of hydrogen in fuel cells to power vehicles.

Promote research and development on non-fossil fuels and carbon sequestration. Federal funding or tax incentives for R&D on alternatives to fossil fuels, such as biofuels and hydrogen, can provide future viable alternatives to oil. Development of economical carbon sequestration technologies could enable continued reliance on coal consistent with a GHG regulatory regime.

 

Conclusions

A “climate-friendly” energy policy can advance climate objectives while serving energy policy goals. However, a climate-friendly energy policy is not a substitute for climate policy. More significant GHG emissions reductions would be necessary in order to address climate change than can be justified solely on the basis of traditional energy policy objectives. In the long run, we can only curb climate change by weaning ourselves of our reliance on fossil fuels. The energy policy options outlined in this brief represent sensible and important first steps in U.S. efforts to reduce GHG emissions.

 


 

Endnotes


1 CO2 from fossil fuel combustion represents 82% of U.S. GHG emissions. Only 2% of U.S. GHG emissions are CO2 released from other activities. Although most methane emissions (the second-largest GHG emissions source) come from landfills and agricultural sources, about one-third are attributable to production of natural gas or coal, or to transportation of natural gas. See U.S. DOE, EIA. 2003. Emissions of Greenhouse Gases in the United States 2001. Available at http://www.eia.doe.gov/oiaf/ggrpt .
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2 Smith, Douglas W., Robert R. Nordhaus, Thomas C. Roberts, Marc Chupka, Shelley Fidler, Janet Anderson, Kyle Danish, and Richard Agnew. Designing a Climate-friendly Energy Policy: Options for the Near Term. Pew Center on Global Climate Change. Arlington, VA. July 2002.
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3 The U.S. Domestic Response to Climate Change: Key Elements of a Prospective Program. In Brief, Number 1. Pew Center on Global Climate Change. Arlington, VA.
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4 Nordhaus, Robert R. and Kyle W. Danish. Designing a Mandatory Greenhouse Gas Reduction Program for the U.S. Pew Center on Global Climate Change. Arlington, VA. May 2003. This report identifies issues that must be addressed in the design of a mandatory U.S. GHG reduction program. Three options are specifically evaluated: (1) cap-and-trade programs, (2) GHG taxes, and (3) a “sectoral hybrid” program that combines efficiency standards for automobiles and consumer products with a cap-and-trade program applicable to large sources of greenhouse gases.
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5 Greene, David L. and Andreas Schafer. Reducing Greenhouse Gas Emissions from U.S. Transportation. Pew Center on Global Climate Change. Arlington, VA. May 2003.
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6 CO2 makes up the lion’s share of U.S. GHG emissions, but other gases also play a role in enhancing the greenhouse effect. Non-CO2 greenhouse gases account for roughly 18% of the global warming potential of U.S. GHG emissions. Some of them have a very weak effect; options to control GHG emissions have focused on the five with the strongest impact. Methane (CH4) and nitrous oxide (N2O) are created through decomposition, chemical processes, fossil fuel production and combustion, and many smaller sources. Sulfur hexafluoride (SF6) is used as an insulating gas in large-scale electrical equipment. The remaining two are hydrofluorocarbons (HFCs) used as refrigerants and perfluorocarbons (PFCs) released during aluminum smelting and used in the manufacture of semiconductors. When compared using 100-year global warming potentials, their weighted emissions are as follows: CH4, 9%;  N2O, 5%; HFC/PFC/SF6, 2%. For further discussion of non-CO2 greenhouse gases, see Reilly, John M., Henry D. Jacoby, and Ronald G. Prinn. Multi-gas Contributors to Global Climate Change. Pew Center on Global Climate Change. Arlington, VA. February 2003.
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7 CO2 emissions from the combustion of biomass are offset by CO2 removed from the atmosphere by the plants.
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8 Crude oil in the SPR plus private company stocks would cover approximately 150 days without imports.
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9 For more information about deregulation in the electric power sector, see U.S. DOE, EIA. Electric Power Industry Restructuring Fact Sheet. Available at http://www.eia.doe.gov/cneaf/electricity/page/fact_sheets/restructuring.html.  
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10 U.S. DOE, EIA. 2002. Annual Energy Review 2001. Available at http://www.eia.doe.gov/aer/contents.html.
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11 U.S. DOE, EIA. 2003. Annual Energy Outlook 2003, p. 83. Available at http://www.eia.doe.gov/oiaf/aeo . This number reflects net imports.
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12Ibid., Tables A2 and A3.
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13 “Primary energy” consists of the sum of “site energy” (the energy directly consumed by end users) and the energy consumed in the production and delivery of energy products to end users. See http://www.eia.doe.gov/emeu/consumptionbriefs/cbecs/cbecs_trends/primary_site.html.
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14 U.S. DOE, EIA. 2002. Annual Energy Review 2001, Table 1.3.
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15 U.S. DOE, EIA. 2003. Annual Energy Outlook 2003, pp. 5-6.
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16 U.S. DOE, EIA. 2002. Annual Energy Review 2001, Tables 1.3 and 8.2a.
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17 U.S. DOE, EIA. 2003. Annual Energy Outlook 2003, p. 6.
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18 In addition to CO2 emissions, energy production and use contributes two other greenhouse gases: CH4, primarily from natural gas systems and coal mining, and N2O from fuel combustion.
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19 See Endnote 1.
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20 See U.S. DOE, EIA. 2003. Emissions of Greenhouse Gases in the United States 2001, p. 26.
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21Ibid.
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22Ibid., pp. 24 and 21 (respectively).
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23 A rulemaking by the Department of Transportation, in progress at time of writing, calls for the light truck standard to be raised to 22.2 mpg by 2008.
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24 Greene and Schafer.
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25 National Research Council. 2002. Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards. Available at http://www.nap.edu/books/0309076013/html/.
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Press Release: Climate Change and the U.S. Transportation Sector

For Immediate Release
May 29, 2003

Contact:   Katie Mandes
               703-516-0606

Climate Change and the U.S. Transportation Sector: New Report Reveals Available Policy Options to Reduce GHG Emissions

Washington, DC —Transportation sources in the U.S. account for nearly a third of our nation's greenhouse gas (GHG) emissions, and are rising faster than in any other sector. It is critical that an effective climate change policy for the U.S. address these emissions. A new report released today by the Pew Center on Global Climate Change, Reducing Greenhouse Gas Emissions from U.S. Transportation, written by David L. Greene of Oak Ridge National Laboratory and Andreas Schafer of the Massachusetts Institute of Technology, identifies a number of policies and technologies that can achieve GHG reductions of the necessary scale.

"The U.S. is the owner of the world's largest transportation system, and reducing emissions from this system is critical to an effective GHG reduction strategy," said Eileen Claussen, President of the Pew Center on Global Climate Change. The U.S. transportation system emits more CO2 than any other nation’s total economy, except that of China, and presently accounts for seven of ten barrels of oil this nation consumes. Many of the actions that would reduce emissions from transportation would also address other national priorities, including U.S. dependence on imported oil.

If we start now with existing technologies and investments, it will be possible to reduce carbon emissions by about 20 percent by 2015, and almost 50 percent by 2030, compared to ‘business as usual.’ Some of the reports recommendations are:
Fuel economy for new cars and light trucks can be increased by 25-33% over the next 10-15 years using market-ready technologies. Emerging technologies, including advanced diesel engines and hybrid-electric vehicles are likely to reap fuel savings of 50-100% by 2030. These technologies could be adopted without reducing the size or performance of the vehicles.

R & D and voluntary efforts are necessary but not sufficient, mandatory policies are essential to pull technological improvements into the marketplace. Fuel economy has gotten worse, not because of lack of technology, but lack of policy.

Fuel cells and hydrogen hold out the tantalizing promise of eliminating GHG emissions from this sector, but government must provide clear policy direction in order to drive massive private investment by the fuel and vehicle industries.

The report concludes that a cost-effective portfolio of policy options to address transportation’s GHG emissions exists, but the long lead time required to turn over an entire fleet of vehicles and the supporting infrastructure mean that policies must be implemented now to create the impetus for change. "The transportation sector in the U.S. offers a myriad of choices for near-term gains in efficiency," says Eileen Claussen, "and since many are affordable and available, it is inexcusable that we are not taking advantage of them. Action needs to begin today in order to start us down the path to a low-carbon transportation future."

Solutions Series
This report is part of the Solutions series, which is aimed at providing individuals and organizations with tools to evaluate and reduce their contributions to climate change. Other Pew Center series focus on domestic and international policy issues, environmental impacts, and the economics of climate change.

A complete copy of this report-and previous Pew Center reports-is available on the Pew Center's web site, www.c2es.org/projects. An abbreviated version of this report written specifically for policy-makers, Taking Climate Change into Account in U.S. Transportation, is also available.

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.

Press Release: Two New Reports Examine Options for a Mandatory GHG Reduction Program

For Immediate Release
May 15, 2003

Contact:   Katie Mandes, 703-516-0606

DESIGNING U.S. POLICY TO ADDRESS CLIMATE CHANGE:
Two New Reports Examine Options for a Mandatory GHG Reduction Program

Washington, DC - The Pew Center on Global Climate Change today released two new reports examining design options for a U.S. greenhouse gas emissions reduction program. One report reviews lessons of emissions trading; the other evaluates multiple options for program design. "With growing Congressional interest in policy to address climate change-including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions-the analysis of potential U.S. greenhouse gas reduction programs is timely," said Pew Center President Eileen Claussen. "These reports draw from previous experience with environmental regulation, examining the strengths and weaknesses of various policy approaches, and providing critical guidance for policy-makers."

In recent decades, emissions trading has become an important element of programs to control air pollution both domestically and internationally. In Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases, report authors A. Denny Ellerman and Paul L. Joskow of MIT, and David Harrison, Jr. of NERA review six diverse U.S. emissions trading programs, drawing general lessons for the development of greenhouse gas reduction programs. The report finds that an emissions trading program, if designed and implemented effectively, can achieve environmental goals faster and at lower costs than traditional command-and-control alternatives. The analysis suggests that a cap-and-trade program is especially attractive for controlling greenhouse gases because the warming effects of greenhouse gases are the same regardless of where they are emitted, the costs of reducing emissions vary widely by source, and the cap ensures that the environmental goal is attained.

The second Pew Center report released today - Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., written by Robert R. Nordhaus and Kyle W. Danish-examines options for designing a domestic greenhouse gas reduction program. In addition to cap-and-trade programs, this report evaluates greenhouse gas taxes and a "sectoral hybrid" program that combines efficiency standards for automobiles and consumer products with a cap-and-trade program applicable to large sources of greenhouse gases. Each option is evaluated according to the following criteria: environmental effectiveness, cost-effectiveness, administrative feasibility, distributional equity, and political acceptability. The report's analysis suggests that the comprehensive, upstream cap-and-trade (or similar) approach and the sectoral hybrid approach are the most viable alternatives for a domestic program.

"In order for the United States to achieve the greenhouse gas reductions necessary to address climate change, it must implement a mandatory greenhouse gas reduction program," said Claussen. "Careful design of a domestic program is pivotal to the ultimate success of achieving greenhouse gas reductions in a cost-effective manner."

 


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.

Designing a Mandatory Greenhouse Gas Reduction Program for the U.S.

US Gas Report Cover

Designing a Mandatory Greenhouse Gas Reduction Program for the U.S.

Prepared for the Pew Center on Global Climate Change
May 2003

By:
Robert R. Nordhaus
Kyle W. Danish

Press Release

Download Entire Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

In response to the goal of the U.N. Framework Convention on Climate Change to stabilize greenhouse gas concentrations at a level that would prevent dangerous human interference with the climate system, the United States has instituted a number of programs since 1992. These include voluntary greenhouse gas mitigation programs, research and development, and a subset of energy policies that focus on energy efficiency and renewable energy. More than a decade of experience with these programs shows that while they have at times inspired significant action on the part of individual companies, these measures have not succeeded in reducing, or even stabilizing, total U.S. emissions. U.S. greenhouse gas emissions increased roughly 12 percent between 1990 and 2001, and are projected to increase another 12 percent by 2012. In order for the United States to achieve the significant greenhouse gas reductions necessary to address climate change, it must implement a mandatory greenhouse gas reduction program.

The Pew Center asked report authors Robert Nordhaus of Van Ness Feldman, P.C., and George Washington University Law School, and Kyle Danish of Van Ness Feldman to examine options for designing a mandatory U.S. greenhouse gas reduction program. Three options are specifically evaluated: (1) cap-and-trade programs, (2) greenhouse gas taxes, and (3) a “sectoral hybrid” program that combines efficiency standards for automobiles and consumer products with a cap-and-trade program applicable to large sources of greenhouse gases. In addition to identifying design issues unique to each type of program, the authors evaluate the options according to the following criteria: environmental effectiveness, cost-effectiveness, administrative feasibility, distributional equity, and political acceptability.

The analysis suggests that a comprehensive, upstream cap-and-trade approach (or a workable variation) and the sectoral hybrid approach are the most viable alternatives for a domestic greenhouse gas reduction program. While an economy-wide cap-and-trade approach may present the best option for low-cost greenhouse gas reductions, a sectoral hybrid approach building on existing programs may evolve. Whatever approach is taken, policy-makers should attempt to reach their environmental goal in a way that incorporates market mechanisms and minimizes administrative complexity.

With growing Congressional interest in programs to address climate change—including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions—the analysis of U.S. greenhouse gas reduction program options is timely. In addition to this review, the Pew Center is simultaneously releasing a complementary report, Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases, which examines six diverse U.S. emissions trading programs, drawing general lessons for future applications and discussing considerations for controlling greenhouse gas emissions.

The Pew Center and the authors would like to thank Joe Goffman, Granger Morgan, Tom Wilson, Ev Ehrlich, and Billy Pizer for providing comments on a previous draft of this report, Anne Smith for reviewing the description of modeling results, and William Nordhaus for his useful insights. The views expressed in this report are the authors’ and not those of the reviewers, Van Ness Feldman, or its clients.

Executive Summary

This report identifies issues that must be addressed in the design of a mandatory, domestic greenhouse gas (GHG) reduction program. Three options are specifically evaluated: (1) cap-and-trade programs, (2) GHG taxes, and (3) a “sectoral hybrid” program that combines efficiency standards for automobiles and consumer products with a cap-and-trade program applicable to large GHG emission sources.

Criteria for Evaluating Options

In order to compare various approaches to GHG reductions, each option is evaluated using the following criteria:
 

  • Environmental Effectiveness. How effective is the program in meeting its emissions reduction target?
     
  • Cost-Effectiveness. Will the program design permit cost-effective compliance?
     
  • Administrative Feasibility. Can the program be administered effectively and does it minimize administrative and transaction costs?
     
  • Distributional Equity. Are the burdens of compliance fairly apportioned?
     
  • Political Acceptability. Are there elements of the program’s design that affect its political acceptability?


Analysis of Options

1. Cap-and-Trade Programs

A conventional cap-and-trade program establishes an economy-wide or sectoral “cap” on emissions (in terms of tons per year or other compliance period), and allocates or auctions tradable “allowances” (the right to emit a ton of greenhouse gases) to GHG emission sources or fuel distributors. The total number of allowances is equal to the cap. A “downstream” cap-and-trade program applies to sources of GHG emissions and requires them to surrender allowances equal to their emissions. An “upstream” program applies to fuel suppliers and requires them to surrender allowances equivalent to the carbon content of fossil fuels they distribute. The primary focus of a cap-and-trade program would be on sources of emissions that can be readily measured and monitored; these include almost all sources of carbon dioxide (CO2) emissions from fossil-fuel combustion as well as many sources of other GHG emissions. Sources not amenable to regulation through a cap-and-trade program can be covered on an “opt in” or project basis or addressed through supplemental regulation. Four major issues should be considered in the design of such a cap-and-trade program:
 

1) Flexibility. To what extent can firms satisfy their obligations by purchasing allowances (either from within or outside the United States), by sequestering carbon, by controlling greenhouse gases other than CO2, or by banking or borrowing allowances?

2) Downstream vs. Upstream. Does the program regulate firms that emit greenhouse gases (“downstream”) or does it regulate their fuel suppliers (“upstream”)?

3) Allowance Allocation. Does the program distribute free allowances to firms affected by GHG regulation, does it auction them to the highest bidder, or is some combination of approaches involved? If free allowances are distributed, what allocation formula is used? If allowances are auctioned, how are the revenues used? How might the allocation process change over time?

4) Cost Cap. Does the program incorporate a “safety valve” in which additional allowances are made available at a pre-set price?

Evaluation of the Cap-and-Trade Approach

Upstream cap-and-trade. An economy-wide upstream cap-and-trade program would be environmentally effective, could attain cost-effective compliance if it incorporates flexibility measures, and would be administratively feasible. Its distributional consequences would depend on how allowances were allocated and, if auctioned, how the auction revenues were recycled back into the economy. These allocation and recycling decisions can also affect overall compliance costs, because some methods of allocating allowances may be less economically efficient than an auction, and according to some economists, using auction revenues to reduce “distortionary” taxes on capital or labor can reduce the net costs of the program. Finally, because an economy-wide upstream cap-and-trade program will drive up the cost of gasoline and home heating fuels, it is likely to present a political challenge.

All-source downstream cap-and-trade. An economy-wide downstream cap-and-trade program—because it implies the regulation of literally millions of individual GHG sources, including cars and homes—would be difficult and costly to administer, and therefore is not a viable prospect for a domestic GHG regulatory program.

Large-source downstream cap-and-trade. A large-source downstream program (i.e., one applicable only to electricity generators and large industrial sources of greenhouse gases) is administratively feasible and could be environmentally effective with respect to the sectors it covered. To be fully effective, however, such an approach would have to be coupled with a program to cover other sectors. A large-source downstream program might be more acceptable politically than an upstream economy-wide program because it would not result in price increases for gasoline and home heating fuels (though it still would result in price increases for electricity).




2. GHG Tax

A GHG tax is a tax on emissions of greenhouse gases or on the carbon content of fossil fuel. Many of the design issues discussed in connection with cap-and-trade programs are also present—though in somewhat different form—in the design of a GHG tax.

Evaluation of the GHG Tax Approach

An upstream GHG tax program could be environmentally effective, but would not provide certainty in meeting a particular emissions target. It would allow for adoption of least-cost mitigation strategies, would offer cost certainty, and would be administratively feasible. The ultimate distributional consequences of a GHG tax would depend on how policy-makers distributed revenues from the tax. Again, according to some economists, using revenues from allowance auctions or emissions taxes to reduce “distortionary” taxes can reduce the net costs of the program. However, political acceptability is likely to be a major obstacle, since the GHG tax combines both new taxes and fuel price increases. A GHG tax could have better prospects as a part of a larger tax reform effort.




3. Sectoral Hybrid Programs (Product Efficiency Standards Plus Large Source Cap-and-Trade)

One way to increase the environmental effectiveness and cost-effectiveness of a domestic program that relies on a large-source downstream cap-and-trade policy is to regulate uncapped sectors through product efficiency standards. Such a “sectoral hybrid” program would combine a large source cap-and-trade program with product efficiency standards. The product efficiency standard component would be similar to current automobile and appliance efficiency standards, and would be designed to limit GHG emissions from new automobiles and consumer products.

Issues in designing the product efficiency standards component of the sectoral hybrid include: the scope of the program (which products are regulated); the extent to which standards are made “tradable” (i.e., whether manufacturers can trade between product lines within the firm, with other manufacturers, or with facilities regulated under the cap-and-trade program); and whether the program “caps” projected lifetime emissions from use of the product (“capped tradable standards”).

Evaluation of the Sectoral Hybrid Approach

A sectoral hybrid program consisting of a large-source downstream program coupled with product efficiency standards would be more environmentally effective than a downstream program alone (or standards alone), because standards could address emissions from sources (such as automobiles and appliances) that could not feasibly be covered by the downstream cap-and-trade program. Building on existing standards programs, such a hybrid program could attain coverage of about 80 percent of U.S. energy-related CO2 emissions. However, product efficiency standards would not address the intensity of product use or the replacement rate of new products for old, less-efficient products. A hybrid program would be a more costly means of achieving any particular emissions target than an economy-wide upstream cap-and-trade or tax program, though making the standards “tradable” would reduce the disparity. Incorporating tradable standards would present significant administrative challenges, however, because of the need to prevent double-counting of emission reductions and the technical issues in setting and revising standards. Finally, a sectoral hybrid program may score better on political acceptability because it constrains domestic GHG emissions while largely shielding consumers from
fuel price increases.




Summary of Analysis

The paper’s analysis would argue against an economy-wide downstream cap-and-trade program (as unadministrable), a stand-alone large-source cap-and-trade program (as incomplete), and a GHG tax program (as unviable politically, unless coupled with structured tax reform). The paper’s analysis indicates that at least two major alternatives appear to be feasible: (1) an economy-wide upstream cap-and-trade program, or (2) a sectoral hybrid program under which product efficiency standards complement a large-source downstream cap-and-trade program.

The first alternative (a comprehensive upstream cap-and-trade program) may be the best one if it can be put in place. However, U.S. energy policy experience over the past three decades suggests that putting it in place may be extraordinarily difficult. Even in times of most compelling national circumstances, such as the 1973 Arab oil embargo, Congress was unwilling to use energy price increases to rein in consumer demand. The second alternative—a sectoral hybrid program—may be all that can be implemented in the near term. If policy-makers take that course, careful attention will have to be given to minimizing economic costs and administrative complexity, and assuring that the program can be effectively enforced.

Kyle W. Danish
Robert R. Nordhaus
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Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases

Emissions Trading Report Cover

Emissions Trading in the U.S.: Experience, Lessons and Considerations for Greenhouse Gases

Prepared for the Pew Center on Global Climate Change
May 2003

By:
A. Denny Ellerman and Paul L. Joskow, Massachusetts Institute of Technology
David Harrison, Jr., National Economic Research Associates, Inc.

Press Release

Download Entire Report (pdf)

Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

In recent years, emissions trading has become an important element of programs to control air pollution. Experience indicates that an emissions trading program, if designed and implemented effectively, can achieve environmental goals faster and at lower costs than traditional command-and-control alternatives. Under such a program, emissions are capped but sources have the flexibility to find and apply the lowest-cost methods for reducing pollution. A cap-and-trade program is especially attractive for controlling global pollutants such as greenhouse gases because their warming effects are the same regardless of where they are emitted, the costs of reducing emissions vary widely by source, and the cap ensures that the environmental goal is attained.

Report authors Denny Ellerman and Paul Joskow of the Massachusetts Institute of Technology and David Harrison of National Economic Research Associates, Inc. review six diverse U.S. emissions trading programs, drawing general lessons for future applications and discussing considerations for controlling greenhouse gas emissions. The authors derive five key lessons from this experience. First, emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Second, the use of emissions trading has enhanced—not compromised—the achievement of environmental goals. Third, emissions trading has worked best when the allowances or credits being traded are clearly defined and tradable without case-by-case certification. Fourth, banking has played an important role in improving the economic and environmental performance of emissions trading programs. Finally, while the initial allocation of allowances in cap-and-trade programs is important from a distributional perspective, the method of allocation generally does not impair the program’s potential cost savings or environmental performance.

With growing Congressional interest in programs to address climate change—including the recent introduction of economy-wide cap-and-trade legislation controlling greenhouse gas emissions—the application of lessons learned from previous emissions trading programs is timely. In addition to this review, the Pew Center is simultaneously releasing a complementary report, Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., which examines additional options for designing a domestic climate change program.

The authors and the Pew Center are grateful to Dallas Burtraw and Tom Tietenberg for reviewing a previous draft of this report. The authors also wish to acknowledge Henry Jacoby, Juan-Pablo Montero, Daniel Radov, and Eric Haxthausen for their contributions to various parts of the report, and James Patchett and Warren Herold for their research assistance.

Executive Summary

Emissions trading has emerged over the last two decades as a popular policy tool for controlling air pollution. Indeed, most major air quality improvement initiatives in the United States now include emissions trading as a component of emissions control programs. The primary attraction of emissions trading is that a properly designed program provides a framework to meet emissions reduction goals at the lowest possible cost. It does so by giving emissions sources the flexibility to find and apply the lowest-cost methods for reducing pollution. Emission sources with low-cost compliance options have an incentive to reduce emissions more than they would under command-and-control regulation. By trading emission credits and allowances to high-cost compliance sources, which can then reduce emissions less, cost-effective emission reductions are achieved by both parties. When inter-temporal trading is allowed, sources can also reduce emissions early, accumulating credits or allowances that can be used for compliance in future periods if this reduces cumulative compliance costs. Accordingly, cap-and-trade programs achieve the greatest cost savings when the costs of controlling emissions vary widely across sources or over time. In practice, well-designed emissions trading programs also have achieved environmental goals more quickly and with greater confidence than more costly command-and-control alternatives.

Emissions trading has achieved prominence beyond the United States largely in the context of discussions regarding implementation of the Kyoto Protocol, a proposed international agreement to control emissions of carbon dioxide (CO2) and other greenhouse gases. The Kyoto Protocol provides for the use of various emissions trading mechanisms at the international level. Some countries already are developing emissions trading programs while the process of ratifying the Protocol moves forward. Both the United Kingdom and Denmark have instituted greenhouse gas (GHG) emissions trading programs, and, in December 2002, the European environment ministers agreed on the ground rules for a European Union trading program that would begin in 2005 for large sources of CO2 emissions (and later for other GHG emissions). Indeed, proposals to control GHG emissions in the United States also include the use of emissions trading.

The theoretical virtues of emissions trading have been recognized for many decades—the basic elements were outlined in Coase (1960) and elaborated in Dales (1968)—but actual emissions trading programs have been brought from the textbook to the policy arena mostly in the last decade. It is important to recognize, however, that while properly designed emissions trading programs can reduce the cost of meeting environmental goals, experience does not indicate that significant emissions reductions can be obtained without costs. Emissions trading can be an effective mechanism for controlling emissions by providing sources with the flexibility to select the lowest-cost opportunities for abatement, but it does not make costs disappear. Moreover, emissions trading programs must be designed properly in order to realize their potential cost-reduction and environmental compliance goals. As with any emissions control program, poor design is likely to lead to disappointing results.

Experience with emissions trading, including both the design and operation of trading programs, provides a number of general lessons for future applications. This report reviews the experience with six emissions trading programs with which one or more of the authors have considerable experience:

  • The early Environmental Protection Agency (EPA) Emissions Trading programs that began in the late 1970s;
  • The Lead Trading program for gasoline that was implemented in the 1980s;
  • The Acid Rain program for electric industry sulfur dioxide (SO2) emissions and the Los Angeles air basin (RECLAIM) programs for both nitrogen oxides (NOx) and SO2 emissions, all of which went into operation in the mid-1990s;
  • The federal mobile source averaging, banking, and trading (ABT) programs that began in the early 1990s; and
  • The Northeast NOx Budget trading program, which began operations in the late 1990s.

Based on this experience, this report identifies and discusses five general lessons concerning the design and implementation of emissions trading programs, and two considerations of particular relevance for GHG applications.



General Lessons from Experience with Emissions Trading

Emissions trading has been successful in its major objective of lowering the cost of meeting emission reduction goals. Experience shows that properly designed emissions trading programs can reduce compliance costs significantly compared to command-and-control alternatives. While it is impossible to provide precise measures of cost savings compared to hypothetical control approaches that might have been applied, the available evidence suggests that the increased compliance flexibility of emissions trading yields costs savings of as much as 50 percent.

The use of emissions trading has enhanced—not compromised—the achievement of environmental goals. While some skeptics have suggested that emissions trading is a way of evading environmental requirements, experience to date with well-designed trading programs indicates that emissions trading helps achieve environmental goals in several ways.

For one thing, the achievement of required emission reductions has been accelerated when emission reduction requirements are phased-in and firms are able to bank emissions reduction credits. The Lead Trading program for gasoline, the Acid Rain program for the electric industry, the federal mobile source ABT programs, and the Northeast NOx Budget programs each achieved environmental goals more quickly through these program design features. Moreover, giving firms with high abatement costs the flexibility to meet their compliance obligations by buying emissions allowances eliminates the rationale underlying requests for special exemptions from emissions regulations based on “hardship” and “high cost.” The reduction of compliance costs has also led to instances of tighter emissions targets, in keeping with efforts to balance the costs and benefits of emissions reductions. Finally, properly designed emissions trading programs appear to provide other efficiency gains, such as greater incentives for innovation and improved emissions monitoring.

Emissions trading has worked best when allowances or credits being traded are clearly defined and tradable without case-by-case pre-certification. Several different types of emissions trading mechanisms have been implemented. Their performance has varied widely, and these variations illuminate the key features of emissions trading programs that are most likely to lead to significant cost savings while maintaining (or exceeding) environmental goals.

The term “emissions trading” is used, often very loosely, to refer to three different types of trading programs: (1) reduction credit trading, in which credits for emission reductions must be pre-certified relative to an emission standard before they can be traded; (2) emission rate averaging, in which credits and debits are certified automatically according to a set average emission rate; and (3) cap-and-trade programs, in which an overall cap is set, allowances (i.e., rights to emit a unit) equal to the cap are distributed, and sources subject to the cap are required to surrender an allowance for every unit (e.g., ton) they emit.

The turnaround in perception of emissions trading over the last decade—from a reputation as a theoretically attractive but largely impractical approach to its acceptance as a practical framework for meeting air quality goals in a cost-effective manner—largely reflects the increased use of averaging and cap-and-trade type programs. The performance of the early EPA reduction credit programs was very poor and gave “emissions trading” a bad name. These early EPA programs emphasized case-by-case pre-certification of emission reductions and were characterized by burdensome and time-consuming administrative approval processes that made trading difficult. The averaging and cap-and-trade programs have been much more successful. While the use of cap-and-trade or averaging does not guarantee success, and the problems with the reduction credit-based approach can be reduced by good design, avoiding high transaction costs associated with trade-by-trade administrative certification is critical to the success of an emissions trading program. The success of any emissions trading program also requires several additional elements: emissions levels must be readily measured, legal emissions rates or caps must be clearly specified, and compliance must be verified and enforced aggressively.

Banking has played an important role in improving the economic and environmental performance of emissions trading programs. Early advocates of emissions trading tended to emphasize gains from trading among participants (i.e., low-cost compliance sources selling credits and allowances to high-cost compliance sources) in the same time period. The experience with the programs reviewed here indicates that inter-temporal trading also has been important. The form that inter-temporal trading most often takes is credit or allowance banking, i.e., reducing emissions early and accumulating credits or allowances that can be used for compliance in future periods. Banking improves environmental performance and reduces cumulative compliance costs. Moreover, it has been particularly important in providing flexibility to deal with many uncertainties associated with an emissions trading market—production levels, compliance costs, and the many other factors that influence demand for credits or allowances. Indeed, the one major program without a substantial banking provision, the Los Angeles RECLAIM program, appears to have suffered because of its absence.

The initial allocation of allowances in cap-and-trade programs has shown that equity and political concerns can be addressed without impairing the cost savings from trading or the environmental performance of these programs. Because emissions allowances in cap-and-trade programs are valuable, their allocation has been perhaps the single most contentious issue in establishing the existing cap-and-trade programs. However, the ability to allocate this valuable commodity and thereby account for the economic impacts of new regulatory requirements has been an important means of attaining political support for more stringent emissions caps. Moreover, despite all the jockeying for allowance allotments through the political process, the allocations of allowances to firms in the major programs have not compromised environmental goals or cost savings. The three cap-and-trade programs that have been observed so far all have relied upon “grandfathering,” i.e., distributing allowances without charge to sources based upon historical emissions information, which generally does not affect firms’ choices regarding cost-effective emission reductions and thus the overall cost savings from emissions trading. There are other methods of allocating initial allowances—such as auctioning by the government and distributing on the basis of future information—that can affect cost savings and other overall impacts; but the major effects of the initial allocation are to distribute valuable assets in some manner and to provide effective compensation for the financial impacts of capping emissions on participating sources.



Considerations for Greenhouse Gas Control Programs

Emissions trading seems especially well-suited to be part of a program to control greenhouse gas emissions. The emissions trading programs reviewed for this report generally have spatial or temporal limitations because sources of the pollutants included in these programs—such as lead, SO2, and NOx—may have different environmental impacts depending on the sources’ locations (e.g., upwind or downwind from population centers) and the time of the emissions (e.g., summer or winter). The concerns of trading programs associated with climate change are different because greenhouse gases are both uniformly mixed in the earth’s atmosphere and long-lived. The effects of GHG emissions thus are the same regardless of where the source is located and when the emissions occur (within a broad time band). This means that emissions trading can be global in scope as well as inter-temporal, creating an opportunity for the banking of emission credits, which allows emissions to vary from year to year as long as an aggregate inter-temporal cap is achieved.

Emissions trading is also well suited for GHG emissions control because the costs of reducing emissions vary widely between individual greenhouse gases, sectors, and countries, and thus there are large potential gains from trade. While other market-based approaches, such as emissions taxes, also would provide for these cost savings, the cap-and-trade version of emissions trading has the further advantage of providing greater certainty that an emission target will be met. Moreover, GHG emissions generally can be measured using relatively inexpensive methods (e.g., fuel consumption and emission factors), rather than the expensive continuous emissions monitoring required for some existing trading programs.

Furthermore, emissions trading provides important incentives for low-cost compliance sources initially outside the program to find ways to participate, and thereby further reduce costs. This opt-in feature is useful because an environmentally and cost-effective solution for reducing concentrations of greenhouse gases should be comprehensive and global, whereas initial controls on GHG emissions will—for political reasons—likely be limited, if not to certain sectors and greenhouse gases, then almost certainly to a restricted number of countries. Therefore, an important criterion for initial measures is that they be able to induce participation by sources not yet controlled. The markets created by cap-and-trade programs provide incentives for sources outside the trading program to enter if they can provide reductions more cheaply than the market prices—a common feature of any market. Although, as discussed below, the voluntary nature of these incentives can create some problems, the ability to induce further participation is an important reason to include a market-based approach initially. Indeed, it is hard to imagine how command-and-control regulations or emissions taxes could provide similar incentives to non-participants to adopt new measures to reduce greenhouse gas emissions.

Opt-in or voluntary features have a strategic role that is likely to warrant their inclusion despite the potential problems associated with them. Experience with allowing sources not covered by mandatory emissions trading programs to “opt-in,” i.e., to voluntarily assume emissions control obligations and to participate in the emissions market, has revealed a trade-off. Setting clear baselines for opting-in lowers transactions costs and thus encourages participation; but some of this participation consists of credits for calculated “reductions” that are unrelated to the trading program and actually lead to increased emissions. For example, in the Acid Rain Program, evidence indicates that many of the voluntary participants received credits for having emissions below the pre-specified baseline even though they took no abatement actions. The simple emissions baseline had been set higher than these facilities’ actual emissions, so at least some of the credits they received did not represent real emissions reductions.

This experience suggests that the decision whether or not to include opt-in provisions should be determined by weighing the cost-saving benefits against the emissions-increasing potential. For greenhouse gases, the potential cost-savings benefits of including a voluntary element in the mandatory program are large because initial efforts are not likely to be comprehensive and global, as they must be eventually to achieve their environmental goals and be cost-effective. Opt-in provisions also have value in improving measurement and monitoring techniques, in familiarizing participants with the requirements of emissions trading, and more generally with inducing participation of sources outside the trading program that can offer cheaper abatement. As a result, allowing participants outside the mandatory GHG emissions control program to opt-in has a strategic value that has not been prominent in other opt-in programs. Indeed, it should be possible to learn from existing experience with opt-in programs how to reduce adverse effects while achieving cost-savings.

Viewed from a broad historical perspective, emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Although still not the dominant form of controlling pollution in the United States or elsewhere, emissions trading is being included in an increasing number of programs and proposals throughout the world, and its role seems likely to expand in the future.

Conclusions

Emissions trading has emerged as a practical framework for introducing cost-reducing flexibility into environmental control programs and reducing the costs associated with conventional command-and-control regulation of air pollution emissions. Over the last two decades considerable experience with various forms of emissions trading has been gained, and today nearly all proposals for new initiatives to control air emissions include some form of emissions trading. This report has attempted to summarize that experience and to draw appropriate lessons that may apply to proposals to limit GHG emissions. In doing so, we hope that the reader has gained a better understanding of emissions trading and the reasons for its increasing importance as an instrument for addressing environmental problems.

Six diverse programs constitute the primary U.S. experience with air emissions trading. The EPA’s early attempts starting in the late 1970s to introduce flexibility into the Clean Air Act through netting, offsets, bubbles, and banking were not particularly encouraging. Most of the potential trades, and economic gains from trading, in these early systems were frustrated by the high transaction costs of certifying emission reductions. The first really successful use of emissions trading occurred in the mid-1980s when the lead content in gasoline was reduced by 90 percent in a program that allowed refiners to automatically earn credits for exceeding the mandated reductions in lead content and to sell those credits to others or bank them for later use.

The Acid Rain or SO2 allowance trading program for electricity generators, which has become by far the most prominent experiment in emissions trading, was adopted in 1990 and implemented beginning in 1995. This innovative program introduced a significantly different form of emissions trading, known as cap-and-trade, in which participants traded a fixed number of allowances—or rights to emit—equal in aggregate number to the cap, instead of trading on the differences from some pre-existing or external standard as had been the case in the early EPA trading programs and the lead phase-down program.

Another cap-and-trade program, the RECLAIM program for both SO2 and NOx emissions, was developed and implemented at the same time as the Acid Rain program by the regulatory authority in the Los Angeles Basin as part of its efforts to bring that area into attainment with National Ambient Air Quality Standards. The RECLAIM program is the first instance of emissions trading both supplementing and supplanting a pre-existing command-and-control structure that theoretically was capable of achieving the same environmental objective. The standards of the pre-existing command-and-control system largely determined the level of the cap, and the program’s ten-year phase-in design and trading provided the flexibility that led to the achievement of environmental goals that had been previously elusive. RECLAIM also introduced trading among different sectors.

The 1990 Amendments to the Clean Air Act also provided enabling legislation for two other emissions trading programs. Emissions from mobile sources were more effectively and efficiently controlled by the introduction of mobile source averaging, banking, and trading programs. The mobile source programs followed the example of the lead phase-down program by allowing firms to create credits automatically for any reductions beyond a required uniform emission standard and to use these credits in lieu of more costly reductions elsewhere or later within the company and to sell them. The 1990 Amendments also provided the mechanism that encouraged states in the Northeastern United States to adopt cap-and-trade programs to control NOx emissions that contributed to ozone non-attainment in that region of the country. As was the case in the RECLAIM program, emissions trading was adopted as a means to attain environmental objectives more quickly and cost-effectively than had proved possible through conventional command-and-control regulation.

There are many lessons to be gained from the experience with these six programs, but the five most important lessons can be summarized as follows. First, the major objective of emissions trading, lowering the cost of meeting emission reduction goals, has been achieved in most of these programs. Second, emissions trading has not compromised the achievement of the environmental goals embodied in these programs. If anything, and this is perhaps surprising, the achievement of those goals has been enhanced by emissions trading. Third, emissions trading has worked best in reducing costs and achieving environmental goals when the credits being traded are clearly defined and readily tradable without case-by-case certification. Fourth, temporal flexibility, i.e., the ability to bank allowances, has been more important than generally expected, and the ability to bank has contributed significantly to accelerating emission reductions and dampening price fluctuations. Fifth, the initial allocation of allowances in cap-and-trade programs has shown that equitable and political concerns can be met without impairing either the cost savings from trading or the environmental performance of these programs. In addition, the success of any emissions trading program requires that emissions levels can be readily measured and compliance verified and enforced.

All of these five lessons are relevant when considering the use of emissions trading in a program aimed at reducing GHG emissions. In fact, emissions trading seems especially appropriate for this environmental problem. Greenhouse gas emissions mix uniformly and remain in the atmosphere for a long time. Thus, it matters little where or when the emissions are reduced, as long as the required cumulative reductions are made. These specific characteristics of GHG emissions eliminate two of the concerns that have limited the scope of emissions trading in many other programs.

Although an effective GHG mitigation program must eventually be global in scope and comprehensive in its coverage of pollutants and economic sectors, the likelihood that control efforts will be limited initially to the richer countries, the more easily measurable gases, and perhaps to certain sectors of the economy introduces another consideration. The ability to induce initially uncapped sources to participate voluntarily in the early efforts will reduce costs and prepare the way for extending the caps. Thus, providing opportunities to opt-in for uncapped sources that can reduce emissions at lower cost than those within the cap has a strategic value beyond the potential cost savings. Although some existing programs with voluntary provisions have revealed opportunities for misuse, these problems can be managed more successfully now with the benefit of experience. The strategic value of opt-in provisions in any GHG emission control program makes their inclusion highly desirable.

Emissions trading has come a long way since the first theoretical insights forty years ago and the first tentative application almost a quarter of a century ago. Since then, the use of emissions trading has expanded steadily and significant experience has been gained. Although not the dominant form of controlling pollution in the United States or elsewhere, emissions trading now seems firmly established as a valuable instrument and its future use seems sure to increase. Our review of experience over the past quarter century suggests that this trend toward greater use of emissions trading will improve the performance of environmental regulation, including efforts to control GHG emissions.

About the Authors

A. Denny Ellerman, Massachusetts Institute of Technology

Dr. Ellerman is a Senior Lecturer with the Sloan School of Management at the Massachusetts Institute of Technology, where he also serves as the Executive Director of the Center for Energy and Environmental Policy Research and of the Joint Program on the Science and Policy of Global Change. His former employment includes Charles River Associates, the National Coal Association, the U.S. Department of Energy, and the U.S. Executive Office of the President. He served as President of the International Association for Energy Economics for 1990. Dr. Ellerman received his undergraduate education at Princeton University and his Ph.D. in Political Economy and Government from Harvard University. His current research interests focus on emissions trading, climate change policy, and the economics of fuel choice, especially concerning coal and natural gas.


Paul L. Joskow, Massachusetts Institute of Technology

Paul L. Joskow is Elizabeth and James Killian Professor of Economics and Management at MIT and Director of the MIT Center for Energy and Environmental Policy Research. He received a B.A. from Cornell University in 1968 and a Ph.D. in Economics from Yale University in 1972. Professor Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998.

At MIT he is engaged in teaching and research in the areas of industrial organization, energy and environmental economics, and government regulation of industry. Professor Joskow has published five books and over 100 articles and papers in these areas. He has been studying the behavior and performance of the SO2 allowance trading program created by the Clean Air Act Amendments of 1990 for several years and is a co-author of the book Markets for Clean Air: The U.S. Acid Rain Program (Cambridge University Press).

Professor Joskow has served as a consultant on regulatory and competitive issues to organizations around the world. He served on the EPA’s Acid Rain Advisory Committee from 1990-1992 and was a member of the Environmental Economics Advisory Committee of the EPA’s Science Advisory Board from 1998-2002. He is a Director of the National Grid Transco Group and the Whitehead Institute for Biomedical Research and a Trustee of the Putnam Mutual Funds. He is a Fellow of the Econometric Society and the American Academy of Arts and Sciences.


David Harrison, Jr. , National Economic Research Associates, Inc.

David Harrison is a Senior Vice President at National Economic Research Associates (NERA), an international firm of 500 consulting economists operating in 16 offices on five continents and a Marsh & McLennan company. Dr. Harrison is co-chair of NERA’s energy and environmental economics practice.

Before joining NERA in 1988, Dr. Harrison was an Associate Professor at the John F. Kennedy School of Government at Harvard University, where he taught microeconomics, environmental and energy policy, transportation policy, and benefit-cost analysis. He was a member of the Faculty Steering Committee of Harvard’s Energy and Environmental Policy Center. Dr. Harrison earlier served as a Senior Staff Economist on the President’s Council of Economic Advisors, where his areas of responsibility included environmental regulation, natural resource policy, transportation policy, and occupational health and safety.

Dr. Harrison has consulted for private firms, trade associations, and government agencies in the U.S. and abroad on many energy and environmental issues. Dr. Harrison has been active in the development of major emissions trading programs, including serving on the advisory committee to develop RECLAIM, an author of proposals for averaging, banking, and trading programs for mobile sources and for NOx trading proposals for the Northeast, and a consultant to the European Commission (EC) with regard to aspects of its proposed greenhouse gas emissions trading program. He is currently advising the UK government with regard to aspects of its EU program and the EC with regard to trading programs for non-greenhouse gas emissions.

Dr. Harrison holds a Ph.D. in Economics from Harvard University, a M.Sc. in Economics from the London School of Economics, and a B.A. in Economics from Harvard University.

 

A. Denny Ellerman
David Harrison, Jr.
Paul L. Joskow
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