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It is not an easy task to craft regulation, but by inviting a wide range of views to be heard Senators Domenici and Bingaman have signaled their intent to craft a workable and fair piece of legislation. Most important, the Senators are not asking if we should do something, they are asking how we should do it.
A successful United States policy must meet the following objectives: it must be comprehensive; it must include a program to cap emissions from large sources and allow for emissions trading; and it should protect U.S. firms in energy-intensive industries against competitiveness impacts. It is important too that other countries adopt measures to reduce and limit their emissions, but the single most important step the United States can take to encourage efforts by other countries is to begin in earnest to address our own greenhouse gas emissions.
Today's hearings are a watershed event and I commend the Energy committee for their political will.
HON. EILEEN CLAUSSEN, PRESIDENT
PEW CENTER ON GLOBAL CLIMATE CHANGE
At the Climate Conference of
The Energy and Natural Resources Committee
United States Senate
Panel: Trading and International Competitiveness
April 4, 2006
Mr. Chairman and members of the committee, thank you for the opportunity to participate in this conference. The Pew Center works closely with a council of forty-one major companies to advance practical and effective climate change policies.
I would like to address the issue of the comparability of national efforts by disentangling two distinct but related objectives: (1) achieving adequate action by all major emitting countries, and (2) protecting U.S. firms against competitiveness impacts.
The first of these objectives is best achieved through multilateral commitments engaging all the major greenhouse gas-emitting nations in a fair and effective long-term effort. Twenty-five countries account for 83 percent of global emissions. Engaging these major economies requires a flexible framework that allows different countries to take on different types of binding commitments. We believe the United States should play a leadership role in developing such a framework.
But ensuring broad comparability at the national level will not necessarily achieve the second objective: protecting U.S. firms against competitiveness impacts. It is not the competitiveness of the U.S. economy as a whole that is at issue. To the degree that there are competitiveness impacts, they will fall on specific sectors: energy-intensive industries whose goods are traded internationally. These sectors might remain vulnerable even if efforts by all major emitters are broadly comparable, because countries could choose to exempt a given sector from controls, giving that sector an advantage over foreign competitors.
At the international level, one way to ensure a level playing field is to establish multilateral agreements along sectoral lines. These could be one element of the framework I mentioned earlier.
At the domestic level, in designing a national cap-and-trade system, we should set the caps at modest levels, allow offsets, and “grandfather” allowances in a way that protects vulnerable firms or sectors. We could also dedicate funds, possibly by auctioning a portion of allowances, to provide technology assistance to affected industries and transition assistance for their workers.
I would like to note in closing that the single most important step the United States can take to encourage stronger efforts by other countries is to begin in earnest to address our own greenhouse gas emissions. I applaud the Committee for advancing this critical debate.
Read related content on the Senate Energy and Natural Resource Committee's Climate Conference.
AN AGENDA FOR CLIMATE ACTION
SPEECH BY EILEEN CLAUSSEN
PRESIDENT, PEW CENTER ON GLOBAL CLIMATE CHANGE
YALE SCHOOL OF FORESTRY AND ENVIRONMENTAL STUDIES
NEW HAVEN, CONNECTICUT
MARCH 30, 2006
Thank you very much. It is great to be here at Yale. I want to open my remarks today with some polling numbers. And I know what some of you may be thinking. You’re thinking this is a typical Washington thing to do: talk about polls. And you’re thinking about how polls really don’t get at the real issues. And you may be right, particularly in this era of television and internet insta-polls.
I was watching BBC Television shortly after the death of Slobodan Milosevic and the announcer asked viewers to call in with their opinions on this question: “How will Milosevic’s death affect the future of peace in the Balkans?” And I thought that’s really a fairly sophisticated question. Sort of the kind of essay question you might have to respond to here at Yale. And fairly typical, I imagine, of BBC’s expectations of its audience.
In contrast, if you turn on CNN or FOX or one of the other American cable networks, the questions tend to be of the quick yes or no variety. Here is an actual CNN online poll I found on the Internet: “Would you consider having microchips implanted in your body? Yes or no.” I can only imagine how someone might use these results.
But seriously, I think we can all learn something from looking at the polling on an issue such as climate change, especially when it reveals a clear divergence between public opinion and what is happening in Washington to address this issue.
Just a couple of weeks ago, a national survey showed that Americans of all political beliefs are not happy with the U.S. government’s leadership (or lack thereof) on the issues of global warming and alternative energy. More than three out of four – including two out of three conservatives – said the federal government is not doing enough on either of these issues. And nearly nine out of ten agreed with the following statement—and I quote: “U.S. leaders should take steps to reduce carbon pollution now and speed up the conversion to renewable energy and other alternatives.”
Nine out of ten people. That’s higher than the proportion of dentists who recommend sugarless gum for their patients who chew gum. Seriously, it is an overwhelming majority of Americans. And they all want to see something done to address the climate issue and to put America on a path to a low-carbon future.
Of course, President Bush and Vice President Cheney say they don’t pay attention to polls – and this is one time when I believe them. Because if they were to pay attention to polls, they would be doing something serious to solve the climate problem. In ever-increasing numbers, Americans recognize that we are facing a potential crisis here, and they are looking to their elected leaders in Washington to shape solutions.
I am here today to talk about what those solutions might entail—and I want to do that by focusing on a comprehensive plan to reduce greenhouse gas emissions in the United States that the Pew Center released in February. But I want to start with a brief look at the science of climate change, as well as what is happening now at both the state level and nationally.
Then I want to reserve the rest of my remarks to talk about the Pew Center’s Agenda – because what is happening right now in this country is clearly not enough.
The Science of Climate Change
So first the science. The polling data I talked about shows a pronounced shift in Americans’ views on the climate issue and what to do about it. And the main reason for this shift is not that people are beginning to notice that it’s getting warmer or that the pond over at the town park just isn’t freezing as much in the winter as it used to.
No, what’s happening is that people are beginning to pay attention to the science on this issue. And they are coming to understand that there is no longer any doubt about it: climate change is a very real and very serious problem.
Scientists now know for certain that the globe has been warming for the past century. They also know that human activities, mainly the burning of coal and oil, but also agriculture and deforestation, have dramatically increased concentrations of heat-trapping gases in the atmosphere
In just the past year, the science linking observed climate change directly to human activities has become increasingly solid. And the impacts of climate change, distributed across the globe, are occurring in patterns that can only be explained by human activities and not by natural variations in regional climate. During the first half of the 20th century, natural factors may have been as important as anthropogenic factors. Unfortunately, the more dramatic warming that has occurred since then has been dominated by the human influence. The science is now clear on this point.
But what is really changing how people view this issue is that the impacts we are seeing now—today—are happening much sooner than anyone might have anticipated even a decade ago. These changes were predicted, but even the scientists who made the predictions are surprised at the rate at which they are now occurring.
What do we know about the impacts of climate change?
We know that ice cover around the world is changing at an unprecedented rate. Just last month, new satellite-based measurements of ice flow in Greenland were published in the Journal Science. And what they showed is that the second largest land-based ice sheet in the world is losing ice twice as fast as scientists had estimated before these new measurements were available. This ice sheet, if completely melted, could raise global sea level by almost 20 feet. That would permanently flood not just New Orleans, but virtually all of America’s major coastal cities.
We also know that we are experiencing a worldwide loss of mountain glaciers, a trend that is accelerating. By mid-century, most mountain glaciers may be gone.
We know that hurricanes are becoming more intense, not just in the Atlantic, which gave us Katrina and Rita, but in all oceans where hurricanes occur.
We know that ecosystems around the world are showing signs of responding to climate change. One study found that 130 species - both plants and animals - have responded to earlier spring warming over the last 30 years. These organisms have changed their timing of flowering, migration and other spring activities. More startling than this, however, climate change is also driving some species to extinction. For instance, in the past 20 years dozens of species of mountain frogs in Central America have disappeared because of a disease that formerly did not occur where they live. Early this year, a paper in the journal Nature revealed that the disease-causing organism, a fungus, has spread to higher elevations as a result of climate warming. This paper not only provides an example of climate change driving species extinct, but also strong scientific evidence that climate change is promoting the spread of diseases to new areas. In the authors' own words, "With climate change promoting infectious disease and eroding biodiversity, the urgency of reducing greenhouse-gas concentrations is now undeniable."
And these are, if I may say this, just the tip of the melting iceberg.
So the bottom line is this: The earth is warming; the impacts—once only predictions—are now upon us and are likely to worsen; and human activity is largely to blame.
U.S. Action on Climate Change
So we have all this science, and we have Americans responding to it by saying that our government needs to do more. How has our government responded? Well, at the state level at least, the response has been encouraging. For example:
Twenty-one states and the District of Columbia have enacted renewable energy mandates requiring utilities to generate a share of their power from renewable sources.
- Twenty-eight state governments have adopted climate action plans; 15 have programs or policies in place to reduce, sequester or register greenhouse gases; and nine states have statewide targets for reducing their emissions.
Connecticut, I am pleased to say, has done all of these things. And more. As many of you know, Connecticut, along with six other northeastern states has signed onto a regional initiative called RGGI that is aimed at reducing carbon dioxide emissions from power plants in the Northeast. This is the first “cap and trade” program to control these emissions in the United States. It couples a mandatory cap on emissions from the electricity sector with a market-based trading program that will allow companies to achieve their reductions at the lowest possible cost.
So Connecticut is really out in front on this issue—and all of you should be proud to live in a state with leaders who understand the need for climate action.
Among the other states that are taking this issue seriously, I have to mention California.
Like Connecticut, California has established greenhouse gas emissions targets, and they are very ambitious. And that state also has taken steps to begin regulating carbon dioxide emissions from cars and trucks. (a policy that Connecticut will follow if it survives the automakers’ legal challenge)
And then there is New Mexico, a major coal-producing state. NM has established its own targets, and has also announced a partnership with neighboring Arizona to jointly reduce greenhouse gas emissions and address the impacts of climate change in the Southwest.
These are just a few examples of the kinds of things states are doing. Now, you might think one state’s actions cannot possibly affect a global problem like climate change. But consider this: California’s emissions top those of Brazil. Texas comes in ahead of Canada, the UK and Mexico. And Illinois produces more CO2 than the Netherlands. States are a significant part of the climate problem, and many of them, including Connecticut, are showing they can be a significant part of the solution as well.
So what about our national government? To what extent have our leaders in Washington embraced the need for action? Well, I have some good news and some bad news.
First the good news: During the U.S. Senate’s debate on energy legislation last year, senators approved a bipartisan measure calling for a national, mandatory, market-based program to slow, stop and, ultimately, reverse the growth in U.S. greenhouse gas emissions. The legislation was sponsored by senators Domenici and Bingaman, the chair and the ranking Democrat on the Senate Energy Committee. And although it was a nonbinding measure, it marked the first time the Senate has gone on record to support mandatory action on this issue. That is an important achievement – and now Senators Bingaman and Domenici are seeking input on how to create a mandatory climate program that gets real results.
Still in play is the cap and trade legislation proposed by Senators John McCain and Connecticut’s own Joseph Lieberman. And now Senator Dianne Feinstein has joined the issue as well, offering her own version of a cap and trade climate policy. And we are helping others in Congress develop other proposals. So clearly, we’ve seen an up-tick in Congressional interest in this issue. Granted, these proposals may not become law right away, probably not before 2008, but I believe it is only a matter of time before limits on greenhouse gas emissions are in place.
So that’s the good news: people on Capitol Hill, especially in the Senate, are looking at this issue and thinking hard about how to address it.
The bad news is that the White House and leadership of the House of Representatives are strongly opposed to addressing climate change in any significant way. As a result, I do not believe anything substantive is likely to come out of Congress on this issue for some time. I would like to be proved wrong, but it is hard for me to see any leadership on this issue coming from the White House during the remainder of its term.
Despite the President’s famous statement in his State of the Union Address that America is addicted to oil, Washington does not seem truly ready to fight the addiction. The Administration’s budget proposals don’t come anywhere close to providing the shot in the arm we need to accelerate clean energy research in this country. (Again, this is despite the American public’s clear interest in alternative energy solutions.) More importantly, even if the technology programs were properly funded, they simply are not enough.
And this is the problem with what has been happening on this issue to date, whether at the state or the federal level. In addition to being late to start, what we are talking about and doing is simply not enough. As I said, I applaud what many of the states are doing, and I am pleased to see members of Congress beginning to understand the need for action. But we need to remember what this is about.
James Hansen, the NASA scientist who is one of the world’s leading experts on climate change, says we have just 10 years to begin reducing greenhouse gases before global warming reaches what he calls a tipping point; the tipping point, as the phrase implies, is the point from which we may not be able to avert a catastrophe. To forestall a climate crisis, we must stabilize greenhouse gas concentrations in the atmosphere. And what does that mean? According to the Intergovernmental Panel on Climate Change, it means limiting the concentrations to about 550 parts per million –roughly double the pre-industrial level of atmospheric greenhouse gases.
To get to that level, we need to reduce global CO2 emissions by 55 to 85 percent below what is currently projected. Fifty-five to 85 percent. And we need to do this at the same time that energy demand around the world is growing at an unprecedented rate. We need to act now to come up with ways to limit emissions growth without endangering economic growth. And make no mistake: The United States, which is responsible for one-fourth of global emissions, needs to play a leadership role.
And that is going to require a fundamental shift. We need to move from an economy based on traditional burning of fossil fuels to one based on more energy efficiency; increased use of low-carbon energy sources; and the capture and storage of carbon from fossil fuels. This is not something that one piece of legislation, or even one strategy or one approach, will accomplish. We need a comprehensive approach.
An Agenda for Climate Action
In February, the Pew Center released the first comprehensive plan to reduce greenhouse gas emissions in the United States. Our Agenda outlines an ambitious yet practical approach to addressing this issue. It is based on seven years of Pew Center analysis and work with leading businesses and policymakers.
The number-one lesson we have learned from this work: There is no single technology fix, no single policy and no single sector that can solve this problem on its own. For example, addressing emissions from the utility sector is key, but doing only that leaves out about 60 percent of emissions. In the same way, if we adopt policies to limit emissions from transportation and do nothing else, we’re hitting just 30 percent of the problem—which is significant, of course, but it is not enough.
The Pew Center’s Agenda outlines 15 specific recommendations in six overarching areas where the United States must take action. These six areas are: 1) science and technology; 2) market-based programs; 3) sectoral emissions; 4) energy production and use; 5) adaptation; and 6) international engagement.
I want to provide you with a better sense of what our Agenda is about by highlighting some of the recommendations in each of these six areas.
In the area of science and technology research, we call for increased and stable funding to spur technological innovation. Because it is important to spend this money wisely, we suggest the use of a “reverse auction.” Unlike a traditional auction, where buyers bid against each other to purchase an item, a reverse auction allows providers of goods or services—in this case, new, climate-friendly technologies—to compete for a pot of money by offering emissions reductions.
Since 1998, California has used reverse auctions to promote development of renewable energy. The program collects money through a charge on electric power, and solicits bids for renewable projects, with the money going to the bidder that can provide the renewable energy at the cheapest rate. Thus far, there have been 81 successful bids to produce renewable energy through this competitive and cost-effective system.
Second, we believe it is critically important to enact a mandatory cap and trade program that applies to large stationary sources – power-plants and major manufacturing facilities. Our work over the years has shown that market mechanisms such as emissions trading allow companies to reduce emissions in the cheapest, most efficient manner possible.
What a cap and trade system does in essence is send a signal to the market. It tells the market that there is a value in reducing emissions. And it tells inventors and investors that there is profit in creating and deploying climate-friendly technologies. It creates an essential pull for new technologies to enter the market. The push for those technologies, in turn, comes from the funding of innovation, through mechanisms like the reverse auction. And we need both the push and the pull to achieve real and cost-effective results. A cap and trade system coupled with a reverse auction is a great example of a comprehensive approach.
But the fact is that a cap-and-trade system by itself, and particularly at the level that would be politically practical, is not enough. In fact, many of the current proposals for cap-and-trade programs, tend to leave out the transportation sector, which is of course a major source of emissions.
And this is why the Pew Center’s Agenda also calls for sectoral approaches such as transforming the much-maligned Corporate Average Fuel Efficiency (or CAFE) program. CAFE, as you know, sets average fuel efficiency levels for carmakers across their fleets. But the standards have not changed significantly in over 20 years. And, because SUVs and light trucks now make up as much as half of the new-vehicle product mix, the average fuel economy of all the cars and light trucks sold in America—import and domestic— is no better today than it was in the early 1980s. Although NHTSA is currently considering changing the way it classifies different kinds of light trucks, it is unclear what that will translate into as far as actual emission reductions. But I am fairly sure it won’t be enough.
We recommend strengthening and converting the United States’ current fuel economy standards to a set of tradable standards based on greenhouse gas emissions. If you are looking to protect the climate, focusing on emissions rather than fuel efficiency seems more logical. By creating a market for emissions reductions through trading, and at the same time supporting the development of low-emission vehicles and fuels (the push and pull approach)—you can reduce the cost of getting the job done.
Of course, it is not only in the transportation sector where additional action is needed.
Our plan proposes tighter standards for appliance and equipment efficiency, as well as incentives for the manufacture of more climate-friendly products. Similarly, for the building sector, we call for stricter building codes to decrease energy use. We even touch on the role of the agriculture and forestry sectors in keeping carbon out of the atmosphere through climate-friendly practices. Again, all sectors of the economy have a role to play in this, and it is going to take all sectors to achieve the results we need.
But all sectors are not equal when it comes to having a hand in the climate problem and its potential solutions. One sector stands head and shoulders above the rest, and that is, you guessed it, energy. Eighty-percent of US greenhouse gas emissions come from the combustion of fossil fuels. The ways in which we generate, distribute and use energy have a profound impact on our emissions of greenhouse gases—and that is why the Pew Center’s Agenda reserves a special set of recommendations for this all-important sector. Our recommendations cover all of the major energy sources.
Let’s start with coal. And we need to be realists here. Coal is responsible for 50 percent of our nation’s electricity. It is cheap and it is plentiful and I believe (along with many others) that it will continue to play a role in meeting U.S. and global energy needs for years to come. Let’s look for a moment at our current and projected energy mix and needs. If we assume coal will continue to contribute roughly half of U.S. electricity requirements; and you look at the projected growth of energy demand in this country - by 2025 the U.S. will need to grow our coal capacity by 60% - that would mean emissions from U.S. coal burning alone in 2025 would equal 15% of our current global emissions. Globally, the numbers are even more dramatic. China is even more dependent on coal for electricity than the US. It contributes to 75% of their electricity needs, and despite efforts to ramp up generation in gas, renewables and nuclear, the overall share of coal in the mix is unlikely to change significantly. Think about this: China is building new coal power plants at a rate of one plant per week.
So we need to get serious—and I mean very serious—about reducing emissions from coal-fired power plants. First, we need to build the very best, most efficient coal burning power plants possible to reduce emissions per kWh of electricity. And then we have to prove that the carbon dioxide that still is emitted from these plants can be captured and stored (sequestered) in geological formations where it can be kept from entering the atmosphere for centuries or millennia.
We recommend an aggressive program of research, development and demonstration for these technologies. A few random demonstration projects done at a leisurely pace clearly are not enough. We need to build the most efficient plants and we need a concerted public-private effort to demonstrate that capture and sequestration can work, and then we have to insist that it be done.
But dealing with coal alone is not enough. Because capture and storage technologies are not quite ready, we need to work on expanding the role that renewables play in our energy future. We should also concentrate on expanding natural gas supplies and using natural gas more efficiently. And we will need to solve the problems associated with nuclear power. For each energy source, we propose specific measures in areas from R&D to incentives to regulation that can help expand the suite of carbon-friendly technologies that are necessary to put us on a low-carbon path.
It is of course important to understand that none of the things I have talked about can fully prevent all of the potential effects of climate change. In fact, as I mentioned at the start of my remarks, many impacts are already being seen. This is why, at the same time that we are working to reduce emissions in order to minimize the effects of climate change, we also need to develop a national strategy to adapt to those effects. Climate change is happening, and it is going to affect everything from agriculture to public safety and public health. Without a strategy, as well as a system for identifying the early warning signs of climate problems confronting our country, we are going to be caught unprepared.
Finally, the Pew Center’s Agenda, while primarily focused on domestic actions, also calls for greater U.S. participation in international negotiations on this issue. It is obvious now that there is no chance the United States will sign on to the Kyoto Protocol. Kyoto, of course, is the 1997 agreement that sets country-by-country targets for reducing emissions for industrialized countries. However you feel about Kyoto, the fact remains that climate change is a global problem that demands a global solution. It also needs a longer-term solution; Kyoto includes targets only through 2012.
We need to engage every country that is a major source of these emissions, not just the United States but China and India as well. And we need to come up with ways to make the process fair and equitable for all involved.
Finding common ground on global approaches to the climate problem has been the focus of a special Pew Center initiative we launched a couple of years ago and released in Montreal in December. I don’t want to spend a lot of time on it here, but we organized a dialogue-with business and political leaders from the United States, the United Kingdom, Germany, Japan, Australia, China, India, Mexico, Brazil, and other countries. And a key take-away from the group is that we need a more flexible framework than Kyoto, something that allows different countries to take on different types of commitments, all under the umbrella of a common global framework.
Working with us on global approaches are Senators Lugar and Biden, the majority and minority leaders in the Senate Foreign Relations Committee. And I cannot speak highly enough of what these Senators have done. They sent senior staff to participate in our dialogue. They co-sponsored a resolution urging US leadership in the international negotiating process, and are committed to getting a majority of Senators to support it this year. And they expect to hold hearings this year on energy security and climate change.
So those are the recommendations in the Pew Center’s Agenda. Once again, they cover the areas of: 1) science and technology; 2) market-based programs; 3) sectoral emissions; 4) energy production and use; 5) adaptation; and 6) international engagement.
The Role of Business
What I want to emphasize about this agenda is that this isn’t pie-in-the-sky thinking. All of the steps we are recommending are eminently doable. We just need the political will to do them.
And, if we do these things thoughtfully, this transition can actually become a platform for new economic growth, new jobs, new manufacturing and service industries, and new roles for sectors such as agriculture and forestry in our nation’s efforts to protect the climate.
America’s business leaders appear to understand this. They know that a mandatory program to limit and reduce greenhouse gas emissions in the U.S. is inevitable, and they know it is in their best interests to see that the program is designed intelligently and fairly.
That’s why so many of them stood with us at the event in February where we unveiled our Agenda. And why so many companies responded to Senator Bingaman and Domenici’s call for proposals and suggestions to fashion legislation setting mandatory caps on U.S. emissions of greenhouse gases. And that is why last June, five Fortune 500 companies provided testimony on climate to the Science Committee of the House of Representatives. ;
There are two unifying themes in these examples of corporate and investor leadership. First, most corporate leaders know that greenhouse gas regulation is inevitable. Second, they know that properly designed mandatory climate policies are consistent with sound business planning and good corporate governance. As more companies and investors come to this realization, pressure will mount for other companies to take a more responsible stance on the climate issue. And as corporate leadership aligns with activity at the state and international level, pressure will grow for serious policy change at the federal level.
Why? Because these companies want to ensure that the burden of responding to the climate problem is evenly shared across all sectors of the economy. And they also want another thing: they want certainty. Businesses, particularly electric utilities that have to make significant up-front investments in power plants, are saying they need to be able to plan for the future-and they cannot plan effectively without knowing what kind of policies this country is going to adopt to control emissions.
I opened my remarks with some polling data that shows Americans clearly understand the need for action on this issue. And I have concluded with examples of how business leaders, too, are concerned and how they’re beginning to take action. And, when you consider what many of the states are doing to address this issue, you realize that the one place where climate change still hasn’t achieved priority status is in Washington. Yes, we have seen a fair amount of discussion of this issue. And, yes, there are policymakers who take it seriously and who want to shape solutions.
But we need solutions now. We don’t have time to wait. Climate change policy in this country is at a crossroads, and the American public, together with visionary business and state leaders, are pointing us in the direction we need to go.
The sooner we get started by reversing our current course and adopting a serious and comprehensive approach to addressing this problem, the better off and the safer we will be. And the sooner we’ll begin transforming our economy for the realities and the opportunities that lie ahead.
And so, I will leave you today with another bit of polling described by Jay Leno. "According to a survey in this week’s Time magazine, 85% of Americans think global warming is happening. The other 15%" according to Leno, "work for the White House." Thank you very much. I welcome your questions.
One sign that the United States Senate is getting serious about crafting domestic climate policy is the interest in the issue shown by the Senate Energy and Natural Resources Committee Chairman Pete V. Domenici (R - New Mexico) and Ranking Member Jeff Bingaman (D - New Mexico). The Committee conducts legislative activity in areas such as energy resources and development, including regulation, conservation, strategic petroleum reserves and appliance standards; nuclear energy; and public lands and their renewable resources. Recently the Committee has been active on the issue of climate change.
In June 2005, Bingaman filed legislation embodying a recommendation by the multi-stakeholder National Commission on Energy Policy (NCEP) for a mandatory program that would allow greenhouse gas (GHG) emissions to continue to rise, though at a slower pace than otherwise projected. Domenici, among others, publicly expressed interest in the measure, though was not then prepared to support it. Consequently, Bingaman chose not to offer it. Instead, with Domenici’s support, Bingaman offered a nonbinding resolution expressing the sense of the Senate that human-caused GHGs are causing temperatures to rise, and that Congress should enact a national mandatory, market-based program to slow, stop, and reverse the growth of these emissions. After the resolution was supported by a strong majority of 53 - 44, Domenici announced his intention to hold a series of hearings on the Bingaman-NCEP proposal. The committee held its hearings on climate science and economics later in 2005.
In early 2006, the Committee issued a white paper on Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System. Read the Center's response to this white paper.
Pew Center on Global Climate Changes Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Additional Topic #2
Download Additional Topic #2 (pdf)
Recent Climate Science
The Center commends the Senate Energy Committee for addressing the climate change issue and urges a continued high level of effort – especially in light of recent developments in climate science. In the past 3 years, and especially in 2005-06, the science attributing global warming to human enhancement of the greenhouse effect has become very compelling. At the same time, globally distributed impacts of climate change have occurred in patterns that are readily explained by global warming, and not by natural variations in regional climate. Many changes that have been predicted by models are now occuring.
1. Attribution of global warming to the enhanced greenhouse effect. Scientists have tested alternate hypotheses of natural versus anthropogenic forcings to explain observed climate change. Two recent studies illustrate the state of the science in this endeavor, but represent a small fraction of the studies that have produced similar conclusions.
a. Physical simulation of 20th century surface warming: A study (Meehl et al. 2004. Journal of Climate 17:3721-3727) by scientists at the National Center for Atmospheric Research (NCAR) examined a variety of natural (solar, volcanoes) and anthropogenic (GHG, ozone, sulfate aerosols) forcings on global surface temperature, comparing model output with observed changes during the 20th century. The study found that all of these factors act additively and all must be included as forcings in the model in order to closely mimic the observed temperature change. During the last half of the 20th century, the largest forcing explaining warmer global temperatures was anthropogenic GHG. These and many other results directly contradict claims that models fail to mimic observed changes.
b. Physical simulation of heat penetration into the oceans. Scientists at Scripps Institution of Oceanography, Lawrence Livermore National Lab, the UK’s Hadley Center, and NCAR produced a study (Barnett et al. Science 309:284-287) showing that the global ocean basins are warming simultaneously as a result of global greenhouse warming. Whereas natural variations occur at different times, and often in direct opposite patterns, in different ocean basins, there has been a simultaneous warming of all the major ocean basins over the past 40 years. Moreover, the pattern of penetration of warming at different ocean depths varies from basin to basin. Modeling of natural internal variability alone did not reproduce these complex patterns, whereas combining internal variability with GHG forcing did. Hence, using a very different approach from the study above, scientists once again find that observed patterns of climate change can only be mimicked when anthropogenic GHGs are included as a climate forcing.
c. Physical simulation of the increasing height of the tropopause. The tropopause is a region of the atmosphere that separates the lower atmosphere (troposphere) from the upper atmosphere (stratosphere). Its height is determined by physical conditions in the troposphere and stratosphere, among them being the temperature of the troposphere below and the stratosphere above. As these conditions change, the height of the tropopause changes in response. Forcings that either warm the troposphere or cool the stratosphere tend to increase the tropopause height, whereas those that cool the troposphere or warm the stratosphere decrease troposphere height. Changes in solar radiation and volcanic particles are natural forcings and changes in stratospheric ozone and tropospheric greenhouse gas concentrations are anthropogenic forcings.
Scientists from the US, UK, and Germany teamed up to test whether they could simulate observed changes in the height of the tropopause based on changes in the natural and/or anthropogenic forcings and their physical understanding of atmospheric dynamics (Santer et al. 2003. Science 301:479-483; Santer et al. 2004. Journal of Geophysical Research 109:D21104). Observations revealed a 620-foot increase in tropopause height between 1979 and 2001. The scientists obtained a similar increase in the simulated tropopause height when their model was forced by anthropogenic GHG and stratospheric ozone depletion (from man-made chemicals). About 40% of the effect was from GHG and 60% from ozone depletion. Including natural variability of solar input and volcanic emissions in the model had little effect on this outcome, suggesting that enhanced greenhouse warming and stratospheric ozone depletion were the main causes of global tropospheric height increase (Santer et al. 2003. Science 301:479-483; Santer et al. 2004. Journal of Geophysical Research 109:D21104). Because of the Montreal Protocol, ozone depleting substances will decline in the future. GHGs, however, are expected to increase. Hence, the model predicted that tropopause elevation will continue to rise in the future mainly because of anthropogenic GHG.
2. Linking major climate change impacts with global warming. In recent years, several important impacts have been observed that are readily explained by human-induced global warming. In some cases, global warming plus regional variability combine to produce impacts, but natural variability alone cannot explain the observations.
a. Global ice cover – In recent years, glaciologists and oceanographers have been surprised by the unprecedented rates of change in global ice cover, both for Arctic sea ice and land-based glaciers and ice sheets.
Greenland: The second largest land-based ice sheet, with enough water to raise the global sea level by 6 meters if melted, covers the Greenland continent. Fifteen years ago, glaciologists believed that the Greenland ice sheet was in balance (i.e., not losing or gaining ice). Over the past decade, glaciologists documented rapid melting around the coasts of Greenland and adjusted their estimates to reflect a net loss of ice due to melting. In February 2006, new satellite-based measurements of ice flow were published, revealing that Greenland is losing ice even more rapidly than realized as a result of ice flowing into the sea at high rates. This work doubled the estimated rate of ice loss from Greenland and its contribution to the rate of global sea level rise (Rignot et al. 2006. Science 311:986-990).
Antarctic ice sheet. Western Antarctica is losing ice rapidly. Until recently, East Antarctica was thought be gaining ice, but now is thought to be just in balance, such that future warming could quickly shift it to net ice loss. Overall, Antarctica appears to have lost about 450 km3 of ice just in the past three years (Velicogna. 2006. Science Online, March 2). Because these results are from the GRACE satellites launched in 2002, we do not know how long Antarctica has been losing ice. Antarctica holds enough ice to raise sea level by 70 m if melted.
Arctic sea ice: Arctic sea ice is being lost at an unprecedented rate, reaching a record low area during summer 2005. Some scientists estimate that by the end of the 21st century the Arctic Ocean will be completely free of ice during the summer, a condition that probably has not existed for at least a million years (Overpeck et al. 2005. EOS 86:309-312). This loss of ice has important implications for global climate change and for Arctic ecosystems and wildlife (Arctic Climate Impact Assessment. 2005. Cambridge Univ. Press, New York).
Mountain glaciers. For several decades, glaciologists have documented a continuing worldwide loss of mountain glaciers, which continue to dwindle at an accelerating rate (Dyurgerov. 2006. AAAS Symposium, St. Louis; Dyurgerov, 2005. INSAAR Occasional Paper No. 58, Univ. of Colorado). Billions of people around the world depend solely on glaciers for their water supply. In Central Asia, mountain glaciers are retreating rapidly and may be virtually gone within decades, creating a billion environmental refugees (V. Aizen, 2006. AAAS Symposium, St. Louis).
The global trend. There is a clear pattern of globally distributed loss of ice indicative of global greenhouse warming, and not isolated regional losses of ice resulting from natural regional variability, as asserted by some. While some regions of the globe may presently be in a phase of natural warming, in addition to enhanced greenhouse warming, other regions are in natural cooling phases that will also reverse at some point. Hence, the overall loss of ice is a fingerprint of global warming.
b. Hurricanes – In 2005, two independent studies found that hurricanes were becoming more intense worldwide (Emanuel, 2005. Nature 436:686-688; Webster et al. 2005. Science 309:1844-1846). All ocean basins where tropical cyclones develop exhibited this change in recent decades. Immediately, some responded that this upswing resulted from natural variability, rather than from greenhouse warming. However, they overlooked the well-established knowledge that natural cycles do not occur in sync across the various basins. In fact, they tend to vary in opposite phases, for instance, in the North Atlantic and North Pacific basins. The existence of a trend of intensification in all six of the tropical cyclone-producing ocean basins thus represents a fingerprint of global warming, consistent with the enhanced greenhouse effect and not with natural variability alone.
c. Species changes – Two recent studies have documented apparent connections between changes in species and anthropogenic climate change. One study (Root et al. 2005. Proceedings of the National Academy of Sciences 102:7465-7469) found that 130 species, including many different plants and animals, have responded to earlier spring temperatures between 1970 and 2000. The power of this study, however, was that it linked these changes statistically to a climate model, demonstrating that the relationship between the timing of spring biological events (such as timing of flowering or migration) was well correlated with GHG-driven climate change, but not with natural variability alone. The species were distributed throughout Europe, North America, and Asia, thus representing a large portion of the Northern Hemisphere and not a particular region. Hence, the same type of response occurred regardless of differences in regional climate variability, again suggesting a global driving mechanism. The correlation with anthropogenically driven climate demonstrates that this global response can be explained by enhanced greenhouse warming, but not by natural climate variability alone.
A second study (Pounds et al. 2006. Nature 439:161-167) linked widespread mass amphibian extinctions in the tropics to the timing of climate change events associated with sea-surface and atmospheric temperatures. Warm years, which have increased in frequency over time, are followed closely by extinction events. Also, the majority of recorded extinction events are associated with warm years. While extinction rates correlate with the large-scale warming trend, they do not correlate with local variability associated with regional El Nino events, once again demonstrating that a global trend, rather than regional variability, is the more likely explanation for the impact. The authors explained this relationship as a function of pathogen outbreaks fostered by the observed warming and moistening trend in tropical mountain environments as a result of climate change.
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
If a key element of the proposed U.S. system is to “encourage comparable action by other nations that are major trading partners and key contributors to global emissions,” should the design concepts in the NCEP plan (i.e., to take some action and then make further steps contingent on a review of what these other nations do) be part of a mandatory market-based program? If so, how?
Pew Center Response
Download Response to Question 4 (pdf)
It is important to distinguish between two distinct but related policy objectives: 1) achieving adequate action by all major emitting countries, and 2) protecting U.S. firms against competitiveness impacts. Each requires a different set of policy approaches.
Ensuring that other countries act against climate change is important from a competitiveness standpoint. However, it is first and foremost an environmental imperative: without adequate action by all major emitters, the goal of climate protection cannot be met. Of steps the United States can take to encourage other nations to act, establishing a mandatory program to limit and reduce U.S. emissions may in and of itself be the most critical. Lack of action by the United States stands as the major impediment to stronger efforts by other countries. Demonstrating the will – and establishing the means – to reduce U.S. emissions will greatly alter the international political dynamic and improve prospects for international cooperation.
Making future U.S. action expressly contingent on the efforts of other countries may provide some further inducement for action. Alternatively, by appearing irresolute, it may deter others from commencing ambitious long-term efforts. A more effective means of achieving adequate and comparable effort by all major emitters would be the establishment of mutual commitments through multilateral negotiation and agreements.60; In the case of developing countries, this should include or be complemented by positive incentives, preferably through market mechanisms.
Ensuring that efforts are broadly comparable, however, will not necessarily achieve the second objective: protecting against competitiveness impacts. It is not the competitiveness of the U.S. economy as a whole that is at issue. Competitiveness at the national scale is largely a reflection of productivity, and the U.S. economy consistently ranks among the world’s most competitive . The cost of achieving mandatory GHG limits at the levels under consideration would only marginally affect projected economic growth and is unlikely to affect overall competitiveness .
To the degree there are competitiveness impacts, they would fall on specific sectors – energy-intensive industries whose goods are traded internationally, a relatively small segment of the U.S. economy . However, these sectors could remain vulnerable even if efforts by all major emitters are broadly comparable because countries will choose to allocate effort differently . For instance, a country may reduce overall emissions but exempt a given sector from controls, giving that sector an advantage over foreign competitors that are subject to controls. In that case, a review of comparability, unless undertaken sector by sector, offers little assurance against competitiveness impacts.
A full assessment of policy options for addressing competitiveness would require a more thorough analysis of the potential impacts on vulnerable sectors than is presently available. Generally, the impacts on a given sector or firm would depend on its specific competitive positioning and its ability to substitute and innovate. Most analyses of U.S. industry experience with past environmental regulation find little evidence of competitive harm. One comprehensive review – synthesizing dozens of studies across a range of U.S. regulations and sectors – concluded that while environmental standards may impose significant costs on regulated industries, they do not appreciably affect patterns of trade . Some economic literature suggests that, to the contrary, innovation spurred by regulation may in fact confer a competitive advantage .
In the design of a cap-and-trade system, the best way to protect broadly against competitiveness impacts is to set the caps at modest levels and minimize compliance costs by, for instance, allowing offsets and full banking of allowances. The choice of allocation approach also has implications. A free “grandfathering” of allowances based on historic emissions provides inherent protection for potentially vulnerable firms by conferring assets whose sale can offset losses.
One option to mitigate potential competitiveness impacts is to provide supplemental allowances to sectors deemed to be vulnerable. Another is to dedicate funds — possibly by auctioning a portion of allowances — to assist vulnerable sectors. Assistance could include:
- Incentives for the deployment of cleaner or more efficient technologies, such as accelerated depreciation of existing stock, or tax credits for the deployment of specific technologies or the production of less emissions-intensive products.
- Support for research and development of long-term technology.
- Transition assistance for workers in sectors likely to experience job losses.
Further steps to address competitiveness would require some mechanism to identify vulnerable sectors based on an analysis of export patterns among energy-intensive industries and relative energy pricing in competing countries.
 EIA projects that achieving the emission targets of the Climate Stewardship Act would diminish U.S. GDP by 0.4 percent in 2028, thus total GDP is projected to be 89.6 percent higher rather than 90 percent higher than GDP in 2006. (EIA, Analysis of Senate Amendment 2028, the Climate Stewardship Act of 2003. [pdf] May 2004.)
 Repetto et al. found in a 1997 analysis that, among all U.S. industries producing tradeable goods and services, roughly 90 percent of output and employment was in industries with energy costs representing 3 percent or less of output value. (Repetto, R., C. Maurer and G.C. Bird. “U.S. Competitiveness is Not at Risk in the Climate Negotiations.” WRI Issue Brief, October 1997.)
 The Carbon Trust recently suggested that differences between National Allocation Plans within the EU Emissions Trading system has significant implications on sectoral competitiveness even though country efforts under the overall system are widely viewed as compatible (Carbon Trust, “The European Emissions Trading Scheme: Implications for Industrial Competitiveness.” June, 2004. See also IISD, “Climate Change and Competitiveness: A Survey of the Issues,” March 2005; and European Commission, “International Trade and Competitiveness Effects,” Emissions Trading Policy Brief No. 6, 2003.)
 Jaffe, A.B., S.R. Peterson,P.R. Portney, and R.N. Stavins. “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature. Vol. XXXIII, March 1995.
 Porter, M. “America’s Green Strategy,” Scientific American, 264, 4: 96, 1991; Porter, M. and C. van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship,” Journal of Economic Perspectives 9, 4:97-118, 1995.
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Should a U.S. system be designed to eventually allow for trading with other greenhouse gas cap-and-trade systems being put in place around the world, such as the Canadian Large Final Emitter system or the European Union emissions trading system?
Clarifying Question 3a
- Do the potential benefits of leaving the door open to linkage outweigh the potential difficulties?
Pew Center Response
Download Response to Question 3 (pdf)
Yes. The ability to link to other programs is critical in order to minimize mitigation and transaction costs, and to harmonize obligations under various systems. Companies whose obligations differ in the many nations in which they operate will have a much harder time complying with the requirements. For this reason it is crucial not only to link programs, but also to minimize the differences between relevant aspects of the programs as they are developed.
This position is corroborated by the extensive and ongoing discussions the Pew Center has had with member companies of the Business Environmental Leadership Council (BELC ) and other domestic and international corporations about U.S. and international greenhouse gas (GHG) markets. Those that have expressed an opinion unanimously support designing U.S. cap and trade to allow for linkage to other national and regional trading systems. They cite several reasons.
- Most note that a well-functioning global trading market is perhaps the most critical mechanism for minimizing the long-term costs of GHG reductions for firms and society as a whole.
- Among cost-containment approaches, the linking of global GHG markets is among the least distortionary.
- Generally, larger trading volume and greater liquidity of GHG allowances will result in clearer, more stable prices. More stable prices will allow firms to project future prices more accurately and provide the certainty to plan and invest appropriately for the future (for example, in breakthrough technologies).
- Globalizing GHG markets supports the goal of encouraging all countries, including China and India, to participate in making real and verifiable reductions. (Companies note that offsets originating in large emitter developing countries will be among the lowest cost reductions and can be combined with export opportunities for U.S. firms.)
Note that the Northeast Regional Greenhouse Gas Initiative (RGGI) will accept EU and Clean Development Mechanism (CDM) allowances if certain price triggers are reached, but that under the Kyoto Protocol the EU can not accept RGGI allowances because the United States is not a party to Kyoto. RGGI analyses indicate that international agreements that enable two-way linkages would be economically beneficial.
Clarifying Question 3b
- If linkage is desirable, what would be the process for deciding whether and how to link to systems in other countries?
Pew Center Response
In order to link a U.S. program with other systems, reductions would have to be considered real and verifiable by the respective systems. Deciding whether to link would involve evaluating the inventory, methodologies, monitoring protocols and compliance mechanisms of the other systems, and as well as the design of these programs to make sure that the environmental effect of a given reduction is roughly equivalent across the two programs. In addition, care should be taken to design a U.S. program that other countries will be interested in linking with. In particular, mechanisms that alter the environmental integrity of the program (e.g., a low safety valve) would make reductions in one program not necessarily equivalent to reductions in another, jeopardizing the ability to link the two.
Federal legislation will need to address the state and regional GHG cap-and-trade programs now under development, some of which may be linked to each other and to other countries. As with any area of federal policy in which the states have taken the lead, Congress will have to decide on the extent to which the federal program will defer to pre-existing state programs, for example, governing allowance allocation.
Clarifying Question 3c
- What sort of institutions or coordination would be required between linked systems?
Pew Center Response
Because the validity and verifiability of reductions is critical for trading, measuring, monitoring, and compliance mechanisms would need to be comparable. While this may or may not require a central overseeing body, a shared platform on which to carry out the trades – such as an agreement to use a common monotoring and reporting protocol – would be required.
While elements within each country differ, Kyoto signatory countries, including the EU, Canada and Japan, have trading systems that are inherently linked by means of the treaty requirements. Requirements stipulate that each country needs to develop a consistent national system for estimating emissions and removals of GHGs by their common definition of trading units – Assigned Annual Units (AAUs), Joint Implementation (JI) credits and Clean Development Mechanism (CDM) credits – and by the requirement that an international transaction log (ITL) be established. This shared platform will enable the tracking and the issuance of credits, cancellation, retirement and carry-over to the commitment periods following 2012. In essence, Kyoto parties are linked because they share common definitions, common requirements and a common platform for trading.
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Should the costs of regulation be mitigated for any sector of the economy, through the allocation of allowances without cost? Or, should allowances be distributed by means of an auction? If allowances are allocated, what is the criteria for and method of such allocation?
Pew Center Response
Download Response to Question 2 (pdf)
The Pew Center believes that the costs of regulation can be mitigated through the free allocation of many allowances, as well as through other measures, as discussed in the section on “Cost Containment” in the Additional Topics.
Resolving the question of how to allocate emission allowances will be fundamentally an issue of political acceptability. As observed in the successful acid rain trading program and noted in the Pew Center’s previous analytical work (see, e.g., Ellerman et al), there is no appreciable difference in environmental effectiveness in using a free distribution, rather than an auction, to start a program. The environmental benefits accrue from the timing and quantity of reductions – recognizing that a program that starts sooner would require less drastic reductions. In other words, the allocation vs. auction debate is more relevant to political feasibility than environmental outcome. However, there are a number of key considerations and tradeoffs among the various approaches to allocation. The Pew Center does not have a position on the method of allocation, but has led workshops and discussions addressing these many considerations in developing an allocation method. The following response lays out these areas of consideration, and in some cases makes recommendations. It also describes the views of the surveyed corporations on these issues. More detail on the implications of various allocation options can be found in the attached documents (along with a lengthier discussion on the pros and cons of free allocation).
Pew Center Analysis
Covered entities, especially those with significant compliance obligations and those in energy-intensive industries, will bear costs associated with transitioning into a market-based system for emissions allowances. To assist with this transition, a high percentage of allowances (e.g., 90% - 95%) should be allocated at no cost, rather than auctioned, at least in the initial years of a cap-and-trade system. A small initial allowance auction can fund transition assistance and research, development and deployment of climate-friendly technologies. This auction may serve as a price discovery mechanism to give firms an initial idea of the market price for an emissions allowance. Over time, the amount auctioned could increase, as firms successfully transition into the trading system and the associated expenditures decrease. In providing federal funding for technology development, a competitive process, such as a “reverse auction” in which funding is allocated based on emission reduction potential, can reduce program costs. In the early years of the program, the highest priorities for allocation should be transition assistance and technology development; over time the priorities should shift toward rewarding low-emitting technologies and practices.
The choice of allocation approaches may have strong distributional impacts, and thus may be a very contentious decision. For large point sources, allocation can be made either on the basis of historical emissions or against a sector-specific benchmark or set of benchmarks. Power plant allocations, for example, may be made on an input, net output, or gross output basis. The goal of allocation is to encourage the transition to a cleaner, more efficient generation fleet, but to do so in a way that recognizes that players in the industry have different starting points.
If the point of regulation is at the power plant level, policymakers must also decide whether to allocate allowances to non-emitting generators, and whether allocation will be fuel-specific or fuel-neutral. Allocating allowances to non-emitting generation would create incentives for the expansion of these sources, but may increase the burden on emitting generation. Fuel-neutral allocation may promote fuel switching and efficiency, while similarly increasing the burden on higher-emitting generation sources.
Another important issue is whether subsequent allocations should be fixed at the same level, or should be updated over time. The argument for updating is that a fixed allocation may disadvantage new and growing businesses. However, many economists argue that updating is economically inefficient because it encourages emitters to modify their behavior in order to increase future allocations, rather than simply meet the emissions cap at the lowest cost . Updating also creates uncertainty for business decisions as well as emissions outcomes. Ultimately, however, the inefficiencies and behavioral consequences of updating are an empirical question. While preliminary evidence on the Ozone Transport Commission NOX program suggests that behavior is not significantly different in states that update versus those that do not, there is some consensus that the inefficiencies of updating grow as the magnitude of the program grows. (See RGGI Allocation Workshop Summary and Proceedings for more detail on this question.)
A reasonable compromise might be to update over long time periods (e.g., 5 or 10 years), which should not affect economic efficiency significantly and would contribute to a fairer allocation over time.
Another important issue is how to deal with new entrants. Updating automatically does this, but there are other methods that may be useful, especially if updating only occurs infrequently. The simplest is to require new entrants to purchase allowances on the open market. To the extent that allowances are allocated largely to existing sources, this means that new sources would need to purchase allowances from existing sources. Allowances could also be set aside in a “reserve” at a fixed price – this was the approach taken under the U.S. acid rain program. This reserve was never actually used because cheaper allowances were available on the market, but it was an important insurance policy for new entrants. Finally, allowances for new sources could be set aside and given to eligible new sources for free.
A federal cap-and-trade system may either directly allocate allowances, or may “apportion” allowances to the states, which can individually decide how to allocate allowances. (The Regional Greenhouse Gas Initiative does the latter.) Alternatively, the federal government may foster some degree of harmonization by requiring a certain percentage of each state’s allowances go to certain purposes or entities, and then permitting states to allocate the remaining percentage as they wish. The Pew Center believes that it is preferable for the federal government to oversee the allocation process. Allocation is politically very difficult; addressing it at the federal level would save considerable state-by-state trouble and create an uneven playing field. In addition, although difficult, federal-level allocation can enable political solutions, which Congress may be able to utilize to reach agreement .
Some analysts believe that a high level of free allocation will result in windfall gains for allowance recipients. The potential for windfall gains depends, for each economic actor, on the relationships between its compliance obligation, its allowance allocation, and its ability to pass along price increases. While windfall gain may accrue to some sectors that are able to pass along price increases (in excess of cost increases); it will not accrue to all firms within that sector and more importantly will not be available to all sectors. Furthermore, because some firms will experience additional costs, free allocation can serve to minimize this impact while still sending the appropriate signal that emission reductions are valuable. There is disagreement among analysts about the degree to which various sectors and firms are able to pass along price increases, and what level of free allocation may compensate those affected.
Company Perspectives on Design Considerations
Among the companies the Pew Center surveyed, there was little consensus on the method of allocation. Opinions fell into a small number of distinct “camps” based on financial implications of various allocation methodologies.
The electric power utilities hold the strongest views, but these differ significantly, based largely on the relative carbon intensity of their generating fleets, which in turn corresponds to their fuel mix. Power companies with a relatively low-carbon fuel mix prefer allocation based on electricity output. Power companies with relatively high-carbon fuel mix prefer allocation based on historic emissions. Some manufacturing companies agree with the latter approach, based in part on their interests as large power users and depending on the carbon intensity of the generators supplying their electricity. Power companies in both camps indicate a willingness to consider compromise approaches depending on other aspects of a regulatory design package. Some utilities note that a compromise approach might involve beginning with an input-focused allocation that transitions over a period of years toward a more output-based allocation. Another utility points out the challenge and importance of reconciling differences between regions and economies fueled primarily by coal and regions with abundant natural gas.
Allocation is just one aspect of the larger picture in which all design elements will be considered. Some note that allowance distribution could serve as a means for awarding credit for early action. One utility holds that it is better to minimize the cost impacts on power customers in advance – i.e., at the allocation stage – rather than through the recycling of allowances. Another company suggests allocating allowances based on technology “benchmarking,” which would determine a reasonable baseline level that reflects a balance of technologies used across an industry.
Another company suggests that the allocation system can and should be used to encourage the power generation sector to transition from higher carbon-intensity fleet to a lower one. They believe that instead of viewing allocation as a “compensation” issue, it is important to use the allocation process both to create the bridge to a new energy future and to send a message to the power sector of the overall direction Congress wants the industry to take.
One utility makes the important point that allocation is not the driving force on new plant investment decisions – rather, choice of new plants is based on the overall price signal created by the cap and associated flexibility mechanisms. Finally, there were differing opinions among the surveyed companies as to whether the federal or state government should play the role of deciding how much to allocate to individual emitters.
Clarifying Questions 2a
Technology R&D and Incentives
- What level of resources should be devoted to stimulating technology innovation and early deployment?
- What portion, if any, of the revenues from permits or the auction of allowances should be reserved for technology development? If some portion is reserved for this purpose, should that set-aside flow to the federal government with funds spent through the traditional appropriation process? Or should the funds be allocated directly to a non-profit research consortium, chartered by the federal government, which would then administer technology development and deployment projects? Or should there be some combination of these two options?
- What criteria should be used to determine how such funds are spent and which projects are chosen?
- What other mechanisms should be used to promote technology deployment? Options include tax credits, cost-sharing for demonstration projects, assistance to state energy programs, etc.
Pew Center Response
Effective research, innovation, development, and deployment strategies will be critical to enabling a low-carbon energy future. Current levels of federal RD&D need to be significantly increased to reflect parity with other sectors in the U.S. economy (on the basis of RD&D dollars spent per GDP) and with the magnitude of the challenge of enabling a low-carbon energy future. Equally as important, strategies for managing these funds need to be revamped. Current RD&D efforts on low-carbon technologies suffer from a cultural focus on niche markets, inter- and intra-agency “stove-piping,” uncertainty caused by the annual appropriations process and cycle, and detrimental Congressional earmarks on scarce funds. The federal government needs a more integrated approach to RD&D in order to focus the appropriate agencies and resources on critical RD&D needs at appropriate times within a long-term R&D framework. Management modeled on the Defense Advanced Research Projects Administration (DARPA) is needed to instill a culture focused on development and commercialization of these technologies, and forward funding would help reduce the level of uncertainty and detrimental earmarks. Public/private partnerships and government procurement have a key role to play as developers and incubators of technology and to foster “learning by doing”—a critical step in bringing down the cost of low-carbon technologies and increasing deployment. While support for breakthrough technologies is often appealing, experts point out that what often appears to be a breakthrough is indeed the result of years of incremental investment and work. Public/private partnerships are an effective vehicle for enabling sustained incremental improvements in the performance and cost of low-carbon technologies.
Policy-makers should be wary of the dangers of “picking winners” among technologies, but some support to push the likely candidates along can overcome cost barriers that would otherwise be insurmountable . Research has shown that focusing exclusively on technology-push policies (instruments that offer technology funding incentives without motivating a corresponding demand for these technologies) or exclusively on technology-pull policies (mandates that generate demand for advanced technologies without corresponding support for their development) is more expensive than a combination of the two approaches . Opportunities to introduce competition into the incentive process will reduce the costs of the program and avoid picking winners.
A competitive process to distribute incentives will reduce the costs of the program and avoid picking winners. A “reverse auction”, in which bidders compete to provide some technology or service for the lowest cost, would allow reduction projects to compete for these incentives on a level playing field. An auction could specify technology categories as well as offer a broad competition to elicit new, as-yet-unknown technologies. Alternative funding mechanisms include forward funding, technology prizes , tax rebates, guaranteed government purchase agreements (i.e., renewable energy or IGCC-CCS energy), green loans and public-private partnerships.
The private sector is generally a more efficient engine of technological innovation than the government. The private sector is particularly good at identifying and allocating resources to those technologies that have the best potential to become financially self sustaining, since private investment is almost uniquely profit-oriented and return-driven. One example raised by companies is in energy efficiency programs. If the government creates frameworks incentivizing but not directing the private sector (tax credits, cap and trade rules that allow efficiency-based offsets, etc.) and allowing private companies and investors to easily monetize the value of efficiency investments, there is ample evidence that the private sector can achieve these at costs per kilowatt or BTU lower than those for which the government is an intermediary.
When it comes to large-scale, longer-term technologies, companies note that it can be effective to match private investment with public funding in some way, as in the case of existing partnerships for clean coal, nuclear power, and fuel cells. Companies expressing a view favor direct government investment and guidance for early stages of research development – the pre-commercial stages of product life cycle. Where infrastructure and programs already exist and are successful, (e.g., NIST grants or the Department of Energy’s Industrial Technologies Program) these should be used and consistently funded.
Given the relative advantages of the private sector in generating innovation, while it is important to fund federal R&D and deployment activities for certain climate-friendly technologies, it is also important to design a GHG cap-and-trade program to leave the greatest share of the money in private hands, where it will be most efficiently spent, rather than flowing to the federal agencies. For example, a cap-and-trade program that sets a meaningful target and allocates a high percentage of allowances for free to a large number of covered emitters would likely foster a robust private market in allowances. The money in such a market would stay in private hands, without the government acting as middle-man, creating with minimum waste a direct incentive for every company to deploy climate-friendly technologies and practices.
In 2004, the Pew Center conducted a workshop called “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future” , and published recommendations in several technology areas for types and levels of investment needed. Some specific funding recommendations included:
- International coordination to plan, fund, and deploy coal gasification with CCS trial projects that focus on remaining technical issues and with publicly shared results (e.g., adequately addressing remaining uncertainties will likely require four to six projects, at an estimated cost of approximately $5 billion, and an estimated project lifetime of 10 years)
- Establishment of carbon sequestration trial projects in the United States to validate the integrity of geologic storage (e.g., such validation will likely require four such projects at an estimated cost of approximately $1 billion, and an estimated project lifetime of 10 years)
- Reinvent the U.S. electricity grid to facilitate distributed power generation and consumption in ways that make this new model attractive to utilities, and promote energy storage technologies. The estimated price of this upgrade is in the $100 billion range.
Other mechanisms can provide incentives for deployment without direct funding. These include:
- Carbon capture and sequestration: Development of a regulatory system for sequestered carbon, including clarity about state-federal split of jurisdiction, and about which agencies at both levels have jurisdiction. In addition, companies note that public-private partnership in the development of private sector insurance products to cover various liabilities would reduce the financial uncertainty for those in the CO2 chain of custody.
- Renewables: Development of a uniform system to track renewable energy credits in a consistent way across the country and facilitate trading between multiple state programs; utilities and other companies with interest in generation, as well as firms in the investment community, note the value of improvements to the national power grid that facilitate distributed generation as a driver for renewable energy technology.
- Nuclear power: Expansion of scope of U.S. Department of Energy nuclear waste R&D to options beyond Yucca Mountain
- Combined heat and power (CHP) and distributed generation (DG): Support for net metering and incentives for uniform grid interconnection standards at the state level. Development of national test beds for new electricity grid systems.
- End-use efficiency: Promotion of state adoption of building codes. Expansion and tightening of product standards, potentially made tradable between manufacturers.Product standards on emissions will pull technologies into the marketplace by generating demand for them, and can complement a downstream cap-and-trade program by capturing emissions that would not be covered in a large-source system. Combining end-use standards with large-source emissions trading and funding for technology R&D can allow all sectors of the economy to play a role in reducing emissions in a cost-effective way.
Clarifying Questions 2b
- What portion of the overall allowance pool should be dedicated to adaptation research or adaptation-related activities?
- How should these allowances or funds be administered?
- What is the appropriate division between federal vs. regional, state, and local initiatives?
Pew Center Response
The Pew Center recommends a national adaptation strategy that would assess the range of needs and provide guidelines or standards for infrastructure planning, as well as reform existing policies that promote maladaptive behavior. In addition to the needs outlined in this strategy, funding should be provided for the development of early-warning systems for heat waves and other related threats, enhanced monitoring of infectious diseases, and evaluations of the implications of climate change for disaster management. Support should also be given for efforts at local, state, and regional levels, which is where much of the adaptation measures will be taken. Indeed, because we are already observing effects of climate change (sea-level rise, increased storm intensity, ecosystem impacts), the funding needs for adaptation will grow substantially over time – from funding research and planning to supporting on-the-ground changes in infrastructure and response.
Clarifying Questions 2c
- What portion of the overall allocation pool should be reserved to assist consumers?
- Should funds from the sale of permits or allowances be targeted primarily to low-income consumers, or should they be more widely distributed to benefit all consumers?
Pew Center Response
Initially, some portion of auction funds should be used for transition program for affected workers and communities, end-use efficiency investments, and otherwise addressing increased consumer costs as needed.
An earlier Pew Center report, Worker Transition & Global Climate Change , indicated that for the average non-supervisory worker in a goods-producing sector (mining, construction, and manufacturing) who does not find a job until having completed two years of training, the total cost of a transition program would be about $106,000 per worker in 2010.
A separate report, Community Adjustment to Climate Change Policy , concluded that that a new federal adjustment program for at-risk communities should be part of U.S. climate change policy. The report recommended that the U.S. government take the following actions:
- Designate and fund the Economic Development Administration (E.D.A.) of the U.S. Department of Commerce to design and implement an economic adjustment program for communities;
- Identify and assist communities that are particularly dependent on energy-producing and energy-intensive sectors before dislocations occur;
- Leverage and integrate additional resources by involving multiple federal agencies and state and local governments through federal and regional task forces; and
- Be flexible in addressing community needs by supporting locally determined, comprehensive strategies for five to seven years after the implementation of new climate policies.
While the amount of resources required for program implementation is difficult to determine, the authors suggested that an appropriate federal commitment might be $550 million ($50 million for planning, $500 million for implementation), and that resources be allocated so that a community has five to seven years to pursue adjustment.
Note that, while transition programs are not formally part of the RGGI allocation process, the program does set aside 25% of the allowances for energy efficiency and strategic energy investments.
Clarifying Questions 2d:
- What portion of the allocation pool should be reserved for the early reduction credit program and the offset pilot program?
- Are other set-aside programs needed?
Pew Center Response
The Pew Center believes early reduction credit and offsets need not be treated as set-aside programs, but rather as cost-containing flexibility mechanisms. Early reduction credit provides temporal flexibility, while offsets may provide geographic and sectoral flexibility to covered entities, and will be evaluated as part of the overall legislative package.
The Pew Center and nearly every company surveyed by the Center feel that credit or recognition should be given for GHG emission reductions achieved before the program becomes mandatory. The system should be designed so that the many companies that have voluntarily reduced their GHG emissions (as urged by the last three presidents) will not be implicitly penalized for doing so. Without such credit, companies that have taken early action could face higher costs for future emissions reductions than companies that did not pursue early voluntary reductions and thus have more “low hanging fruit” to harvest – therefore putting the early actors at a competitive disadvantage.
Credit should be provided not only to companies that registered their reductions under the U.S. Department of Energy’s Voluntary Reporting of Greenhouse Gases Program (established under section 1605(b) of the Energy Policy Act of 1992), but also to those conforming to U.S. EPA Climate Leaders guidelines, the reporting protocol developed by the World Business Council on Sustainable Development and the World Resources Institute, the protocol developed by the World Economic Forum, and equivalent state and private registries, such as the California Climate Action Registry. The test should be whether the reductions were real and verifiable.
Note that the establishment of a “set-aside” program is by no means the only way to provide recognition of early action. Companies could be directly allocated allowances based on their registered emissions reduction. Some companies have suggested that covered emitters be allocated allowances as a function of their “baseline” emissions levels – the default baseline level being the amount emitted during a given year (or period of years). Emitters who could document beginning their emission reductions earlier than the default baseline year (or years) could move their baseline to that earlier period, leading to their being allocated a greater number of allowances. Such a program could either use set-aside credits or direct allowance allocation.
Offsets are generally defined as out-of-system GHG reductions achieved by non-covered entities. Examples include greenhouse sequestration projects or verifiable credits from the programs of other countries with capped emissions. The use of offsets to meet allowance submission requirements should not be restricted, as long as the offsets reflect real, measurable, and verifiable reductions. In general, offset programs have significant benefits, because they provide flexibility in the geographic and sectoral location of emissions reductions. Inclusion of an offset program expands incentives for emissions reductions beyond those entities covered by the cap. These reductions opportunities will lower the overall cost of program compliance, and motivate a continuous search for low-cost, verifiable reduction opportunities.
Most companies note that offsets are a fundamental tool to efficiently lower the cost of emissions reductions both for firms and for the economy as a whole. They are also a critical market-based mechanism for directing investment to promising technologies and approaches for energy efficiency, low or no-carbon energy, low GHG manufacturing, and carbon sequestration. Offsets specifically expand the scope of the program and serve to unleash the power of the market to stimulate innovation and cost-effectively reduce emissions. One company notes that it will take decades to transition capital stock of power generating plants to low carbon sources, so there is a critical need for offsets as a way of cutting net emissions affordably in the short and medium term. Several companies note that the very function of a market-based system that allows offsets with firm rules regarding verifiability and liability for actual reductions will by its nature favor sources of offsets (all the way down to the specific project level) that are real and verifiable, and steer investment away from projects for which the expected reductions must be discounted due to risk factors (technical, commercial, political, etc.)
Regarding the special case of carbon sequestration, a broad “results-based” program — which provides rewards to project developers in proportion to the amount of additional carbon sequestered — has the potential to improve the cost-effectiveness of a national GHG mitigation program. A results-based program is also likely to result in more innovative solutions than “practice-based” approaches – approaches that give credit for certain practices without verifying the amount of carbon sequestered by each project. Nevertheless, some observers believe the government—in cooperation with researchers, landowners, and project developers—may be able to develop project-measurement and monitoring methods that are sufficiently accurate and reproducible to protect the environmental integrity of a large-scale program that allocates rewards on the basis of evaluations of individual projects.
The following would be needed to provide such integrity:
- A description of accepted practices for sampling and measuring carbon stocks at the project site;
- Methods to develop reference cases or baselines against which observed changes in carbon levels can be compared. Several different approaches to reference case development may be needed to accommodate the wide range of potential activities and settings.
- Methods to estimate or address the leakage effects, including permanence, geographical, and trade-offs among different GHGs;
- Program methodologies designed to provide results that are reproducible by competent, independently-operating evaluators.
In general, offset programs have significant benefits, because they provide flexibility in the geographic and sectoral location of emissions reductions. Inclusion of an offset program expands incentives for emissions reductions beyond those entities covered by the cap. These reduction opportunities will lower the overall cost of program compliance, and motivate a continuous search for low-cost, verifiable reduction opportunities.
In order to verify emission reductions that are fungible with reductions made within the capped sectors, a robust system of measurement and verification is required. The Clean Development Mechanism in the Kyoto Protocol initially provided for a project-by-project review of proposed offsets that presents significant burden and uncertainty for entities seeking offsets. The Pew Center prefers the “standards” approach to offsets taken by the northeast Regional Greenhouse Gas Initiative (RGGI). RGGI’s standards approach seeks to balance reduction verification with regulatory burden. Rather than reviewing projects one at a time, making judgments as to whether the project baseline is appropriate, whether project reductions are additional and real, etc., standards are set for a specific category of offsets, and project applications are assessed against that standard. This approach has two benefits: it makes program administration easier and project approvals more predictable, thus benefiting governments, environmental advocates and offset project developers by lowering the risk premium for such reductions. In the case of RGGI, the program is starting with the following offset categories: natural gas, heating oil, and propane efficiency; landfill gas capture and combustion; methane capture from animal operations; forestation of non-forested land; reductions of sulfur hexafluoride (SF6) emissions from electricity transmission & distribution equipment; and reductions in fugitive emissions from natural gas transmission and distribution systems. RGGI expects to add project categories over time .
The RGGI offset categories are not necessarily the right categories for a national program; they make sense for RGGI because RGGI only covered power plants. Offsets should be in source categories not covered by the cap-and-trade program; therefore, once the scope of the trading program is determined, one can evaluate which offsets are appropriate.
Clarifying Questions 2e
Special considerations for fossil-fuel producers?
- Would some upstream fossil fuel producers be unable to pass the cost of purchasing permits or allowances through in fuel prices if they are the regulated entity?
- Is there a sufficient policy rationale for addressing these costs to justify the complexity of setting up and administering an allocation system for these entities?
- What other options exist to address the inability of fossil fuel producers to pass through these costs?
Clarifying Questions 2f
Allocations for downstream electric generators?
- Should electricity generators be included in the allocation if they are not regulated? (Clarification: We mean to ask if an electric generator should be included in the allocation if the greenhouse gas regulation occurs at a point of regulation that is upstream or downstream from the generator, but not the generator itself.)
- What portion of the total allocation should be granted to the electric power sector? Should it be based on the industry’s share of greenhouse gas emissions or some other factor?
- Should generators in competitive and cost-of-service markets be treated differently under an allocation scheme?
- How should permits or allowances be distributed within the electric sector? Should it be based on historic emissions? Electricity output? Heat input?
Pew Center Response
The Pew Center disagrees with the white paper’s assertion that “All told, these costs would be offset completely by an allocation of roughly 5 to 10 percent of the total permit or allowance pool to fossil fuel producers,” and would support a much larger free allocation, as described at the beginning of the response to Question 2.
The Pew Center supports allocating most allowances at the same point that regulation takes places in order to compensate those who are required to comply.
Power companies with a relatively low-carbon fuel mix prefer allocation based on electricity output. Power companies with a relatively high-carbon fuel mix prefer allocation based on historic emissions. Some manufacturing companies agree with the latter approach, based in part on their interests as large power users and depending on the carbon intensity of the generators supplying their electricity. Power companies in both camps indicate a willingness to consider compromise approaches depending on other aspects of a regulatory design package. They also generally agree that the most critical goal in reducing power sector GHG emissions in the medium and long term is to facilitate new plant investment in low-carbon and no-net-carbon technology, and many agree that the system should aim to phase out the highest-carbon plants in the generating fleet.
One utility notes that a compromise approach might involve beginning with a relatively input-focused allocation that transitions over a period of years toward a more output-based allocation. This sort of approach is one under consideration by a number of industry players. Another utility points out the importance of fairly reconciling differences between regions and economies dependent on coal and regions with abundant natural gas.
Clarifying Questions 2g
Allocations for energy-intensive industries?
- Is there a sufficient policy rationale to have an allocation to selected energy-intensive industries? What industries should be included in the allocation?
- What portion of the overall allocation framework should be reserved for these industries?
- What are the appropriate metrics for determining allocations across different industries?
Pew Center Response
Allocation as a policy vehicle can serve multiple purposes – reducing costs, motivating and compensating early action, addressing transition issues, etc. However, it will also likely be the most contentious element of the trading system development. Implementation may be made more straightforward by using a consistent rule for allocation across all sectors. On the other hand, sectoral tailoring may be necessary to address concerns about global competitiveness. Allowance allocation may be a particularly effective way of accounting for the relative price insensitivity of different sectors.
For vulnerable stationary sources that face intense competition that could lead to offshoring (and even higher GHG emissions), allowances can be provided to help ease the transition of capital stock to newer, more efficient technologies and cleaner fuels.
In transportation, while there is no clear consensus on how to reduce emissions from private vehicles, many observers believe that demand from U.S. private vehicle drivers is inelastic in the short term, i.e., that vehicle drivers will be willing to pay a very high price for gasoline without significantly modifying their travel behavior (with the exception of short term reaction to dramatic price spikes) or vehicle preferences. One serious negative effect of this price inelasticity is that if vehicle drivers are essentially included in a national cap-and-trade program — for example, by requiring allowance submission by the importers and refiners of petroleum products burned for transportation — they might bid the emissions allowance prices very high, to the detriment of the more price-sensitive manufacturing sector. As is the case with any potential damage to certain industries, allowance allocation might be a mechanism to make whole those requiring relief — and to do so in a way that changes over time to increase pressure for those industries to reduce emission at a pace they can afford.
Clarifying Questions 2h
Allocations to other industries/entities?
- What other industries/entities (e.g. agriculture, small businesses, etc.) should be considered in the allocation pool?
- What should be the basis for their share of the total allocation as well as for the distribution among such industries/entities?
Pew Center Response
Please see response to Question 2g.
 For example, if allowances are distributed per kwh of generation, that would provide an incentive to increase generation, lowering electricity prices and encouraging fuel switching and plant efficiency over end-use efficiency. Some argue that, if allowances are allocated based on average emission rates, updating would not encourage generators with high emissions rates to generate more because they would still have to buy additional allowances to cover their incremental emissions.
 Further analysis on allocation can be found in Nordhuas, R. 2003. Designing A Mandatory Greenhouse Gas Reduction Program for the United States. Arlington, VA: Pew Center on Global Climate Change, pgs. 27 – 29.
 “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future”. Washington DC, March 25-26, 2004.
 Alic, J.; D. Mowery; E. Rubin. 2003. U.S. Technology and Innovation Policies: Lessons for Climate Change. Arlington, VA: Pew Center on Global Climate Change. Goulder, L. 2004. Induced Technological Change and Climate Policy. Arlington, VA: Pew Center on Global Climate Change.
A technology prize grants a monetary award for a specific goal in R&D to spur innovative step-changes in technologies. The best-known example has been the 2004 “ANSARI X PRIZE,” which was awarded for the first successful private space flight.
 “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future”. Washington DC, March 25-26, 2004.
 Further information on offsets can be found in “Summary of RGGI Stakeholder Workshop on Greenhouse Gas Offsets”, accessed at http://www.rggi.org/docs/offsets_workshopsummary.pdf.
Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
Question 1: Who is regulated and where?
Clarifying Question 1a
Is the objective of building a fair, simple, and rational greenhouse gas program best served by an economy-wide approach, or by limiting the program to a few sectors of the economy?
Pew Center Response
Download Response to Question 1 (pdf)
The Pew Center’s responses to these questions draw from two sources:
- An extensive body of analysis, conference and workshop proceedings, and other work undertaken by the Pew Center from 1998 to the present with input from the Center’s Business Environmental Leadership Council (BELC) , leading scholars, policymakers, and stakeholder groups. This work provides the foundation for the Pew Center’s positions on these design questions. Documentation of this work is available at the Pew Center website.
- Opinions expressed to the Pew Center in dozens of hours of discussion over several years with over 30 large corporations regarding design elements of a greenhouse gas (GHG) cap-and-trade program. The companies include several large utilities as well as companies in other sectors, ranging from primary fuels to manufacturing to retail. Although the Pew Center and the companies with which the Center has discussed design elements agree on the broad outlines of a cap-and-trade program, individual company opinions may or may not agree with the Center’s positions on particular issues.
As reflected in the Center’s 15-point Agenda for Climate Action, the Pew Center believes that mandatory GHG mitigation measures must cover the economy as a whole, equitably spreading responsibility for reducing emissions among large emitters, the transportation sector, and households. The companies surveyed unanimously supported this position.
Because emissions from electricity generation and transportation make up approximately 40% and 30% of U.S. GHG emissions respectively, it is critical to address these sectors sooner rather than later. However, these emissions need not be covered through the same system.
Large stationary sources should be addressed through a cap-and-trade program . A cap on emissions would send an economy-wide signal favoring reductions, and emissions trading would ensure that reductions are achieved at the lowest cost possible. Such a program should cover all GHGs in all major emitting sectors and include all measurable, verifiable reductions and offset measures, without restrictions on trading. An absolute cap for the national program should be set to achieve a modest level of emission reductions and announced sufficiently far in advance to allow for planning (e.g., a return to current levels within a five- to ten-year period). Further reductions should be phased in over time as new technologies come online and capital stock turns over. Because individual sectors have different sensitivities to the price of carbon and are growing at different rates, sector-specific emission limits or allowance allocations within the overall cap could be established.
At the end of a year, each emitter would be required to surrender allowances equal to its emissions. Emitters whose cost of abating emissions was lower than the allowance price could sell allowances or “bank” them for future use. Emitters whose cost of reducing emissions was more than the price of an allowance could buy allowances. This flexibility would allow for the most cost-effective emissions reductions.
The transportation sector is difficult to incorporate into a downstream cap-and-trade program, and should be addressed through requirements on vehicle manufacturers, for example by converting the Corporate Average Fuel Economy (CAFE) program into strengthened, tradable corporate average CO2 (or GHG) standards. Average fuel economy standards under the current CAFE program could be replaced by corporate average CO2 emission standards for each manufacturer’s combined sales of cars and light trucks. A manufacturer that “overachieves” (whose average emissions are below the standard) in a given year would earn allowances based on the reduction in projected lifetime emissions from vehicles produced in that year. These allowances could be banked, sold to other manufacturers or sold into the broader, economy-wide GHG cap-and-trade program. A manufacturer that does not meet its CO2 standard would purchase allowances to cover its shortfall.
In order not to penalize any vehicle manufacturer at the start, efforts of those who invested early and exceeded standards would be recognized (for example, through credit allocation) with adequate time provided for other companies to catch up, recognizing the time needed to develop and market new vehicles. Concerns about a lack of price-responsiveness within the transportation sector driving up costs of allowances for stationary sources could be addressed by keeping this program separate from the stationary source cap-and-trade program, or by requiring a certain amount of reductions from within the sector.
Since the energy services required by residential, commercial and industrial buildings produce approximately 43% of U.S. CO2 emissions , a comprehensive climate program must address this sector. Measures such as upgraded building codes and appliance efficiency standards are an important complement to a large-source cap-and-trade program. Incentives for technologies such as combined heat and power could move the country toward net zero-energy buildings.
While it is important to cover all major emitters, policies may address some sectors first – for example, by implementing cap-and-trade for the electric power sector before other sectors. Some of the utilities surveyed indicate a willingness to consider such an approach, provided the design of regulations is sensible and fair, in exchange for the regulatory certainty that a program would provide. Similarly, some companies state that, although GHG legislation ultimately needs to cover the economy as a whole, a cap-and-trade program initially needs to be as straightforward and easy to implement as possible. At least two major utilities, however, say they oppose a bill that excludes buildings and transportation. They state that the program otherwise would create a distortion that moves electricity generation away from the sector most able to make low-cost reductions to captive generation by large electricity users. Almost all the utilities note they have extensive experience and internal capacity gained over many years of compliance with other air regulations and, in many cases, are also experienced in emissions trading of other air pollutants, so they are well prepared to work within a GHG cap and trade system.
Finally, while the objective is to build “a fair, simple, and rational” program, it is important to recognize possible tensions between “fair” and “simple.” The Pew Center and all of the companies with which we have discussed design elements agree that fairness calls for all sectors to bear a fair share of the emissions reduction burden. However, implementing a cap and trade bill for large emitters could be a simpler first step than covering other sectors in the same bill. Establishing a large emitter cap and a U.S. GHG trading market could provide a simple, effective platform for integrating transportation, buildings, and other sectors into a GHG regime over time, rather than undertake measures for all sectors simultaneously.
Clarifying Question 1b
What is the most effective place in the chain of activities to regulate greenhouse gas emissions, both from the perspective of administrative simplicity and program effectiveness?
Pew Center Response
The Pew Center and most of the companies surveyed believe that allowance submission should be required “downstream” at the point of emission from large stationary sources, rather than “upstream” (e.g., on producers of coal, oil, and natural gas). To many, a program that applies a cap and trade to upstream producers functions for all practical purposes like a carbon tax, rather than a robust market. Moreover, some research suggests that carbon taxes must be very high and continuous to motivate a significant market response. It is more useful to apply regulation to those in a position to alter the behavior that results in emissions, rather than to apply a tax on firms that have no technology or process options to reduce emissions.
Regarding the special case of transportation emissions, the Pew Center recommends a focus on vehicles – changing the CAFE standard to a tradable emissions approach, as discussed in response to the Question 1a.
 The BELC is the largest U.S. based association of corporations focused on addressing the challenges of climate change, with forty-one members representing $2 trillion in market capitalization and over 3 million employees.
See also: Claussen, E., and R. Fri, co-chairs. 2004. A Climate Policy Framework: Balancing Policy and Politics. Ed. J. Riggs. Report of an Aspen Institute Climate Change Policy Dialogue, November 14-17, 2003. Washington DC: The Aspen Institute.
Nordhaus, R., and K. Danish. 2003. Designing a Mandatory Greenhouse Gas Reduction Program for the U.S., Arlington, VA: Pew Center on Global Climate Change.
 Brown, M., Southworth, F., Stovall, T. 2005. Towards a Climate-Friendly Built Environment, Arlington, VA: Pew Center on Global Climate Change.
The Pew Center on Global Climate Change Response to:
"Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System"
Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
In February 2006, Senate Energy and Natural Resources Committee Chairman Sen. Pete V. Domenici (R - New Mexico) and top Democrat Sen. Jeff Bingaman (D - New Mexico) issued a white paper on Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System, which posed several detailed questions about the design of a GHG cap-and-trade system.
The committee invited all interested parties to respond to the questions by March 13. Read a summary of our response below and the full response using the navigation bar in the top right corner of this page. You may also download the entire response (pdf) or sections of the response below.
Selected respondents were invited to attend the Senate Energy and Natural Resources Committee's conference-style hearing, or "Climate Conference", on April 4. Read Pew Center President Eileen Claussen's opening statement given at the Climate Conference. Read also Eileen Claussen's statement on the event of the Climate Conference.
Summary of Response to "Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System" from Eileen Claussen, President, Center for Climate and Energy Solutions
Pew Center applauds the Senate Energy Committee for its continued efforts to address the critical issue of climate change. The Center is responding to all four main questions, and submitting additional information on cost containment and recent climate science. Responses draw from an extensive body of analysis, conference and workshop proceedings undertaken by the Center with input from the Center’s Business Environmental Leadership Council, scholars, policymakers, and stakeholders; as well as opinions expressed to the Center in discussions with over 30 large corporations. Please note that the Center and most companies surveyed believe that, rather than focusing on any one design element in isolation, any bill must be evaluated as a whole, especially in minimizing the costs to covered entities and the economy.
1. Point of Regulation: Ultimately mandatory GHG mitigation measures should cover the economy as a whole, equitably spreading responsibility among large emitters, the transportation sector, and households. For large stationary sources, the submission of allowances would best be required “downstream” at the point of emission, rather than “upstream.” For the transportation sector, the Center recommends an approach that would cover vehicle manufacturers through use of tradable vehicle GHG emission standards.
2. Allowance Allocation: To assist with the transition to GHG regulation, a high percentage of allowances (e.g., 90% - 95%) should be allocated at no cost, rather than auctioned, at least in the initial years of a cap-and-trade system. A small initial auction can provide funds for transition assistance and technology deployment. Over time, the amount auctioned could increase. In providing federal funding for technology development, a competitive process, such as a “reverse auction,” allocating funding on the basis of emission reduction potential, can minimize costs. In the early years of the program, the highest priorities for allocation should be transition assistance and technology development; over time the priorities should shift toward rewarding low-emitting technologies and practices. Offsets are critical for minimizing program costs. Use of offsets to meet allowance submission requirements should not be restricted, as long as the offsets meet reasonable standards for real, verifiable emission reductions. Early action credit is important and could be provided by allowing emitters who document emission reductions earlier than the default baseline year to use an earlier baseline, resulting in a higher allowance allocation.
3. Linkage: A U.S. GHG program should be integrated with systems around the world. This is both environmentally and economically important. Linkage will minimize costs while expanding GHG mitigation and technology transfer opportunities. Use of a low safety valve will greatly complicate such linkage and minimize the incentive for technology transfer and innovation.
4. Encouraging Comparable Action: Different policies are needed to address two distinct but related objectives: (1) achieving adequate action by all major emitting countries, and (2) protecting U.S. firms in energy-intensive industries whose goods are traded internationally against competitiveness impacts. The first is best achieved through multilateral commitments; the second through overall cost containment and targeted support for the vulnerable sectors.
Cost Containment: A “safety valve” is just one cost containment method. Costs to regulated entities can also be minimized through offsets, allocation, linkage, etc.
Climate Science: The evidence of globally-distributed climate change impacts is mounting.
Download Sections of Our Response (all pdf)
Question 1: Point of Regulation
Question 2: Allowance Allocation
Question 3: Linkage
Question 4: Encouraging Comparable Action
Additional Topics: Cost Containment & Climate Science
Additional Topics: Cost Containment Chart