The Center for Climate and Energy Solutions seeks to inform the design and implementation of federal policies that will significantly reduce greenhouse gas emissions. Drawing from its extensive peer-reviewed published works, in-house policy analyses, and tracking of current legislative proposals, the Center provides research, analysis, and recommendations to policymakers in Congress and the Executive Branch. Read More
"A Climate Policy Framework: Balancing Policy and Politics"
Proceedings from the joint Aspen Institute/Pew Center Conference, March 2004
A diverse group of business, government, and environmental leaders, brought together by the Aspen Institute and the Pew Center, recommends a framework for a mandatory greenhouse gas reduction program for the United States. The group started with the premise that, if mandatory action is taken, climate policies should be environmentally effective, economical and fair. After a three-day dialogue, the participants reached consensus on a policy framework that is both effective and politically feasible.
U.S. Technology and Innovation Policies: Lessons for Climate Change
Prepared for the Pew Center on Global Climate Change
John A. Alic, Consultant
David C. Mowery, University of California, Berkeley
Edward S. Rubin, Carnegie Mellon University
Eileen Claussen, President, Pew Center on Global Climate Change
New technologies for electric power generation, transportation, industry, and consumer products are expected to play a major role in efforts to reduce the greenhouse gas (GHG) emissions that contribute to global climate change. Yet technological change on this scale cannot happen overnight. Government policies will be instrumental in encouraging more rapid development and adoption of technology. In the United States—long a leader in innovation—well-crafted policies that encourage the development, deployment, and diffusion of new technologies will be essential complements to other GHG-reduction policies.
The Pew Center commissioned this report to examine U.S. experience with technology and innovation policies—both successes and failures—and to draw lessons for future applications, including efforts to address climate change. The authors found that because innovation is a complex, iterative process, different policy tools can be employed as catalysts at various phases (e.g., invention, adoption, diffusion). They also discuss the roles that intellectual property protection and regulatory policies play in driving innovation, and examine programs such as the Defense Advanced Research Project Agency (an innovative force in information technology), as well as public-private collaborations such as the Partnership for a New Generation of Vehicles, to glean lessons for climate change policy. The insights revealed are clear:
- A balanced policy portfolio must support not only R&D, but also promote diffusion of knowledge and deployment of new technologies: R&D, by itself, is not enough.
- Support for education and training should supplement research funding.
- “Non-technology policies” provide critical signposts for prospective innovators by indicating technological directions likely to be favored by future markets.
- Policy-makers should channel funds for technology development and diffusion through multiple agencies and programs, because competition contributes to policy success.
- Public-private partnerships can foster helpful, ongoing collaborations.
- Effective programs require insulation from short-term political pressures.
- Policy-makers must be prepared to tolerate some “failures” (i.e., investments that do not pay off), and learn from them as private sector entrepreneurs do.
- In light of the inherent uncertainty in innovation processes, government policies should generally support a suite of options rather than a specific technology or design.
Technology policies, while important, cannot by themselves achieve the GHG reductions necessary to mitigate climate change. Rather, they should be part of a comprehensive approach that includes “non-technology policies,” such as a GHG cap and-trade program. The authors and the Pew Center thank Bob Friedman, Ken Flamm, David Hart, and Ev Ehrlich for commenting on previous report drafts.
Large-scale reductions in the greenhouse gases (GHGs) that contribute to global climate change can only be achieved through widespread development and adoption of new technologies. In the United States, energy consumption is the dominant source of GHG emissions. Most of these emissions consist of carbon dioxide (CO2), which accounts for approximately 84 percent of total GHG emissions. Although other GHGs, such as methane (CH4), have a more powerful effect on global warming per unit of release, CO2 enters the atmosphere in far greater quantities because it is produced whenever fossil fuels are burned. Thus the technological innovations needed to reduce GHG emissions and eventually stabilize GHG concentrations in the atmosphere are those that can, at reasonable cost: (1) improve the efficiency of energy conversion and utilization so as to reduce the demand for energy; (2) replace high-carbon fossil fuels such as coal and petroleum with lower-carbon or zero-carbon alternatives, such as natural gas, nuclear, and renewable energy (e.g., wind and solar); (3) capture and sequester the CO2 from fossil fuels before (or after) it enters the atmosphere; and (4) reduce emissions of GHGs other than CO2 that have significant impacts on global warming.
Although innovation cannot be planned or programmed, and most innovations come from private firms, government policies of many types influence the rate and direction of technological change. This report identifies technology policy tools that have fostered innovation in the past (see summary table below) and draws lessons for GHG abatement. It also briefly discusses other measures such as environmental regulations that would serve to induce innovation.
A Summary of Technology Policy Tools
Direct Government Funding of Research and Development (R&D)
Direct or Indirect Support for Commercialization and Production; Indirect Support for Development
Support for Learning and Diffusion of Knowledge and Technology
* Refers only to standards intended to ensure commonality (e.g., driving cycles for comparing automobile fuel economy), or compatibility (e.g., connectors for charging electric vehicle batteries), not to regulatory standards.
The key lessons of this analysis are supported by a large body of literature in economics and other fields concerning the innovation process, and include the following:
- Technological innovation is a complex process involving invention, development, adoption, learning, and diffusion of technology into the marketplace. The process is highly iterative, and different policies influence outcomes at different stages.
- Gains from new technologies are realized only with widespread adoption, a process that takes considerable time and typically depends on a lengthy sequence of incremental improvements that enhance performance and reduce costs. For example, several decades passed before gas turbines derived from military jet engines improved in efficiency and reliability to the point that they were cost-effective for electric power generation. Today, gas turbines are the leading technology for new, high-efficiency power plants with low GHG emissions.
- Technological learning is the essential step that paces adoption and diffusion. “Learning-by-doing” contributes to reductions in production costs. Adopters of new technology contribute to ongoing innovation through “learning-by-using.” Widespread adoption accelerates the incremental improvements from learning by both users and producers, further speeding adoption and diffusion.
- Technological innovation is a highly uncertain process. Because pathways of development cannot be predicted, government policies should support a portfolio of options, rather than a particular technology or design.
Government policies influence technological change at all stages in the innovation process. Lessons learned from U.S. experience with technology policies over the past several decades include the following:
- Federal investments contribute to innovation not only through R&D but also through “downstream” adoption and learning. Government procurement of jet engines, for example, accelerated the development of gas turbines by providing a (military) market that allowed users and producers to gain experience and learn by using. Likewise, in the early years of computing, defense agencies made indispensable contributions to a technological infrastructure that propelled the industry’s rise to global dominance.
- Public-private R&D partnerships have become politically popular because they leverage government funds and promote inter-firm collaboration. Partnerships may have particular advantages in fostering vertical collaborations, such as those between suppliers and consumers of energy.
- Adoption of innovations that originate outside a firm or industry often requires substantial internal investments in R&D and human resources. Smaller firms may be less able to absorb innovations without government assistance.
- Just as competition in markets helps resolve uncertainties and improves economic performance, competition within government can improve performance in fostering innovation. The messy and often duplicative structure of U.S. R&D support and related policies creates diversity and pluralism, fostering innovation by encouraging the exploration of many technological alternatives.
- Because processes of innovation and adoption are lengthy and convoluted, effective policies and programs require insulation from short-term political pressures.Reliable political constituencies have been essential for the development of new technologies in defense, for research in the biomedical sciences, and for agricultural and manufacturing extension. By contrast, technology policies for addressing climate change face a discordant political environment.
Technology policies alone cannot adequately respond to global climate change. They must be complemented by regulatory and/or energy pricing policies that create incentives for innovation and adoption of improved or alternative technologies. Such “non-technology policies” induce technological change, with powerful and pervasive effects. Environmental regulations and energy efficiency standards have fostered innovations that altered the design of many U.S. power plants and all passenger cars over the past several decades. The technological response to climate change will depend critically on environmental and energy policies as well as technology policies. Because climate change is an issue with time horizons of decades to centuries, learning-by-doing and learning-by-using have special salience. Both technology policies and regulatory policies should leave “space” for continuing technological improvements based on future learning. Climate change policy must accommodate uncertainties, not only regarding the course and impacts of climate change itself, but also in the outcomes of innovation.
Greenhouse gas emission reductions will require a broad portfolio of policies to foster technology development and adoption by actors ranging from households to multinational corporations. The policy portfolio should combine technology policies as discussed in this report with other policies to induce innovation and deployment.
A climate change policy package must account for uncertainties in the pace and cost of innovation. Technological evolution is always accompanied by unknowns concerning the levels of performance that can ultimately be achieved, the technological attributes that will prove most attractive to adopters, and the costs of these technologies. Technical design and development are fluid, open-ended activities with multiple choices and tradeoffs and often-ambiguous selection or evaluative criteria. Uncertainties, part and parcel of innovation, can be resolved only through learning processes. These processes are often slow and piecemeal, studded with lessons from both successes and failures. Technology-oriented policies and non-technology policies alike must function in such settings.
Further lessons for climate change policy include the following:
- Because the benefits of technological innovation come only with widespread adoption, and because adoption and learning are mutually reinforcing processes, the policy portfolio should support diffusion of knowledge and deployment of new technologies as well as research and discovery. In short, R&D alone is not enough.
- Because private investments respond primarily to near-term market incentives, public investments are necessary to build a technological infrastructure able to support innovation over the long term. A key ingredient of such infrastructures is a vibrant community of technologists and entrepreneurs working in settings in which knowledge and information flow freely. Government financial support for education and training, as well as for research, enhances such infrastructures. Excessively strong intellectual property rights may weaken such infrastructures.
- Competition among firms contributes to effective selection of innovations, and competition among academic research groups contributes to discovery. Similarly, competition among government agencies and government laboratories contributes to policy success. Competition exposes ineffectual bureaucracies, out-of-touch government laboratories, poor policy choices, and project-level mistakes. It encourages diversity by opening alternatives for exploration by technology creators and technology users alike. For these reasons, policy-makers should channel new funds for R&D through multiple agencies and allocate funds to industry and other researchers on a competitive basis.
- Because there can be no learning without some failures, policy-makers cannot expect every government investment to pay off. They must be prepared to tolerate mistakes, and to learn from them, just as entrepreneurs in the private sector do. Needless to say, tolerance for error is no excuse for sloppy management or ill-conceived policies and programs.
To encourage innovation in response to climate change, the federal government should support the development of an environment that nourishes creativity and learning in science, technology, and commercial applications. Well-designed technology policies support the free flow of information, which promotes the evaluation of new ideas and the acceptance and diffusion of the best new technologies. Much innovation will be needed if GHG emissions are to be reduced to the levels needed to stabilize atmospheric concentrations of heat-trapping gases. Government policies will set the underlying conditions for (and constraints on) innovation. The effectiveness of climate change policies will be judged by the innovation that follows. Well-crafted policies can help nourish an energy technology revolution over the next half century as astonishing as the information technology revolution of the last half century.
About the Authors
JOHN A. ALIC, Consultant
John Alic writes and consults on policy issues related to technology, science, and the economy. As a staff member at the congressional Office of Technology Assessment from 1979 to 1995, he directed projects that include U.S. Industrial Competitiveness: A Comparison of Steel, Electronics, and Automobiles (1981) and Commercializing High-Temperature Superconductivity (1988). His consulting has included work for government agencies, the National Academy of Engineering, and the H. John Heinz III Center for Science, Economics, and the Environment project on “Technology Policies for Reducing Greenhouse Gas Emissions.” Alic is co-author of Beyond Spinoff: Military and Commercial Technologies in a Changing World (1992) and New Rules for a New Economy: Employment and Opportunity in Postindustrial America, a Century Foundation book published in 1998. A graduate of Cornell, Stanford, and the University of Maryland, he has taught at several universities and is currently completing a book manuscript with the working title, Trillions for Technology: Innovation and the U.S. Military.
DAVID C. MOWERY, University of California, Berkeley
David Mowery is Milton W. Terrill Professor of Business at the Walter A. Haas School of Business at the University of California, Berkeley, a Research Associate of the National Bureau of Economic Research, and during the 2003-04 academic year, the Bower Fellow at the Harvard Business School. He received his undergraduate and Ph.D. degrees in economics from Stanford University and was a postdoctoral fellow at the Harvard Business School. Dr. Mowery taught at Carnegie Mellon University, served as the Study Director for the Panel on Technology and Employment of the National Academy of Sciences, and served in the Office of the United States Trade Representative as a Council on Foreign Relations International Affairs Fellow. He has been a member of a number of National Research Council panels, including those on the Competitive Status of the U.S. Civil Aviation Industry, on the Causes and Consequences of the Internationalization of U.S. Manufacturing, on the Federal Role in Civilian Technology Development, on U.S. Strategies for the Children's Vaccine Initiative, on Applications of Biotechnology to Contraceptive Research and Development, on New Approaches to Breast Cancer Detection and Diagnosis. His research deals with the economics of technological innovation and with the effects of public policies on innovation; he has testified before Congressional committees and served as an adviser for the Organization for Economic Cooperation and Development, various federal agencies and industrial firms. Dr. Mowery has published numerous academic papers and has written or edited a number of books, including ‘Ivory Tower’ and Industrial Innovation: University-Industry Technology Transfer Before and After the Bayh-Dole Act; Paths of Innovation: Technological Change in 20th-Century America; The International Computer Software Industry: A Comparative Study of Industry Evolution and Structure; U.S. Industry in 2000; The Sources of Industrial Leadership; Science and Technology Policy in Interdependent Economies; Technology and the Pursuit of Economic Growth; Technology and Employment: Innovation and Growth in the U.S. Economy; The Impact of Technological Change on Employment and Economic Growth;Technology and the Wealth of Nations; and International Collaborative Ventures in U.S. Manufacturing. His academic awards include the Raymond Vernon Prize from the Association for Public Policy Analysis and Management, the Economic History Association's Fritz Redlich Prize, the Business History Review's Newcomen Prize, and the Cheit Outstanding Teaching Award.
EDWARD S. RUBIN, Carnegie Mellon University
Dr. Rubin is the Alumni Professor of Environmental Engineering and Science at Carnegie Mellon University. He holds joint appointments in the departments of Engineering and Public Policy and Mechanical Engineering, and is also Director of CMU's Center for Energy and Environmental Studies. He obtained his Bachelor's degree in mechanical engineering at the City College of New York, and his Masters and Ph.D. at Stanford University. Over the past 32 years, he has directed research on a wide range of technology-policy issues related to energy and the environment, especially focused on coal-based systems. He has served on various technical and advisory boards to the U.S. Department of Energy, the U.S. Environmental Protection Agency, and the National Academies, and is currently a member of the National Research Council's Board on Energy and Environmental Systems (BEES), and its committee assessing DOE's Vision 21 program. He is the author of over 200 technical papers and reports dealing with advanced energy technologies, environmental control systems and environmental policy, as well as a recent textbook on Engineering and the Environment. In addition, he has served as a consultant to a variety of public and private organizations in the U.S. and abroad concerned with energy use and environmental protection.
FOR IMMEDIATE RELEASE:
Thursday, October 30, 2003
Contact: Katie Mandes (703) 516-0606
Eileen Claussen Statement on McCain-Lieberman Vote
Washington, DC — Today's Senate vote on the Climate Stewardship Act demonstrates strong and growing bipartisan support for real action against climate change. John McCain and Joe Lieberman have crafted a piece of legislation that is ambitious yet achievable and affordable. The bill couples strong environmental goals with a flexible market-based approach that allows business to reduce emissions at the lowest possible cost. According to an analysis by MIT economists the cost to the average U.S. household would be just $15 a year in 2010, a modest price for insurance against the very real risks of global warming. It may be some time before a bill like this can be enacted. But thanks to this bill, Congress is for the first time engaged in a genuine debate over climate solutions. This debate is long overdue. This is a beginning.
The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, non-profit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
Critique of the Charles River Associates Cost Projections of S.139 (as offered in 10/03)
On Wednesday morning, October 29, 2003, Tech Central Station released a Charles River Associates (CRA) analysis purported to analyze the version of the Lieberman-McCain Climate Stewardship Act (S. 139) to be voted on by the Senate on October 30. The CRA analysis has neither gone through peer review nor been revised after comment and debate. Among the most dubious aspects of the CRA analysis is that it projects a price per ton of greenhouse gas (GHG) emissions similar to that projected by the MIT model1 while projecting a much higher impact on GDP and household consumption.
This is in part because CRA has not actually modeled the bill as it is being offered today. In particular:
- The CRA results are largely driven by an assumed hike in personal income taxes not included in the bill.
- The CRA model does not include reductions of the five GHGs besides carbon dioxide covered by the bill2 which offer low-cost reduction opportunities.
In addition, the CRA analysis incorporates assumptions that further skew its cost estimates upwards.
- The CRA analysis assumes, as the business-as-usual baseline, massive growth over the next 70 years in carbon-intensive fuels and activities. This extrapolation exaggerates the reductions needed to meet the long-term targets imposed by their analysis.
- The CRA analysis assumes that long-term technological change will be limited, ignoring U.S. industry’s long history of innovation in meeting major policy goals, whether related to defense, health, energy or environmental protection.
The CRA analysis assumes that the lower economic growth they project will lead to reduced tax revenue and result in other taxes being raised. But increasing personal income tax leads to greater distortions in the economy, resulting in a vicious cycle: the more the price of energy goes up, the less is consumed, so the personal tax burden is further increased, so less energy is consumed, etc.
Without assumptions that are not reflective of the bill as written, CRA’s results become more comparable to MIT’s results3. In CRA’s words, “When all three of these changes [foresight, future policy assumptions, and tax distortions] are combined, we are able to project consumption losses in the range of less than 0.06% or less than $70 per household per year.”
1 CRA projects carbon prices of $27/TC ($7/TCO2) in 2010 and $44/TC in 2020 ($12/TCO2), compared to $31/TC and $52/TC in the MIT study.
2 The six greenhouse gases addressed by S.139 are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).
3 MIT projects a 0.02% effect on consumption at an annual cost of roughly $15 per household.
Fact Sheet on MIT Cost Estimates of S.139 (as offered in 10/03)
The Massachusetts Institute of Technology (MIT), through its Joint Program on the Science and Policy of Global Change, has assembled a world-class collaboration of economists and scientists to model and analyze global climate change policies. Using their EPPA1 model, one of the world’s premier energy-economic models, MIT has undertaken the only analysis of the Lieberman-McCain Climate Stewardship Act (S.139) as it will be offered on the Senate Floor in October 2003 – i.e., Phase I only – achieving 2000 emissions in 2010.
- MIT uses the same economic, energy use and emissions baselines as the U.S. Energy Information Agency (EIA), but has a much less pessimistic view of the future supply curve for natural gas, based on potentially available natural gas sources (federal lands, unconventional gas, Alaska, deep sea and LNG).
- The strength of the MIT-EPPA model is its treatment of non-CO2 greenhouse gases2 (GHGs) and biomass sequestration – both these sources offer opportunities for low-cost reductions.
- MIT finds considerable efficiency opportunities, including accelerated penetration of combined heat and power plants and distributed generation.
- The use of efficiency, non-CO2 GHGs and sequestration means that much less switching in energy supply is required.
- This allows coal use to remain consistent at around 24 Quads per year.
- This also means that, although there is some fuel switching to natural gas, overall gas demand growth is less because overall, less energy is being consumed.
Total consumption change
Consumption % change
Cost per household ($)
Natural gas % change from reference
Carbon price in $/tC [$/tCO2]
- All prices are in $2001.
- Consumption is the major component of GDP (the others are investment, government expenditures and imports/exports balance) and thus is a good measure of actual impact on the population.
- In year 2000, US GDP was around $10 trillion with consumption at $6.3 trillion.
- In year 2000, there were 108 million households in the US with a median income of $41,000, by 2020, there is projected to be 127 million households with a median income of $61,000.
Summary of The Lieberman-McCain Climate Stewardship Act
(As debated in the U.S. Senate on October 30, 2003)
On October 30, 2003, Senators Joseph I. Lieberman (D-CT) and John McCain (R-AZ) brought a revised version of their Climate Stewardship Act of 2003 (S.139) to a vote in the United States Senate. While the measured failed by a vote of 43 to 55, the vote demonstrated growing bipartisan support for a genuine climate change policy.
The revised version of the bill would require the Administrator of the EPA to promulgate regulations to limit the greenhouse gas (GHG) emissions from the electricity generation, transportation, industrial, and commercial economic sectors (as defined by EPA's Inventory of U.S. Greenhouse Gas Emissions and Sinks). The affected sectors accounted for approximately 85% of the overall U.S. emissions in the year 2000. The bill also would provide for the trading of emissions allowances and reductions through a National Greenhouse Gas Database which would contain an inventory of emissions and registry of reductions.
Target: The bill would cap the 2010 aggregate emissions level for the covered sectors at the 2000 level. The bill's emissions limits would not apply to the agricultural and the residential sectors. Certain subsectors would be exempt if the Administrator determined that it was not feasible to measure their GHG emissions. The Commerce Department would biennially re-evaluate the level of allowances to determine whether it was consistent with the objective of the United Nation’s Framework Convention on Climate Change of stabilizing GHG emissions at a level that will prevent dangerous anthropogenic interference with the climate system.
Allowances: An entity that was in a covered sector, or that produced or imported synthetic GHGs, would be subject to the requirements of this bill if it (a) owned at least one facility that annually emitted more than 10,000 metric tons of GHGs (measured in units of carbon dioxide equivalents – MTCO2E); (b) produced or imported petroleum products used for transportation that, when combusted, would emit more than 10,000 MTCO2E; or (c) produced or imported HFC, PFC and SF6 that, when used, would emit more than 10,000 MTCO2E. Each covered entity would be required to submit to the EPA one tradeable allowance for each MTCO2E directly emitted. Each petroleum refiner or importer would be required to submit an allowance for each unit of petroleum product sold that, when combusted, would emit one MTCO2E. Each producer or importer of HFC, PFC, and SF6 would be required to submit an allowance for each unit sold that, when used, would emit one MTCO2E. The Administrator would determine the method of calculating the amount of GHG emissions associated with combustion of petroleum products and use of HFC, PFC, and SF6.
Allocation of Allowances: The Secretary of Commerce would determine the amount of allowances to be given away or "grandfathered" to covered entities and the amount to be auctioned. The Secretary's determination would be subject to a number of allocation factors identified in the bill. Proceeds from the auction would be used to reduce energy costs of consumers and assist disproportionately affected workers.
Flexibility Mechanisms: Covered entities would have flexibility in acquiring their allowances. In addition to the allowances grandfathered to them, covered entities could trade with other covered entities to acquire additional allowances, if necessary. Also, any entity would be allowed to satisfy up to 15% of its total allowance requirements by submitting (a) tradeable allowances from another nation's market in GHGs; (b) a net increase in sequestration registered with the National Greenhouse Gas Database established by the bill; (c) a GHG emission reduction by a non-covered entity registered with the Database; and (d) allowances borrowed against future reductions (as described below). A covered entity that agreed to emit no more than its 1990 levels by 2010 would be allowed meet up to 20% of its requirement through (a) international credits, (b) sequestration, and (c) registered reductions, but not (d) borrowed credits. An entity planning to make capital investments or deploy technologies within the next 5 years would be allowed to borrow against the expected GHG emission reductions to meet current year requirements. The loan would include a 10 percent interest rate.
National Greenhouse Gas Database: The EPA Administrator would be required to implement a comprehensive system for GHG reporting, inventorying, and reductions registrations. Covered entities would be required to report their GHG emissions and non-covered entities would be allowed to register GHG emission reductions and sequestration. The National Greenhouse Gas Database would be, to the maximum extent possible, complete, transparent, accurate, and designed to minimize costs incurred by entities in measuring and reporting emissions. The Commerce Department, within one year of enactment, would be required to establish, by rule, measurement and verification standards and standards to ensure a consistent and accurate record of GHG emissions, emissions reductions, sequestration, and atmospheric concentrations for use in the registry.
Penalty: Any covered entity not meeting its emissions limits would be fined for each ton of GHGs over the limit at the rate of three times the market value of a ton of GHG.
Research: The bill would establish a scholarship program at the National Science Foundation for students studying climate change. The bill would also require the Commerce Department to report on technology transfer and on the impact of the Kyoto Protocol on the U.S. industrial competitiveness and international scientific cooperation.
The bill also would make changes to the U.S. Global Change Research Program, establish an abrupt climate change research program at the Commerce Department, and establish a program at the National Institute of Standards and Technology in the areas of standards and measurement technologies.
As the scientific evidence of climate change has mounted, so has congressional activity. The number of climate change-related legislative proposals increased from seven introduced in the 105th Congress (1997-1998) to 25 in the 106th Congress (1999-2000), to over 80 in the 107th Congress (2001-2002), and 96 in the 108th Congress (2003-2004). Of the relevant bills, resolutions, and amendments introduced in the 108th Congress, focus primarily has been on global climate change research and comprehensive emissions cap and trade programs with additional bills concentrated on GHG reporting and power plant emissions of CO2.
The relevant legislative proposals - bills, resolutions, and amendments - for addressing global climate change and GHG emissions in this Congress are listed here in the following categories:
- GHG Emission Limits
- GHG Emission Reporting
- International Negotiations
- Transportation Emissions
- Climate Science Research
- Climate-Friendly Technology R&D
- Agriculture & Carbon Sequestration
Of note, the 108th Congress enacted the following climate-relevant legislation in 2004:
- Extension of tax credit for electricity produced from wind, closed-loop biomass and chicken waste.
- Tax incentives for alcohol and biodiesel fuel.
- Tax deductions for clean-fuel and electric vehicles.
- Earmarking of appropriations for programs in developing countries and countries in transition that directly: (1) promote energy conservation, energy efficiency and clean energy; (2) measure, monitor, and reduce GHG emissions; (3) increase carbon sequestration activities; and (4) enhance climate change mitigation and adaptation programs. (H.R.2673, Consolidated Appropriations Act, 2004)
- Establishment of the Congo Basin Forest Partnership program, recognizing, among other things, the role of Congo Basin forests in absorbing carbon dioxide. (H.R.2264, The Congo Basin Forest Partnership Act of 2003)
In addition, the following bills were acted upon, but not enacted into law:
- The Senate Commerce Committee passed a bill to establish within the National Oceanic and Atmospheric Administration (NOAA) a program of scientific research on abrupt climate change. (S.1164, The Abrupt Climate Change Research Act of 2003)
- The House Science Committee passed a bill that, among other things, would direct NOAA to conduct basic and applied research on high-performance computing applications, with emphasis on improving weather forecasting and climate prediction. (H.R.4218, High-Performance Computing Revitalization Act of 2004)
- The House Science Committee passed a bill that, among other things, would establish a multimodal energy and climate change program to study the relationship of energy, transportation, and climate change, and call for the development of strategies to reduce GHG emissions from transportation. (H.R.3551, Surface Transportation Research and Development Act of 2003)
As one can see, climate change measures are increasingly being offered by members of both the Democratic and Republican Parties (to which all but two members of Congress belong). The growing interest suggests that a bipartisan consensus is developing around the need to address climate change. Addressing climate change will ultimately require a more comprehensive set of approaches, including a mandatory program to reduce GHG emissions (such as a program to cap GHG emissions and allow trading of emission credits), and efficiency standards to promote the use of efficient products and technologies. The first such bipartisan bills were introduced in the 108th Congress. Enactment of such policy will no doubt be a longer-term proposition.
For Immediate Release
July 10, 2003
Contact: Katie Mandes
Future U.S. Energy Scenarios: New Report Discusses Importance of Climate Policy to Future U.S. Energy Picture
Washington, DC -Absent a mandatory carbon cap, U.S. carbon dioxide emissions are likely to rise across a wide range of possible energy futures, according to a new report released today by the Pew Center on Global Climate Change, U.S. Energy Scenarios for the 21st Century. The report, written by Irving Mintzer, J. Amber Leonard, and Peter Schwartz of Global Business Network, discusses three divergent paths for U.S. energy supply and use from 2000 through 2035, and the effect of climate policy on the three scenarios.
"This report suggests that technology research and development efforts coupled with voluntary measures cannot reduce greenhouse gas emissions, and it highlights the need for a mandatory climate change policy to address carbon emissions - regardless of how the future unfolds," said Eileen Claussen, President of the Pew Center on Global Climate Change. The Pew Center scenarios explore what might happen to U.S. energy supply and use in the future. They are not predictions, but they cover a wide range of possible energy futures. The scenarios are Awash in Oil and Gas, driven by cheap and abundant oil and gas; Turbulent World, in which energy supply disruptions and threats to energy facilities lead to aggressive energy policy measures; and Technology Triumphs, in which state policies, technological breakthroughs, private investment, and consumer interest push and pull climate-friendly technologies into the marketplace.
The question of how U.S. energy supply and use - which account for over 80 percent of U.S. greenhouse gas emissions - will evolve over the next several decades is critical to developing sound U.S. climate policy. To answer this question, the Pew Center convened two workshops with members of its Business Environmental Leadership Council and experts from the academic and NGO sectors to envision possible future energy scenarios and to draw policy-relevant conclusions from them. This report includes discussion of these three scenarios, as well as assessments of key energy technologies for the future. Three significant insights emerged:
Without a mandatory carbon constraint, the absolute level of U.S. emissions rises in the range of 15 to 50 percent over the year 2000 level in each of the Pew Center scenarios, despite the fact that the carbon intensity of the economy declines considerably. This result points to a key conclusion of this report - policy is necessary to stem these increases and to address climate change.
A second conclusion of the report is that no matter which direction the future takes there are technologies-with supporting policies and investments-that could address climate change, accelerate capital stock turnover, and enhance energy security. If U.S. decision-makers can implement the necessary policies and encourage appropriate investments during the next thirty years, the United States would be better positioned to achieve multiple public policy goals.
Finally, the scenarios indicate that energy policy and investment decisions made today affect the difficulty of implementing a climate policy tomorrow.
"With the appropriate set of policies and investments during the next thirty years, the United States could be better positioned to achieve its complementary economic, energy security, and environmental goals," said Claussen. The Pew Center now plans to turn to an exploration of what ought to happen, now and in the future, towards developing a national vision of policies, strategies and investments that will help achieve these goals.
This report is part of the Solutions series, which is aimed at providing individuals and organizations with tools to evaluate and reduce their contributions to climate change. Other Pew Center series focus on domestic and international policy issues, environmental impacts, and the economics of climate change.
The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States' largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.
See Summary for a quick overview of the EIA analysis.
On July 3, 2003 the Energy Information Administration (EIA) of the U.S. Department of Energy released its economic analysis of Senate Bill 139: the Climate Stewardship Act of 2003. This bill was introduced by Senators John McCain and Joseph Lieberman on January 9, 2003. S.139 represents the first economy-wide “cap-and-trade” bill that reduces greenhouse gas (GHG) emissions primarily through limiting the amount of emissions from key economic sectors and providing flexibility in obtaining GHG reductions through emissions trading and sequestration (or storage) of carbon. The program would apply to greenhouse gas emissions from major sectors – electric utilities, transportation, and industry-- covering roughly 80% of U.S. emissions.
This analysis discusses key features of EIA’s National Energy Modeling System (NEMS) model and relevant assumptions used by EIA in analyzing the costs of S.139. Modeling an economy-wide greenhouse gas trading program presents real challenges. Model results can provide important insights regarding policy design features and their implications for costs but should not be viewed as definitive predictions of future costs. Historically, advance projections of costs of many environmental programs – particularly market-based programs such as the SO2 acid rain trading program – have been much higher than the actual costs of implemented programs. Consumers of any modeling results should understand how model structure, inputs, and assumptions drive the results – which in this case focus only on the costs, but not the benefits, of climate change policy. (For more information on key drivers of cost estimates in modeling, see An Introduction to the Economics of Climate Change Policy.
EIA’s analysis of S.139 using its (NEMS) model is just one of a number of efforts by a range of organizations to model S.139. In addition to the EIA analysis, both MIT and NRDC have released their own review of the potential costs of S.139, and these results are compared with EIA’s below. In addition, the Center is working with Dr. Dale Jorgenson of Harvard University and his colleagues to evaluate possible costs of the bill.
The Center's Director of Policy Analysis, Vicki Arroyo, served as a peer reviewer on the EIA effort. She and other reviewers provided input to EIA, and while some of those comments have been reflected in their analysis (e.g., deleting a side case with zero offsets and including one with a higher limit on offsets), many were not addressed. The discussion below reflects comments submitted during the review process and notes how the cumulative effect of many factors – both structural features of NEMS and assumed inputs – serves to drive the projected costs higher than what they are likely to be.
Characterization of the EIA NEMS Model
As a macro-energy model, NEMS is a useful tool to analyze an economy-wide greenhouse gas trading program. Macro-energy models solve for the most promising solutions to achieving reductions in greenhouse gas emissions, and program costs are calculated from the economy-wide impacts of higher fossil fuel prices, altered productivity, and changing competitive advantages of firms and sectors. However, the trade-off is that macro-energy models lose detail on new technologies, characteristics of individual sectors and opportunities for energy efficiency. As a result, they often miss available opportunities to minimize program costs.
EIA’s NEMS model is considered a conservative macro-energy model and has often produced cost projections in the top quarter of modeling comparisons (for example, in the Energy Modeling Forum’s modeling comparison of the U.S. and the Kyoto Protocol). 1 Some NEMS features yielding higher projected costs are listed below.
Substitution by Firms and Consumers
- NEMS aggregates all non-energy sectors and thus ignores opportunities for process improvements and substituting energy and material inputs.
- NEMS assumes a “putty-clay” formation of capital investments; that is, there is complete flexibility before investment in energy capital and no flexibility once that facility has been built. This is important in shorter-term reductions where capital is assumed to be retired rather than retrofitted.
- NEMS assumes a starting point of full and efficient employment of capital and labor; thus there are no existing low-cost opportunities for energy efficiency.
- NEMS allows increased use of existing or new energy technologies into the energy mix, however, these opportunities are limited by specific resource and infrastructure constraints. If a technology requires a regulatory change to realize its potential, NEMS will not include it.
- NEMS only chooses from a predetermined menu of technologies; thus while these technologies may improve with greater market penetration, no new technologies beyond the existing set can be used.
Inclusion of Benefits of Climate Change Policies
- NEMS does not consider the benefits of policy in terms of avoided climate change impacts.
- NEMS does not consider ancillary benefits of reducing local air pollution, addressing energy security etc.
Baseline Estimates of Population, GDP, Energy Use and Hence Emissions
- NEMS projects strong economic growth for the U.S.
- NEMS projects continued rapid expansion of carbon-intensive sources, especially electricity from coal and petroleum-based transportation.
- NEMS includes military and bunker (aircraft and shipping) emissions, thus raising the baseline of projected “business-as-usual” (BAU) emissions.
- NEMS has a pessimistic projection on the available supply (low) and price (high) of North American natural gas; this heavily influences cost projections as natural gas is a major transition fuel to a lower carbon economy.
Policy Regime Considered
- The discussion of EIA’s assumptions below details the treatment of important variables including the extent of international emissions trading, inclusion of non-CO2 GHGs, use of sequestration, and methods of revenue recycling to lessen impacts on specific user groups or sectors. All of these mechanisms can reduce the cost impacts of reducing greenhouse gas emissions
Key Parameters of McCain-Lieberman S.139
The key characteristics of the S.139 GHG cap-and-trade program are:
- All six greenhouse gases (GHGs) are covered, including emissions from the electricity, industrial and transportation sectors.
- Covered entities for the transportation sector are upstream fuel producers/importers, while covered entities in the electricity and industrial sectors are all downstream firms responsible for more than 10,000 tons of carbon equivalent (TCE) per year.
- Prescribed targets are Phase 1 -- year 2000 emission levels by 2010, and Phase 2 -- year 1990 emission levels by 2016.
- The assumed “business as usual” or “base case” (without policy) specified in the bill is based on EPA’s U.S. Climate Action Report.
- Flexibility mechanisms (international emission trading, carbon sequestration and reduction opportunities in non-covered sectors) are permitted for 15% of an entity’s required emissions allowances through 2010, declining to 10% through 2016.
For international emission trading, the bill specifies that only pre-certified programs (e.g., the EU emissions trading scheme) can sell permits to the U.S.
- Early action credits – firms that pursue early emissions reductions can use flexibility mechanisms to meet 20% of required reductions through 2016.
- Banking of credits is permitted, allowing for early over-compliance to generate credits for use later in the program
- Method of permit allocation is unspecified in the bill.
- While the bill allows for revenue recycling via a Climate Change Credit Corporation, the methodology and amount is unspecified.
The first driver of the costs of reductions is the assumed “business as usual” or “base” case – that is, what emissions would have been in the absence of S.139.
The base case in NEMS assumes strong economic growth (3% per year, despite continuing economic uncertainty), and a continued reliance on fossil fuels with high carbon emissions. In particular, a significant increase of coal for electricity production is forecast, with generation from coal predicted to rise by 32% by 2025 relative to year 2000. In addition, continued expansion of transportation is expected, with petroleum consumption rising by 46% by 2025 relative to year 2000. Additional emissions increases are expected in the industrial, commercial and residential sectors. Despite these high baselines, electricity and fuel prices remain low in the base case, further exaggerating the relative impact of S.139 when costs are imposed.
The future supply -- and hence price -- of natural gas is a crucial component of the costs of controlling GHGs since natural gas is expected to be the primary transition fuel to a lower carbon economy. EIA assumes a tight supply under increased demand for natural gas in their 2003 Annual Energy Outlook, yet in its analysis of S.139, these estimates have been revised to be even higher based on the short-term indications from EIA’s recent Monthly Energy Reviews. This assumption represents a very pessimistic long-term assessment of North American natural gas resources, especially regarding the price level at which new “back-stop” natural gas resources would become available – e.g., from Northern Canada and Alaska, deep water in the Gulf of Mexico, and unconventional gas resources.
In addition, no new policy measures -- including those aimed at reducing local air pollution, improving energy security, developing new technology, promoting hydrogen, or liberalizing the electricity market -- are included in EIA’s analysis. Enactment of these complementary policies is likely to reduce the costs of controlling greenhouse gas emissions over the time period studied (to 2025).
EIA’s Primary Analysis of S.139
In EIA’s primary analysis run of S.139, a number of additional input assumptions drive up the costs of controlling GHGs under this bill. These can be divided into two main categories:
Input data and use of flexibility mechanisms for lower cost reductions:
- A conservative assessment of available international emissions trading, due to the bill’s requirement only to trade with certified programs, hence excluding bilateral CDM opportunities.
- High discounting of international and sequestration offsets.
- Pessimistic assumptions of early action by firms, and hence very limited use of the increased 20% allowance for flexibility mechanisms (the equivalent assumption being employed is that only 1/5th of firms take early action).
- Lack of inclusion of certain non-CO2 GHGs, especially methane from natural gas systems and smaller landfills.
- Lack of inclusion of CO2 emissions from non-energy sources.
- Use of EIA’s CO2 emissions from fossil fuel combustion rather than EPA’s estimates (as specified in S.139), resulting in a greater required reduction to meet target levels.
Technology penetration and energy efficiency opportunities:
- Lack of foresight in the residential and commercial sectors despite publicity surrounding GHG reduction policies that would accompany debate over and passage of S.139.
- Limited and constrained use of key technologies that require institutional and regulatory changes, especially combined heat and power (CHP), distributed generation (DG), buildings integrated photo-voltaics (BIPV), and wind.
- Lack of consideration of efficiency step changes (e.g., widespread penetration of hybrid vehicles) in the transportation sector, and resulting small improvements in efficiency despite a large price signal (for example, an average efficiency increase of only 1.3 mpg is projected by 2025, to only 21.8 mpg).
- Projected low level of energy efficiency improvements of products in the commercial and residential sectors resulting from the program. This lack of significant efficiency improvement is despite a significant price signal and is not well-supported by this analysis.
- These factors combine to give extremely low levels of end-use energy efficiency in all sectors despite a significant and sustained price signal.
As a result of the above assumptions, the majority of emission reductions in this analysis come from anticipated fuel switching in the electricity sector. This leads to higher prices, premature reduction of existing energy equipment, and hence higher costs of the bill.
EIA Sensitivity Analyses of S.139
The report details a number of sensitivity cases in addition to the primary case. Many of these cases were specified by the Senators directing EIA to undertake the analysis. In some cases undertaken by EIA, the specified cases diverged from the recommendations of the reviewers.
- A further tightening of natural gas supply resulting in even higher costs, despite the reference case already having higher natural gas prices than EIA’s AEO 2003. Given the huge uncertainties over longer term natural gas supply, a lower natural gas price case should have been included.
- Prohibiting inclusion of both geological sequestration and advanced nuclear technologies. While both technologies are permitted under the bill itself, EIA was directed to exclude both options. Combined with tight natural gas supply and other technology restrictions, this assumption serves to dramatically drive up projected costs.
- Zero banking of credits despite its availability under the bill and experience of cost reductions from banking under the SO2 acid rain program.
- While EIA did include a high technology case, it only considers improvements in consumer products and electricity technologies, but does not cover advances in the natural gas production and distribution industries nor does it include a range of potentially significant new technologies (e.g., IGCC with sequestration). In addition, the improved technologies are also assumed to be available in a high tech reference case rather than be induced by the climate policy. One would expect additional technological change to be induced given the sustained price signals that EIA calculates for this bill.
- Finally, the sensitivity case on increased use of offsets or flexibility mechanisms (e.g., participation of non-covered sectors, international trading, and sequestration) is very illustrative. Increasing the allowable offsets to 50% of required reductions shows the significant cost reductions from allowing greater flexibility in meeting the target. ($64/tC [$17/tCO2] and $174/tC [$47/tCO2] if 50% flexibility is allowed in years 2010 and 2025 vs. $79/tC [$22/tCO2] and $221/tC [$60/tCO2] under the bill’s current caps).
- However, in the additional sensitivity case with international trading prices assumed to be halved, the bill’s cap on offsets results in most offset reductions coming from domestic non-CO2 and sequestration sources.
Discussion of Results
The cost projections generated by the EIA analysis reflect the input assumptions and model structure of NEMS, and hence are higher than costs are likely to be under the bill as proposed.
Impacts on GDP are reported at a loss of 0.4% by 2025. EIA also reports a higher loss in “real GDP” (down to 0.7% in 2015 before converging with “potential GDP” at 0.4% loss by 2025). This reflects EIA’s assumptions regarding imperfect responses in interest rates and other macro-economic variables. However, this compounded loss in GDP represents only a very small change in annual economic growth rates. The S.139 program would only reduce annual GDP growth in 2001-2025 from 3.04% to 3.02%. That is, rather than growing at 3.04% through 2025, curtailing greenhouse gases under this legislation will result in the economy growing slightly less – at 3.02%. As EIA notes in the Executive Summary, “…other factors that drive the U.S. economy, such as labor force and productivity growth are likely to play a larger role than decisions regarding the enactment of S. 139 in determining the size of the U.S. economy in 2025.”
Specific sectoral impacts are projected to be more pronounced, reflecting the presumed high baseline. The restrictions on natural gas supply, the low level of energy efficiency improvements in the face of sustained price signals (especially in transportation), and low penetration of key technologies that require institutional and regulatory changes for full market penetration, mean that the overwhelming reductions come from fuel and technology switching in the electricity supply industry. As a result, the energy price increases are expected to be significant: e.g., by 2025 prices are projected to increase 27% for petroleum, 46% for natural gas (above an already high base gas price), 475% for coal (because coal is currently very cheap and has more carbon content), and 46% for electricity. In contrast, the MIT analysis of S.139 has far more efficiency improvements, significantly more coal use coupled with carbon sequestration and accelerated penetration of alternative energy supply technologies, including distributed generation and combined heat and power plants. MIT results anticipate a falling price for natural gas under GHG reductions, as higher efficiency and use of alternative fuels weakens demand for natural gas.
Comparison to Other Analyses
Although additional analyses of S.139 are forthcoming, results of EIA’s NEMS runs can be compared with the previously released MIT study (using their EPPA model). As discussed above, a number of different input assumptions in the MIT analysis lead to different principal paths for greenhouse gas reductions, resulting in very different carbon prices and economic impacts. This is illustrated in the table below. Also shown are the results from an analysis for NRDC by the Tellus Institute, which adapts the NEMS model using a more optimistic assessment of opportunities for energy efficiency and the diffusion of lower carbon technologies. In addition, the NRDC analysis includes complementary policies, such as mandatory improvements in vehicle fuel efficiency, controls on local air pollutants and easing of regulatory restrictions that limit combined heat and power technologies.
|Carbon Price in $/tC [$/tCO2]||2010||79 ||62 ||31 ||29 |
|2015||119 ||81 ||40 ||66 |
|2020||178 ||103 ||52 ||81 |
|Welfare % cost||2010||-0.30%||-0.07%||-0.02%||-|
|Total Welfare cost (billion $)||2010||-26.9||-6.1||-1.7||-|
|Cost per Household ($)||2010||228||52||15||53|
The table shows carbon prices, welfare costs and costs per household.
All prices are in $2001.
MIT refers to scenario #9 in that analysis.
Welfare in this case measures lost consumption (or income) by consumers (as leisure effects are ignored). The NRDC analysis does not derive costs per household from overall welfare impacts, instead simply reporting net resource cost changes. Consumption is the major component of GDP (the other components being investment, government expenditures and imports/exports balance). Welfare is a good measure of actual impact on the population.
In year 2000, US GDP was around $10 trillion with consumption at $6.3 trillion.
In year 2000, there were 108 million households in the US with a median income of $41,000, by 2020, there is projected to be 127 million households with a median income of $61,000.
MIT’s analysis of S.139 finds carbon prices to be significantly less for both phases of the bill, including offsets. This reduced impact is even smaller when the model calculates the effects of higher energy prices on overall economic performance and on an individual household basis. Note that if only Phase 1 of S.139 is enacted, the anticipated economic impacts are very small. NRDC’s emphasis on greatly improved energy efficient technologies leads to net benefits from S.139.
The EIA analysis represents an ambitious attempt to provide insights into possible costs related to S.139; however, it should be thought of as an upper bound of likely costs. A more technologically rich and flexible model accompanied by more realistic assumptions regarding modeling inputs would yield lower cost projections.
1 See Weyant J. (ed) 1999, The Costs of the Kyoto Protocol: A Multi-Model Evaluation, Special Issue of the Energy Journal
On July 3, 2003, EIA released an economic analysis of S. 139: the Climate Stewardship Act introduced by Senators John McCain and Joe Lieberman. The EIA analysis was undertaken at the request of Senator James Inhofe, with additional analyses requested by the bill’s sponsors.
The Center has examined the EIA analysis and believes that the model’s structure, combined with unrealistic input assumptions, results in unrealistically high cost projections. Key factors driving up the costs in the EIA analysis include:
Structural issues with EIA’s model, including inflexibility in altering existing equipment (capital stock), limited ability to consider improvements in technology driven by regulatory changes, and lack of existing low-cost energy efficiency opportunities.
Assumptions regarding natural gas supply (low) and price (high), relatively high expectations for “business as usual” emissions growth (including presumed rapid expansion of coal-powered electricity), and limited energy conservation measures even with a sustained price signal.
Additional sensitivity cases (many pre-determined by the requests of the Senators soliciting EIA’s analysis) that also generally serve to drive up projected costs. These include cases with even higher natural gas prices and cases limiting certain advanced low-emitting technologies for the generation of electricity.
A more technologically rich and flexible model accompanied by more realistic assumptions regarding modeling inputs would yield lower cost projections.