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The Emerging International Greenhouse Gas Market
Prepared for the Pew Center on Global Climate Change
Richard Rosenzweig, Matthew Varilek, Ben Feldman, and Radha Kuppalli of Natsource, LLC
Josef Janssen, University of St. Gallen
Eileen Claussen, President, Pew Center on Global Climate Change
As businesses, policy-makers, and other stakeholders around the world have become familiar with greenhouse gas emissions trading, it has emerged as the policy of choice to address climate change. Now—with the recent agreements in Bonn and Marrakech, with new carbon trading systems in Europe, and with private sector interest and activity across many economic sectors both here and abroad—we are beginning to see the outlines of a genuine greenhouse gas market.
In this Pew Center report, authors Richard Rosenzweig, Matthew Varilek, Josef Janssen et al. describe the various public and private programs under which many early trades have occurred, the characteristics of the emerging market including the key features of early transactions, and the potential evolution of the market given the concurrent development of domestic and international climate change policy. Case studies of actual trades between four power companies—TransAlta and HEW, and PG&E and Ontario Power Generation—help illustrate leading companies’ motivations for engaging in trading, as well as the challenges they have faced in the absence of clear guidelines in the nascent market.
Despite the impressive interest in greenhouse gas trading, the market that has developed thus far remains fragmented. For example, as originally proposed, the trading regimes put forth by the United Kingdom and the European Union differ in important respects: the former is voluntary and the latter is not; the former covers the full basket of six greenhouse gases while the latter is restricted to carbon dioxide. This results in higher transaction costs just as the market is getting off the ground. The challenge ahead, for business, policy-makers, and others, is to work together to help forge linkages between the emerging regimes, and ultimately to achieve convergence.
I am optimistic that we can meet this challenge. We are beginning to see the first glimmers of interest in the U.S. Congress, although the debate is expected to be long and difficult. Perhaps more encouraging are private sector efforts to build a greenhouse gas trading system, such as the Chicago Climate Exchange. Also, many companies have set up their own internal trading systems to “learn by doing,” and have been eager to participate in early trades. The need for certainty, for consistency, and for a level playing field all will work to encourage a merging of regimes. Policy-makers must do their best to ensure that all systems are compatible.
The authors and the Pew Center would like to thank the companies featured in this report for sharing their experiences and perspectives, and acknowledge the members of the Center’s Business Environmental Leadership Council, as well as Aldyen Donnelly of GEMCo; Erik Haites of Margaree Consultants; Richard Sandor of Environmental Financial Products, L.L.C.; and Tom Wilson of EPRI for their review and advice on a previous draft of this report.
A market for greenhouse gas (GHG) emissions has begun to emerge over the past five years. This market is driven in large part by ongoing negotiations of an international global climate change treaty, which will likely impose limitations on GHG emissions. The market has been shaped by successful emissions trading programs established over the past decade, such as the sulfur dioxide (SO2) trading program incorporated in the U.S. Clean Air Act Amendments (CAAA) of 1990.
This paper describes: (1) programs and initiatives that have provided a framework for early trades and policy development; (2) characteristics of the emerging GHG market and key features of early transactions; (3) potential evolution of the market due to ongoing concurrent domestic and international climate change policy development; and (4) potential scenarios regarding the U.S. response to climate change.
Greenhouse gas trading has its origins in the United Nations Framework Convention on Climate Change (UNFCCC). Adopted in Rio de Janeiro, Brazil, in 1992, the UNFCCC established the goal for industrialized countries to return to their 1990 GHG emissions levels by the year 2000 and a long-term objective of stabilizing atmospheric concentrations of greenhouse gases “at a level that would prevent dangerous anthropogenic interference with the climate system.” In 1995, the Parties reviewed their progress and concluded that the non-binding goal would not lead to the achievement of the Convention’s objective of atmospheric stabilization. In response, Parties agreed to pursue a complementary agreement that would establish quantified emissions limitations and reduction obligations for developed countries. This culminated in the negotiation of the Kyoto Protocol in December of 1997.
The process to develop rules, mechanisms, and institutions necessary to bring the Protocol into force is ongoing, including the seventh Conference of Parties (COP-7), held in Marrakech, Morocco, during November of 2001. Though significant progress was achieved there and in previous negotiations, the Protocol has not yet entered into force, and few national governments have imposed limitations on domestic GHG emissions or established trading rules. Thus, the GHG market is evolving under a loosely constructed, ad hoc framework. To date, it has evolved from a variety of mostly project-based emissions trading programs, which have been voluntary in nature and which collectively serve as precursors to formal GHG regulation. More recently, the United Kingdom and Denmark have developed national regulatory programs.
The UNFCCC allows industrialized countries to meet their emissions reduction commitments “jointly with other Parties” through a form of project-based emissions trading. This program became known as Joint Implementation (JI). Subsequent programs have provided practical experience with key aspects of project-based emissions trading. These programs and initiatives include the U.S. government’s Initiative on Joint Implementation (USIJI); the pilot phase of international project-based emissions trading known as Activities Implemented Jointly (AIJ); Ontario, Canada’s multi-stakeholder Pilot Emissions Reduction Trading program (PERT); Oregon’s Climate Trust; the Dutch government’s Emission Reduction Unit Procurement Tender (ERUPT); and the World Bank’s Prototype Carbon Fund (PCF), among others.
Each of these programs is governed by a unique set of rules. However, they exhibit some common elements that constitute a de facto (though non-binding) set of minimum quality criteria that govern the creation of credible emissions reductions. These common elements include: (1) establishment of a credible counterfactual emissions baseline; (2) proof of environmental additionality; (3) evidence that the reductions are surplus to existing regulatory requirements; (4) proof of permanence or durability of the reductions; (5) demonstration that the emissions-reducing project will not cause emissions to increase beyond the project’s boundaries (referred to as “leakage”); (6) establishment of credible monitoring and verification procedures; and (7) proof of ownership of the reductions.
Even though few sources of GHG emissions presently confront binding emissions limitations, a growing number of companies and governments have begun to purchase reductions generated in most part by the programs described above. Few trades of GHG emissions to date have involved an exchange of emissions permits such as “allowances” or “credits,” since these terms refer to government-issued commodities that only exist within the context of formal trading systems. Most GHG trades have taken place under a voluntary ad hoc framework involving a commodity defined by the trade’s participants and known commonly as verified emissions reductions (VERs). These carry only the possibility, but not a guarantee, that governments will allow them to be applied against future emissions reduction requirements.
The authors estimate that approximately 65 GHG trades for quantities above 1,000 metric tons of carbon dioxide equivalent (CO2e)1 have occurred worldwide since 1996. This figure includes trades of reductions as well as financial derivatives based on reductions. However, the figure probably understates actual market activity because not all trades are made public, and internal corporate trades and small trades are excluded. It is important to note also that this figure refers to purchases of emissions-related commodities and excludes countless investments in projects that either purposely or incidentally reduce GHG emissions. Prices for VERs have ranged between $.60 and $3.50 per metric ton of CO2e. Some of the price differentials between trades can be explained by differences in the features of the reductions such as their type and vintage, geographical location, and the rigor of the monitoring and verification procedures. Other factors that affect reductions’ commercial value include contractual liability provisions, seller creditworthiness, and demonstration of host country approval of the emissions-reducing project.
Two case studies provide a detailed look at actual GHG trades in this market, illustrating some of the challenges and benefits of early GHG trading as described by market participants. The first case study reviews a purchase of VERs by TransAlta, a Canadian electric utility, from HEW, a German utility. HEW generated reductions by displacing some of its fossil fuel-based generation with electricity generated by wind. The second case study examines a purchase of VERs by Ontario Power Generation, a Canadian utility, from US Gen, a subsidiary of the U.S.-based PG&E National Energy Group. US Gen created reductions by capturing and destroying methane produced at a landfill. Both case studies demonstrate that while participants benefited from these early GHG trades, the lack of clear trading rules has increased transaction costs and been a significant impediment to the development of a more robust GHG market.
National Trading Programs
Several governments have moved forward in designing domestic trading systems while international trading rules remain under development. At the national level, the United Kingdom and Denmark have each established domestic emissions trading programs. Some trading in these programs has already begun. The European Union (EU) and other countries are in various stages of domestic policy development. At the sub-national level, the state of Massachusetts, for example, will require reductions of carbon dioxide (CO2) emissions from power plants and will allow sources to use trading as a means of compliance.
The development of these and other trading programs demonstrates that emissions trading has gained acceptance as a preferred policy instrument in the world’s efforts to reduce GHG emissions. These programs will boost GHG trading activity and motivate more rapid emissions abatement than if governments had waited for the international community to conclude negotiation of the Kyoto Protocol. Already, the initiation of these programs is producing a shift in the commodity that market participants prefer to trade. Some buyers’ interest is starting to shift away from VERs, whose eligibility for use as a hedge against binding emissions limitations is uncertain. Interest is beginning to shift towards government-issued permits created by the programs, which are by definition eligible for use against an emissions limitation in their jurisdiction of origin. Permits also stand a superior chance of being transferable into foreign jurisdictions for purposes of compliance.
Significant benefits have and will result from the current development of domestic trading systems. However, some adverse impacts have also resulted from the concurrent development of international and domestic climate change policy. Emissions trading systems currently in operation or under development exhibit unique features that may render them incompatible with each other. For example, the Danish and United Kingdom (UK) systems allow for trading of different gases, cover different economic sectors, and utilize different mixes of allowance and credit-based trading. To date, they have not developed rules governing interchange and mutual recognition of their tradable units with each other, which could impede or preclude beneficial cross-border transactions. There are also significant differences between each of these systems and the one being developed in the European Union. Already, the European Commission has warned that the differences in the UK and the EU systems “could create market distortions in the future.”2 Had the treaty been concluded more rapidly, the international framework would have made it easier for Parties to conform their systems leading to increased trading. Several private-sector and nongovernmental organizations (NGOs) also have developed initiatives to help build the market and to create and take advantage of trading opportunities. They include the Partnership for Climate Action (PCA), the Emissions Market Development Group (EMDG), and the Chicago Climate Exchange (CCX).
Recent international agreements negotiated at Bonn and Marrakech resolve many details concerning implementation of the Kyoto Protocol, providing greater clarity to Parties developing domestic trading programs. These agreements will increase the likelihood that future domestic climate change policy measures will be consistent with the rules of the Protocol. However, several issues still must be resolved, and, although likely, the treaty’s entry into force is not yet assured. Thus, in the near future, international and domestic GHG policy will continue to develop concurrently, with the risk that incompatibilities between regional, national, and sub-national climate change policies will lead to market fragmentation and sub-optimal economic and environmental outcomes. Such fragmentation does not mean that market participants will not trade across systems. Indeed, market participants will likely devise methods of trading across jurisdictions. However, devising such structures and mechanisms will increase costs.
Prospects for a well-functioning international GHG market have greatly improved as a result of the agreements reached in international climate change negotiations during 2001. However, significant barriers remain, including the unwillingness of the United States, the world’s largest emitter, to ratify the Kyoto Protocol. A qualitative analysis of several scenarios related to the United States’ future climate policy response reveals that, while in the near term the lack of an emissions constraint may provide an advantage to U.S. firms against foreign competitors confronting such constraints, continued policy uncertainty may be detrimental in the longer term.
In order for the market to achieve its intended environmental and economic results, much work remains to be done. The international community must make an ultimate decision on the legal nature of Parties’ compliance obligations with the Kyoto Protocol’s provisions and must resolve several other key issues. Institutions governing the treaty’s mechanisms must move forward expeditiously to implement the details of the Protocol. Such action will provide Parties with clear policy guidance allowing them to conform their domestic programs to international rules and to enjoy the full economic and environmental benefits of GHG emissions trading.
About the Authors
Richard Rosenzweig provides consulting services to private firms, governments, international financial institutions, and associations on all aspects of the climate change issue, including risk management, market entry strategies, international climate change negotiations, and domestic policy development. He joined Natsource from the Washington law firm of Van Ness Feldman, where he was Principal. Mr. Rosenzweig counseled clients on Clean Air Act matters and provided strategic government affairs counsel on global climate change and energy matters. Mr. Rosenzweig has extensive experience in all aspects of emissions trading and risk management. He represented several companies in the design of the U.S. Acid Rain Program and the Nox SIP Call. Mr. Rosenzweig was involved in the first transactions of UK and Danish greenhouse gas allowances. He also assists companies to determine their risk to the climate issue and develop appropriate risk management strategies. Mr. Rosenzweig served as Chief of Staff to the U.S. Secretary of Energy from 1993-96. His national policy responsibilities included key roles in the development of the first U.S. Climate Change Action Plan. He also helped to negotiate voluntary agreements between the Department of Energy and more than 600 electric utilities in the "Climate Challenge" program.
Matthew Varilek is an emissions markets analyst in Natsource's Strategic Services unit. Since joining Natsource in 1999, he has led projects for clients including the World Bank, the European Commission, the U.S. Agency for International Development, the Dutch Ministry of Economic Affairs, the Government of Uganda, and several multinational companies. Previously, Mr. Varilek lectured for Columbia University on international environmental agreements as an environmental policy teaching assistant at Biosphere 2 Center in southern Arizona. Mr. Varilek has a Masters degree with distinction in Economic Development from the University of Glasgow, Scotland, and a B.A. with distinction in Philosophy and Environmental Policy from Carleton College, Minnesota.
Dr Josef Janssen
University of St. Gallen
Josef Janssen is an expert in financial and economic aspects of greenhouse gas emissions trading and the Kyoto Mechanisms. He is head of Emissions Trading and Climate Policy at the Institute for Economy and the Environment (IWOe) at the University of St. Gallen (HSG) in Switzerland (www.iwoe.unisg.ch/kyoto). He is also scientific coordinator of the European R&D project entitled "Implementing the Kyoto Mechanisms - Contributions by Financial Institutions." In early 2001, he completed his PhD in economics at the University of St. Gallen. In his PhD thesis (Risk Management of Investments in Joint Implementation and Clean Development Mechanism Projects) he focuses on carbon portfolio risk diversification and insurance.
Dr. Janssen has advised several firms and organizations on the Kyoto Mechanisms, including UBS, Swiss Re, Sanpaolo IMI, Landesbank Baden-Württemberg, and the World Bank. In 1998 he was a member of the Italian delegation to the international climate policy negotiations at the EU and UN level. Dr. Janssen frequently speaks on greenhouse gas emissions trading at international commercial and academic conferences, and has published a number of articles on this subject.
Climate Change: Ten Years After Rio
Remarks of Elliot Diringer
Pew Center on Global Climate Change
Delhi Sustainable Development Summit
New Delhi, India
February 11, 2002
I'd like to thank TERI for providing me the opportunity to speak here today. The concerns we are addressing at this summit reach across the globe. But too often, I am afraid, we understand them only from a single vantage point. I am very grateful to be here in New Delhi to share my perspective and, more importantly, to learn from the perspectives of others.
I represent the Pew Center on Global Climate Change, a US-based NGO dedicated to achieving fair and effective action against climate change. The Pew Center brings together expert analysis and a progressive business perspective. We work with scientists, economists and other experts to examine and explain the many dimensions of climate change. And we work with major corporations to develop and promote practical, cost-effective strategies to reduce greenhouse gas emissions. Our goal is a smooth transition to a clean energy economy that ensures both a stable climate and strong, sustainable growth. We have two overriding policy objectives: the establishment of flexible, mandatory measures to significantly reduce greenhouse gas emissions in the United States; and the creation over time of a global framework that helps put all countries on the path to climate protection and sustainable development.
One of the signature achievements of the Earth Summit in 1992 was the UN Framework Convention on Climate Change, which commits nations to the long-term goal of a safe and stable climate. Ten years after Rio, we are at last in a position to report some measure of progress toward that goal. Despite the withdrawal of the United States, or perhaps in part because of it, other industrialized nations have resolved to push forward with the Kyoto Protocol. The recent agreements in Bonn and in Marrakech, while imperfect, establish a sound, workable framework for cost-effective emissions reduction. They represent a triumph not only for multilateralism, but also for the principle of harnessing the global market to protect our global environment. Having made the hard compromises, nations must now move forward with ratification, and implementation, so they can begin to deliver on Kyoto's promise.
Whether or not it is party to Kyoto, the United States must also commit itself to concrete action to reduce emissions. In time, the United States must again become a full partner in the international effort. But it does not appear that time will come soon. There is virtually no chance the present administration will reverse its opposition to Kyoto. Nor does it appear the administration is prepared to advance serious domestic measures to curb emissions. Yet there are signs that the United States is in fact moving closer to recognizing and beginning to meet its responsibilities as the world's largest greenhouse gas polluter. Just as President Bush's rejection of Kyoto helped galvanize international support for the Protocol, it has helped stir support for domestic measures as well. It has elevated the issue in the press, and in Washington. And it has spurred bipartisan interest in Congress, where leading lawmakers from both parties have introduced measures that could start the United States on the path to emissions reduction. It may be years still before the United States launches the kinds of efforts that ultimately are needed. But I believe public support, and the prospects for action, will continue to build.
Support is growing, as well, within the U.S. business community. Many in the private sector, it is true, are pleased with the present administration's approach. But a growing number of companies - including the 37 major corporations that are members of the Pew Center's Business Environmental Leadership Council - are taking concrete steps to reduce their emissions. What's more, these companies favor government action mandating broader efforts. Many, particularly the multinationals, may be disadvantaged by the U.S. withdrawal from Kyoto. They will not be able to manage their emissions reductions as cost-effectively and they may miss important market opportunities. We believe it is important that any domestic regime in the United States provide opportunities for international trading and emissions offsets, and that it be as compatible as possible with the international regime to help pave the way for their ultimate convergence.
We must of course recognize that Kyoto's entry into force, and any U.S. effort that may emerge in parallel, will represent only first steps. And while the road from Rio to Marrakech was difficult, the road ahead will be more difficult still. If we are to construct the full global framework needed to achieve the objective of the Framework Convention, we must begin focusing right now on the next set of critical challenges. One challenge is deciding whether the Convention's long-term objective must be translated into an agreed, quantifiable target - and if so, how. Others include devising medium-term emissions targets that can most effectively mobilize investment in climate-friendly technologies; and creating stronger mechanisms to ensure that these technologies are widely shared.
But the most critical - and most difficult - challenge ahead is reaching consensus on an equitable sharing of responsibility for addressing climate change. Ultimately, we can achieve the objective set in Rio only if all nations are assured that each is contributing its fair share to this collective effort. And this can happen, I believe, only if we understand climate change - both the challenges it presents, and the opportunities - in the broader context of sustainable development. In the efforts they are already undertaking, developing countries themselves are providing powerful evidence of the linkages between climate and sustainable development. Through actions to protect their local environments, reform their energy markets, strengthen their economies and create a more promising future for their people, many developing countries are at the same time achieving extraordinary progress in reducing or avoiding greenhouse gas emissions. The very impressive efforts underway here in India to improve energy efficiency and expand the use of renewable power are prime examples. These efforts by developing countries must be more broadly recognized. And they must be nurtured. Strengthening the incentives for investment and technology flows, and the capacity to fruitfully absorb them, will better enable developing countries to meet their critical development needs while contributing further to the effort against climate change. Developing countries are understandably reluctant to consider taking on binding commitments until developed countries demonstrate real progress in meeting their own. But we must begin now to open a new dialogue - a dialogue grounded in a deeper understanding of the links between climate and sustainable development - so we may in time arrive at an equitable sharing of our "common but differentiated" responsibilities.
In closing, I'd like to offer some brief thoughts on the opportunities presented by the World Summit on Sustainable Development. Translating the vision of sustainable development into tangible benefits for the millions around the world who have yet to share in the fruits of globalization requires action on many fronts - action to protect freshwater resources, improve basic health services, enhance agricultural productivity, and grow new industries. Each of these, in turn, depends at least in part on the availability of adequate energy resources. This new energy must be not only affordable and reliable - it must also be clean. A major aim for Johannesburg, one that would address both climate and sustainable development, should be the launch of substantial new efforts to deliver clean energy in developing countries. The need, the benefits, and the barriers are well understood. What is needed now is for governments and the private sector to commit additional resources.
Ten years after nations pledged themselves to the fight against climate change, we can at last report some progress. A real and sustained commitment to clean energy development would help build on this progress, and would help ensure future generations a fairer, safer, more prosperous world.
Thank you very much.
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Transportation in Developing Countries: Greenhouse Gas Scenarios for South Africa
Prepared for the Pew Center on Global Climate Change
Jolanda Pretorius Prozzi, Cambridge Systematics
Clifford Naudé, Council for Scientific and Industrial Research: Transportek, South Africa
Daniel Sperling and Mark Delucchi, University of California, Davis
Eileen Claussen, President, Pew Center on Global Climate Change
South Africa has relatively high aggregate and per capita greenhouse gas (GHG) emissions compared to other developing countries, and to world averages. Transportation sector emissions are increasing, but climate change competes with urgent economic, social, and public health concerns for government attention. As a party to the UN Framework Convention on Climate Change and an active participant in the Kyoto Protocol negotiations, South Africa may be able to address transportation emissions through projects under the Protocol's Clean Development Mechanism.
The two major forces affecting South Africa's transportation sector are the country's legacy of apartheid and privatization. Apartheid-era policies cause high greenhouse gas emissions in two ways: (1) Blacks lived in separate townships and homelands, forcing them to travel long distances to jobs in commercial or white residential areas; and (2) anti-apartheid sanctions resulted in South Africa using high-carbon synthetic fuels based on domestic coal and boosting the local vehicle manufacturing industry. Privatization in the 1980s resulted in freight transportation shifting from rail to more energy-intensive trucks. Intense competition within the trucking industry has resulted in poor maintenance and extended use of inefficient vehicles by small entrepreneurial companies. This problem is more widespread in the minibus 'jitney' sector, which evolved to serve the unmet travel needs of black South Africans.
This report creates two scenarios of greenhouse gas emissions in 2020. In the high business as usual scenario, residual land use policies continue to aggravate transportation problems. Personal car use accelerates as car prices drop and consumer credit becomes more widely available. In the low GHG scenario, mobility, accessibility, and safety concerns drive the government to play an active role in land use and transportation policies. More efficient use of urban land and energy resources improves the quality of life and reduces GHG emissions. Low-emissions scenario strategies are not necessarily costly but require strong political commitment.
Some key results are:
- GHG emissions increase 82 percent in the high scenario; but decrease 12 percent in the low scenario.
- Coordinating land use, housing, and passenger transportation policies would promote more efficient urban land use patterns that reduce travel distances and correct spatial imbalances.
- Both (1) restructuring commuter services so that rail serves the densest population centers, buses serve secondary routes, and minibus jitneys provide feeder or local services; and (2) dedicated taxes on vehicle purchases and use, would improve and help sustain public transportation.
- Changing technology, such as cleaner feedstock for synthetic fuel, would reduce GHG emissions.
- Providing incentives to domestic auto manufacturers to produce buses and minibuses instead of cars would reduce the car orientation of the transportation system.
Transportation in Developing Countries: Greenhouse Gas Scenarios for South Africa is the third report in a five-part series examining transportation sector GHG emissions in developing countries. The findings are based on a Lifecycle Energy Use and Emissions Model developed by the Institute of Transportation Studies at the University of California at Davis, which estimates GHG emissions from the transportation sector. The Pew Center gratefully acknowledges Ogunlade Davidson of the University of Cape Town, Ralph Gakenheimer of MIT, Talia McCray of the Université de Laval, and Michael Walsh, an independent transportation consultant, for their review of earlier drafts.
The performance and structure of South Africas transportation system is largely explained by two phenomena: the legacy of apartheid and privatization. Apartheid had far-reaching impacts, even extending deep into the country's transportation and energy system. Largely as a result of these policies, the country's contributions to global greenhouse gas (GHG) emissions are high compared to those of other African nations, both in aggregate and per capita terms. Some of the transportation and energy effects of apartheid include the following:
- Land use policies were based on race and ethnicity, in which black residential areas were moved to the outskirts of growing urban areas and beyond, creating long commuting distances for most of the black poor.
- Energy investments in innovative coal-based synthetic fuel processes were greatly expanded following international sanctions during the 1970s and 1980s.
- Import substitution economic policies promoted the domestic motor vehicle manufacturing industry.
- Generous company car allowances and subsidized vehicle schemes nurtured a market for private cars to support the domestic auto industry.
- Public transportation services designed to serve long-distance commuters with low levels of service inspired black entrepreneurs to create informal services by minibus jitneys - van-type vehicles - for the many unserved travel needs. These services tend to be provided with inefficient vehicles resulting in higher energy consumption and emissions.
The good news is that South Africa has emerged from decades of apartheid policies with a functioning economy and extensive social and physical infrastructure. The bad news is that besides creating pervasive economic and social problems, apartheid polices led to a set of travel behaviors and transportation-related investments that increased energy use and GHG emissions.
Privatization is a second major phenomenon shaping South Africa's transportation system and its energy and environmental performance. The country is steadily privatizing both its passenger and freight transportation systems, largely because of shrinking government funds and an inability to manage urban sprawl. The effects of privatization in the transportation sector have been positive in many ways - including expanded transit service and lower freight costs. But dwindling government subsidies and rapid growth in minibus jitney services have led to sharp ridership losses on the extensive rail and bus systems. This change has resulted in more energy use, GHG emissions, pollution, road deaths, and, paradoxically, continuing urban sprawl.
Minibus jitneys have come to dominate the provision of passenger transportation services. They are almost totally owned by black South Africans. In only two decades, jitneys have expanded to account for two-thirds of all public transportation services and over one-third of total passenger travel in South Africa. They are expensive relative to bus and rail transit, but ubiquitous, providing service to many poor travelers. Financial problems in the minibus jitney industry have led to increasingly old, dilapidated, uncomfortable, and unsafe vehicles, resulting in higher energy consumption and GHG emissions. The government is now attempting to organize and regulate the minibus jitney sector.
Privatization in the freight sector has also propelled large modal shifts from rail to truck. Until 1988, trucks were not allowed to compete with the government-owned railroad. When the freight sector was deregulated in 1988, truck use rapidly expanded, resulting in lower freight tariffs, and a large drop-off in rail use.
Overall, the combined effect of privatization and the apartheid legacy is inflated travel demand, growing use of motor vehicles and trucks, and use of high-carbon fuels. The challenge is to devise policies and strategies to redirect these behaviors and investments to create a more economical, environmental, and socially beneficial transportation system.
Numerous policy options exist to reduce GHG emissions from the transportation sector. These policies affect when, how, where, and why people travel. Options range from adopting efficient advanced vehicle technologies to various administrative controls (including parking controls and car restriction zones) and economic measures (including additional vehicle and fuel taxes).
Environmental quality is not a high priority in South Africa, one of the few countries that does not regulate motor vehicle emissions of air pollutants. However, leaders are motivated to improve mobility, accessibility, and road safety, and reduce traffic congestion. Many of the strategies targeted at those goals will restrain GHG emissions:
- Improve accessibility and mobility. Due to racial segregation, most South Africans live far away from employment centers and economic services. Improved public transportation is the most efficient means of enhancing mobility and accessibility. Enhanced public transportation would restrain growth in the use of personal vehicles, with associated reductions in the growth of GHG emissions.
- Improve road safety. Road safety is a serious concern in South Africa. Policies that improve road safety, such as enforcing speed limits, scrapping older vehicles, and improving vehicle maintenance could help reduce GHG emissions.
- Reduce traffic congestion. Congestion is increasing in all major areas and is expected to become a major problem shortly. Since South Africa does not have the funding to build many more roads, an improved public transportation system will be vital to ensure mobility for the vast majority of its people.
- Increase tax revenue. Increasing fuel and vehicle taxes - an important source of government revenue - would help pay for social expenditures and raise the cost of private vehicle use.
- Respond to international pressure. By ratifying the United Nations Framework Convention on Climate Change, South Africa has become part of the global community that is committed to taking responsibility for its GHG emissions.
Two transportation scenarios were designed for South Africa - one that yielded higher GHG emissions by 2020, and one that yielded lower emissions. These scenarios draw upon extensive interviews with decision-makers and experts in South Africa.
The higher GHG scenario assumes a continuation of observable and emerging trends. In this 'business-as-usual' scenario, the government remains entangled in crisis management. It focuses on health, education and social unrest related to skewed income distributions, and ignores transportation concerns. Residual land use policies from apartheid continue to aggravate transportation problems. Cities remain divided and land developers give little consideration to the implications of long commuting distances. The automotive industry remains a pillar of economic development. Personal car use accelerates as car prices drop and consumer credit becomes more widely available.
In this scenario, private cars and minibuses increase their share of total passenger-kilometers from 51 percent in 2000 to 59 percent in 2020, while public transits share decreases from 49 to 41 percent. Minibus jitneys retain 60 percent of the public transit modal share. The effect on greenhouse gases is significant: South African emissions increase by 82 percent from 2000 to 2020.
In the lower GHG scenario, the motivation for change and government action are driven by mobility, accessibility, and safety concerns. The government plays an active role in land use policies and surface passenger transportation. Land use and housing policies are adopted that promote more efficient urban land use patterns, gradually correcting spatial imbalances and reducing travel distances. The government promotes public transportation, restructuring the minibus jitney, bus, and commuter rail sectors. Under the new structure, trains serve the routes with the densest population, buses serve the secondary routes and minibus jitneys provide feeder or local services. The sustainability of the public transportation system is ensured through revenues raised from dedicated taxes on vehicle buyers and users. South African auto manufacturers are provided with incentives to design and build buses and minibuses appropriate to the local market. Sasol, the large industrial company in South Africa that produces synthetic oil from coal, starts to use natural gas as feedstock in the production of synthetic fuel. This change would avoid the high costs of impending capital investments in coal mining, while harnessing the environmental benefits associated with the use of a cleaner feedstock.
This low-emissions scenario leads to enhanced quality of life and more efficient use of resources - urban land and energy - and decreased GHG emissions. The modal share of private cars and public transit remains approximately constant at 48 and 52 percent, respectively, but minibus jitneys suffer a significant decline in public transit modal share, from 65 percent in 2000 to 56 percent in 2020. Bus and rail transportation account for the remaining share of public transit mode share at 19 and 25 percent respectively. The result is a 12-percent decrease in GHG emissions despite the fact that passenger-kilometers increase by about 54 percent. The strategies in the low-emissions scenario are not necessarily costly, but they do require strong political will and a commitment that has yet to be demonstrated by South African leaders.
About the Author
Jolanda Pretorius Prozzi
Ms. Jolanda Prozzi holds a Master of Science in Transportation Technology and Policy from the University of California (Davis) and a Master of Commercial Sciences from the University of Stellenbosch (South Africa), with specialization in transport economics. Ms. Prozzi has almost nine years of professional and research experience in transportation economics and policy analysis, including a number of environmental policy studies. Prior to joining the Center for Transportation Research at the University of Texas, Austin, Ms. Prozzi was a Transportation Analyst at Cambridge Systematics, Inc., a Consultant Transport Economist for the World Bank and a Researcher at the Council for Scientific and Industrial Research (CSIR): Division of Roads and Transport Technology in Pretoria, South Africa.
This working paper examines some of the potential implications for U.S. business of the Kyoto Protocol's entry into force – in particular, the effects of the U.S. decision to stay out of the Protocol.
The Bonn and Marrakech meetings adopted generally sound rules regarding the Kyoto mechanisms. However, the implications for U.S. business will depend as much or more on the domestic policies and measures of Annex B parties1 as on the Kyoto rules themselves. The Kyoto rules merely establish the general framework within which national implementation will take place. Although bad Kyoto rules might have precluded efficient implementation of the Protocol, the Bonn and Marrakech rules do not ensure efficiency, since this will depend on the extent to which governments choose to utilize the Kyoto mechanisms to achieve their targets.
The implications of Kyoto for U.S. business will also depend significantly on whether the United States decides as a matter of domestic policy to undertake emission reduction requirements, and the stringency of any such requirements. This paper generally assumes a scenario in which the U.S. does not take significant domestic action to control emissions. In the final section, it considers an alternative scenario involving adoption of strong U.S. domestic measures to reduce emissions.
by: Daniel Bodansky, University of Washington
Fundamentals of Climate Change
Remarks of Elliot Diringer
Environment, Education, and the United Nations:
Working Towards Sustainable Development
United Nations, New York
January 11, 2002
Thank you. I'd especially like to thank the organizers of this conference for inviting me here this morning. It's a tremendous honor to be speaking to you here at the United Nations. And I particularly appreciate the opportunity to speak to you about an issue that so exemplifies the mission of the U.N. - the challenge of global climate change. For climate change is not simply an international issue - it is a quintessentially global issue. It implicates literally every nation, and every person, on Earth. And ultimately it can be overcome only if all nations work together. It was in that spirit that world leaders signed the U.N. Framework Convention on Climate Change in 1992 at the Earth Summit in Rio de Janeiro, launching the international effort against climate change. The decade since Rio has shown us how hard it is to translate that spirit into action. We have made some important headway, but there is still a very long way to go. And I believe that you, as educators, are in a unique position to help get us there.
I'd like to say at the outset, though, that I'm not here to try to enlist you in a cause. For many years I was a journalist. I believed my role was to inform and illuminate, not to advocate. And I'm sure many of you feel the same way about your work. Instead, I'd like to offer some thoughts on how you, by teaching about climate change, can help our children better understand the world in which they live. Yes, climate change is a profound challenge. But it is also a profound window on our world. It is a window on both our past and our future; on the intricate relationship between man and the environment; and on the often difficult relations among nations. Climate change teaches us about the limits of science and the importance of economics. It touches on the most mundane and commonplace: how we heat our homes, cook our food, move from place to place, even how we till our soil. And at the same time, it raises fundamental issues of fairness, and the responsibility of one generation to the next. You can see, there are many directions you might go. The question is where to begin.
Here's where I'd like to begin. I'm not going to focus on causes and consequences and solutions. There is plenty of good material out there. If you stop by our display, you can see some of the reports we've produced on everything from health impacts to emissions trading. We also have a list of on-line resources, including several excellent websites geared specifically for educators. So rather than cover those basics, I'd like to step back a bit and try to describe for you some of the fundamental characteristics of climate change. What are the attributes that really define this challenge, that make it different from any other we have faced before? I believe there are four.
First, as I've already said, climate change is a truly global phenomenon. With the exception of the threat to the Earth's ozone layer, which it appears we are well on our way to addressing, we have never before faced a challenge so comprehensive in its reach. The buildup of greenhouse gases in our atmosphere influences physical and chemical systems that shape climate literally everywhere on Earth. The impacts of global warming will vary widely from place to place. But no nation is immune. By the same token, every nation bears some responsibility for meeting this challenge. Each molecule of carbon dioxide added to the atmosphere presents the very same risk whether it originates from a taxi in New York or from a power plant in New Delhi. And for that reason, it is futile for any one nation to limit its greenhouse gas emissions unless, ultimately, all do.
That is not to say that every nation must act at the same time or in the same way. I'll come back to this question later. But in time, all must assume their fair share of this common responsibility. Ten years after Rio, we are now at a point where most industrialized countries appear finally on the verge of beginning to tackle their greenhouse gas emissions. Negotiations last fall in Marrakech put the finishing touches on the Kyoto Protocol, which sets the first binding international targets for cutting emissions. Countries are now moving toward ratification and some hope to bring the treaty into force by the 10th anniversary of Rio later this year. Of course, this progress is tempered considerably by the fact that the United States has now abandoned Kyoto. What the United States is prepared to do on its own remains to be seen. But in time, we must bring it back into the international effort, and we must build on Kyoto to forge a framework for action that is as global in reach as the threat it addresses.
A second characteristic of climate change is that it is a long-term challenge. Measured in geologic time, the rapid buildup of greenhouse gases in the atmosphere over the past century, and the impacts that are likely to follow, might seem sudden and precipitous. But measured on the scale of a human lifetime, climate change is very slow moving. The added carbon dioxide now burdening our atmosphere has accumulated over the course of generations. Scientists believe the warming trend has now begun. The 1990s were the hottest decade of the past millennium. 1997, '98, and '99 were three of the hottest years ever, and last year was the second hottest on record. Scientists also believe they are beginning to see the first impacts. The Arctic ice cap is getting thinner. Spring is arriving earlier here and in Europe. And all around the world, glaciers are retreating. Yet the kinds of impacts that will inflict serious harm - extreme flooding and drought, dramatic sea level rise, the spread of tropical diseases, and the disruption of our agricultural and water supplies - those are still decades down the road. And the full impact of today's emissions will not be felt until next century.
But just as global warming is slow in coming, doing something about it is also a long-term proposition. Certainly, there are steps we can and should take right now - for instance, there are countless ways we could be using energy more efficiently. But ultimately what is needed is a fundamental transformation in the way we power our homes, our factories, our cars - in short, in the way we power our entire economy. We must wean ourselves from fossil fuels, the principal source of greenhouse gas emissions, and adopt alternatives that emit little or no carbon. This means nurturing technologies now in their infancy, and devising others not yet even imagined. Clearly, this can't happen overnight. It will take time - which is all the more reason to get started now.
But here is the dilemma: We must make investments and take actions now to avert threats that might not even materialize in our own lifetimes. If you could calculate the real costs and the real benefits of reducing emissions - something our most sophisticated economic models can only take a stab at - I'm confident the long-term payoff would be well worth the investment. But our decision-making structures are not geared to taking the long-term view. Our investment decisions are made with an eye to the quarterly earnings reports. Our political decisions are made with an eye toward the next election. Part of confronting climate change, then, is learning to think, and to act, for the long term.
Here is a third characteristic of climate change - uncertainty. There is much we do not know about climate change. We know it is happening. But we cannot accurately predict how much the earth's temperature will rise or how quickly. Will it be just two degrees over the next century, which is the low end of the scientists' best estimate? Or will it be 10 degrees, the high end? Nor can we forecast precisely what impacts will be felt where. Is it safe to assume a gradual rise in temperature and impacts? Or, as some scientists believe, is there a significant risk of triggering sudden changes in the climate system that will have swift and catastrophic consequences? There are tremendous economic uncertainties as well. How quickly can our engineers perfect climate-friendly technologies? How quickly will companies and consumers adopt them? Might the economic benefits of addressing climate change be greater than we think because we will at the same time be solving other problems, like air pollution and our costly reliance on imported oil?
We don't have good answers to these questions. So how do we, as a society, act in the face of such uncertainty? One approach is to wait and see. Maybe the warming won't be as bad as the scientists say. So why not give them more time to figure all this out before investing a lot of money that could go to other priorities? The problem is that uncertainty cuts two ways. Maybe the warming will be much worse than the scientists say. Do we want to take that risk? As I said earlier, the strategies needed to address climate change must be implemented over many years. The sooner we begin the less costly they will be. Can we really afford to wait? Climate change forces us to weigh the knowns against the unknowns. Do we insist on absolute certainty? Or do we begin to act now, with smart, flexible strategies that allow us to change course as we learn more?
There is one more characteristic of climate change I'd like to discuss: It is deeply unfair. Earlier I said that climate change affects us all and, that to successfully overcome it, all of us must act. It represents a common threat, and a common challenge. But climate change confronts us as well with extraordinary inequities. First, who is responsible for it? If you look only to the past, the answer seems clear: the industrialized countries. Nearly two-thirds of the greenhouse gases added to the atmosphere over the past century as a result of human activity came from developed countries. Nearly a third was contributed by the United States alone. That is not because our populations are larger, but because we are wealthier and consume more. Per-capita emissions are nearly 20 times higher in the United States than in India. If you look forward, however, the calculus changes. As developing countries build their economies, their emissions are growing. And within a few decades, they will surpass those of the industrialized world. In the long run, climate change cannot be effectively addressed without limiting their emissions also. But developing countries are understandably reluctant to sacrifice hard-won gains, or their aspirations for the future, to solve a problem that is not of their making.
There is an even crueler inequity, however - and that is the unequal distribution of the impacts of climate change. Simply by virtue of their location on the planet and their natural endowments, different nations will be affected very differently. And it appears the worst impacts will fall disproportionately on the poorer nations. Countries like Bangladesh, where the flooding of low-lying lands could displace millions. Or small island states like Tuvalu in the southern Pacific, whose people have decided to abandon their homeland before it is swallowed by rising seas. Or the nations of Africa, where increased drought and desertification could mean widespread famine. In other words, the consequences of climate change will fall most heavily on the countries that bear least responsibility for it, and are least able to cope with them.
Ten years ago, in Rio, these inequities were understood, and it was agreed that for all these reasons, the developed countries would act first. That is why the Kyoto Protocol sets emissions limits only for developed countries. President Bush said he was rejecting Kyoto, in part, because it was unfair - it imposed limits on the United States while requiring nothing of large developing countries like China and India. Fairness, it would seem, is a matter of perspective. But one thing, I believe, is clear: We cannot expect nations to agree on an effective global plan against climate change, let alone abide by it, unless each perceives it to be fair. Finding an equitable way of sharing this common burden may the toughest dilemma of all.
Those are four fundamental characteristics of climate change: it is global; it is long-term; it is fraught with uncertainties; and it confronts us with deep inequities. These characteristics define what I believe to be one of most profound challenges we face in this new century. Meeting this challenge will severely test the capacity of the global community, and institutions like the United Nations, to forge a common, effective path forward. It will require political will. It will require tremendous creativity and resourcefulness. It will require new ways of thinking. It will require understanding.
That is where you can help. I said at the outset that I was not here to enlist you as advocates. That is not your role. Yet I am confident that any honest examination of these issues can only help lead us in the right direction. No matter where we begin - by exploring the evidence buried deep in Arctic ice, or the energy systems that sustain our economy, or the ethical quandaries of what is fair - we can arrive at a clearer, deeper understanding of the world in which we live. And by imparting that understanding to our children, we can help ensure a fairer, safer, more secure world for generations yet to come. Thank you very much for listening.
For Immediate Release:
December 20, 2001
Contact: Katie Mandes
New Report on Discounting the Benefits of Future Climate Change Mitigation
Washington, DC - How do we compare the costs of greenhouse gas reduction measures taken today with the future benefits of these actions? How do we calculate the value of investments when benefits will continue to accrue over centuries? These are important questions, because the way we value the benefits of greenhouse gas emission reductions will guide the development of cost-effective solutions to the threat of global climate change. A report released today by the Pew Center on Global Climate Change addresses these crucial questions.
The report, Discounting the Benefits of Future Climate Change Mitigation: How Much Do Uncertain Rates Increase Valuations?, by Richard Newell and William Pizer of the independent nonprofit research institute Resources for the Future, highlights an important variable that often goes unexamined in current climate change models-uncertainty in future interest rates. Climate models incorporate discount rates to compare costs and benefits over time-in essence, they tell us how high future benefits need to be to justify spending a dollar today. Most climate models choose one rate and hold it constant over the time horizon of the model.
This study questions that conventional approach, arguing that future rates are uncertain. The authors demonstrate that acknowledging uncertainty about future interest rates leads to a higher valuation of the future benefits of reducing greenhouse gas emissions today - regardless of the initial rate one chooses. The authors conclude that, by ignoring uncertainty, current approaches used in economic modelling may be consistently undervaluing the future benefits of current climate change mitigation efforts. The report shows that including the effect of interest rate uncertainty in climate models could raise valuations of mitigation efforts by as much as 95 percent relative to conventional discounting at a constant rate.
"This report indicates that immediate action to address global climate change could yield significantly greater benefits in the long-run than conventional economic models have estimated," said Eileen Claussen, President of the Pew Center. "This information will be especially useful for policymakers as they seek to balance near-term mitigation costs with long-term economic and environmental benefits."
This report is the first to be published as a technical report in the Pew Center's economics series. The results of this work - and additional ongoing Pew Center analyses - will be incorporated into a dynamic general equilibrium model in order to better capture the full complexity of the climate change issue.
A complete copy of this report and other Pew Center reports can be accessed from the Pew Center's web site, www.c2es.org.
The full text of this report is accessible on the Internet:
Discounting the Benefits of Future Climate Change Mitigation: How Much Do Uncertain Rates Increase Valuations? Report.
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 conducting studies, launching public education efforts and working with businesses to develop market-oriented solutions to reduce greenhouse gases. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. The Pew Center includes the Business Environmental Leadership Council, which is composed of 37 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.
Press Release: Easing the Burden: Two New Reports Identify Steps for Reducing the Economic Impacts of Climate Action
For Immediate Release:
December 5, 2001
Contact: Katie Mandes
Easing the Burden: Two New Reports Identify Steps for Reducing the Economic Impacts of Climate Action on Affected Communities and Workers
Washington, DC - Policymakers can do a great deal to ease the economic burden of addressing climate change by taking specific steps to assist affected workers and communities. This according to two new reports released today by the Pew Center on Global Climate Change.
"Responding to climate change means reducing greenhouse gas emissions, and that means making a shift from the current carbon-intensive economy to an economy that relies less on fossil fuels," said Pew Center President Eileen Claussen. "This shift is in everybody's interest, but it will not affect everybody equally. As a result, we need to be thinking now about how to assist those workers and communities that will be affected by the policy choices we make. Rather than leave them behind in our quest for a new economy, we must give them the tools and the resources they need to play their rightful role in our future success."
Focusing on the workers and communities that are likely to be most affected by efforts to address climate change, the Pew Center reports recommend worker retraining programs, economic adjustment initiatives for affected communities, and other steps. According to Claussen, the cost of these and other initiatives would amount to a small fraction of the overall bill for dealing with climate change. She added that permit fees and other revenues related to the implementation of new climate policies could provide an important source of funding for the transition efforts.
Worker Transition & Global Climate Change
Any major reduction in greenhouse gas emissions in the United States will almost certainly cause a decline in demand for fossil fuels. The result could be employment losses in the coal, petroleum, and electricity industries, and possibly in other sectors as well.
Worker Transition & Global Climate Change is a Pew Center report written by Jim Barrett of the Economic Policy Institute. The report draws lessons from the government's experience assisting workers who were adversely affected by policy choices and market forces in the past. The author also outlines the building blocks of a worker transition program that could assist workers adversely affected by government efforts to address climate change.
This report recommends that a worker transition program include:
- Substantial retraining and/or education for laid-off workers, as well as income support for program participants;
- A bridge to retirement for workers nearing retirement age that maintains their standards of living and retirement benefit levels;
- Maintenance of laid-off workers' health and pension benefits until they find suitable employment; and
- Advance notice of layoffs whenever possible.
Community Adjustment to Climate Change Policy
Efforts to avert global climate change are also likely to place certain communities at risk of economic dislocation. Affected communities could include those with large numbers of jobs in energy production, such as coal mining communities in Wyoming or oil producing areas of Louisiana. Also affected could be communities with energy-intensive industries-for example, parts of Pennsylvania with steel manufacturing operations.
Community Adjustment to Climate Change Policy was authored by Judith M. Greenwald of the Pew Center on Global Climate Change, Brandon Roberts of Brandon Roberts & Associates, and Andrew D. Reamer of Andrew Reamer & Associates. Based on a survey of how policymakers in the United States and elsewhere have responded to similar challenges in the past, the report suggests that appropriately designed programs can lessen the pain of economic adjustment considerably.
The report recommends a new federal adjustment program for communities as part of global climate change policy, and calls on U.S. policymakers to take the following steps:
- Designate and fund the Economic Development Administration (EDA) 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 regional task forces; and
- Support the development and implementation of locally determined, comprehensive adjustment strategies.
A future Pew Center report will address the issue of competitiveness for those industries affected by climate change policy.
The full text of both reports is accessible on the Internet:
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 conducting studies, launching public education efforts and working with businesses to develop market-oriented solutions to reduce greenhouse gases. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs. The Pew Center includes the Business Environmental Leadership Council, which is composed of 36 major, largely Fortune 500 corporations all working with the Pew Center to address issues related to climate change. The companies do not contribute financially to the Pew Center - it is solely supported by contributions from charitable foundations.
Climate Change Policy After Marrakech: The Quest For Convergence
Speech by Eileen Claussen, President
Pew Center on Global Climate Change
Forum on the Future of the Greenhouse Gas Market
International Emissions Trading Association
December 3, 2001
Greetings and welcome to Washington. It is wonderful to see so much climate leadership in one place. And I am delighted to see the U.S. Administration represented on the program. I must say, however, that I am surprised the White House did not send Vice President Cheney. I know that sounds funny, but the Vice President, as most of you know, has been kept in an undisclosed location in recent weeks for security reasons. And I was thinking on my way over that this would be a great hiding place for him.
After all, who would expect to find Vice President Cheney at a conference on global warming?
Seriously, it is a pleasure to be here, and I want to thank Andrei Marcu and his colleagues at IETA for organizing this very important conference. I also want to pay tribute to the wonderful work that IETA is doing to encourage the development of an active, global greenhouse gas market. Getting the business community to come together to explore and promote solutions to climate change is a goal that the Pew Center shares with IETA. It is the goal that led us to form the Pew Center's Business Environmental Leadership Council. And I am pleased to note that a number of the Council's members-including BP, DuPont, Ontario Power Generation, Shell International, and TransAlta-are also active members of IETA. All of these companies-and, indeed, all of the corporate members of both of our organizations-should be applauded for their commitment to climate solutions.
I'd also like to take a moment to pay a special tribute to someone who throughout the past decade has been at the very center of this struggle. I speak of Michael Zammit Cutajar who, as many of you know, will soon be stepping down as executive secretary of the climate change secretariat. Michael's not the sort to acknowledge just how tough a job that is. But believe me, it is tough. And Michael has handled it all with dignity, with great diplomatic skill, and with tremendous equanimity. His steady hand helped navigate us through some of our rockiest moments. And when it was most necessary, he was always there to remind us of our real objective: a safer and fairer world for all who will follow. Would you join me, please, in thanking Michael for his unstinting dedication to that cause.
This certainly is not the first conference to contemplate the future of the greenhouse gas market. But it may well be the most illustrious, and it says a great deal about how far we have come in the international effort against climate change. With the recent agreements in Bonn and Marrakech; with new proposals in Europe for carbon trading systems; with the steady growth in interest and investment across so many sectors of the economy; we are making real headway. We are beginning to see the outlines of a genuine greenhouse gas market.
At the same time, of course, we face new challenges. Those of us who have been at this issue for some time know that it's just one challenge after another after another. The rest of you are now forewarned. Our latest challenge, I would suggest, is one of convergence. Of course, it was clear from the start that getting everyone to play by the same rules wasn't going to be easy. So convergence isn't exactly a new challenge. But for reasons obvious to us all, it has taken on a whole new dimension. Before, at least, we could assume that everyone was playing the same game. Now we're not sure whether the biggest player is playing at all. There are hopeful signs, and I'll say more about that later. But it's clear that for some time to come, if the United States chooses to play, it will be playing its own game. That may be okay. It may even be beneficial. But sooner or later - if we're going to do what it takes to avert global warming - we will all need to learn to play together, in the same game. We will need convergence.
To those of us eager to see a healthy, thriving greenhouse gas market, the emergence of fragmented or competing regimes is naturally troublesome. It means conflicting rules, higher transaction costs, trade distortions, the need for more lawyers - hardly the sorts of things that make a market flourish. But what I'd like to suggest to you today is that the market is really less the victim than the cure. I mean "market" here not in the narrow sense - the buying and selling of emissions reductions - but rather, in the broadest sense. I mean the extraordinary power of the marketplace to spur innovation, capitalize on opportunity, and mobilize the investment needed to tackle even a challenge as large as climate change. I believe that, once unleashed, the demands of this mighty economic engine will in themselves compel governments to work together. The need for certainty, for consistency, and for a level playing field all will work to encourage a merging of regimes. And, I'm willing to venture, they will work to encourage a leveling up, not a leveling down. Those of us working on climate change have looked to the market mostly as a way to deliver emissions reductions as cost-effectively as possible. What I'm arguing is that the market will serve, also, as a powerful force for convergence - for the kind of convergence that will be needed if we are to mount a truly effective response to climate change.
In the next few minutes, I'd like to review recent developments, both internationally and here in the United States, and what they suggest about the need for convergence, and the prospects for convergence, on the road ahead. And then I'd like to touch on the new challenges dominating the domestic agenda here in the United States in the wake of the September 11 tragedies, and how our efforts against climate change can help meet them as well.
International Climate Policy After Marrakech
First, the international context. As all of you know, climate negotiators reached agreement last month in Morocco on a complex set of decisions spelling out the rules for implementing the Kyoto Protocol. The Marrakech Accords followed very much in the spirit of the Bonn Agreement four months earlier. Together, they represent a true milestone in a difficult international effort begun more than a decade ago. The agreements have been rightly declared a triumph of multilateralism. But I believe they represent a triumph as well for the principle of harnessing the global market to protect our global environment.
It wasn't so long ago that the whole notion of emissions trading, particularly within Europe, got the same kind of reception Disneyland originally received in Paris a few years back. It was seen as a fanciful American export. But the Kyoto architecture - an architecture that, indeed, was largely made in America - is at its core a market-based strategy. And, for the most part, the decisions in Bonn and Marrakech provide the certainty and the flexibility needed to ensure that this architecture works the way it was intended. There will be no arbitrary cap on emissions trading; there is reasonable fungibility among the Kyoto mechanisms; and the establishment of unilateral CDM and project-based JI creates important opportunities for emissions-reducing investment. While not completely unfettered, the Kyoto mechanisms emerged from Marrakech as sound as one might have hoped.
It's true, Kyoto's first target period takes us only a decade into the future, and provides only a small fraction of the total reductions we must ultimately achieve. But the bottom line is that we have to start somewhere, and in Marrakech, much of the world established that starting point. The priority now is to ensure the Protocol's swift ratification and entry into force so we can, at long last, begin to deliver on Kyoto's promise and achieve real progress on the most urgent environmental issue of our time.
Even before the Marrakech accords, we saw important progress on emissions trading at the national and regional levels as well. The UK Emissions Trading Scheme, as all of you know, was launched in August of this year, and government officials there say it could reduce carbon emissions by as much as 2 million tons per year by 2010. Similarly, the European Union intends to introduce an EU-wide trading system by 2005 and is working out the trading rules as we speak.
The emergence of these regimes, while quite promising, poses an early test of our ability to converge. The two regimes differ in key respects. The British system, for instance, is strictly voluntary; the EU proposal is not. The British system covers the full basket of six greenhouse gases included in Kyoto; the EU restricts trading to carbon dioxide alone. It will be interesting, perhaps even amusing, to see how these and other differences are resolved. I saw in the press recently that my friend and colleague, UK Environment Minister Michael Meecher, had declared, with typical British bluster, "We think our scheme is better." He said he was -- quote -- "keen" for the EU to come up with something compatible to the UK system. I haven't yet heard the response from Brussels. And I hope that Michael Meecher remains my friend!
Nonetheless, these developments - the completion of the Kyoto rules, and the emergence of trading systems in Europe - are critical steps. They show governments working both individually and collectively to create systems that could eventually form the basis of a coordinated global approach. They are important as well because, as these new systems are put in place, we will begin to learn what works and what does not. They will help us better understand how to make trading a true cornerstone of our climate strategy.
Assessing the Climate for U.S. Action
What, then, of the United States? What are the prospects for a credible domestic strategy that could, in time, merge with the international regime? Better, I would suggest, than many of you might imagine. I have little expectation, to be sure, that the Bush administration is or will be prepared to put forward the kind of proposals needed to launch a serious effort, at least not at the moment. Nor, for that matter, was the previous administration. But just as President Bush's rejection of Kyoto helped rally international support for the Protocol, it seems to have stimulated a very interesting and encouraging bipartisan response on Capitol Hill. Suddenly, both Democrats and Republicans seem eager to demonstrate their commitment to tackling climate change.
Senator John Kerry of Massachusetts, for instance, recently introduced a bipartisan bill to establish mandatory tracking and reporting of greenhouse gas emissions. This would be an important first step toward building a comprehensive emissions reduction strategy. It's also an idea that the White House seems at least open to considering.
Then there is a bill introduced jointly by Senator Robert Byrd, a leading Democrat from coal-producing West Virginia, and Senator Ted Stevens, a leading Republican from oil-producing Alaska. Their bill would devote billions to researching and developing climate-friendly technology. It also would establish a climate change office in the White House and give the President one year to develop a comprehensive strategy aimed at stabilizing greenhouse gas concentrations in the atmosphere. Again, a first step, but an important one.
Some of you, I imagine, have been following closely the ongoing debate over multi-pollutant legislation for power plants. This is, in fact, the first real debate in the United States over mandatory carbon caps. You will recall that, as a candidate, President Bush favored including carbon in a new multi-pollutant regime, but that once in office, he changed his mind. Senator Jim Jeffords of Vermont, the new chair of the Senate Environment Committee, has made moving a power plant bill his top priority. I expect that serious negotiations over the shape of that bill could be underway shortly. Whether or not a bill that includes a mandatory cap on carbon can make it to the President's desk remains to be seen. But for the first time, it is being seriously debated.
Finally, another bipartisan duo, Senators John McCain and Joe Lieberman, have declared their intent to draw up legislation establishing an economy-wide cap-and-trade system - that's right, cap-and-trade, economy-wide. The senators intend to consult broadly with industry and other stakeholders before drafting the bill, and it's hard to imagine that any such legislation could move through Congress anytime soon. But the very idea that two such prominent lawmakers would be advocating such a far-reaching strategy was virtually unthinkable just a year ago.
To be certain, there are many in Congress, particularly in the House, who remain adamantly opposed to concrete action against climate change. Perhaps they assume, in the greatest tradition of laissez-faire economics, that a rising sea level lifts all boats. Or maybe they just don't like glaciers. But I do believe there is a growing bipartisan recognition that the United States cannot continue to blithely ignore its responsibilities as the world's largest greenhouse gas polluter. It will take some time, several years perhaps, to translate that belated awareness into an effective, credible domestic strategy. But I' confident that in time we will get there. And along the way, we must do our best to ensure that this domestic effort is as compatible as possible with the international effort. The people in the room, who understand the needs of the market, must work with policymakers here and abroad to help forge linkages between the emerging regimes. Working together, we must create the preconditions for the convergence that will be so critical to achieving our ultimate aim.
Climate in the New Domestic Agenda
Our efforts to address climate change do not, of course, proceed in a vacuum. And now, more than ever, we must be sensitive to other concerns that shape the broader context within which we act. For that context has been radically transformed - first, by the slowing of the economy, but much more so by the horrible, haunting events of September 11. The security of our nation and the strength of our economy are now, and will for some time remain, the overriding concerns here in Washington, and with good reason. As a result, a host of other vital issues - climate change among them - will for now take a lower profile. But it is important that we engage, and engage constructively, on the very urgent issues now dominating our national agenda. For it would be a mistake to let others think that the need to safeguard our nation, and the need to safeguard our economy, are somehow at odds with the need to safeguard our environment. We must show that, to the contrary, the right strategies can both protect and strengthen our nation, and advance the fight against global warming.
Let's look, for instance, at the question of "energy security." We can all agree that continuing to rely so heavily on imported oil is a costly mistake. So what is the solution? No matter what your views on drilling in the Arctic refuge, it is clear that no amount of domestic drilling will significantly reduce our reliance on foreign oil. In fact, to the extent that we keep pushing domestic drilling, we only delay the inescapable realization that we need to explore serious alternatives to the oil economy. And, in turn, we put ourselves at a disadvantage against those nations that are planning already for the inevitable transition.
We need to think beyond oil. Not because it's running out; most projections show ample supplies for another quarter century at least. But if we are serious about energy security - whether or not we're serious about addressing climate change - we need to think a lot more shrewdly right now about our future energy paths. We need to be more prudent with the oil we do use - insisting, for instance, on more fuel-efficient vehicles. And we need to start investing in alternatives to oil so that two decades from now we will have new fuels to run our economy, and the infrastructure to support it, that are not only more secure, but also more climate-friendly.
Similarly, we should not let concern over the weakening economy become an excuse for not addressing climate change. I know some are very pleased that the United States has rejected Kyoto. They see economic advantage in it. But whatever the short-term competitive advantage, it will be far outweighed in the long run by the economic consequences of inaction. Whatever the economic indicators for the latest quarter, over the long haul, increased efficiencies can only strengthen a firm's bottom line, and the health of our economy. There are real economic opportunities that come with taking action on climate change. It would be a mistake not to seize them.
The companies in our Business Environmental Leadership Council are demonstrating that investing in cleaner fuels and technologies is good not only for the climate, but for the bottom line, too. We recently released a report that took a close look at six companies that have adopted voluntary greenhouse gas targets. It looked at the reasons why they took on targets, and what the results have been. The companies said one of the motivations for taking on a target was to improve their competitive positioning in the marketplace. And that, in fact, has been the result. Each of the companies is on track to meeting or exceeding its greenhouse gas goal. Together, they've delivered reductions equal to the annual emissions of three million cars. And all the companies are finding that their efforts are helping to reduce production costs and enhance product sales today.
Another motivation cited by the companies was to gain experience that would help inform future climate change policy. It's vital, I believe, that the lessons of these and other companies showing leadership on climate change be widely shared. Our policymakers need to understand that sensible, cost-effective action against climate change will strengthen, not weaken, the long-term health of our economy.
Earlier, I spoke of the need for convergence within and between climate regimes. But we must nurture as well a convergence of critical concerns that - while seemingly independent, or even antagonistic - are all vital to the security and well-being of our nation, and our planet. We must make clear that efforts to protect our homeland and our economic future need not come at the expense of our climate - nor vice-versa.
The great American inventor Thomas Edison once said, "Hell, there are no rules here. We're trying to accomplish something." But to achieve real progress in the struggle against global climate change, clear, sensible rules are absolutely essential. Not to hamstring governments or corporations, but to eventually get everyone playing the same game. It's like baseball or soccer. The rules don't tell you how to win. They merely put everyone on an equal footing, headed for the same goal.
Like Thomas Edison, we are indeed trying to accomplish something, and it is something very important to the future of our businesses, our nations, and the world. We have made important progress, but there is still a very long way to go. Getting there will require tremendous patience and determination. It will require political will. It will require the power of the marketplace. And, it will require convergence.
Thank you very much.
By Eileen Claussen, President, Pew Center on Global Climate Change
The Periodical of the Mansfield Center for Pacific Affairs
Almost a decade ago, the nations of the world gathered in Rio de Janeiro, Brazil, and acknowledged that "the global nature of climate change calls for the widest possible cooperation by all countries" to address this enormous challenge. Over the intervening years, the international effort to live up to these words from the United Nations Framework Convention on Climate Change has proceeded in a series of fits and starts that bring to mind the progress of a run-down car. One of the more tenuous moments came earlier this year after failed negotiations in The Hague and the U.S. government's unilateral rejection of the Kyoto Protocol. But now, it appears the old car is back on the road and poised to make real progress.
Even without the United States' participation, the climate change agreement reached by 178 nations in Bonn, Germany, in July marks an important milestone in the global effort to address the most urgent environmental challenge facing the world today. If all goes according to plan, the outcome in Bonn will allow the Kyoto agreement to enter into force in time for the tenth anniversary of the Rio meeting in 2002. First negotiated in 1997, the Protocol requires developed countries to reduce or limit their emissions of greenhouse gases in relation to 1990 levels, with different countries agreeing to different targets.
At the same time that Bonn has breathed new life into Kyoto, there is growing momentum in the United States for domestic strategies to reduce emissions. Indeed, the prospects for action in Congress are stronger than ever - despite the Bush administration's rejection of Kyoto. The challenge now is to insure that the Protocol stays on the road to ratification and entry into force while the United States begins to pursue good-faith domestic efforts to reduce its greenhouse gas emissions. To the extent that U.S. efforts are compatible with the Kyoto framework, the world can still hold out hope that the two roads will eventually merge, yielding a truly global plan of action.
Did U.S. Rejection Save Kyoto?
In the weeks since the conclusion of the Bonn meeting, some have suggested that the U.S. government's repudiation of the Kyoto accord actually saved the Protocol from a harsher fate. After the contentious breakup of the negotiations in The Hague in November 2000, many suggested that it was the end of the road for Kyoto, and that disagreements over the details of the accord-particularly between the United States and Europe-were too great to bridge. The rigidly anti-Kyoto stance adopted just three months later by the Bush administration only added to the impression that the process had run its course.
As it turned out, however, U.S. rejection of the treaty served to rally other countries to its defense. After 10 years of hard negotiations, these nations refused to accept that their work had been in vain. And they resolved to take whatever steps they could to revive the Protocol and allow it to enter into force-with or without the United States. If this meant reaching new compromises on issues where nations had previously refused to budge, then so be it. The view began to take hold among these countries that a flawed agreement was better than none, and that the world could not wait any longer to begin taking concrete steps toward a safer climate.
While many details are as yet undecided, the broad agreement reached in Bonn will likely provide countries with a high degree of flexibility in how they use various strategies-from sinks to emissions trading-to achieve their targets for reduced emissions. Largely in response to concerns from Japan, Australia and Canada, the Europeans backed off earlier demands seeking to place onerous limits on exactly how countries could go about achieving their Kyoto commitments. This is a very important and positive development because it will permit countries and businesses to meet their objectives in the most cost-effective ways. And, ironically, it is a development that the United States had lobbied intensively for during previous rounds of negotiations.
Looking forward, it is critical that the momentum achieved in Bonn be maintained in the months ahead. The parties to the agreement, especially Japan, need to move swiftly to ratify it and bring it into force and demonstrate that the Kyoto process can yield real benefits for the global climate.
Kyoto But a First Step
Still, it is important not to oversell the outcome of the negotiations in Bonn. The Kyoto Protocol is only a very small first step on what will be a long march to a less carbon-intensive world. Its initial targets for emissions reductions take us only to the 2008-2012 period, and they represent just a very small down payment on the level of emissions reductions that scientists say we must achieve in order to have a real effect on mitigating climate change.
In addition, many developing countries, which have no binding emission targets under Kyoto, will have to play larger roles in reducing global emissions in the years ahead. As these nations develop, they will need to do so in ways that are less carbon-intensive and more efficient. This is a challenge they do not face alone-the time has come for all nations of the world, developing or already developed, to consider how best to grow their economies while at the same time reduce the impact of their growth and development on the global environment.
The ultimate impact of the Kyoto Protocol also will be severely limited by the United States government's decision not to be a party to the agreement. Ultimately, no solution to global climate change will be successful without the participation and support of the world's leading generator of greenhouse gases.
It has been suggested that the United States should offer an alternative to Kyoto-something more in line with the Bush administration's priorities. However, this likely would serve only as a distraction and yet another obstacle to real action. Much more important is that U.S. leaders begin to focus seriously on how to achieve real reductions in domestic emissions.
Next Steps for the United States
To date, efforts to reduce U.S. emissions have been limited almost exclusively to voluntary activities at the federal, state, local and corporate levels. While some voluntary efforts have resulted in significant emissions cuts-some companies, for instance, have achieve reductions of 10 percent or more-they have not succeeded in curbing the overall growth in U.S. emissions.
Three decades of experience fighting pollution in the United States have taught us a great deal about what works best. In general, the most cost-effective approaches allow emitters flexibility to decide how best to meet a given, binding emissions limit; provide early direction so targets can be anticipated and factored into major capital and investment decisions; and employ market mechanisms, such as emissions trading, to achieve reductions where they cost least. To ease the transition from established ways of doing business, targets should be realistic and achievable. What is important is that they be strong enough to spur real action and to encourage investment in development of the technology and infrastructure needed to achieve the long-term objective.
A good first step for the United States will be to get its house in order by immediately requiring accurate measurement, tracking, reporting and disclosure of greenhouse gas emissions. However, the long-term emission reductions needed can be achieved only with a far more comprehensive-and binding-strategy. Alternative approaches should be closely studied, and the results publicly debated. But much of the analysis thus far suggests that domestic "cap-and-trade" systems-which set an overall cap on emissions and establish a market in carbon credits-can provide the private sector with the certainty, the flexibility and the incentives it needs to achieve emission reductions at the lowest possible cost.
Ideally, the design of a domestic U.S. program would be compatible with the Kyoto Protocol or any successor agreement. As an interim step, it would be important to explore ways for U.S. companies to have access to the emerging market in emissions credits, even before the United States becomes party to an international agreement. While it might not be possible to engage directly in the trading system established under the Protocol, companies should be provided other ways to receive credit for emissions reductions achieved abroad.
Ultimately, however, the United States must become a full partner in the global effort. From an economic standpoint, a global agreement is needed to achieve maximum cost-effectiveness by allowing full access to the carbon market; to provide businesses, particularly those operating multinationally, the certainty and consistency they need; and to stimulate worldwide demand for the technology that will allow conversion to a low-carbon economy. From an environmental standpoint, only a global agreement can ensure that all major emitting countries are achieving the emissions reductions that are necessary to avert the worst consequences of global warming.
The Road Ahead
Our immediate challenges are to bring the Kyoto Protocol into force, launch real emission reduction efforts in the United States, and chart a path for merging these frameworks. At the same time, we must begin developing creative strategies to meet the challenges still ahead. As industrialized countries demonstrate progress in meeting their initial targets, we must find ways to more fully engage developing countries in the global effort. We also must begin working toward international consensus on a long-term environmental objective, both to determine the level of emissions reduction that ultimately will be needed, and to help provide a basis for equitably sharing the burden among developed and developing nations.
The most recent projections from the Intergovernmental Panel on Climate Change indicate that worldwide temperatures will rise by anywhere from 2.5 to 10 degrees Fahrenheit over the next century, and that the rise in temperature will have important and potentially calamitous effects on sea level, weather patterns and more.
As these impacts of climate change become more real to people, and as governments and businesses begin to come to terms with the dramatic effect of climate change on our economies and our communities, I believe that the global effort to achieve real, long-term solutions to this problem will gain even more momentum. And even the United States will not be able to avoid the necessity of taking strong action, both domestically and internationally, to avert a looming environmental crisis.
Eileen Claussen is the President of the Pew Center on Global Climate Change, and President and Chairman of the Board of Strategies for the Global Environment. She has served as Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs, as a Special Assistant to the President at the National Security Council, and has spent over 20 years at the U.S. Environmental Protection Agency. Ms. Claussen is the recipient of the Department of State's Career Achievement Award, and the Distinguished Executive Award for Sustained Extraordinary Accomplishment. She served as the Timothy Atkeson Scholar in Residence at Yale University, is a member of the Board of Directors of the Environmental Law Institute, and currently serves as a Commissioner on the Pew Oceans Commission.
© 2001 The Mansfield Center for Pacific Affairs
Press Release: Nobel Prize Recipient Dr. Joseph E. Stiglitz Calls for Immediate Action Against Climate Change
For Immediate Release:
October 11, 2001
Contact: Katie Mandes
Nobel Prize Recipient Dr. Joseph E. Stiglitz Calls for Immediate Action Against Climate Change
Dr. Joseph E. Stiglitz, co-recipient of the 2001 Nobel Prize in economics, called on governments today to join in a comprehensive global strategy to address the long-term threat of global climate change.
In a keynote address at a workshop sponsored by the Pew Center on Global Climate Change, Dr. Stiglitz said that despite uncertainties over the pace and precise impacts of climate change, governments can and should take immediate cost-effective steps to begin reducing emissions of greenhouse gases.
"Climate change is probably the most important environmental problem we face in the world," Dr. Stiglitz told 40 scientists, economists and other experts at the Pew Center's Workshop on the Timing of Climate Change Policies. "We need a framework for collective action."
Dr. Stiglitz, a professor of economics at Columbia University, was one of three U.S. economists awarded the Nobel Memorial Prize in Economic Science on Wednesday for their seminal work on the role of "asymmetric information" in markets. He previously served as chairman of the President's Council of Economic Advisers and as chief economist at the World Bank.
"We congratulate Dr. Stiglitz on his prestigious award and are delighted that he could share with us his keen insights on the challenge of climate change - particularly on what is such a remarkable day for him," said Eileen Claussen, president of the Pew Center on Global Climate Change.
In a paper presented at the workshop, Dr. Stiglitz and his co-authors explored the challenges of crafting a global strategy to address climate change given uncertainties in the science and economics and the diverse and conflicting interests of nations.
The paper states, "A global consensus now exists that climate change represents a significant potential threat to the world's well-being&Put simply, we favor immediate action," the authors state. "Although policymakers are forced to make decisions under uncertainty, they can undertake actions that help reduce this uncertainty. In particular, pursuing some emissions abatement policies now allows policy-makers to learn more about the costs of emission reduction."
The full text of his paper, co-authored with Peter R. Orszag of the Brookings Institution and Joseph E. Aldy of Harvard University, is available on the Pew Center website, www.c2es.org.
Dr. Stiglitz was introduced at the workshop by Dr. Kenneth J. Arrow of Stanford University, a previous recipient of the Nobel Prize in economics and a member of the Pew Center's board of directors.
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.