Climate Policy and Natural Gas: A Bridge to a Lower-GHG Future

Speech by Eileen Claussen, President, Pew Center on Global Climate Change

American Gas Association Executive Conference
WASHINGTON, DC

October 6, 2008


I am delighted to be here and to add my welcome to Washington.  

Of course, I am here to talk about global warming, but I can't stay away from politics, and I think it is interesting that, even in the middle of our economic troubles, the presidential and vice-presidential candidates are talking about this issue too.  Governor Palin, for one, has publicly acknowledged that her state is suffering from the effects of higher temperatures.  Polar bears are disappearing, coastal erosion is a problem, her poll numbers are melting … it’s a real mess.  She also said rising sea level is uprooting coastal communities so they have to move inland.  And you know what that means: it’s getting harder to see Russia.  So there goes all that foreign policy experience.

But Governor Palin still isn’t sure of her position on the causes of climate change.  When asked if man had anything to do with it, she said it was a sexist question and women should get some credit too.

The Obama campaign, for its part, already has shown it has the capacity to keep a lid on dangerous emissions. Joe Biden was on live TV for 90 minutes last week and he kept the verbose answers to a minimum and did not "emit" a single gaffe.  That’s quite an achievement.

There was one awkward moment – when the moderator asked what he thought about CAP and TRADE, Biden thought she was talking about Governor Palin's children.    

In all seriousness, Charlie Cook has given you a true insider’s perspective on the 2008 elections and how things are shaping up.  What I want to do today is talk about what all of this means for climate policy – or, more specifically, what we can expect to see in the next year or two as Washington finally comes to grips with climate and energy issues in a serious way.  

We all know that climate legislation has been making the rounds, and the Senate actually considered  a major cap-and-trade bill this summer.  But as I reflect on what is likely to happen in 2009 and 2010, I am reminded of the old Monty Python line … “And now for something completely different.”   

I predict that we will see real legislation, a real debate, and real action on the climate issue in the next Congress .  And what happens on this issue will obviously have important implications for the natural gas industry – which I will discuss in some detail later in my remarks.

But first I want to offer some perspective on the state of play in Washington right now – and where we stand today in the effort to forge a response to one of the most urgent global problems of our time.  

The reality of course, is that at the moment, all of Washington has been caught up in trying to rescue the U.S. economy, and so the question becomes – again – will the immediate crisis trump the need for climate policy?  Many seem to think so, but I have a different view.   

Certainly the new Administration and the new Congress will have a very full plate, but I do not believe that climate policy will fall off the agenda – and there are 4 reasons why I say that.  First, there are very high global expectations (unrealistic expectations, actually ) for what the next administration will do on the climate issue.  Foreign countries are anxious and frustrated with the lack of action by the U.S.; they are hoping for quick and dramatic changes from the new Administration.  If the next President wants to get off on the right foot with the global community, something that will serve us well on a variety of  critically important foreign policy issues, it is imperative that we craft and pass reasonable national policy, and that we engage constructively with the rest of the world on a global framework for action.   

Second, there is momentum and pressure from corporate America and from the states.  In the midst of this economic meltdown, the Western Climate Initiative unveiled their design recommendations for their regional cap-and-trade program – the most aggressive design to date in the U.S. - and RGGI, the consortium of northeastern states, held their first auction on Thursday Sept. 25– ringing the opening bell on Wall Street no less!  In total - 24 states are currently involved in regional cap and trade programs.  And corporate America is ready for the certainty that a well-designed national policy will afford them.  

Third, the Supreme Court decision in Massachusetts v. EPA paves the way for a more traditional “command and control” regulatory approach to addressing greenhouse gases.  Continued inaction is not an option.  If federal legislation doesn’t move, an approach based on existing Clean Air Act authorities is more likely – and yet less cost-effective – than a greenhouse gas cap-and-trade program.  And as this summer’s DC Circuit decision vacating the CAIR rule illustrates, it’s not clear that EPA can choose a more flexible and cost-effective approach such as emissions trading – or determine an allocation under a cap – in the absence of specific authorizing legislation.   So traditional standards (at least under some parts of the Clean Air Act) are the more likely outcome, a scary thought for many in industry and in the Congress.

And finally, and most important of all, we cannot have a growing, competitive economy without both a comprehensive energy policy and a sound climate policy.    A good climate policy will drive private and public investment in new, cleaner technologies, create jobs, and help us to transform our dependence on foreign energy supplies. Conservation and efficiency will help stabilize the climate, and make us more energy secure.  Moving forward with alternative, renewable technologies will decrease our carbon footprint and harness our innovation agenda.  Doing whatever we can to make use of existing cleaner, greener technologies, whether expanding our use of nuclear energy, or mounting a crash effort to demonstrate carbon capture and sequestration, or expanding our supplies of natural gas, have to be a part of our energy and climate policy.  Because without a major effort in all of these areas, I do not believe our economy will rebound, I do not see us being globally competitive, and I see us spending far more of our tax dollars in responding to the serious effects of a changing climate than we would spend preventing them.   

And, happily, since this economic crisis erupted – both Senator Obama and Senator McCain have reaffirmed their commitment to addressing climate and energy policy, including working for passage of a greenhouse gas cap-and-trade bill.   

So – while I believe some will try to use the current economic situation to obfuscate and delay – I do not think they will succeed.   Certainly, it  will be a challenge getting people to pay attention to climate change. But the bottom line is we have to.  We don’t have any other choice.  And to the extent that we can make the connection between protecting the climate, decreasing our dependence on foreign energy supplies,  and advancing the economy, I believe we will be successful.  

Now back to the state of play.   I am sure that all of you followed what happened in the Senate this summer on the Lieberman-Warner bill.  Whether you agreed with the specifics of that measure or not – and believe me: we had our share of concerns about the bill, as I am sure many of you did … But the specifics aside, this was truly an historic moment: the first time ever that comprehensive climate legislation came to the Senate floor out of a committee.  

And how did the Senate greet this historic opportunity, this unique chance to engage in a civil and substantive debate about how best to get this nation on track toward reducing its contribution to climate change?  

The answer is they engaged in a knock-down, drag-out partisan fight over Senate procedures.  Because of an unrelated dispute over judicial nominations, opponents of the bill dispensed with Senate courtesy and forced the reading of the entire 492-page bill into the Senate record.  It took nine hours.  

Now, if you are going to take up nine hours of the public’s time reading aloud on the Senate floor, the least you could do would be to read from the classics, or Harry Potter, or perhaps Chicken Soup for the Soul of an Aggrieved Public.  The Climate Security Act of 2008 was, sad to say, not a page-turner.  And the wasted opportunity, and the wasted time that these shenanigans entailed, are even more galling when you consider that Congress wasted no time this summer passing bills recognizing National Corvette Day and the National Day of the American Cowboy.  

But still … but still there was the fact that bipartisan climate legislation had been voted out of committee and reached the full Senate.  And it was an important reminder of how far we have come on this issue in the last ten years.  

When we started the Pew Center in 1998, many people in the United States still viewed climate change as unimportant, unproven and undeserving of a lot of public debate.  Now, ten years later, Washington is moving ever-closer to developing a national plan for reducing U.S. greenhouse gas emissions, many U.S. states and cities have adopted innovative climate strategies of their own, and we have two major-party presidential candidates who both are committed to taking serious action on this issue.  For all their differences, John McCain and Barack Obama agree on the salient facts about climate change.  They agree that this is a real and an urgent problem, that it is caused in large part by human activity, and that the United States must focus on solutions.  And they even agree, albeit with some differences, on the broad outlines of a solution: a strong domestic cap-and-trade law coupled with U.S. support for a global climate change agreement.  Where there is a real difference is when you contrast the McCain and Obama positions to what’s happened in the last eight years.  

So we have come a long way indeed.  And one of the main reasons we’ve come this far, as I see it, is because of people like you.  All across this country, there is an ever-expanding contingent of business leaders who are saying they trust the science on this issue and it’s time to act.   

Today, the Pew Center’s Business Environmental Leadership Council includes 42 companies representing roughly $2.8 trillion in market capitalization and more than 3.8 million employees.  It is the largest U.S.-based association of companies committed to climate change policy and business solutions.  Members come from a range of sectors, including oil, high technology, diversified manufacturing, transportation, aluminum, electric and gas utilities, chemicals, healthcare, insurance, financial services -- and, of course, natural gas.  Our members include Exelon, PG&E and other natural gas industry leaders.

These companies share our belief that climate change is an urgent problem that will affect our economy and our communities in profound ways in the years and decades to come.  And they believe, and I quote: “The United States should significantly reduce its GHG emissions through economy-wide, mandatory approaches,” including a “flexible, market-based cap-and-trade program.”

Last year, many of these same companies took their advocacy on this issue to a new level when they joined with the Pew Center and others to form the U.S. Climate Action Partnership.   The USCAP group has issued a cap-and-trade proposal with specific targets and timetables—a real plan of action to slow, stop and reverse U.S. emissions. In addition to cap and trade, the group has embraced an array of other policies aimed at building a low-carbon energy economy.

So we have seen enormous progress, in large part because of business leadership on this issue.  But, of course, we still have an enormous amount of ground to cover.  And now people are looking ahead to what will happen – or, more precisely, what must happen – in 2009 and 2010. 

And so here’s my prediction: The Pew Center anticipates that the next President, whether it is John McCain or Barack Obama, will propose a framework for achieving substantial reductions in U.S. greenhouse gas emissions, including a cap-and-trade program, during the first half of 2009.  We expect Congress to begin debate on comprehensive climate legislation in the same timeframe, and we believe it is likely that a cap-and-trade bill will be signed by the President during the 111th Congress.  
As of January 20, 2009, the date of the next president’s inauguration, the question driving the U.S. debate on this issue will not be whether we need comprehensive, mandatory action, but how to do it right.  And the major challenge facing the next Administration and Congress as they seek to answer this question will be to resolve the cost and spending issues associated with comprehensive climate action.  

How can we minimize and contain the overall costs of a mandatory program?  How can we provide relief for those who will be most affected – including energy-intensive industries that will face higher fuel prices, regions of the country that rely on less climate-friendly sources of energy, and consumers who will face higher prices for electricity?  How can we reduce administrative costs and bureaucracy?  And, last but not least, how should we spend and invest the estimated trillions of dollars in future allowance value that could flow to the government, the private sector and consumers under a cap-and-trade regime?

Answering these questions will not be easy, which is why the next President and Congress should get to work right away.   And, of course, the questions I have asked are only the beginning.  Of great interest to all of you will be how our leaders here in Washington address specific questions having to do with natural gas.  And that’s where I want to focus in the remainder of my remarks.  

The Pew Center soon will be publishing a paper on the coverage of natural gas emissions under a cap-and-trade regime.  According to this paper, combustion-related GHG emissions from natural gas are 16 percent of total U.S. GHG emissions.  The largest source of emissions from the burning of gas is industry, accounting for 5.3 percent of total U.S. GHG emissions, followed by the power sector, at 4.4 percent.

Clearly, regulating and reducing GHG emissions related to the use of natural gas has to be part of any solution to climate change.  But the question, again, is how to do this effectively and fairly … how to do it right.   

This is a question that has spurred a very intense and very impassioned debate – well, as impassioned as you can get, I suppose, when throwing around terms like “points of regulation” and “allowance allocation provisions.”  

Seriously, the debate has been intense because these are important decisions with wide-ranging implications for your industry and for our economy as a whole.  And one of the biggest decisions that lawmakers will have to make has to do with the point-of-regulation issue.   The issue, as you know, is this: Should we regulate natural gas-related emissions on the upstream side – at the point where gas is produced and processed and distributed to consumers?  Or should it happen downstream – where gas is actually used?  

Well, to adapt the classic round, “Row Row Row Your Boat,” I say the chorus right now should be “thoughtfully down the stream.”  The Pew Center supports downstream regulation as the short-term answer to the point-of-regulation question.  And I say “thoughtfully down the stream” because we need to think carefully about how to do downstream regulation right.  More specifically, I agree with the AGA that it is impractical to include small-volume consumers of natural gas as part of any emissions cap.  Rather, we believe that any cap-and-trade measure that becomes law should cover downstream emissions from large users in the industrial and power sectors.

Over time, we believe local natural gas utilities should become responsible for meeting a cap on emissions related to the service they provide to residential and commercial customers.  This will make them “covered entities,” to use the legislative lingo.  (As an aside, I think it’s interesting that the only other statutes using the term “covered entities” are those governing indecent exposure.)

How many facilities would this kind of downstream approach cover?  Well, let’s do the math …

Our forthcoming paper estimates that fully 54 percent of the natural gas consumed for combustion in the United States is consumed at facilities producing more than 10,000 metric tons of greenhouse gases each year.  If we set that volume of emissions as the threshold for new regulations governing large users of natural gas, our paper says it would cover about 7,000 manufacturing facilities, plus 500 gas-only power plants and 750 or so compressor stations.  That adds up to about 8,250 facilities that would be regulated for their downstream CO2 emissions from natural gas consumption.

Accounting for co-ownership of these facilities and other factors, the paper comes up with a final estimate of 5,382 entities to be regulated under this approach.  Add the largest 150 LDCs, which account for 95 percent of gas throughput, and you get 5,532 covered entities – a number that could clearly be accommodated within a larger cap-and-trade program.  At the Pew Center, we believe the best choice is to include these large LDCs right now, but we recognize there are differing opinions.  The AGA has said that LDCs should not necessarily be included as covered entities now, and I hope that in the spirit of compromise we can agree that LDCs should at least be phased in.  Whether we phase them in or not, the largest LDCs are certainly an appropriate point to regulate the gas industry over time if we are looking at downstream emissions.

But at the same time that we are discussing “points of regulation” and all these other technicalities, we also need to consider something else – and that is how to better support natural gas as a bridge fuel to a more climate-friendly energy supply.

This is a real opportunity for your industry – this is not a “bridge to nowhere” that we are talking about.  Natural gas provides a bridge to the future.  To the extent that you can deliver gas at a reasonable cost, you can be part of the solution to climate change.

But here’s the problem: this industry cannot come close to fulfilling its role in protecting the climate without a strong policy push from Washington.  If natural gas is to play a role in helping us reduce greenhouse gas emissions, we need to keep it affordable, and we need policies to help make this happen – policies to help expand our natural gas infrastructure, policies to keep costs down, and policies to increase natural gas supply.

And we also need policies to help make natural gas even more efficient as a fuel source.  This industry is doing great things  to promote increased energy efficiency.  And America’s natural gas companies are funding programs that help their residential and commercial customers reduce their natural gas use by 9.5 trillion BTUs per year.  The resulting reduction in CO2 emissions: 500,000 metric tons every year.  

From home energy audits and cash rebates to low-interest financing for high-efficiency natural gas appliances, your industry offers consumers an array of tools to help them get a better handle on how much energy they use, and reduce it.  Today, according to AGA’s own data, the average American home uses one-third less natural gas than in 1980.  This has happened even as demand for energy has risen, and it can be explained in part because consumers are installing energy-saving windows and insulation, buying more efficient appliances, and taking other steps they might not have taken in the absence of incentives and active encouragement from America’s natural gas utilities.

Take PG&E, which I already mentioned is a member of the Pew Center’s Business Environmental Leadership Council.  PG&E offers its gas customers a rebate of up to $300 toward the purchase of an energy-efficient natural gas furnace, up to $400 toward the cost of sealing leaky ductwork, and up to $150 per 1,000 square feet for insulation.  That is real money, and a real incentive for PG&E’s gas customers to do their part to save energy and protect the climate.

This is important and commendable work.  But we can do more, with  tightened product and equipment efficiency standards, stronger building codes, and more.  We also need to make sure that natural gas utilities have the right economic incentives to promote efficiency.  The bottom line is this: Utility profits should not take a hit when customers use less natural gas.  The government needs to step up its support for innovative utility rate designs that encourage increased energy efficiency.

And this is why industry partnerships are so important.  The Pew Center has been proud to stand beside our business partners in the U.S. Climate Action Partnership and advocate for sensible solutions to climate change.  And we feel there is much more room for additional partnerships on this issue – between NGOs and business, and among business and NGOs and government.  With active industry involvement, I strongly believe that we can develop not just the right technological solutions but also the right policy solutions – solutions that make sense given the issues that all of you face in your businesses each day.

In just one month, the election will be over and a new President-elect and Congress will begin the work of preparing to take their seats at either end of Pennsylvania Avenue, just blocks away from where we sit today.  They will have a lot on their plates – a lot of people coming after them to do their bidding on issues from the economy and health care to energy and climate change.  And my challenge to you is this: as an industry, natural gas needs to do everything in its power to make absolutely certain that the climate issue receives the attention it deserves.  

We will not have another chance like this … and the longer we wait to act, the harder and more expensive this problem will be to solve.  Indeed, some say we have a window of just a few years.  We are going to need to use all of the persuasive power we have – all of the contacts, all of the political savvy – to make the case for workable solutions to the climate problem – solutions that combine all of the tools we have at our disposal to reduce greenhouse gas emissions.  Natural gas is one of those tools – and a crucial one.  We just have to help our leaders figure out how to use it right.  

Thank you very much.