Outlook on Climate Policy: Answering a U.S. and Global Imperative

OUTLOOK ON CLIMATE POLICY: ANSWERING A U.S. AND GLOBAL IMPERATIVE


Keynote Speech by Eileen Claussen
President, Pew Center on Global Climate Change
Carbon Finance North America
New York, New York

June 11, 2009

It is an honor to be here to present your keynote address this morning. We are here to talk about emissions trading … and forgive me for saying that I wouldn’t trade this opportunity for anything.  I was wondering about something this morning, and realized I should have checked with the conference organizers on this: If my speech ends up shorter than advertised, would it be possible for me to sell the unused minutes to someone who is much more verbose?

Just imagine the possibilities if we could create a system like this.  It would be a whole new market in public speaking credits.  And, to the delight of conference-goers everywhere, perhaps we could once and for all address a very different emissions problem – yes, I am talking about far too many speakers going on for far too long.   

In all seriousness, the conference organizers have put together a very impressive and packed agenda for the next two days.  And I cannot imagine a more opportune time to be having this discussion.

These are exciting times in the energy and climate world.  We have a President and Cabinet that are fully committed to addressing climate change – with cap and trade legislation being their preferred approach.  We have an EPA that is poised to regulate greenhouse gas emissions – in response to the recent Supreme Court ruling in Massachusetts v. EPA.  We have a number of state and regional initiatives in place and operational. We have teams of negotiators around the world preparing for the December meeting in Copenhagen, and we have ever increasing  numbers in the business community that are ready – really ready for the certainty that regulatory frameworks will offer them.

Most recently, on May 21st, the House Energy and Commerce Committee achieved something extraordinary – passage of a climate and energy bill that has the potential to set the United States on a path to tackle climate change in a serious way.   This bill could reach a vote by the full House as early as the end of this month – but almost certainly before the fall.

Einstein once said that “the only reason for time is so that everything doesn’t happen all at once.”  But right now, it seems that everything is happening all at once. 

And our job here at this workshop is to try and make sense of all these simultaneous goings-on – and to look ahead to another time, not far in the future, when cap and trade becomes an integral part of our national economy, a fait accompli.

What will this system look like?  When will it take hold?  And what does it mean for the organizations you represent, for American business in general, and for the American consumer?  These are the questions you are here to explore over the next two days.  And you will be hearing from a remarkable line-up of experts on finance, policy, trading and other topics. 

My role this morning is to kick things off with a brief overview of where we stand today on the climate issue from a political and policy perspective.  The Pew Center, both in its own right and as a participant in the U.S. Climate Action Partnership, remains very deeply engaged in the work of helping to forge domestic and international solutions to climate change.  And I want to share with you some reflections based on this work, and some ideas about where this issue may be headed in the weeks and months ahead. 

Please understand, however, that the climate issue is still very much in flux.  Therefore, I will borrow from the latest statement I received from my investment advisor and say that this speech “contains forward-looking statements that reflect our beliefs, judgments and current expectations … these statements are not guarantees of future performance.”

And you can take that straight to the bank!

With that caveat out of the way, I want to start with some observations on how far we have come on this issue in what is actually a fairly short amount of time.  For those of us in the trenches, of course, it feels like we have been at this forever.  Trying to get our elected leaders, the general public, business executives and other audiences engaged in the work of addressing this enormous problem, and coming up with creative solutions that use the power of markets to reduce emissions, has required years of exertion, frustration and worse.  But when you look at where we were just ten years ago, and then at where we are now, you see a transformation in how we think about this problem of climate change, and also in how we think about solving it. 

And, of course, the main reason why we are thinking differently about the climate problem today is because the science is clear: there is no longer any doubt that climate change is real, that it is largely caused by humans, and that addressing this problem must be an urgent priority.

The Nobel Prize-winning Intergovernmental Panel on Climate Change said in its landmark 2007 report that the warming of the climate system is – I quote – “unequivocal.” In just the two years since the IPCC issued that report, it has become increasingly clear that the impacts of climate change are happening much sooner than scientists had projected.  There is also growing concern among scientists that the 2007 estimates understate the potential level and pace of climate change, and that these changes will not happen gradually but potentially in fits and starts that will give the world far less time to adapt. 
 
For example, projections from recent studies indicate a total rise in sea level of anywhere from one-and-a-half to six-and-a-half feet, compared to the maximum of two feet in the IPCC report.  Recent studies also indicate that the melting of the Greenland ice sheet is accelerating, and that ice shelves in the Antarctic, which help prevent the rapid flow of land-based ice into the sea, are collapsing more rapidly than expected. To our North, the dramatic decline in Arctic summer sea ice has stunned scientists, who had not expected to see this level of ice loss for decades.  These sorts of changes are happening right now and they are happening faster than anyone predicted.

The bottom line is that the science shows we have no choice but to take action on this issue.  And it is largely because of the science that public opinion on this issue has shifted in recent years. 

A national survey conducted earlier this spring found that 77 percent of voters now favor action to reduce greenhouse gas emissions.  Further evidence of the shift in public opinion came in another spring poll showing that 59 percent of voters believe efforts to tackle global warming will create new American jobs. 

Now, my intention is not to stand up here and paint a completely rosy scenario of public support for climate action. While public opinion has shifted over the past decade – there is still some pretty significant polling that shows we have a ways to go. 

For instance, earlier this year, in a widely touted poll, global warming ranked last in a survey of the nation’s top 20 policy priorities. Among Republican voters, only 16% considered it a priority. And while this polling has gotten a lot of mileage in particular policy circles – what is important to know is this:  In the same survey, 60% identified energy as a top policy concern – a 20% increase from six years ago. And as we know, energy and climate change are inextricably linked – so I am OK with 60% of respondents listing energy in the top three priorities – a win for energy could well be a win for climate.   So part of our challenge has been to help make the energy-climate connection more clear to more people.


Yet another factor in the growing support for climate action in the nation’s capital is a profound change in the stance of leading businesses toward this issue.  I mentioned the U.S. Climate Action Partnership already.  With leadership from a range of Fortune 500 companies, in partnership with the Pew Center and other NGOs, USCAP has become a powerful advocate for strong and swift action on climate change. 

A decade ago, it would have been unimaginable for so many leading businesses to sign on to an agenda advocating cap-and-trade and other measures to achieve dramatic reductions in U.S. emissions.  But the USCAP Blueprint for Legislative Action is part and parcel of a campaign that has engaged CEOs from companies such as Alcoa, GE, Duke Energy, Shell and many others to become active and very visible supporters of mandatory climate solutions.  Their plea for strong action and regulatory certainty on this issue has found a very receptive audience in Washington and has provided a vital push for Congress.

Another push has come from the states, which continue to act on their own in the absence of a federal program to reduce emissions.  The first regional effort, of course, is the Regional Greenhouse Gas Initiative, under which ten Northeastern and Mid-Atlantic states will cap and reduce emissions from the power sector by 10 percent by the year 2018.  But the Western states, and the states in the Midwest are also getting ready to implement cap and trade programs.  And in May, a coalition of Governors of 27 states and three U.S. territories signed an agreement calling on Congress to enact energy efficiency and clean energy legislation and to cap greenhouse gas emissions to levels that scientists consider necessary to protect the climate.

So the pressure for action is coming from all directions: from the science, from public opinion, from business leaders and from the states.  And it is therefore no wonder that we’ve seen Congress and the Administration engage on this issue in such a determined fashion this year.

But make no mistake – there are still some very real obstacles to cap-and-trade becoming law in the U.S., and there are also considerable obstacles to overcome before we will see effective international action on this issue – and I will address that later.  But as never before, the stars are aligned for the United States and the world to finally develop solutions to tackle this problem. 

With that, I want to get to exactly what’s been happening on this issue over the past few months, and what it means as we look ahead.  Domestically, the Obama administration and Congress have made climate and energy policy a signature issue.  And I say this not just because of where we are with cap and trade.  It’s easy to forget that President Obama, in his first months in office, made some crucial decisions that will result in real reductions in U.S. emissions of greenhouse gases, and real changes in how we produce and use energy in the decades ahead. 

The economic stimulus package signed by the President in February included more than $80 billion in new spending and incentives for everything from smart-grid technologies to renewable energy development to coal with carbon capture and storage to energy efficiency improvements and mass transit.   This investment represents a down payment on building the clean energy infrastructure that we need to keep our economy strong for decades to come. 

And then there was the President’s budget proposal, which called for an economy-wide cap-and-trade program to reduce U.S. emissions 14% below 2005 levels by 2020, and 83% below 2005 levels by 2050.  Then, in response to a Supreme Court ruling, the EPA in April opened the door to regulation of greenhouse gases with its proposed finding that greenhouse gases contribute to air pollution that may endanger public health and welfare.  And, one month later, the White House forged a groundbreaking agreement to increase the average fuel efficiency of cars and light trucks by 30 percent by 2016.

In his statements, his appointments, his stimulus plan, and his early executive actions, President Obama has given every indication that he understands the urgency of the climate challenge and is determined to meet it. 

And the President’s engagement has been reciprocated on Capitol Hill.  The most obvious evidence of this is the May vote of the House Energy and Commerce Committee on the American Clean Energy and Security Act.  This bill combines ambitious but achievable greenhouse gas emission reduction targets with a market-based cap and trade program.  It passed the Committee after roughly 37 hours and 94 amendments, by a vote of 33 to 25.  It is a good bill – it protects consumers and provides the certainty businesses need to invest in a clean energy future for America.  And now it will go before other committees – primarily the Agriculture Committee and Ways and Means -- for their consideration before it is taken up by the full House this summer.  Given the support it received in Energy and Commerce – where Members represent a broad range of geographic regions with coal, oil, auto, and manufacturing concerns – the prospects are good for the bill’s passage by the full House.

Of course, the Senate is an entirely different matter.  Majority Leader Harry Reid and Senator Barbara Boxer, who chairs the Environment and Public Works Committee, have made cap-and-trade legislation a priority for 2009.  But action in the Senate will be far more difficult than in the House, and while Senator Reid has said he hopes for a vote this year, it’s nowhere near certain that this will happen.  Although a bill can pass the House along partisan lines, this is not a possibility in the Senate.  And so the White House will have to play a much more prominent role in mobilizing support from both Republican and Democratic senators.   

The main challenge to fast action on this issue, of course, is the state of the U.S. and global economies.  We should keep in mind that everything I have discussed is happening in the context of a serious economic downturn. In my view, President Obama is absolutely right when he says that tackling energy and climate change will not only help with the immediate challenge of economic recovery, but also will provide a new foundation for strong, sustainable economic growth.  But the fact that he is right does not necessarily make our challenge easier to overcome.  The opponents of strong climate action are using current economic conditions as reason for delay – and they are sure to ratchet up their opposition, and their rhetoric, as Congress continues its work. 

In fact, the debate over climate policy in the U.S. in the coming months will in reality be a debate over costs – we will hear a lot about overall costs to the economy, costs for households, and possible job losses.  And so the task facing those of us who support climate solutions is to do our best to make sure the debate is comprehensive and honest. 

We cannot accept the numbers that are cited as the costs of the Waxman-Markey bill when they are not based on what is actually in the bill. We cannot accept cost estimates where the assumptions in the models used to generate those estimates are not transparent.  And we need to make sure that the costs of solving this problem are balanced against the ultimate costs of the problem itself; that the clean energy jobs we will create as we transition to a lower-carbon economy are also accounted for; and that the costs of deferred investments in new technologies because of the uncertainty created by a lack of policy are not ignored.  Only then will we be able to win the arguments against the opponents of serious action on this issue.  And only then will we be able to develop policies that face up to the true scope of the climate problem.    

These have to be our talking points in the weeks and months ahead as Congress continues to debate cap-and-trade and other measures.  We must not let the debate rest solely on the costs of moving forward with these measures, although, of course, there will be costs.  But we need to be honest about what these costs might be, and we need to array them against the benefits of acting  – for workers, businesses, investors and, of course, the general public for whom climate change poses very serious consequences now and in the future. 

Consider the costs of drought and other weather extremes.  Reductions in water availability in the Central Valley of California could cost farmers $3 billion by 2050 and increased wildfires in the State could cost homeowners an additional $2 billion annually.

Making this discussion balanced and honest will not be easy. Given the severity of the economic crisis we are in, the debate about the costs of domestic action on climate will be a high-volume, highly contentious affair.   As a result, even if we work very hard to pass national climate legislation in 2009, I do not believe we can count on a bill reaching the President’s desk this year.  We can try, and we must.  But at the same time, we also must be realistic about what’s possible to achieve in the current political climate here in Washington.   And so my prediction – and remember: this is a forward-looking statement and not a guarantee – is that climate change legislation will pass Congress and be signed by the President sometime in 2010. 

When this occurs, the implications for carbon markets will be profound.  I know you will be discussing this throughout the conference, but let me just say that effective oversight of carbon markets will be essential to the success of any domestic cap-and-trade system.     We need to make absolutely certain this market delivers what it promises: real reductions in overall emissions. 

Our current economic conditions have caused many to rightfully question the future role of markets. So more than ever, we must ensure that a market for greenhouse gases is created with the rules and enforcement necessary to prevent manipulation and abuses. Getting it right from the start is critical, and much progress is already being made to ensure its success.  As a member of the Energy and Environmental Markets Advisory Committee of the Commodity Futures Trading Commission, I look forward to consulting with many of you as we set out to design an effective carbon trading system for the U.S.

Under a mandatory national climate program, the U.S. will have the largest carbon market in the world. Considering the size of the carbon market is important, because as the cap-and-trade program’s scope increases, so do opportunities to lower the overall program costs for the economy. Containing costs, and protecting consumers and businesses from price volatility, is critical both for the economy and for the program’s political viability.
 
It’s no surprise, then, that cost containment mechanisms are critical to the Waxman-Markey bill. In addition to sensible rules for banking and borrowing allowances, the legislation allows up to 2 billion tons of offsets to be used for compliance—up to 1 billion tons domestic and 1 billion tons international. Offsets availability is one of the most important tools for containing the cost carbon allowance prices—indeed, EPA’s analysis of the Waxman-Markey discussion draft found that without international offsets, allowance prices would be 96% higher.  And above all else, we must ensure that offsets, whether international or domestic, deliver real, verifiable and additional emission reductions.

This is especially true when considering international offsets.  One advantage of international offsets is their ability to engage developing countries in climate change mitigation.  And these countries do need to be engaged proactively in developing and implementing measures and programs to reduce emissions.    

And this leads us to a discussion of where we stand in the international negotiations on this issue.  The Pew Center believes that, ultimately, a multilateral treaty is not only the best solution, but is a requirement if we are going to seriously address climate change.   Over the past two weeks, officials from 182 countries for the first time debated the “draft text” for a Copenhagen agreement. Their goal is extremely ambitious: they want to reach a new global climate agreement this year.  And this is where we can see a clear connection between domestic and international action on climate change.  Because without a solid blueprint for domestic action, it will be difficult for the United States to help craft an international plan to reduce emissions. 

We simply cannot afford to repeat the mistake we made in negotiating the Kyoto Protocol.  Despite the fact that the Clinton administration signed Kyoto in 1997 with much fanfare, it was never sent to the U.S. Senate for ratification.  The problem was that there was a major disconnect between our domestic and our international policy.  We were promising things on the international stage that we simply were not prepared to deliver at home. 

Does this mean we should sit out today’s international negotiations until the President signs a comprehensive domestic climate bill?   Of course not.  The world can make substantial progress in Copenhagen.  With a lot of hard work, I believe it is possible to achieve an interim agreement, one that sets the stage for a ratifiable agreement in 2010.  But the chances for such an agreement will improve markedly to the extent that the United States is engaged in a serious discussion of what we intend to do here at home, and to the extent that we reach consensus this year on such critical issues as domestic targets and the assistance we are willing to provide to developing countries as they tackle this challenge. 

Todd Stern, the U.S. special climate envoy, understands the delicate balance the United States must strike, and the challenges we face.  He knows that we have to balance our interest in achieving an effective post-2012 global climate agreement with a realistic appraisal of what the world can expect from the U.S. in terms of mitigation commitments and financial support.  The next 6-12 months will require the ultimate in political and diplomatic skill.

Stern has repeatedly highlighted the need for the U.S. to enact a domestic cap-and-trade program and invest in clean energy technologies that can help drive economic growth in the 21st century – suggesting – I believe rightly so –  that the United States’ leverage in the negotiations will depend heavily on the pace of domestic climate legislation. The Waxman-Markey bill will allow the United States to help lead the efforts toward a global agreement in which the major economies of the world, both developed and developing, play their part to address the climate challenge.

But, in the same way that we must be honest with ourselves about the prospect of completing work on national legislation this year, we also must also be honest with ourselves about the prospect of wrapping up work this year on an international agreement.  Reaching even an interim global agreement presents its own set of very serious challenges.  What target levels are appropriate for the United States and other developed countries as they set out to reduce their emissions, especially in the midst of a global economic downturn?  What’s the best way to ensure that developing countries like China and India are doing their part?  How can we make certain that developing countries have the resources they need to invest in clean energy and other emissions-reducing technologies?

These are not easy questions.  Answering them in a way that yields real progress toward an effective international climate agreement will take perseverance and a lot of hard work.  And we will not get far, as I said, unless the United States is working hard to address this issue here at home. 

Ultimately, we need a legally binding, post-2012 global agreement that includes commitments from all major economies, while respecting the common but differentiated responsibilities of developed and developing countries. The good news is that the major developing economies are indeed making progress on this issue – including China, India, Mexico, South Africa, and Brazil.  But in the context of an international agreement, it’s critical to ensure the efforts of these countries are verifiable, and that they put the world on a path to stopping and reversing the growth in global emissions.  Binding emissions targets are out of the question for developing countries at this time.  And so the central challenge is to determine how to incorporate and enhance their national policies and actions, such as renewable energy and energy intensity targets, efficiency standards, and forestry goals, into an effective international framework.

At the same time, we also need to resolve the pressing question of financing for developing country efforts.  There is an enormous need for technology and new investments in developing countries’ capacity to reduce emissions and adapt to climate change.  But right now, given the state of the global economy, as well as the increasing portion of public monies dedicated to economic stimulus in the United States and many other nations, it is hard to see where the money comes from. 
Whether the developed world, in 2009, will be able or willing to agree to mechanisms for providing dependable funding to developing countries on this issue remains unclear at best.  And so money, as is so often the case, is perhaps the major challenge we will face as we move into serious negotiations on a post-2012 global climate agreement.  Add to that the other challenges I have mentioned, and it’s clear that negotiators have their work cut out for them in the run-up to the Copenhagen meeting later this year. 

Of course, the other complication when it comes to international action on climate change is the nature of the U.S. relationship with China.  Of all the bilateral relationships on this issue, this is perhaps the most critical, and the most delicate. While China has shown a greater willingness to engage in climate discussions, and is sensitive to its new standing as the world’s largest greenhouse gas emitter, the Chinese do not want their country cast in a spotlight. So, rather than making an issue of what the Chinese must do to rein in emissions, a better approach for the U.S. at this moment is to pursue closer collaboration on clean coal technology and other energy and climate challenges.  This could produce practical benefits for both countries, build trust, and help pave the way for a multilateral agreement.

In closing, I want to note that I have identified an array of challenges to domestic and international action on the climate issue, a whole host of potential hurdles.  But I want to leave no doubt that I remain optimistic.  The United States is moving ever closer to adopting a domestic cap-and-trade system, and international negotiators are engaged in a determined effort to forge an effective global climate agreement.  We must succeed in both of these endeavors.  And this is something that more and more of our leaders, more and more of the people of this world, understand.  They have seen the science.  They know that the time for action on this issue is now.  And they understand like all of you that, if we do this right, we will leave future generations not only a safer climate but also a stronger economy that rewards innovation and that drives investment to industries and projects that will benefit us all.

I hope I have not gone over my allotted time, and if I have, then perhaps one of your other speakers will allow me to buy a few extra minutes. 

Thank you very much.