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California’s cap-and-trade program received court affirmation this month that the state has authority to auction allowances. But questions remain about the program’s future.
California lawmakers are evaluating ways to achieve the state’s 2030 greenhouse gas reduction goal. One option, championed by Governor Brown, is to extend its cap-and-trade program. But some lawmakers are concerned the program isn’t delivering the expected revenues for state clean energy programs. Others worry it doesn’t do enough to provide equitable environmental co-benefits.
Could the single step of extending the program address these concerns? To some extent, yes.
The debate in Sacramento
Under California’s cap-and-trade program, operating since 2013, emissions are down and economic productivity is up.
But there are some areas of concern. Auction revenues are down. As I’ve noted before, low carbon prices don’t mean a cap-and-trade program isn’t working. They just mean the required emissions reductions are cheap. But California legislators want to use auction revenue to fund other projects like planting trees in urban areas and putting rooftop solar panels in disadvantaged communities. More importantly, a recent analysis shows emitters are more likely to be near disadvantaged communities, raising concern Californians won’t enjoy the co-benefits, like cleaner air, equally.
Legislators have proposed extending the cap-and-trade program through 2030, although they are debating restricting how it operates. Discussion continues about replacing cap-and-trade with a carbon tax approach. This tax proposal would seek to address the first concern, that allowance prices are too low to fund desired programs. Other debate centers around restrictions to force more emissions reductions to occur inside the state. Current rules allow for reductions at sources of electricity outside California, or at limited offset project sites in the U.S. and Canada.
Economic theory tells us that limiting emissions through a cap-and-trade program will achieve the environmental objective at the least cost, through business innovation. Could lowering the cap address other key concerns as well?
Tighter cap = higher revenues
The California Air Resources Board’s (CARB) 2017 Climate Change Scoping Plan Update (Scoping Plan) evaluates policy options to achieve the 2030 goal. The regulator’s preferred approach is to keep existing programs (like the state’s aggressive 50 percent Renewable Portfolio Standard), extend the cap-and-trade program, and require extra emissions reductions at in-state refineries. Its analysis concludes this would meet the 2030 goal, using market-based approaches to minimize costs while prioritizing in-state reductions.
Using the information in the Scoping Plan, let’s examine how CARB’s preferred policy approach would address concerns about revenue and equity.
First, compare actual auction revenue in 2016 with projections of how revenue might change if the cap-and-trade program were extended (see Table 1). Making some conservative assumptions, revenues could double by 2020, from $2 billion without an extended cap to $4 billion with an extended cap. The increase comes mostly from increased allowance demand that would be expected if the business community receives a long-term policy signal in favor of cap-and-trade. Auction revenue could reach $5 billion in 2025, even as the cap (and the number of allowances sold) declines.
Table 1. Relationship between allowance supply and state revenue.
2016 values are calculated from CARB data. Projections for 2020 are based on CARB’s projected auction volumes and our conservative price estimates. Projections for 2025 are estimated assuming a linear cap decline and no significant changes to program allocation rules. Current program rules set a minimum auction price of $15.40 in 2020. The minimum price would be $19.70 in 2025 under the current escalation rate.
Annual allowance sales at auction (tons, all vintages*)
Annual average auction clearing price ($/ton)
Annual state revenue ($)
2016 actual values
2020 projection, BAU policy**
2020 projection, extended cap-and-trade policy***
2025 projection, extended cap-and-trade policy***
*The vintage is the first year in which the allowance is eligible for compliance. California currently auctions a small number of allowances three years in advance (“future vintages”), to promote price discovery and liquidity in the market.
**Assumes auctions are subscribed at same level as 2016, but no future vintages offered.
***Assumes current and future vintage auctions are fully subscribed
Source: CARB data and C2ES calculations.
These calculations are based on the observation that allowance demand (and prices) increase when businesses receive policy signals that buying allowances will be a good long-term investment. Experience in both Europe and the U.S. Northeast’s Regional Greenhouse Gas Initiative has borne this out. Each of those markets has had periods of low prices. When rulemakers responded by tightening the cap, allowance prices increased.
A key point from those experiences is that the market didn’t wait to respond after the agreed cuts took place – prices increased as soon as the legislation was passed. Legislators can boost state revenue for greenhouse gas reduction programs today by committing to the market through 2030.
Tighter cap = greater co-benefits
But what about concerns that the trading provision doesn’t allow disadvantaged communities to enjoy equal co-benefits, like fewer criteria air pollutants (SO2, NOx, PM 2.5), from the regulation?
It is worth noting that the cap-and-trade program is not the state’s sole policy measure aimed at reducing greenhouse gases. Figure 1 shows the reductions each measure in CARB’s preferred plan is expected to produce. The total reductions needed to meet the 2030 target are estimated at 680 million tons (Mt). CARB expects other policies will reduce at least 339 Mt and potentially 489 Mt (the figure shows the high value). The cap-and-trade program is expected to make up the difference, or 28-50 percent of the required reductions.
While a detailed analysis is required to estimate cap-and-trade compliance pathways, it is reasonable to assume that improved energy efficiency and substituting cleaner fuels would play a major role. These actions also reduce criteria air pollutants as a co-benefit. A potential 50 percent cut in these pollutants would make a big difference in the air quality near covered sources.
Figure 1. Projected emissions reductions from the policies included in the Scoping Plan analysis.
Solid black dashes show historic statewide emissions. The dotted line shows a trajectory to meet California’s 2020 and 2030 targets. The colored areas show the reductions from each policy measure, including the potential new refinery reduction measure. The blue dashed area shows the reductions that the cap-and-trade program would need to achieve to meet the 2030 goal.
Source: California Air Resources Board
While cap-and-trade is not a perfect policy tool, it provides emissions certainty while minimizing costs to society. Economic theory and experience show that extending (and lowering) the cap can cause near- and long-term market impacts. These include increased auction revenue and reduced criteria air pollutant emissions, and help address concerns about revenue and equity through the existing cap-and-trade program alone. Other policy options are available – such as modifying the trading rules or creating additional location-specific reduction targets. But legislators may have a simpler option that takes advantage of the flexibility of market mechanisms: Cut the cap, and let businesses respond.
(Ashley Lawson is a Senior Solutions Fellow at C2ES. Next on the Climate Compass blog: How carbon capture could play a greater role in the ARB Scoping Plan.)
Statement of Bob Perciasepe
President, Center for Climate and Energy Solutions
December 6, 2016
On Google's announcement that it will power its operations with 100 percent renewable energy:
We congratulate Google on achieving its goal of powering its global operations with 100 percent renewable energy.
Google’s achievement is further evidence of the continuing momentum of America’s clean-energy transition. Companies like Google are investing billions of dollars in clean energy and efficiency because it makes sound business sense. Hundreds of companies have not only made commitments like these, but reaffirmed their support for the Paris Agreement and U.S. policies that address climate change.
Businesses like Google are taking climate action because they understand the costs of inaction and see the economic benefits of a clean-energy economy. Google’s commitment to 100 percent renewable shows that leading companies are committed to making long-term investments that are good for the environment, their consumers and their bottom lines.
PREPARED REMARKS BY BOB PERCIASEPE
PRESIDENT, CENTER FOR CLIMATE AND ENERGY SOLUTIONS
CHALLENGES FOR THE NEW PRESIDENT
HARVARD UNIVERSITY CENTER FOR THE ENVIRONMENT
November 15, 2016
I want to thank Doctor (Daniel) Schrag and the Harvard University Center for the Environment for inviting me to speak. And my thanks to all of you for coming to listen. Dan and I have been talking for some time about my coming up from Washington to do a lecture. I’m not sure either one of us had quite this backdrop of current events in mind.
What a week. I know folks are still processing what happened seven nights ago and what happens next. The truth is: Elections have consequences. That’s why it’s so important to exercise our right to vote.
It’s too soon to tell exactly what steps the next administration will take on climate and energy policy. The rhetoric of campaigning doesn’t always exactly match the realities of governing. We hope President-elect Trump and his advisers take some time to study the issues and hear a broad range of perspectives.
They’ll find that a majority of Americans support stronger climate action.
They’ll find that many cities and states are promoting energy efficiency, deploying renewable energy, and supporting alternative fuel vehicles.
And they’ll find that business leaders recognize the rising costs of climate impacts, and also see opportunities in clean technologies. You could say they want to “win” in the growing global clean-energy economy.
This evening, I want to explore three questions:
- What are the climate and energy realities facing this president, and all of us?
- What might we expect from a Trump Administration?
- And what can we do to promote environmentally responsible policies in the years ahead?
To put my remarks in context, it helps to know a little bit about my organization C2ES – the Center for Climate and Energy Solutions. C2ES is a nonpartisan, nonprofit think tank. We work to forge practical solutions to climate change. Our mission is to advance strong policy and action to reduce greenhouse gas emissions, promote clean energy, and strengthen resilience to climate impacts.
We believe a sound climate strategy is essential to ensure a strong, sustainable economy. I want to underline that. It’s a conviction our think tank was founded on. And it’s a message I hope you’ll leave here with tonight: Environmental and economic progress go hand in hand.
I came to C2ES a little over two years ago because of its reputation:
- As a Trusted Source of impartial information. We rank regularly among the top environmental think tanks in the world.
- As a Bridge-Builder. We bring city, state, and national policymakers together with businesses to achieve common understanding.
- As a Policy Innovator. We explore market-based solutions and other practical policy approaches.
- And as Catalyst for Business Action. We work with Fortune 500 companies to strengthen business support for climate policy.
The idea of bringing disparate groups together is part of our DNA. Here are four quick examples:
At the international level, C2ES brought together negotiators from two dozen countries for a series of private discussions that helped lay the groundwork for the landmark Paris Agreement.
Our Solutions Forum is fostering collaboration to reduce emissions, mobilize climate finance, and strengthen resilience to climate impacts. That last one -- climate resilience -- is relatively new. With communities experiencing climate impacts here and now, it’s something we can’t afford to ignore.
We recently partnered with The U.S. Conference of Mayors to create the Alliance for a Sustainable Future, whose goal is to strengthen public-private cooperation.
And our multi-sectoral Business Environmental Leadership Council is the largest U.S.-based group of companies devoted solely to addressing climate change.
That’s who we are and where I’m coming from. Now, let’s look at the some of the realities facing the next administration.
Realities on the Ground
Depending on your point of view, this was either a “Change Election” or a “Fear of Change Election.” What I can tell you is that it wasn’t a “Climate Change Election” because nobody was talking about it.
Climate change didn’t come up once in any of the presidential debates. The only question about energy policy came from that guy in a red sweater, Ken Bone. Climate change was not top of mind in the voting booth. Asked before the election where climate change ranked among their concerns, voters put it No. 19 out of 23.
But when asked where they stand, the majority of Americans – of all political viewpoints -- support climate action. A majority of Democrats, Independents, and Republicans support funding renewables research, providing tax rebates for energy-efficient vehicles or solar panels, and regulating carbon dioxide as a pollutant.
Americans support climate action because they understand that climate change is occurring, and that human actions are largely responsible.
Here are a few more facts:
- 2014 was the hottest year globally ever recorded. Until 2015. 2016 has been even hotter.
- Climate change is a matter of science, but also a matter of dollars and cents. This year, the United States experienced a dozen billion-dollar disasters.
- Climate impacts like rising sea levels and more frequent and intense heatwaves, downpours, and droughts threaten the way we all live our lives.
Another reality is that our energy landscape has already changed. This isn’t your grandfather’s energy system. When I was born, the United States didn’t get any commercial power from natural gas or nuclear. Zero. Now those two sources together are responsible for more than half of our electricity.
Let’s talk a minute about those two. First, natural gas. Thirty years ago, before many of you were born, it was illegal to use natural gas in a power plant. Now it makes up more than a third of U.S. electricity supply. Coal makes up another third of our energy mix, down from about half 10 years ago. This change is due in large part to market forces. Natural gas is inexpensive, so utilities have switched to if from coal.
These same market forces are posing a challenge for nuclear energy. Nuclear is responsible for more than 60 percent of zero-carbon electricity in the United States – It’s the biggest source. A number of reactors have been closing prematurely, which could make it even harder to meet our climate goals.
Renewables have been surging as costs have plummeted. Wind and solar generation have grown nearly twelve-fold since 2005. That’s nearly eight times greater than expected.
Thanks to diversifying our energy mix, and improving energy efficiency, power sector emissions have fallen by more than 20 percent in the past 10 years. We’re moving in the right direction. The challenge will be to keep doing so.
What to expect
What can we expect from the new administration? I’ve been getting two questions for the past week: What will happen to the Clean Power Plan? And what will happen with the Paris Agreement? So let’s talk about those.
Every new president usually halts regulations that are in the process of being formulated, so we can expect that. For a final regulation, like the Clean Power Plan, a simple stroke of the pen can’t undo it. It’s a process. First, they’d have to do a rule-making, which requires public comment. Then, they'd need to come back with an alternative plan. That’s because under previous Supreme Court rulings, EPA is still under a legal obligation to reduce greenhouse gas emissions. It’s mandatory. They’ll be sued if they don't.
The Clean Power Plan is currently in the courts. So we could find ourselves replacing the current legal uncertainty with new and different legal uncertainty.
On a positive note, the Clean Power Plan prompted a lot of state environmental officials, public utility regulators and other stakeholders to sit down together for the first time to talk about electricity reliability, efficiency and affordability. We hope those conversations bear fruit.
There’s no doubt that the Clean Power Plan could reduce power plant emissions faster and further than no plan at all. But progress has already been made and I think there are ways it can continue.
Mr. Trump has also said he wants to “cancel” the Paris Agreement. The bottom line is that he could legally pull the U.S. out of it. Let’s think through, practically, how that would work out for us. Consider that virtually every country in the world has committed to taking climate action. The Paris Agreement is a bottom-up, flexible framework. It relies on peer pressure. If we want to hold other countries accountable, we have to hold up our end. If we walk away from our commitments, we also give up being a player in the innovative energy and transportation technologies that can create U.S. jobs. China, Brazil and the US led the world last year in employment in renewable energy.
The Paris Agreement has widespread support among the business community. Eleven major companies we work with, including Berkshire Hathaway Energy, Microsoft, National Grid, and Shell, signed onto a C2ES statement applauding governments for bringing the agreement into force so quickly this month. Businesses say the agreement provides long-term direction, promotes transparency, and addresses competitiveness.
Because the Paris Agreement is flexible, there are a lot of ways for an individual country to tailor its efforts. It was also designed to be durable – It can survive shifts in political currents. The nearly 100 other countries that have already ratified it are reducing emissions for a variety of reasons, including economic opportunities and health benefits to their people. I expect they will remain committed to moving forward.
As for what else we can expect – we’ll have to wait and see. From opening up public lands and offshore areas to more drilling to re-assessing pipelines to appointing agency leaders with very different priorities from the past eight years, we’re going to see changes.
What we can do
So that brings me to my final question tonight: What can we do to promote environmentally responsible policies in the years ahead? Let’s look at four vantage points – federal, state, local, and business.
First: The executive branch has been the focus of climate action for a number of years. That’s going to change. I want to posit that it may be time to return our focus on the legislative branch. Three areas where bipartisan support already exists are: building infrastructure, incentivizing carbon capture technologies, and preserving the nuclear fleet.
Both presidential candidates talked about the need to modernize our aging infrastructure. That’s not just roads and bridges. We need to modernize our electric grid to move renewable power from where it’s generated to where it’s needed. We need to improve the natural gas pipeline system to reduce leaks. And we need to expand electric vehicle charging. The electric grid should be able to accommodate clean energy technologies like energy storage, time-of-day pricing, and grid-to-vehicle interfaces.
Millions of miles of pipes carrying drinking water and wastewater are nearing end of life. And it takes a lot of energy to move a gallon of water. The nation’s utilities lose about $2.6 billion dollars annually from trillions of gallons of leaked drinking water.
Infrastructure projects can also help communities be more resilient to extreme weather, make communities more livable, increase property values, and save energy and water. And, of course, infrastructure projects create jobs.
The second area where we could make progress is carbon capture, use and storage, or CCUS. Some of you might be skeptical about this as “clean coal.” The truth is, there’s no scenario for achieving the emission cuts we need globally without carbon capture. We need to keep emissions out of the air not only from coal and natural-gas power plants around the world, but also the industrial sector like steel, chemical, and cement plants. The industrial sector is responsible for more than 20 percent of U.S. greenhouse gases.
Right now, there are bipartisan bills in the House and Senate that would spur carbon capture technology. Imagine Senate Majority Leader Mitch McConnell and Hillary Clinton’s running mate, Senator Tim Kaine, on the same bill. It’s true.
A third area where we might get some bipartisan agreement is preserving our nuclear fleet. There’s a bill right now that both Senators Whitehouse and Inhofe support. From a climate perspective, it doesn’t make sense to prematurely close nuclear plants when, in the short- and medium-term, they cannot realistically be replaced by zero-emission power sources. Keeping these reactors operational also buys us time to address energy storage and transmission challenges to support more renewable generation.
Let me add one more area as a possibility where we might see some agreement at the federal level: helping the communities most affected by the transition to clean energy. Remember that market forces – not regulations -- have mainly been driving the decline of coal. And natural gas will continue to displace coal in our power generation fleet at current prices. There are no plans for new coal-fired power plants in the United States. What coal communities need is opportunities for new jobs. The United States could be world leaders in manufacturing clean energy and transportation technologies. More Americans work now in the solar industry than work in either oil & gas extraction or coal mining. It will take a concerted effort involving education and training, but we have to help.
Moving to the states, which have always been the incubators of policy, we’ve seen a lot of progress on clean energy. Twenty-nine9 states require electric utilities to deliver a certain amount of electricity from renewable or alternative energy sources. Ten states that are home to a quarter of the US population already have a price on carbon and are successfully reducing emissions. Those states are California and the nine Northeast states, including Massachusetts, in the Regional Greenhouse Gas Initiative (RGGI). RGGI has added $243 million in value to Massachusetts’ economy. Massachusetts has also been named the most energy efficient state in the country for the last six years.
Every state has either an operational wind energy project, a wind-related manufacturing facility, or both. Some of the biggest wind energy producers are Texas and Iowa. They won’t want to reverse the economic prosperity they’ve seen as a result. America’s first offshore wind farm has just come online off Rhode Island, launching new industry with the potential to create jobs in manufacturing and the marine trades.
Time and again, we’ve seen leadership at the state level and I expect that will continue.
On environmental policies, so much often comes down to the local level. Many cities have already taken the ball and are running with it. They’re improving the energy efficiency of buildings, deploying cleaner energy, and encouraging cleaner transportation.
Cities see the real and rising risks of climate change. They’re dealing with the impacts now. They also see opportunities to for energy and transportation systems that are cleaner and more efficient than today. To keep their efforts moving forward, partnership and collaboration will be key, especially between cities and companies.
That’s why we at C2ES recently launched a partnership with The US Conference of Mayors called the Alliance for a Sustainable Future. The main goal is to spur public-private cooperation on climate action and sustainable development in cities. Santa Fe Mayor Javier Gonzales is leading the steering committee. Founding sponsors include JPMorgan & Chase Co., Duke Energy, and AECOM, and the mayors of Austin, Des Moines, New York City, and Salt Lake City.
Finally, business leadership has been and will continue to be crucial in transitioning to a clean energy and clean transportation future. A C2ES study found more than 90 percent of the companies in the S&P Global 100 Index see climate change as a business risk. They see rising sea level and more frequent and extreme heat waves, downpours and drought damaging and disrupting their facilities and operations, supply and distribution chains, and water and power supplies.
More than 150 companies -- from Alcoa to Xerox -- signed the White House American Business Act on Climate Pledge. They committed to cutting emissions, reducing water usage, and using more renewable energy. Business leaders see opportunities in clean energy and transportation.
Here’s another thing to think about, the power of the consumer. In the past year, three in 10 Americans say they’ve rewarded companies for taking steps to address climate change.
The reality is that we have strong momentum in the right direction. Our economy has begun decarbonizing. Power sector emissions are down, thanks largely to market forces and to incentives for renewable energy that have strong bipartisan support. Many cities, states and companies, along with a number of congressional Republicans, want to keep that momentum going. Smart investments and technological innovation have started America on a clean-energy transition. Building on that momentum will protect communities from rising climate damages and will contribute to strong and sustained economic growth.
The longer we wait to address climate change, the costlier it will be. I urge all of you to work at the local and state level to support common-sense policies that lead us toward a sustainable future.
|Business leaders at COP 22 in Marrakech, Morocco, explain how investments in clean energy and efficiency make good sense for everyone. L to R: Elliot Diringer, Executive Vice President, C2ES; Cathy Woollums, Senior Vice President, Environmental Services and Chief Environmental Counsel, Berkshire Hathaway Energy; Nanette Lockwood, Global Director, Policy and Advocacy, Ingersoll Rand; Kevin Rabinovitch, Global Sustainability Director, Mars Incorporated; Tamara “TJ” DiCaprio, Senior Director of Environmental Sustainability, Microsoft.|
Businesses have invested billions in clean energy and efficiency because it makes business sense.
At a side event at the U.N. climate talks in Marrakech, Morocco, leaders of major companies reiterated the benefits of those investments – for their companies, customers, the environment and the economy -- and said they will keep moving toward sustainability.
“We see a clear business case for this,” said Kevin Rabinovitch, Global Sustainability Director at Mars Inc. The global food and candy company has committed to eliminate all greenhouse gas emissions from its operations by 2040. Working toward energy efficiency helps the company cut costs, he said, but also motivates employees who are working toward a higher purpose.
“These targets, these programs, these goals need to transcend individual leaders, be they in government or in corporations,” Rabinovitch said. “We’re solving long-term problems. We need to put structures and systems in place that are consistent and durable.”
“You’re now looking at decades of investment. Businesses are not going to walk away from this,” said Nanette Lockwood, Global Director, Policy and Advocacy at Ingersoll Rand. The maker of air conditioners and refrigeration systems has committed to invest $500 million by 2020 to develop alternative refrigerants to HFCs and to reduce emissions by 50 million metric tons by 2030. “Once we set a direction and we create value and markets, we continue down that path.”
The C2ES event, co-sponsored with the Edison Electric Institute, featured senior representatives from Berkshire Hathaway Energy, Ingersoll Rand, Mars and Microsoft. They are among the more than 150 U.S. firms that have committed to specific climate actions as part of the American Business Act on Climate Pledge.
“Microsoft is committed to its sustainability goals, to its clean energy goals. Our investments in innovation in this area are good not only for the environment, but also for our business and for the economy,” said Tamara “TJ” DiCaprio, Senior Director of Environmental Sustainability at Microsoft, whose operations have been carbon neutral since 2012. Microsoft uses an internal carbon fee to fund energy efficiency, renewable energy, and sustainable communities.
As the largest regulated owner of renewable energy generation in the U.S., Berkshire Hathaway Energy has invested more than $15 billion in renewable projects, and has pledged to invest up to another $15 billion going forward.
“We can bring renewable solutions to our customers at very low cost and sometimes no additional cost,” said Cathy Woollums, Senior Vice President for Environmental Services and Chief Environmental Counsel. “It’s a win for the environment; it’s a win for our customers; and it’s a win for us.”
In a C2ES statement released in October when the Paris Agreement reached the threshold for entry into force, 11 leading companies said they are “committed to working on our own and in partnership with governments to mobilize the technology, investment and innovation needed to transition to a sustainable low-carbon economy.” The statement notes that the Paris Agreement facilitates stronger private sector action by providing long-term direction, promoting transparency, addressing competitiveness, and facilitating carbon pricing.
Speakers at the event agreed on the importance of consistency, transparency and partnerships moving forward. The Paris Agreement, with nearly all of the world’s nations committing to move in the same direction, is sending signals that the business and investment community are internalizing in their long-term investing and decision-making. And working together with cities and states, and other companies, helps them share best practices and go further, faster to reach their goals.
A lot of the progress that has been made, especially in the United States, in reducing emissions has been driven by market and technology forces, and those forces will continue even in the absence of federal action on climate change.
Asked what will change under the new U.S. administration, Woollums said, “We need to give the new administration a chance to develop rational policies. The President-elect understands business. To the extent that the things that we’ve been doing make business sense, we will continue to do those things.”
More companies worldwide are turning to internal carbon pricing as an effective tool to spur the transition to low-carbon technologies, and C2ES is helping organizations to explore this frontier through a new working group to share best practices.
By putting a price on the carbon pollution associated with business activity, companies can account for their operations’ climate impact and incentivize actions to achieve their emissions reduction goals. Pricing carbon also responds to stakeholder and investor calls for climate action and prepares businesses for future carbon pricing regulation.
According to CDP, more than 1,200 companies either currently price their carbon emissions, or plan to within the next two years. Meanwhile, more than 120 companies have joined the World Bank Carbon Pricing Leadership Coalition that brings together government, the private sector, and civil society to support effective carbon pricing systems and policies.
This movement isn’t restricted to developed economies. This month, Mahindra & Mahindra became the first Indian company to implement an internal carbon fee (US $10 per ton) to help achieve its goal of reducing greenhouse gas emissions 25 percent over the next three years.
There are a range of ways to implement an internal carbon pricing strategy. The most direct is an internal carbon fee, such as the one Microsoft uses in its pioneering program.
Microsoft, which pledged in 2012 to go carbon neutral, implemented an internal carbon price in 2013 to help reach its goal. Microsoft charges the fee on the company’s scope 1 (direct) and scope 2 (purchased electricity) emissions, including its global data centers, as well as a part of its scope 3 emissions (business air travel).
The fee has helped the company reduce its carbon dioxide equivalent (CO2e) emissions by 7.5 million tons, achieve $10 million in annual energy savings, and invest in 10 billion kilowatt hours of renewable energy as well as support carbon offset projects around the world.
TJ DiCaprio, Microsoft’s senior director of environmental sustainability, said the benefits of the internal carbon fee include:
- It’s easier to target action. By quantifying the carbon emissions of different parts of the organization, it became clear where reductions were possible to meet the company’s carbon neutrality pledge.
- It provides incentive to act. The fee for emissions is charged to each department’s budget. This motivates decision-makers to take meaningful action toward emissions reductions, find low-carbon alternatives, and invest in carbon-saving projects. Even simple steps, such as reducing airline travel, made a real difference in the final accounting.
- It creates a dedicated funding source for action. The fees charged to departments are placed in a centralized fund that Microsoft uses for a variety of projects, from purchasing carbon offsets to investing in programs supporting e-waste recycling.
Among the key lessons for other companies from Microsoft’s experience:
- Set clear objectives you would like your carbon pricing model to meet.
- Align your carbon pricing model to support those objectives.
- Anchor the carbon price across all business units to drive accountability, employee engagement, and a cultural and behavioral change.
While an internal carbon fee prices carbon pollution directly, companies are also using indirect strategies, such as shadow pricing and implicit pricing.
Shadow pricing—a more common approach—is used by companies including BHP Billiton, Duke Energy, EMC, Google, NRG and Shell, as a risk assessment tool. It is the hypothetical or assumed cost of carbon emissions used to evaluate large investment decisions and profitability of projects in light of government regulation and/or the impacts of climate change. Compared to the more direct approach that companies such as Microsoft are taking, however, shadow pricing is not actually reflected in a company or division’s profit and loss statement, thus it may not have the same incentivizing effect.
Implicit pricing, another form that is used by companies including Unilever and Novo Nordisk, is simply a price calculated based on how much a company spends to reduce its greenhouse gas emissions, including the cost of complying with regulations. Here, the price reflects actions taken, rather than being a charge that drives change. Recognizing how much a company spends to meet its internal greenhouse gas targets and/or regulatory requirements can encourage greater action. Some companies, for example, employ an implicit pricing strategy as the first step before establishing a direct carbon fee.
Internal carbon pricing is a relatively new tool that can play a critical role in helping companies achieve aggressive greenhouse gas reductions. Through our Business Environmental Leadership Council, C2ES is engaging companies on internal carbon pricing strategies. Please contact us if your company would like to learn more about internal carbon pricing as a business strategy.
For more information on the C2ES Working Group on Internal Carbon Pricing, contact C2ES Policy and Business Fellow Manjyot Bhan.
(Contributing: Ryan McCoy)
The Growing Urgency of Climate Change:
How Cities and Businesses Build a Sustainable Future
Wednesday, September 21, 2016
1:30 PM - 3:00 PM
295 Lafayette Street, Second Floor
New York, NY 10012-9604
As nations move forward with the landmark Paris Agreement, cities and business are playing a vital and growing role in building a more sustainable, low-carbon future.
In a new partnership, The U.S. Conference of Mayors and C2ES have jointly launched the Alliance for a Sustainable Future to strengthen cooperation between cities and businesses committed to meeting our climate and clean energy challenges.
Please join Alliance leaders as we examine ways cities and the business community can work together to reduce carbon emissions and meet state and national climate and energy goals.
CEO and Executive Director, The U.S. Conference of Mayors
Daniel A. Zarrilli, PE
Senior Director, Climate Policy and Programs, Chief Resilience Officer
New York City Office of the Mayor
Mayor Stephanie Rawlings-Blake
Mayor Javier Gonzales
Santa Fe, New Mexico
Mayor Chris Bollwage
Elizabeth, New Jersey
Global Director of Resilience, AECOM
Insights from a Comparative Analysis
By Charles Fiertz and Ashley Lawson
An updated context, including falling natural gas prices and the extension of federal tax credits, have prompted new modeling of the likely impacts of the Clean Power Plan. Five studies have recently been released analyzing the projected effects of the Clean Power Plan on outcomes including carbon dioxide emissions, the electricity generation mix, and electricity prices. These studies have also examined the probable impacts of different policy choices available to states in implementing the Clean Power Plan. This brief undertakes a comparative analysis of these studies, identifying results that are common across multiple studies and summarizing a few additional analyses of specific policy decisions.
In the year since the Clean Power Plan was finalized, natural gas prices have dropped and federal tax incentives for renewables have been extended. Both developments make it cheaper to generate lower- emitting electricity.
C2ES compared five economic modeling studies released this spring and summer to get an updated look at the Clean Power Plan’s expected impact on carbon emissions, the U.S. power mix, and electricity prices. Each study included several scenarios and made slightly different assumptions, so we focused on observations found in multiple studies. Three key findings were:
1. The Clean Power Plan reduces total power sector emissions compared to business-as-usual scenarios in every study.
Market forces alone, such as lower costs for renewables and natural gas-fired generation, do not achieve the same reductions, even with federal tax credit extensions for wind and solar. On average, the scenarios project total emissions in 2030 will be 18 percent lower with the Clean Power Plan than what they’d be in a business-as-usual scenario.
2. Renewable energy increases and coal decreases compared to business-as-usual generation levels across all five studies.
In each study, power sector emissions decline under the Clean Power Plan because of changes in the electricity generation mix. The models are clear that the Clean Power Plan will cause an increase in renewables and a decrease in coal. The models are less clear on the impact the rule will have on natural gas and nuclear generation, though they suggest that these technologies will benefit from Clean Power Plan implementation. In all studies, the diversity of power generation is maintained.
3. The Clean Power Plan will have minimal impact on U.S. national average retail electricity rates.
Two of the five studies examined the plan’s likely impact on rates. In most scenarios, rate changes range from a 2 percent decrease to a 5 percent increase, depending on how the Clean Power Plan is implemented in each state. A 5 percent increase translates to $4.65 per month, or about 15 cents a day, for the average household.
|The chart shows the projected CO2 emissions in 2030 from the studies we examined for three scenarios: business as usual (BAU), mass-based Clean Power Plan implementation, and rate-based Clean Power Plan implementation. One studied modeled a mixed, or “patchwork” implementation scenario. The five studies are: MJ Bradley & Associates (MJB), U.S. Energy Information Administration (EIA), Bipartisan Policy Center (BPC), Center for Strategic and International Studies partnering with Rhodium Group (CSIS/Rhg), and the Nicholas Institute for Environmental Policy Solutions, Duke University.|
Another key finding is that cumulative carbon dioxide emissions are very similar under rate-based and mass-based compliance plans (See Figure 1). In other words, the choice of implementation approach doesn’t seem to affect the overall reductions — at least, not when every state makes the same choice.
The Clean Power Plan gives each state an emissions target and leaves it up to the state to determine the best path forward. This gives states maximum choice, even though it could lead to fewer reductions than a comprehensive national approach.
Many states are weighing whether to use a mass-based approach, similar to what California and the nine Northeast states in the Regional Greenhouse Gas Initiative use that limits the total amount of carbon emissions, or a rate-based approach that limits emissions per unit of electricity produced.
What’s clear from the models is that if states choose to go different directions, a patchwork of mass- and rate-based implementation, emissions are likely higher than if they all choose a similar path.
From these studies, we can be confident the Clean Power Plan will reduce power sector emissions compared with business as usual. Now it’s up to states to choose how they will implement the plan to best serve the needs of consumers and reduce the emissions that are causing damaging and costly climate impacts to our communities.
Governments, businesses and universities are focusing increasing resources and attention on what is now our nation’s largest generation, millennials.
Generally defined as those born between 1982 and 2000, millennials now represent the largest share of the American workforce. They’re more educated than prior generations. They’re more culturally diverse. And they’re more socially conscious.
How will this millennial generation shape our climate and energy future? Consider just two observations about how millennials want to live and get around -- housing and transportation.
A study found more than 6 in 10 millennials prefer to live in mixed-use communities. They’re more interested in living where amenities and work are geographically close. More than a third of young people are choosing to live as close as 3 miles from city centers.
As for transportation, millennials drive less than other generations. They’re opting for walking, biking, car-sharing or public transit. From 2001 to 2009, vehicle-miles traveled dropped 23 percent for 16- to 34-year-olds.
These preferences point to a future that is low-carbon and more sustainable. Dense urban living and mixed modal transportation options can result in reduced greenhouse gas emissions. A 2014 report from the New Climate Economy notes that “more compact, more connected city forms allow significantly greater energy efficiency and lower emissions per unit of economic activity.”
Millennial demands are influencing other sustainability topics, too. A Rock the Vote poll earlier this year found 80 percent of millennials want the United States to transition to mostly clean or renewable energy by 2030. An earlier poll from the Clinton Global Initiative found millennials care more than their parents’ generation about the environment and would spend extra on products from companies that focus on sustainability.
These facts indicate that this generation of 75.4 million people (in just the United States) wants to live differently than previous generations. Energy policies and technology habits will need to change to keep pace.
Government is paying attention, with President Barack Obama calling on millennials to tackle the challenge of climate change. Businesses, like energy providers, are working to deliver service in a seamless and more socially connected way. And universities are offering more sustainability-focused programs than ever before. The Association for the Advancement of Sustainability in Higher Education (AASHE)’s program list is growing, and university presidents are being asked by students to join the Climate Commitment to reduce emissions and improve resilience to climate impacts.
While millennials wield huge influence, the real power of change will come from all generations working together to develop innovative solutions and implement pragmatic policies to shape a low-carbon future and environmentally stable and economically prosperous planet for all who will inherit it.
Webinar: Financing Climate Resilience – What Are Our Options?
Extreme weather events and disasters are already damaging assets, disrupting supply chains, reducing productivity and revenues, and destroying livelihoods. Projected climate impacts will also likely hit the creditworthiness of companies, posing risks to financial institutions and may affect companies' credit ratings. The need to update infrastructure provides an opportunity to build in climate resilience.
This webinar explores options for financing resilience and features an interactive discussion with experts in the field about opportunities and potential challenges.
July 21, 2016
Noon – 1:30 p.m. ET
Managing Director for HUD Programs (Office of Recovery), New Jersey Energy Resilience Bank
Founder & CEO, re:focus partners
Science Fellow and Resilience Project Coordinator, Center for Climate and Energy Solutions
Fatima Maria Ahmad
Solutions Fellow, Center for Climate and Energy Solutions
Shalini Vajjhala is founder & CEO of re:focus partners, a design firm dedicated to developing integrated resilient infrastructure solutions and innovative public-private partnerships, including the RE.invest Initiative and the RE.bound Program. Prior to starting re:focus, Ms. Vajjhala served as Special Representative in the Office of Administrator Lisa Jackson at the U.S. EPA, where she led the U.S.-Brazil Joint Initiative on Urban Sustainability, EPA Deputy Assistant Administrator in the Office of International & Tribal Affairs, and Deputy Associate Director for Energy & Climate at the White House Council on Environmental Quality. She joined the Obama administration from Resources for the Future, where she was awarded a patent for her work on the Adaptation Atlas. Ms. Vajjhala received her Ph.D. in engineering & public policy and Bachelor of Architecture from Carnegie Mellon University.
Katy Maher is a Science Fellow and Resilience Project Coordinator at the Center for Climate and Energy Solutions (C2ES). She contributes to C2ES’s efforts to assess and communicate the current state of knowledge regarding climate change and its impacts, and to promote actions that strengthen climate resilience. Ms. Maher has more than eight years of experience supporting climate change impacts and adaptation projects. Prior to joining C2ES, she worked for ICF International assisting a range of clients – including the U.S. Environmental Protection Agency, Federal Highway Administration, U.S. Agency for International Development, and state and local governments – in assessing climate change risks and developing adaptation solutions. Ms. Maher also served as Chapter Science Assistant for the Social, Economic and Ethical Concepts and Methods chapter of Working Group III’s contribution to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.
Fatima Maria Ahmad is a Solutions Fellow at the Center for Climate and Energy Solutions (C2ES) where she co-leads the National Enhanced Oil Recovery Initiative with the Great Plains Institute. Ms. Ahmad focuses on financing opportunities and policy support for emerging energy technologies, including carbon capture, use, and storage (CCUS). In a volunteer capacity, Ms. Ahmad is the Co-Chair of the American Bar Association Section of International Law International Environmental Law Committee and is the Women’s Council on Energy & the Environment Vice-Chair for Membership.
Bruce Ciallella is currently the Managing Director for HUD Programs (Office of Recovery). In this role, he oversees the Hurricane Sandy recovery effort for the New Jersey Economic Development Authority (EDA). His role includes managing the Stronger NJ Business Grant Program, the Stronger NJ Business Loan Program, the Neighborhood Community Revitalization Program, and the Energy Resilience Bank. Prior to joining the EDA, Mr. Ciallella served as Deputy Attorney General for the state of New Jersey representing the EDA and New Jersey Housing and Mortgage Finance Agency in various legal matters, including but not limited to the creation of various Hurricane Sandy programs. Furthermore, before joining the state, Mr. Ciallella was a market maker on the floor of the NASDAQ OMX PHLX trading in the oil service, homebuilder, and gold and silver sectors.