Economics

Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. Read More
 

Congressional Testimony of Eileen Claussen - Reducing U.S. greenhouse Gas Emissions Cost-Effectively

HON. EILEEN CLAUSSEN, PRESIDENT
PEW CENTER ON GLOBAL CLIMATE CHANGE

Submitted to the United States Senate,
The Environment and Public Works Committee

November 15, 2007

On
Reducing U.S. greenhouse Gas Emissions Cost-Effectively

Chairman Boxer, Ranking Member Inhofe, and members of the committee, thank you for the opportunity to testify on the most cost-effective means of reducing U.S. greenhouse gas emissions. My name is Eileen Claussen, and I am the President of the Pew Center on Global Climate Change.

The Pew Center on Global Climate Change is a non-profit, non-partisan and independent organization dedicated to providing credible information, straight answers and innovative solutions in the effort to address global climate change. Forty-five major companies in the Pew Center’s Business Environmental Leadership Council (BELC), most included in the Fortune 500, work with the Center in these efforts.1

The Pew Center strongly supports reporting the America’s Climate Security Act of 2007 from the committee on the schedule that you have announced, and looks forward to working with you and the rest of the Congress as the bill goes through the process. I would like to discuss several reasons for recommending that you move forward with this bill.

Cap-and-trade is the most cost-effective way of reducing greenhouse gas emissions

Senators, the bad news is that climate change poses real risks to our nation’s security, economy and environment, and that these risks will grow dramatically if we do not begin to reduce our greenhouse gas emissions now.2 The good news is that the market-based mechanisms found in the America’s Climate Security Act of 2007 will allow us to address this problem cost effectively and in a way that enhances U.S. competitiveness.

Unlike most emissions this committee deals with, greenhouse gas emissions are essentially fungible. Greenhouse gases mix quickly throughout the atmosphere, which means that wherever you can reduce a ton of greenhouse gas emissions – whether from a car, a factory, or a power plant; whether in Los Angeles, London, or Lagos – the benefit to the climate is the same.

In most of our other environmental laws, Congress directs EPA to dictate how much of a given pollutant a facility can emit or which pollution control technology to use. We do not have to take that approach with greenhouse gas emissions. Instead, by using a cap-and-trade program, Congress can set the overall greenhouse gas reduction goals and let the emitters decide for themselves how to achieve the environmental goals of the program at least cost. When we used a market-driven approach in the acid rain program, it provided the best environmental result at the lowest overall cost to our economy.3 This does not mean that achieving our climate security goals will be cost-free, just that the cost can be kept as low as possible – and far less than the cost of not acting.

An economy-wide program will be more cost-effective than sector-by-sector programs

The Pew Center supports the proposal to apply the cap-and-trade program to all large sources of greenhouse gas emissions simultaneously. Congress has seen several proposals to cap and trade emissions from power plants only. Similarly, Congress has seen several proposals that address the transportation sector only, for example, by reducing the carbon footprint of transportation fuels. Certainly, such a sector-by-sector approach can work, but it will be more expensive and slower than an economy-wide approach.4

The most cost-effective approach is to bring power plants, factories and transportation together in one market, where all can benefit from the efficiencies and technological breakthroughs available in any sector at a given time. With an economy-wide program, we do not have to await the deployment of a single solution – such as carbon capture and sequestration, for example – to begin cost-effective reductions. The Pew Center’s research with leading companies demonstrates that there are numerous cost-effective and even cost-saving reductions available now from off-the-shelf technologies and fuels.5 This is especially true in reducing non-CO2 emissions from industrial processes, increasing industrial and building energy efficiency, increasing the use of low-carbon fuels, and improving vehicle efficiency.6 In the medium and longer term, steeper reductions will be made possible through deployment of more advanced technologies, such as highly efficient vehicles, improved nuclear power plants, renewable energy combined with enhanced electricity storage capacity, and carbon capture and storage (CCS). An economy wide trading program will draw these technologies into the marketplace when they are ready, reducing the burden on any one sector, reducing the cost to the economy as a whole, and providing the broadest incentive possible for early emission reductions and technology innovation.

The America’s Climate Security Act uses other important measures to lower the cost of greenhouse gas reductions as well. The bill allows companies to offset some of their emissions with reductions from sources not covered by the program. Allowing the use of offsets motivates emission reductions throughout the economy from sources too small or dispersed to be specifically targeted by the program. Companies would also be allowed to use credits from the markets of other countries, thus making use of the global fungibility of greenhouse gases and expanding the scope of the program. Again, the larger the program, the lower the cost. We see opportunities to increase the use of these measures even beyond what is already in the bill.

A greenhouse gas cap-and-trade program will enhance U.S. competitiveness

The America’s Climate Security Act will enhance U.S. competitiveness. Given what the peer-reviewed science tells us about climate change, we must move quickly from our current economy to one in which our greenhouse gas footprint shrinks even as our standard of living increases. That will require a profound worldwide technological revolution. The United States can and should be leading that revolution, and positioning itself to reap the economic benefits associated with decreased dependence on foreign oil and increased export potential of low carbon technology. We currently are not leading, however, and federal R&D subsidies alone will not change that. An appropriate price on greenhouse gas emissions, in combination with “technology push” policies, will.

Some have asserted a false dichotomy between the need for mandatory climate policy on the one hand and support for climate-friendly technology on the other. In fact, a well-designed mandatory climate policy that leverages the power of the market is essential for driving deployment of climate-friendly technology. When combined with subsidies for specific technologies, it is the most cost-effective method of driving deployment. Government would have to spend roughly ten times the amount in incentives alone in order to achieve the same environmental result as a price signal coupled with incentives.7 The America’s Climate Security Act wisely combines mandatory greenhouse gas constraints and technology subsidies.

I would like to mention three other important issues before I conclude: how to deal with transportation, the use of allowance allocation as a tool, and the need for cost certainty and reliability.

Reducing emissions from the transportation sector

Transportation emissions account for roughly one-quarter of total U.S. emissions and are growing rapidly. Reversing that trend is essential, and can only be done by (1) increasing vehicle efficiency, (2) reducing vehicle miles traveled (VMT), and (3) reducing the carbon footprint of transportation fuels. The America’s Climate Security Act would include transportation fuels in the cap-and-trade program, providing a price signal that would promote all three – especially if complemented by the other measures currently being proposed by the White House and Congress to increase vehicle efficiency and promote low carbon fuels, and with VMT-reduction measures, such as those in the Transportation Equity Act.8

Using the allocation process to aid transition

While the use of a well-designed cap-and-trade program ensures the lowest overall cost, many important sectors of the economy will face real transition costs that can and should be dealt with through the allowance allocation process. Allocation, contrary to the impression some stakeholders may be creating, has no effect on the greenhouse gas reductions mandated by the cap. Given this, we should use the allocation process, in the early years of the program, to address the legitimate transition costs some sectors will face as we move to a low-greenhouse gas economy.

Take coal-based electricity, for example. Coal is cheap and plentiful, and the United States is going to use it for the foreseeable future. Even if we did not, China and India would, so rapid development and deployment of climate-friendly technologies is essential. The best hope, at the moment, lies with carbon capture and sequestration, which most experts believe will take at least a decade to deploy throughout the power sector. While we need not wait until then to begin cost-effective reductions, it would be appropriate to allocate initially a significant amount of allowances to this sector to help with transition.9 The bill does this and also appropriately uses bonus allowances and a clean coal technology program funded out of auction proceeds to accelerate CCS deployment and speed and smooth the transition. There is is a similar need for transition assistance in other sectors of the economy, most particularly energy-intensive industries that face significant foreign competition. As the need for transition assistance diminishes, the allocation of free allowances should phase out, which the bill does as well.

In addition, the bill includes provisions to mitigate any effect the program may have in increasing energy prices, especially for low- and middle-income Americans. A significant percentage of the proceeds from the auction have been dedicated to help these consumers and to help states assist their residents.10

Addressing price volatility and cost containment

Some stakeholders fear that, in the early years of the program, the market price of an allowance might be volatile and might swing too high too rapidly. Similarly, concerns have been raised about market liquidity, hoarding of allowances, and manipulations of the market.

In addition to the cap-and-trade itself, which provides for flexibility in meeting the environmental target, this legislation includes powerful cost containment mechanisms, including banking and borrowing. Allowing firms the ability to bank excess allowances or credits for future use helps firms manage the normal swings of the market. Allowing firms access to offset credits further lessens the danger of supply shortages, which in part create this price volatility. The bill also draws from the excellent work of Senators Warner, Landrieu, Graham and Lincoln and the Nicholas Institute at Duke University in establishing a Carbon Market Efficiency Board, which can gauge market activity and step in should unexpected problems arise. We look forward to working with the authors of this bill, Chairman Boxer, and others as the bill moves forward to refine measures to provide additional assurances of a smoothly functioning market, so long as they do not undermine the integrity of the greenhouse gas emissions cap.

Conclusion

In conclusion, the America’s Climate Security Act of 2007 is an excellent foundation for an environmentally effective, cost-effective greenhouse gas reduction program. Continuing to move it through the legislative process will engage important stakeholders whose contributions will improve the bill. We applaud the committee’s work to date, and urge the committee to report the bill.
 

 


[1] For more on the Pew Center, see www.c2es.org.

[2] For more on the science of climate change and the threat to our environment and economy, see the Pew Center’s extensive body of reports available at www.c2es.org/global-warming-in-depth and the most recent findings of the Intergovernmental Panel on Climate Change at http://www.ipcc.ch/

[3] For more on our experience with emissions trading programs and on the design of a greenhouse gas reduction program, see Ellerman, Denny A., Emissions Trading in the U.S.: Experience, Lessons, and Considerations for Greenhouse Gases, Pew Center on Global Climate Change, May 2003, and Nordhaus, R., Designing a Greenhouse Gas Reduction Program for the U.S., Pew Center on Global Climate Change, May 2003.

[4] The benefits of a wider trading program have been repeatedly demonstrated in all of the credible economic models - including the large number which participate in Stanford’s Energy Modeling Forum. See http://www.stanford.edu/group/EMF/

[5] For more on the Pew Center’s work with companies on strategies to address climate changes, see http://www.c2es.org/companies_leading_the_way_belc

[6] For example, 37 of the 45 companies in the Pew Center’s Business Environmental Leadership Council have set voluntary targets, 22 have achieved those targets, and all have done so from a combination of efficiency improvements and process changes. DuPont, for example, has reduced its emissions 65% through a combination of energy efficiency and process change and has saved over $2 billion. See also the proceedings from a workshop co-sponsored by the Pew Center on Global Climate Change and the National Commission on Energy Policy, The 10-50 Solution: Technologies and Policies for a Low-Carbon Future, found at http://www.c2es.org/global-warming-in-depth/workshops_and_conferences/tenfifty/proceedings.cfm and Reilly, John M., Multi-gas Contributors to Global Climate Change: Climate Impacts and Mitigation Costs of Non-CO2 Gases, Pew Center on Global Climate Change, February 2003.

[7] For more on the benefits of combining R&D and a carbon constraint, see Goulder, L., Induced Technological Change and Climate Policy, Pew Center on Global Climate Change, October 2004.

[8] For more on policies to reduce emissions in the transportation sector, see Green, David L., Reducing Greenhouse Gas Emissions from U.S. Transportation, Pew Center on Global Climate Change, May 2003.

[9] For more on the policy and technology options to deal with GHG emissions from coal see the Pew Center’s new Coal Initiative series found at http://www.c2es.org/white_papers/coal_initiative

[10] For more on on community adjustment and worker transition to climate change policy, see Greenwald, Judith M.; Roberts, Brandon; Reamer, Andrew D.; Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001, and Barrett, Jim, Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001.

White House Major Economies Meeting

REMARKS DELIVERED BY EILEEN CLAUSSEN, PRESIDENT, Pew Center on Global Climate Change 

whITE HOUSE Major Economies Meeting
WASHINGTON, d.C. 
 

September 27, 2007  

  • There are a number of reasons why it is critical that our strategies to address energy and climate change take full account of the land use sector.  
    • First, from an environmental perspective, agriculture, deforestation and other land use activities account for nearly a third of greenhouse gas emissions globally.  For some countries, they are by far the largest source of emissions.  Indeed, some countries [Indonesia, Malaysia] rank among the world’s largest emitters only by virtue of their emissions from deforestation.  For those countries, and globally, a comprehensive approach to climate change must reduce emissions from this sector.
       
    • Second, from an economic perspective, some of the lowest-cost opportunities for emission reduction are to be found in this sector.  A number of analyses, including the Stern Review and work done by McKinsey and Company, show significant mitigation potential in the forestry sector for well under $20 per ton of CO2.  The Stern Review concluded that in some regions emissions from deforestation could be reduced for less than $5 a ton.   
       
    • Third, from a development perspective, addressing emissions from this sector can deliver some very significant co-benefits.  Protecting forests protects biodiversity and soils and creates new opportunities to reduce poverty.  Healthy ecosystems support healthy economies.  Putting a value of the climate benefits provided by forests is one of the keys to sustainable development.  
  • So for all of these reasons, this is a sector we can not afford to ignore.     
     
  •  That said, there are number of caveats and complications. 
    •  First, land use is an area where it’s been notoriously difficult to measure emissions and monitor trends.  We’ve made significant headway, with new methodologies technologies, in particular remote sensing by satellite.  But greater progress is needed.  We need enough precision so that we are confident that a ton is a ton.  
       
    • Second, there is no resource more fundamental than land, and we must be mindful of the many competing demands on it.  This is especially true in the case of biofuels, which potentially are a very important part of the answer to climate change and energy security.  But the move toward biofuels will be beneficial only if we ensure that these truly are low-carbon fuels, calculated on a life-cycle basis.  Our land use and biofuels policies need to be closely coordinated to make sure that we are not simply substituting one form of emissions for another. So, what can be done internationally to fit land use into our climate change strategies? 
       
  • I would first emphasize how encouraging it is that this question is being put on the table by those countries that have the most to contribute.  A coalition led by Papau New Guinea and Costa Rica, and separately Brazil, are calling for new measures under the Framework Convention on Climate Change to reduce tropical deforestation.  At the moment, this appears to be among the most promising avenues for deeper developing country engagement in the global climate effort.
     
  • Let me offer a few observations on how forestry and land use can be addressed in a post-2012 climate framework.  
    • First, there appears to be a growing consensus among the experts and policymakers that we should approach this not project by project, but sector-wide.  In other words, a country’s progress is best ascertained by measuring emissions and changes in those emissions across its entire forestry or land use sector.   
       
    • Second, the overriding message from the tropical forest countries is that incentives are needed if they are to undertake stronger efforts.  There are differences among them on just what form these incentives should take.  Realistically, I think we are far more likely to see significant flows under a market-based approach than through an international fund supported by donor countries.  Either way, it is perfectly reasonable for these countries to ask for incentives.  By the same token, though, I think it’s reasonable for those countries providing the incentives to ask in exchange that the countries receiving them be prepared to deliver action on the basis of commitments, not just voluntary pledges. 
       
    • And this leads to my third, and final, point: I do not believe we will be able to mobilize the efforts needed globally in this sector or in any other without a comprehensive set of binding international commitments.  An aspirational long-term goal is not enough.  To sustain ambitious efforts nationally, and to generate the strong incentives tropical forest countries are asking for, countries must have confidence that their counterparts are contributing their fair share to the global effort.  That’s best done through fair, credible, and verifiable commitments.  We should be open to different types of commitments – for some countries, a commitment to reduce deforestation might be the best approach.  But we are fooling ourselves if we think that we can do what’s needed without binding international commitments.  I look forward to our discussion.  Thank you. 

7th IETA Forum on the State of the Greenhouse Gas Market

REMARKS BY EILEEN CLAUSSEN, PRESIDENT, PEW CENTER ON GLOBAL CLIMATE CHANGE 

7th IETA FORUM ON THE STATE OF THE GREENHOUSE GAS MARKET
WASHINGTON, DC 

September 27, 2007  

Thank you very much.  I am honored to be a part of IETA’s very impressive program.  I was looking over the schedule for your three days here in Washington, and it’s really quite remarkable.  The program here, and the success of this event, is just one more tribute to Andrei’s leadership of this great organization—he has steered IETA to a leadership role on the climate issue, and I wish him all the best in his new position.   

Not only is the program very substantive and strong, but IETA seems to have a superior sense of timing, too.  This forum is taking place at a truly amazing moment— a blizzard of climate activity and meetings, a flood of proposals for domestic and international action, the melting away of industry resistance. Scientists say to expect more extreme weather as a result of climate change, and it appears it’s already here.   

And even though the China Olympics don’t start until next summer, we already have an Olympics competition going on as countries lay out their climate plans.    

  • Most countries, it appears, plan to compete in the biathlon – growing their economies while limiting emissions growth.
     
  • Then there is the synchronized swimming event, where the countries of the EU will try to align their climate activities without the whole thing turning into a freestyle contest. 
     
  • And the United States, under the current Administration, is favored in the stationary target-shooting event.  This, of course, is an event where you don’t really have to move from where you are now, but you make an awful lot of noise.  And, of course, participation is entirely voluntary.  We’ve actually become quite good at this here in America.   

Seriously, this is a remarkable moment.  Consider all of the other climate change-related events going on.  Of course, we had the Secretary General’s sessions at the United Nations in New York at the start of the week, and right now, also here in Washington, there is President Bush’s meeting of major economies.  In addition to these, there are all kinds of conferences and meetings: the Pew Center did two, the U.N. Foundation is doing one; the Brookings Institution did one.  And there is also the annual meeting in New York on the Clinton Global Initiative, which includes a very substantive track on energy and climate change.   

And, of course, these events follow fast on the heels of the Vienna climate change talks in August, and it is not long before the very important U.N. Climate Change Conference in Bali, where I hope we will see real progress toward an effective, post-2012 framework for international action.   

I mention all of these other events because things are heating up on this issue in more ways than one.  And progress, I believe, will depend on finding a way to bring people together and forge practical and effective climate solutions that can draw broad support.  This is what I call the “sensible center.” 

Now, I am sure all of you are familiar with Google maps.  This is where you go online and you get detailed directions by typing in a starting and an ending address.  Well, today, I’d like to borrow the Google maps approach and see if it can help us find our way to the sensible center, if it can provide some insights on how to get to the place where all of us (or at least most of us) want to go.  

So first we need a starting address—and that’s easy enough.  Let’s look at where things stand right now on this issue.  And that means starting where every conversation about climate change must begin: with the science.  All of us are familiar with the latest findings from the IPCC.  “Warming of the climate system is unequivocal,” they tell us.  They also talk about a 90-percent-or-greater chance that we (humanity) are the cause of this—and a 90-percent-or-greater chance that the world will see more hot extremes, heat waves and heavy precipitation events. 

Just last week, we learned that Arctic sea ice is now at its smallest recorded extent.  There is simply no denying any more that our climate is changing, and that human activities are largely to blame. 

But, despite the science, despite knowing we have a very serious problem on our hands, we continue to burn coal at an alarming rate—China alone is building a new coal-fired power plant every week to 10 days.  The world continues to consume 83 million barrels of oil per day.  Here in the United States, we continue to debate back-and-forth about how to address this issue as a nation—Should we do cap-and-trade?  Carbon tax?  Voluntary approaches only?  And, at the global level, we continue to wander about in this no-man’s land we’ve created between Kyoto’s short-term targets and what comes next.   

All of this is part of our starting address—where we are now as we consider how to get to the place where we ultimately want to go.  However, there are also signs of hope, signs of progress.  Here in the United States, for example, we see an increasing number of states taking independent action to establish targets, experiment with trading, and otherwise reduce their contribution to the climate problem.

  • California, as you all know, has an ambitious set of enforceable emission targets, and the state also is a part of the Western Climate Initiative, together with five other western states and the provinces of British Columbia and Manitoba, all are committed to agreeing on the design of a cap-and-trade program by next August.
     
  • The Regional Greenhouse Gas Initiative, including 10 Northeastern and Mid-Atlantic states, aims to get going in 2009.  Right now, the states are working on adopting the model rule and setting up auctioning and allocation.
     
  • And think of Florida’s ambitious program and the 25 states with renewable portfolio mandates.

At the same time that we see these states taking the initiative, we see members of Congress putting forward very serious proposals (with bipartisan support) aimed at limiting emissions at the national level.  We have had more than 120 hearings on climate change since January, and we have numerous bipartisan bills on the table and emerging.   We are clearly on our way here in the United States—and our journey is aided, in large part, by corporate leaders embracing climate policies that in the past would have been universally condemned by U.S. industry.   

So this is our starting address.  And it is honestly a mixed-bag kind of a place.  A place where we are not doing nearly enough to address this looming crisis, but where there are these signs of hope.  Which brings us to the next question: Where do we want to go from here?  What is our ending address? And our ending address, I believe, is a destination we all can agree on.  That place may not have an exact zip code or street number, but we can describe it in enough detail, I believe, to get a solid set of directions.   

It is a place where the United States and other major emitting countries are--each and every one of them--doing their part to protect the climate.  It is a place where the world is united in pursuing the goal of the U.N. Framework Convention on Climate Change, which was signed by the United States and 190 other nations—nearly every nation on this earth.  And that goal is to “avoid dangerous anthropogenic (or human-cased) interference with the climate system.” 

As I said, the interesting thing about this place we want to get to is that there is no real dispute about it.  It’s how to get there that’s in dispute.  The only thing I can compare it to is going on a trip with your family and agreeing that you want to get to, say, Florida but disagreeing on the best route to take to get there.  And so you have to go to that all-purpose, neutral resource, Google, to find out.  At the Pew Center, we like to think of ourselves as providing the Google map toward practical climate solutions (and this will be my only sponsored link!). 

So what would this Google map tell us about how to get to this place where we want to go, now that we have plugged in our starting and ending addresses?  Well, finding the best route is not an easy task because there are a lot of people throwing out different directions to a climate solution.  And, if we were to follow many of these directions, we would either veer way off course or, more likely, never reach our destination at all. 

These directions tend to fall into opposite extremes.  For example, some call for a mandatory, worldwide cap on greenhouse gas emissions with trading, where every major economy accepts a binding emissions target.  Sounds great but it’s a political non-starter. At the other extreme, many people want the world to join hands and unite around an “aspirational goal” – such as an X percent reduction in global emissions by 2050.  Don’t get me wrong: having an aspirational goal is not a bad thing.  But if aspiration is all you’ve got, well, all you’ve got is aspiration.  Under these proposals, no one is required to do much of anything.  We might all feel good for having this goal but the lack of clear commitments would result in more of the same: a little movement that barely brings us closer to where we need to go.     

The same opposing directions appear when the talk turns to emissions trading.  Some say let’s give away all the allowances; others say auction all of them.  Some say allow offsets for all projects that could conceivably reduce emissions.  Others say don’t give credit for any offsets.  

We know, based on Europe’s experience this past year, that we need a price on carbon that is high enough to give firms a reason to invest in new climate-friendly technologies.  Yet we see proposals that talk about limiting that price to something that will motivate very little innovation.  

Well, there’s another direction we can go—there is a route we can take that avoids all of these detours, and that takes us to our destination.  It involves taking what is useful from all of these highways and by-ways, making the necessary compromises, and following a route that lets us go as fast as we can, and as directly as we can.  For example, we can embrace an aspirational goal but we must back it up with international commitments that are binding but flexible.  And, we can design a cap-and-trade program based on a hard-nosed look at what will be both economically viable and environmentally effective.    

It’s not about aiming low, but rather about abandoning the impossible.     

FOR EXAMPLE: It’s great to talk about the potential of voluntary approaches to reduce emissions, but history has shown that while they do deliver something, they don’t deliver the level of reductions we need.  In the same way, it is pure fancy right now to expect developing countries to agree to binding limits on their emissions.  It actually makes things harder when we lay out these expectations, because when developing countries refuse to join in the global effort because of a perception that they are being asked to do too much, then we lose the United States and others as well. 

And so we need to look for the best route—both domestically and at the global level.  Here in the United States, this means pushing ahead with plans for a cap-and-trade system.  I know there has been some commentary recently about the relative merits of cap-and-trade vs. a carbon tax.  But, once again, the thing we need to look at is what’s actually do-able, what gets us to the place we want to go, and what will actually pass?   

Anyone who thinks this Congress or the next will come close to passing a substantial new tax (even if it is offset by other tax reductions and even if it is designed to achieve the very important goal of reducing U.S. emissions) … well, I have some 20-year-old carbon offsets to sell you.  What’s more, the notion that designing a carbon tax is somehow simpler than designing a cap-and-trade program is simply not true.  It’s just as complex.  Plus, to top it all off, there is no environmental certainty in a tax – you enact it, and you have to wait and see what the effect will be, and you need to adjust it and keep adjusting it to get the effect you want. 

With cap-and-trade, there’s certainty in what the cap will be—and, as a result, you know how much of a reduction in emissions you can expect.   

What are the chances of cap-and-trade legislation passing the Congress?  Well, I will tell you one thing.  The chances improved in a big way when companies such as GE, Caterpillar, Chrysler, Duke, and DuPont all became part of the U.S. Climate Action Partnership.  The USCAP plan would reduce U.S. emissions by 10 to 30 percent within 15 years, and by 60 to 80 percent before 2050.  And, with a whole host of America’s leading companies behind it, I believe USCAP has been, and will continue to be, a significant game-changer.  In fact, I feel confident that I can predict here today that enactment of a cap-and-trade measure is still plausible in 2008, and almost inevitable by the end of 2010.  

Looking internationally, we see the same need for cool-headed, practical answers to the climate problem.  The same need to find the sensible center.   Looking at things in this way, we can see that the post-Kyoto framework must have two essential features.  First, it must be based on binding international commitments; and second, it must be flexible in the sense that countries should be able to take on different types of commitments. 

Why commitments?  Because it’s the best and maybe the only way to deliver the level of effort needed to significantly reduce global emissions.  Without commitments, countries can’t be confident that others are contributing their fair share to the global effort.  And without that confidence, it’s hard for any one country to sustain an ambitious climate effort.  

Why different kinds of commitments?  Because countries are different – very different.  Among the major economies, you have developed countries, developing countries, and economies in transition.  Their per capita emissions range by a factor of 14; their per capita incomes by a factor of 18.  The kinds of policies that work for some won’t work for others.  It’s not one-size-fits-all.   

So the post-2012 framework has to integrate different approaches.  Binding emissions targets make sense for developed countries.  But, as I said, it’s naïve to think that China, India, and the other emerging economies are going to agree to them anytime soon.  Still, we need some form of commitment from those countries, so we have to be open to other possibilities.  One possibility is policy-based commitments.  A country like China, for instance, already has some ambitious national policies: an energy intensity goal, renewable energy targets, and fuel economy standards for cars that are stronger than those here in the U.S.  What if China were to commit to fully implementing those policies in a binding international treaty?  What’s key, I think, is that the commitment be credible, quantifiable, and verifiable.   

This, again, is the sensible center … we need a new set of multilateral commitments.  New kinds of commitments.  Which brings us to the other major climate meeting here in Washington this week – the major economies meeting.  What are we to make of it?   

Well, one thing to be said for it is that it brings together the right group of countries.  But what’s the real objective here?  The administration has said its goal is to get a consensus among the major economies by the end of 2008 – just as the president’s about to leave office – contributing to a global deal under the U.N. convention in 2009.  What kind of deal are they hoping to set up? 

From all appearances, a very weak one.  Just about the only thing the Administration thinks countries need to agree on is an aspirational long-term goal.  And, as I have said, that’s not enough.   

The best way to judge the value of the major economies meeting this week is whether it moves us toward or away from a new set of multilateral commitments.  In other words, does it move us toward the sensible center, or not?  That should, in fact, be the test of everything we do on the climate issue in the months ahead.  

I know that some of us are better at following directions than others, but this is one time when we cannot afford to get lost.  By staying on course to the sensible center, we can begin the long-overdue work of figuring out how to reduce domestic and international emissions as cost-effectively as possible — and in ways that deliver real results for the climate.   

We’re just pulling out of the driveway right now, so fasten your seatbelts.  It’s going to be a long and interesting ride.  Thank you very much.    

Climate Policy Should Focus on Reducing Emissions

Climate Policy Should Focus on Reducing Emissions

By Vicki Arroyo

Originally published in the September/October 2007 issue of The Environmental Forum

I wish there were an easy solution to climate change — one that didn’t require fundamental and difficult changes in our energy system, law, or behavior. I also wish I could lose weight without diet or exercise. But depending on “geoengineering” to solve global warming is a dangerous delusion. Like a fad diet or liposuction, it may not provide sustainable benefits and will undoubtedly be accompanied by unforeseen adverse consequences (think fen-phen).

Granted, tackling climate change requires a Herculean effort: emissions are on the rise, while the newest science reveals impacts occurring faster than we envisioned. We are running out of time. To avoid the most serious consequences of warming — loss of species, irreversible breakdown of ice sheets, and the human toll from more intense heat waves and hurricanes — scientists say we need to stabilize atmospheric greenhouse gases such as carbon dioxide at less than a doubling of preindustrial levels (in the range of 450–550 ppm of CO2). If we’re very lucky, that might hold us to a 3.6ºF (2ºC) global average temperature rise.

It’s tempting to dismiss projected impacts as hyperbole or to believe that we can engineer a “fix,” the way the Apollo 13 crew saved themselves by using duct tape to fashion a make-shift filter in their struggle against rising CO2 levels on board their malfunctioning space capsule. I applaud those working on grand fixes and wish them every success. But I place more stock in solutions that exist now. A Princeton University study shows that choosing just seven current technologies from a number of options, including renewables, energy efficiency, and nuclear power, can curb emissions growth sufficiently now, while buying time for technological breakthroughs. Each of these so-called “wedges” can cut emissions by 1 gigaton per year within 50 years.

But these technologies won’t be deployed on the necessary scale without the right policies. One key policy is emissions trading, which has worked for traditional air pollutants such as sulfur dioxide and is even better suited to curbing greenhouse gases. The European Union has already developed the world’s largest carbon market. Some U.S. states are following suit, and a number of cap-and-trade proposals are pending in Congress. By combining cap-and-trade with efficiency standards for cars and appliances, advanced technology research, and development of geological storage, we can reach our emissions reductions goals.

So the essential first step is simple: stimulate existing technologies through demonstrated, cost-effective policies. This takes political will, and there is no time to lose. Greenhouse gases differ from traditional air pollutants, which can be eliminated with more than 99 percent efficiency at the stack. Greenhouse gases remain in the atmosphere — and our oceans — for hundreds of years. Even if geoengineering manages to cool a warming planet, it won’t solve other problems, such as ocean acidification from conversion of CO2 to carbonic acid. And the risks of such “fixes” as seeding the oceans with iron and adding cooling particles to the atmosphere are too big to ignore.

Yes, we should research all options. But right now our focus should be on putting policies in place to reduce our emissions and on preparing to cope with a changing world.

(Ms. Arroyo offers a view on the direction for climate policy that differs from one advocated by Alan Carlin, a senior economist at the EPA. Carlin advocates a “geoengineering” approach called solar radiation management as an effective and economical climate policy. While such long-shot approaches may be necessary to consider in the future, Arroyo argues that the current focus should be on greenhouse gas mitigation.)
by Vicki Arroyo, Director of Policy Analysis--Appeared in The Environmental Forum, September/October 2007
Vicki Arroyo
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Op-Ed: Handling Climate Change

OPINION EDITORIAL
Handling Climate Change

By Eileen Claussen and Judith Greenwald

Miami Herald

July 12, 2007

The climate change debate has shifted. No longer is the argument about whether or not the world is warming, and whether or not this is a problem. It clearly is. Now, the debate is about how to address it.

As Congress moves closer to enacting a ''cap-and-trade'' program aimed at limiting U.S. greenhouse gas emissions, a number of commentators are touting a carbon tax as a preferable policy. Their key arguments in support of such a tax: 1) it would be simpler; and 2) the European Union has tried the cap-and-trade approach, and it has failed.

Both arguments are wrong.

Under a cap-and-trade program, the government sets an overall emissions cap and issues tradable allowances that grant businesses the right to emit a set amount. Those who can reduce their emissions more cheaply are able to sell extra allowances to others who would otherwise have to pay more to comply. Because of this market-based approach, a cap-and-trade system helps assure that you can achieve your overall cap at the lowest possible cost. Cap-and-trade is the basis of the U.S. effort to control acid rain pollution, which has achieved greater reductions at lower costs than anyone anticipated.

Under a carbon tax, emitters are required to pay a tax for every ton of pollution they emit. Neither system is inherently more complex than the other. Both require monitoring and enforcement -- to determine taxable emissions and to guarantee payment in the case of a tax, or to ensure that allowances match overall emissions in the case of cap-and-trade. Both approaches also must address the question of how to distribute costs and benefits. For cap-and-trade, that means figuring out how to distribute and/or auction emission allowances; under a tax, it means figuring out who pays and what to do with the revenue.

Yes, under a cap-and-trade program, exemptions and special treatment are possible, and even likely. But the same goes for a tax. Only someone who has never filled out a tax form or helped write a tax bill could expect a tax to be simpler than cap-and-trade.

As for the cap-and-trade system in Europe, it is actually a major success. The system covers more than 10,000 sources and has spawned a robust emissions trading market with millions of transactions per month.

So why the bum rap for cap-and-trade in Europe? It is a classic case of no good deed going unpunished. Cap-and-trade is the EU's primary means of complying with the Kyoto Protocol, which requires emissions reductions between 2008 and 2012. Looking ahead to the five-year ''compliance period,'' the EU wisely launched a ''learning phase'' for its emissions trading system. And, it has learned a lot.

For example, the European Union learned that its emissions data were flawed and that companies could reap windfall profits by reducing emissions much more cheaply than had been expected. The EU thus is rapidly improving its emission data, and in 2008 it will allocate a smaller percentage of emission allowances.

To commentators appalled that the EU's system thus far hasn't achieved significant emissions reductions or caused industry much pain, the response is clear: they weren't trying to reduce emissions yet. They were just getting their system up and running.

Both a carbon tax and a cap-and trade system would use economic incentives to drive emission reductions. Cap-and-trade, however, has some important advantages. It's more flexible for one, allowing you to link your system to other cap-and-trade systems around the world. In today's global economy, where companies operate in multiple countries at once, this kind of system has obvious advantages. Cap-and-trade also allows the ''banking'' of emission allowances - reducing emissions early and using the saved emission allowances for later.

But the key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What's fixed is the cap itself -- and it is based on an assessment of the level of emissions you need to get to in order to protect the climate.

In response to a carbon tax, many emitters will reduce their emissions rather than pay the tax, but that result is not guaranteed. With Alaska and Greenland melting, and with droughts and other weather extremes on the rise, environmental certainty would seem to be the more compelling imperative.

Combine that with the fact that taxes are awfully hard to get through Congress, and the case for cap-and-trade is even stronger. Which just goes to show: We shouldn't let carbon-tax enthusiasts use false arguments to trash a politically feasible approach in favor of one with a snowball's chance in a warming world.

Eileen Claussen is president of the Pew Center on Global Climate Change. Judith Greenwald is director of innovative solutions at the Pew Center. 

© 2007 Miami Herald Media Company

Appeared in the Miami Herald, Thursday, July 12, 2007— by Eileen Claussen and Judith Greenwald

North America and the Carbon Markets

Promoted in Energy Efficiency section: 
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Point Carbon logoPew Center logo
 

North America and the Carbon Markets

January 17-18, 2007 - Washington, D.C.

The Pew Center is proud to partner with Point Carbon to bring to Washington, D.C. a unique event designed to help facilitate learning about the developing international and domestic carbon market.

Please join us and and others from across the United States and Canada for an innovative forum of speakers, panel discussions and workshops.

Download the conference flyer (pdf).
Download the conference agenda, which includes speakers and presentation topics (pdf).

Day 1 Agenda (January 17)

The EU ETS at Year 1: Lessons for North American Market Design

  • Checkpoint year 1 and outlook to 2012
  • Market size and liquidity
  • Cross-Commodity price impacts: The impact of carbon on the electricity and natural gas markets

Reduction Projects and Carbon Finance: Towards a Global Market?

  • Project investment
  • Project portfolio management
  • Offsets in the Americas
  • Agriculture, forestry and the carbon markets

Emerging North American Carbon Markets

  • The Chicago Climate Exchange
  • Voluntary programs and standards
  • The Northeast Regional Greenhouse Gas Initiative
  • Canadian Developments

North American Carbon Market Design: Comparing Policy Alternatives

  • Federal Proposals: The Intricacies of the McCain/Lieberman, Feinstein and Bingaman Bills
  • The Northeast Regional Greenhouse Gas Initiative
  • California: Bills and proposals
  • A Canadian Trading System?
  • Design experience from the European Union Emissions Trading System
Day 2 Agenda (January 18)
  • The European Union Emissions Trading System in depth
  • Offset Projects: Experience from the Clean Development Mechanism and Joint Implementation
  • Industry perspectives: Preparing for US and Canadian Emissions Trading Systems
  • Offset challenges and opportunities: Reconciling Green Tags, White Tags and Carbon Trading


Press Advisory: Pew Center Addresses Building Industry at Denver Conference

Media Advisory
November 16, 2006

Contact: Katie Mandes, (703) 516-0606

BUILDING SECTOR IS FOUNDATION OF U.S. CLIMATE CHANGE SOLUTIONS

Pew Center Addresses Building Industry at Denver Conference


Denver, CO- Energy used in residential, commercial, and industrial buildings produces about 43 percent of U.S. emissions of carbon dioxide, and these emissions are growing as Americans build more buildings and bigger homes. This makes the building sector the largest source of American emissions of the greenhouse gases (GHGs) that cause climate change.  Numerous stakeholders have begun acting to address the built environment’s role in climate change, and it is imperative that their commitment to green principles and innovation increases so that the building sector can reduce its contribution to climate change.

During a speech yesterday at the Greenbuild International Conference and Expo in Denver, Colorado, Eileen Claussen, President of the Pew Center on Global Climate Change, called on the building sector to play a more definitive role in America’s efforts to address climate change. “Building standards need to be strengthened and we need to factor the very real threat of climate change into every new building that is constructed.  Low or zero emission buildings should be our goal.”  Ms. Claussen challenged the sector to provide the foundation for U.S. climate solutions. The speech was given in conjunction with the release of a new In-Brief by the Pew Center entitled “Building Solutions to Climate Change.”

The In-Brief describes how the built environment can make an important contribution to climate change mitigation while providing more livable spaces.  It concludes that with current technologies and the expansion of a few key policies, significant reductions in greenhouse gases can be realized in the near term.  Furthermore, combining technology research and development with clear and sustained climate and energy policies would drive more dramatic reductions over time.

Ms. Claussen implored the building community to take the lead in cutting emissions of greenhouse gases. “If we do it right, protecting the climate could mean new industries, new markets, and new jobs for localities, states, and nations that successfully position themselves as centers of innovation and technology development for a low-carbon world.”

A copy of the latest In-Brief, “Building Solutions to Climate Change,” is available on the Pew Center’s web site, www.c2es.org.

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The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

Press Release: Pew Center Reports Spotlight Role of Farms, Forests in Reducing Global Warming

Press Release
September 21, 2006

Contact: Katie Mandes, (703) 516-0606        

PEW CENTER REPORTS SPOTLIGHT ROLE OF FARMS, FORESTS IN REDUCING GLOBAL WARMING

WASHINGTON, DC – America’s farms and forestlands have a major role to play in reducing the threat of climate change, according to two reports released today by the Pew Center on Global Climate Change.  Changes in agricultural practices coupled with foresting marginal agricultural lands could offset up to one fifth of current U.S. greenhouse gas emissions, while at the same time creating potential new sources of farming income.  In addition, the nation could reduce emissions by 10 to 25 percent by replacing fossil fuels with biofuels made from agricultural crops. 

The two reports being released today are: Agriculture’s Role in Greenhouse Gas Mitigation by Keith Paustian, John M. Antle, John Sheehan, and Eldor A. Paul, and Agricultural and Forestlands: U.S. Carbon Policy Strategies by Kenneth R. Richards, R. Neil Sampson, and Sandra Brown.

The Pew Center reports showcase the unique position of the agriculture and forestry sectors both as sources of greenhouse gas emissions (including carbon dioxide, methane and nitrous oxide) and as “sinks” that can remove carbon dioxide from the atmosphere. The reports also stress that we need to bolster existing programs and develop new ones in order to capitalize on the opportunity to contribute to climate solutions inherent in these two sectors.

“Climate change is the major environmental challenge of our time. In order to address it in the most cost-effective way, we must take advantage of the full range of solutions—and that means rethinking how we manage our forests and farmlands,” said Eileen Claussen, president of the Pew Center on Global Climate Change.

In Agriculture’s Role in Greenhouse Gas Mitigation, the authors make the case for “suitable payments” to encourage farmers to adopt new management practices to store carbon in agricultural soils and reduce agricultural emissions of methane and nitrous oxide. Policy incentives also are needed, the authors say, to reduce costs of producing biofuels and accelerate key technologies. The report notes that climate mitigation could potentially become a source of new income and cost reductions for farmers. However, access to financing, changes in economic conditions and technologies, and policies will be key factors that will affect farmers’ willingness to play a part in climate solutions.

The second Pew Center report, Agricultural and Forestlands: U.S. Carbon Policy Strategies, considers a range of policy approaches that would ensure a prominent role for U.S. agricultural and forestlands in national climate mitigation plans. Among the potential policies: changing practices on public lands; land use regulations for privately owned forestlands; and incentives designed to promote climate-friendly practices on agricultural lands.

“We have always known that America’s farms and forests could play an important part in reducing the risks of climate change,” said Claussen. “But these sectors aren’t going to do this on their own—policymakers need to create the framework for these solutions through vigorous incentives and other policies.”

For more information about global climate change and the activities of the Pew Center, visit www.c2es.org.

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The Pew Center was established in May 1998 by The Pew Charitable Trusts, one of the United States’ largest philanthropies and an influential voice in efforts to improve the quality of the environment. The Pew Center is an independent, nonprofit, and non-partisan organization dedicated to providing credible information, straight answers, and innovative solutions in the effort to address global climate change. The Pew Center is led by Eileen Claussen, the former U.S. Assistant Secretary of State for Oceans and International Environmental and Scientific Affairs.

Market Mechanisms for Greenhouse Gas Emissions Reductions: Lessons for California

Market Mechanisms for Greenhouse Gas Emissions Reductions: Lessons for California

Prepared by the Pew Center on Global Climate Change
August 2006 

California is currently considering legislation that would establish state-wide caps on greenhouse gas emissions. This paper is based on extensive research by the Pew Center and others on the use of market mechanisms to reduce greenhouse gas emissions. It begins with a summary of possible solutions for the state, and then provides more detailed background on market mechanisms, with particular attention to relevant lessons for California.

Download the full working paper (pdf)

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Additional topic 1 - Cost containment

Our Response to:

"Design Elements of a Mandatory
Market-Based Greenhouse Gas Regulatory System"

Issued by Sen. Pete V. Domenici and Sen. Jeff Bingaman
February 2006

Additional Topic #1
Download Additional Topic #1 (pdf)
Download Cost Containment Chart (pdf)

Cost containment: A function of the whole package

The Center and most of the over 30 large corporations surveyed by the Center believe that, rather than focusing on any one design element in isolation, any bill must be evaluated as a whole, especially in minimizing the costs to covered entities and the economy.  The issue is raised by a design question not specifically mentioned in the White Paper: the concept of a “safety valve.”  Under a safety valve provision, exemplified by the recommendation of the National Commission on Energy Policy (NCEP), covered entities would be allowed to pay the implementing agency a specified amount per ton of GHG instead of submitting emissions allowances, thus capping the cost per ton at the specified “safety valve” level.  In fact, a safety valve is only one tool for providing cost containment.  Moreover, it is one that could limit environmental effectiveness of the program and present complications for linking to other trading programs (as discussed in response to Question 3).  A GHG cap-and-trade program can be designed to minimize costs using a variety of other approaches:

  • selection of moderate targets and timetable;
  • advanced notice of policy;
  • banking of allowances and offsets;
  • borrowing of allowances;
  • staggering compliance deadlines;
  • extending compliance deadlines;
  • providing consumer dividends (payments made to energy consumers to compensate them for any increased energy costs);
  • providing relief for individual emitters;
  • inclusion of offsets;
  • linkage with other trading systems; and
  • complementary policies that drive energy efficiency and technological innovation

Additionally, low price caps act as a tax.  Taxes have been shown to be fairly ineffective in the short term at eliciting significant results. (See attached chart on cost containment mechanisms.)

The companies surveyed by us hold a wide range of opinions about the policy benefits of a safety valve, though most say that a safety valve may be politically necessary. Of companies that favor a safety valve, or at least think it might be politically necessary, several note that $7/ton of CO2 (the initial level recommended by NCEP) is too low to achieve significant emissions reductions or to drive market-based transition to a wide range of low-carbon technologies. If a safety valve is used, it should be set high enough to encourage meaningful change. For instance, integrated gasification combined cycle (IGCC) coal or supercritical pulverized coal electric power generation combined with carbon capture and sequestration (CCS) may only become economically viable on a self-sustaining basis (without continued government subsidy) with CO2 values at or above $25-35 per ton. This does not necessarily mean the safety valve should be set immediately at $25-$35 per ton. Rather, the starting point and growth curve of the safety valve must be such that the net present value of paying it will be more than what companies project will be that of investment in IGCC-CCS.

One company notes that mere inclusion of some reasonable cost limit may be more important for getting legislation enacted than the limit’s specific level. The presence of a safety valve, even at a high dollar level, could undercut assertions that GHG regulation will bring about the “end of the economy,” since it would remove from consideration the modeling results that posit extreme cases of unlimited cost. Another company notes that, when GHG regulation is viewed as inevitable and may affect upstream energy producers, financial structuring for large new oil and gas production projects may not be possible without a price cap, since otherwise these projects would involve a large unknown liability that constrains equity value and cash flows.

A few companies opposea safety valve altogether because of its distortionary effect on the market, or only favor a safety valve with a sunset clause. Companies express concern that a safety valve would complicate linkage between the U.S. carbon trading market and the cap-and-trade programs of other countries, which likely would increase the cost of U.S. reductions and reduce the economic efficiency of the system. Some companies point out that the market, left to develop without interference, will develop a range of financial products and services that provide cost certainty to firms but are less distortionary than safety valves. Under a mature carbon emissions trading market with adequate certainty about cap levels beyond the short term, financial services firms will offer hedging products such as forward call options that allow companies to lock in a maximum cost.

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