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Congressional Testimony of Eileen Claussen - Climate Change Legislation: International Trade Considerations
Hon. Eileen Claussen, President
Pew Center on Global Climate Change
the Committee on Finance
United States Senate
July 8, 2009
For a pdf version, please click here.
Mr. Chairman, Mr. Grassley, members of the Committee, thank you for the opportunity to testify on the international trade considerations of climate change legislation. My name is Eileen Claussen, and I am the President of the Pew Center on Global Climate Change.
The Pew Center on Global Climate Change1 is an independent non-profit, non-partisan organization dedicated to advancing practical and effective solutions and policies to address global climate change. Our work is informed by our Business Environmental Leadership Council (BELC), a group of 44 major companies, most in the Fortune 500, that work with the Center to educate opinion leaders on climate change risks, challenges, and solutions. The Pew Center is also a founding member of the U. S. Climate Action Partnership, a coalition of 25 leading businesses and five environmental organizations that have come together to call on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions.
Addressing global climate change presents policy challenges at both the domestic and the international levels, and the issue of competitiveness underscores the very close nexus between the two. The immediate task before this Committee, and before the Senate, is developing and enacting a comprehensive domestic program to limit and reduce U.S. greenhouse gas (GHG) emissions. Moving forward with a mandatory program to reduce U.S. emissions in advance of a comprehensive international agreement presents both risks and opportunities. On the one hand, domestic GHG limits may lead to a shift of some energy-intensive production to countries without climate constraints, resulting in “emissions leakage” and posing competitiveness concerns for some domestic industries. On the other hand, a mandatory domestic program in the United States is an essential step towards the development of an effective global climate agreement.
In the long term, a strong multilateral framework ensuring that all major economies contribute their fair share to the global climate effort is, I believe, the most effective means of addressing competitiveness concerns. Achieving such an agreement must be a fundamental objective of U.S. climate policy. In designing a domestic climate program, the question before Congress is what to do about the potential for leakage in the interim – until an effective global agreement is in place. In considering this question, it is important to distinguish two distinct but closely related policy challenges: (1) how best to encourage strong climate action by other countries, and in particular, by the major emerging economies; and (2) how best to minimize potential competitiveness impacts on U.S. industry. I believe that each of these two objectives is most effectively addressed through a different set of policy responses, and it is important to ensure that our efforts to address one do not undermine the other.
I will focus today primarily on the second of these challenges: designing transitional policies to minimize potential competitiveness impacts on U.S. industry.2 Our analysis of the underlying issues leads us to conclude that the potential competitiveness impacts of domestic climate policy are modest and are manageable.
In my testimony, I will:
1) present our analysis of the nature and potential magnitude of the competitiveness challenge;
2) discuss a range of options for addressing competitiveness concerns; and
3) outline what we believe would be the most effective approach. This approach would employ output-based emission allocations to vulnerable industries, phased out over time, and other transition assistance to affected workers and communities.
Understanding Competitiveness Concerns
A first step in considering options to address competitiveness is assessing the potential scope and magnitude of potential competitiveness impacts. It is important to note that it is not the competitiveness of the U.S. economy as a whole that is at issue. (According to the Environmental Protection Agency’s (EPA) analysis of the American Clean Energy and Security (ACES) Act of 2009 passed last month by the House, the cost of meeting the bill’s emission reduction targets in 2030 would be a 0.37 percent loss in GDP.3 Put another way, GDP would reach $22.6 trillion, nearly 60 percent higher than today, approximately two months later than without the bill.) Rather, the concern centers on a relatively narrow segment of the U.S. economy: energy-intensive industries whose goods are traded globally, such as steel, aluminum, cement, paper, glass, and chemicals. As heavy users of energy, these industries will face higher costs as a result of domestic GHG constraints; however, as the prices of their goods are set globally, their ability to pass along these price increases is limited.
Competitiveness impacts can be experienced as a loss in market share to foreign producers, a shift in new investment, or, in extreme cases, the relocation of manufacturing facilities overseas. In assessing the economic consequences of past environmental regulation in the United States, most analyses find little evidence of significant competitive harm to U.S. firms. Many studies conclude that other factors—such as labor costs, the availability of capital, and proximity to raw materials and markets—weigh far more heavily in firms’ location decisions. One comprehensive review—synthesizing dozens of studies of the impact of U.S. environmental regulation on a range of sectors—concluded that while new environmental rules imposed significant costs on regulated industries, they did not appreciably affect patterns of trade.4
In the case of GHG regulation, the additional cost to firms could include the compliance cost of purchasing allowances to cover direct emissions; indirect compliance costs embedded in higher fuel or electricity prices; further demand-driven price increases for lower-GHG fuels such as natural gas; and the costs of equipment and process changes to abate emissions or reduce energy use.
In gauging the potential impacts of GHG regulation, it is important to distinguish the “competitiveness” effect from the broader economic impact on a given industry or firm. A mandatory climate policy will present costs for U.S. firms regardless of what action is taken by other countries. In the case of energy-intensive industries, one potential impact of pricing carbon could be a decline in demand for their products as consumers substitute less GHG-intensive products. This is distinct, however, from the international “competitiveness” impact of GHG regulation, which is only that portion of the total impact on a firm resulting from an imbalance between stronger GHG constraints within, and weaker GHG constraints outside, the United States.
To empirically quantify the potential magnitude of this competitiveness impact, the Pew Center commissioned an analysis by economists at Resources for the Future.5 This work, which we published in May, analyzes 20 years of data in order to discern the historical relationship between electricity prices and production, consumption, and employment in more than 400 U.S. manufacturing industries. On that basis, the analysis then projects the potential competitiveness impacts of a U.S. carbon price, assuming no comparable action in other countries. The analysis assumes a CO2 price of $15 per ton. (EPA’s preliminary analysis of the American Clean Energy and Security Act (ACES) Act estimates an allowance price of $16 per ton CO2 in 2020.6)
The Pew/RFF analysis finds an average production decline of 1.3 percent across the U.S. manufacturing sector as a whole, but also a 0.6 percent decline in consumption. This suggests that the decline in production that can be attributed to increased imports – in other words, the competitiveness effect -- is just 0.7 percent. For energy-intensive industries (those whose energy costs exceed 10 percent of shipment value), the analysis projects that average U.S. output declines about 4 percent. However, consumption declines 3 percent, so that only a 1 percent decline in production (or one-fourth of the total decline) can be attributed to an increase in imports, or a loss of competitiveness. For specific energy-intensive industries, including chemicals, paper, iron and steel, aluminum, cement, and bulk glass, the analysis projects a competitiveness impact ranging from 0.6 percent to 0.9 percent, although within certain subsectors, the impact could be higher.
What this analysis demonstrates very clearly is that most of the projected decline in production stems from a reduction in domestic demand for these products, not an increase in imports. In other words, most of the projected economic impact on energy-intensive industries reflects a move toward less emissions-intensive products—as would be expected from any effective climate change policy, even one with global participation—and not a movement of jobs and production overseas. At the carbon price level studied, the projected competitiveness impacts, as well as the broader economic effects on energy-intensive industries, are modest and, in our view, can be readily managed with a range of policy instruments.
In the design of a domestic cap-and-trade system, competitiveness concerns can be addressed in part through a variety of cost-containment measures, such as banking and borrowing and the use of offsets, which can help reduce the costs to all firms, including energy intensive, trade-exposed industries. However, other transitional policies may be needed to directly address competitiveness concerns in the period preceding the establishment of an effective international framework. Options include: fully or partially exempting potentially vulnerable firms from the cap-and trade system; compensating firms for the costs of GHG regulation through allowance allocation or tax rebates; transition assistance to help firms adopt lower-GHG technologies, and to help communities and workers adjust to changing labor markets; and border measures such as taxes on energy-intensive imports from countries without GHG controls. In addition, a domestic policy could be designed to encourage and anticipate international sectoral agreements establishing the respective obligations of major producing companies within given sectors.
Exclusion from Coverage – One option is to fully or partially exclude vulnerable sectors or industries from coverage under the cap-and-trade program. For instance, under the Lieberman-Warner Climate Security Act of 2008,7 the direct “process” emissions of many energy-intensive industries would not have been subject to GHG limits. This type of exclusion would have reduced the number of emission allowances a trade-exposed firm would need to hold and would thereby eliminate some of the direct regulatory costs, shielding it not only from competitiveness impacts but also from some of the broader economic effects of pricing carbon. However, by limiting the scope of the cap-and-trade system, exclusions of trade-exposed industries would undermine the goal of reducing GHG emissions economy-wide, and would reduce the economic efficiency of a national GHG reduction program. Exemptions could also give exempted industries an economic advantage over nonexempt domestic firms and sectors, including competitors. Moreover, firms whose emissions are exempted would still face the indirect costs of higher energy prices and would not be completely shielded from the competitive impact associated with this cost increase.
Compensation for the Costs of GHG Regulation – Another option is to include these sectors in the cap-and-trade system but compensate them for the costs of GHG regulation. Key design considerations include the scope, form, and means of calculating such compensation, and whether and how it should be phased out. As noted earlier, firms covered by the cap-and-trade system face both direct and indirect costs of regulation. Direct compliance costs include the cost of purchasing any allowances needed to cover direct emissions regulated under the cap and/or the cost of equipment and process changes to abate emissions. Indirect costs include higher prices for electricity and natural gas (reflecting an embedded carbon price and, in the case of natural gas, rising demand for this less GHG-intensive fuel). For energy-intensive industries, the indirect cost of higher energy prices represents a significant portion of the total potential cost.
One form of compensation is providing free emission allowances. Because free allocation provides the same economic incentive to reduce emissions as does an auction,8 keeping energy-intensive sectors under the cap, but providing free allowances, provides for greater environmental effectiveness and economic efficiency than excluding them. Furthermore, additional allowances could be provided to compensate for indirect costs, thus providing a more complete shield from international competitiveness impacts.
Another form of compensation for direct and/or indirect costs could be tax credits or rebates. One potential source of revenue for such measures is proceeds from the auction of emission allowances. A tax rebate would be a direct payment to compensate a firm for GHG regulatory costs; a tax credit could alternatively offset those costs by reducing a non-GHG burden such as corporate or payroll taxes, or healthcare or retirement costs.9
Whatever form the compensation takes, the central challenge is determining the appropriate level. In the case of direct compliance costs, allowances could be granted on the basis of historical emissions (“grandfathering”) and energy-intensive sectors could receive more generous allocations than other emitters. For instance, energy-intensive industries could receive a full free allocation while others receive 80 percent of their historical emissions. Over time, the energy-intensive sectors could continue to receive a higher proportion of free allowances than other sectors as the allocation system transitions to fuller auctioning. However, granting allowances on the basis of historical emissions can effectively penalize early action and reward relatively heavier emitters within an industry. In addition, it does not necessarily guard against emissions leakage or a loss of jobs, as a firm could choose to maximize profits by selling its free allowances and reducing production. There is also the risk that firms will be over-compensated and realize windfall profits.
Alternatively, compensation could be “output-based,” pegged to actual production levels and/or energy consumption. This would shield energy-intensive firms from regulatory costs, and lower the risk of emissions leakage and competitiveness impacts, while providing an incentive for continued production. Firms could be compensated in full for their direct and indirect costs. Or, an output-based approach could incorporate a performance standard (i.e., emissions or energy use per unit of production) to encourage and reward lower GHG-intensity production. For instance, free allowances could be pegged to the level needed by a firm whose emissions intensity is only 85 percent of the sector average; that percentage could decline over time, providing an ongoing incentive to switch to lower-GHG processes and energy sources. This was the approach adopted in the Inslee-Doyle Carbon Leakage Prevention Act introduced in the 110th Congress.10 The ACES Act adopts an output-based approach, initially allocating 15 percent of the total allowance pool to energy-intensive industries to compensate for both direct and indirect costs based on a facility’s level of output. However, as allocations to individual firms would be based on average emissions intensity within the sector, rather than a stronger benchmark, there is no added incentive to improve GHG performance beyond the average.
If compensation is provided, one important consideration is how long it should be maintained and at what level. Phasing out the compensation would give firms additional incentive to improve their GHG performance but would also make them more vulnerable to competitiveness impacts. A mandatory program could provide for periodic review of any allowances or other compensation to vulnerable sectors to consider adjusting them on the basis of new information. For instance, if the legislation establishes a specific timetable for moving from free allocation to auctioning, this transition might be slowed for specific industries if there are clear indications of competitiveness impacts. Alternatively, compensation could be phased out or ended if other countries take stronger action or new international agreements are reached. The ACES Act incorporates such approaches. It would phase down the output-based allowance rebates 10 percent a year starting in 2026, but allow the President to adjust that rate depending on an assessment of emissions leakage.
As with the exclusion of trade-exposed sectors from the cap, the remedy provided by these compensation approaches extends beyond any actual competitiveness effect. Whether based on output or historical emissions, most of the proposals offered to date aim to compensate firms for most or all of the increased costs associated with GHG regulation, not just for the impacts they may face due to the asymmetry between GHG constraints within and outside the United States. To limit compensation to competitiveness impacts alone would require in-depth financial knowledge of each firm and/or complex calculations that could be reliably performed only once the impacts have occurred. A drawback of a broader compensation approach is that the financial resources required—whether drawn from auction revenue or other sources—are not available for other climate- or non-climate-related purposes.
Transition Assistance – Another option is to provide transition assistance to vulnerable firms to help them adopt lower-GHG technologies, and to communities and workers affected by competitiveness impacts. In the case of firms, measures could include tax incentives such as accelerated depreciation to encourage the replacement of inefficient technologies, or tax credits for the development or adoption of lower-GHG alternatives. Firms could also be incentivized to switch to low-carbon energy sources, for example through subsidies for the purchase or generation of renewable energy.
Where competitiveness impacts are unavoidable, assistance can be provided to both workers and communities. Previous government efforts to help communities adjust to economic changes resulting from national policies provide lessons for shaping similar efforts as part of climate change policy.11 At the level of individual workers, policies such as the Workforce Investment Act providing income support and retraining to help move workers into new jobs can provide a blueprint for transition programs to assist workers adversely affected by competitiveness imbalances under a climate policy.12 The ACES Act would provide worker transition assistance through two set-asides of emission allowances: one to support retraining and other benefits when employers, unions or other groups of workers demonstrate that employment has suffered as a result of the bill; the other to support training for new jobs in clean energy industries.
Border Adjustment Measures – Another strategy is to try to equalize GHG-related costs for U.S. and foreign producers by imposing a cost or other requirement on energy-intensive imports from countries with weaker or no GHG constraints. One option is a border tax based on an import’s “embedded” emissions (equal to the compliance costs for a domestic producer of an equivalent good). Alternatively, under a cap-and-trade system, emission allowances could be required for the import of energy-intensive goods. In the 110th Congress, the Lieberman-Warner bill, the Bingaman-Specter bill, the Markey ICAP bill, and the Dingell-Boucher discussion draft all adopted variations of this approach. Under the ACES Act, “international reserve allowances” would be required for energy-intensive imports starting in 2020 unless a new international agreement meeting the bill’s negotiating objectives has entered into force, or unless Congress concurs with the President’s determination that the requirement is not in the national interest.
One major shortcoming of unilateral border measures is their limited effectiveness in reducing competitiveness impacts. As the border adjustment measures would apply only to imports to the United States, they would not help “level the playing field” in the larger global market where U.S. producers may face greater competition from foreign producers.
Among the other issues raised by unilateral border measures is their consistency with World Trade Organization (WTO) rules. The legality of a given measure would depend in part on its specific design and on the types of climate policies in place domestically. As such approaches have not been previously employed, there are no definitive rulings, and experts differ in their interpretation of relevant WTO precedents.13 The legal uncertainties ultimately would be resolved only through the adjudication of a WTO challenge, a likely prospect if unilateral border measures were to be applied by the United States or another country.
Another important consideration is the potential impact on trade and international relations. If the United States were to impose border requirements, there is a greater likelihood that it would become the target of similar measures. European policymakers also are weighing the use of border measures and have argued that the emission targets under consideration in the United States are not comparable to those adopted by the European Union. U.S. trade officials and others also have voiced strong concern about the potential for retaliatory trade measures by targeted countries, leading to escalating trade conflicts.14 Proponents argue that the threat of unilateral trade measures would give the United States greater leverage in international climate negotiations. However, there is a significant risk that they would engender more conflict than cooperation, in the end making it more difficult to reach agreements that could more effectively address competitiveness concerns.
International Sectoral Agreements – All of the preceding options are measures that would be implemented domestically. Another approach that would help reduce emissions within and outside the United States, while addressing competitiveness concerns, is to negotiate international agreements setting GHG standards or other measures within energy-intensive globally-traded sectors. For example, major steel-producing countries could agree on standards limiting GHGs per ton of steel, which could be differentiated initially according to national circumstances and converge over time. Sectoral agreements could take a number of forms, depending on the specific sectors, and could be stand-alone agreements or integrated into a comprehensive climate framework.15
Within the domestic context, a purely sector-by-sector approach would sacrifice the broad coverage and economic efficiency of an economy-wide cap-and-trade program. However, sectoral agreements could exist alongside a cap-and-trade program, and the system could be designed to encourage U.S. producers to work toward their establishment. One option would be to provide for a sector’s exclusion from the cap once an international agreement of comparable stringency is in place (although, as noted, diminishing the scope of the cap-and-trade system by exempting one or more sectors would limit its economic efficiency). An alternative is to keep the sectors under the cap but align their obligations under the domestic program and the international sectoral agreement. For instance, a firm’s emissions allowance allocation under the trading system could be based on the GHG standard that is agreed to internationally.
In keeping with the principle of “common but differentiated responsibilities,” an international sectoral agreement may not set fully equivalent requirements for all countries, particularly at the outset. In that event, compensation for energy-intensive industries could be maintained at some level and phased out as the requirements for other countries rise to those borne by the United States.
Based on our assessment of the available options, the Pew Center believes that the Senate should seek to address competitiveness concerns by:
1) strongly encouraging the executive branch to negotiate a new multilateral climate agreement establishing strong, equitable, and verifiable commitments by all major economies;
2) including in domestic legislation incentives for such an agreement, including support for stronger action by major developing countries; and
3) including in cap-and-trade legislation transitional measures to cushion the impact of mandatory GHG limits on energy-intensive trade-exposed industries and the workers and communities they support. These transitional measures should be structured as follows:
- In the initial phase of a cap-and-trade program, free allowances should be granted to vulnerable industries to compensate them for the costs of GHG regulation. For direct costs, allowance allocations should be based on actual production levels. For indirect costs, allocations should reflect the emitter’s production-based energy consumption, taking into account the GHG intensity of its energy supplies.
- Based on an analysis of GHG performance within a given sector, allocations should be set initially so that producers with average GHG performance are fully compensated for regulatory costs, while those performing above or below the norm receive allowances whose value is greater or less than their costs, respectively. This factor should be adjusted over time as an incentive to producers to continually improve their GHG performance.
- Free allocation levels should decline over time, gradually transitioning to full auctioning, although at a slower rate than for other sectors.
- A review should be conducted periodically to assess whether sectors are experiencing competitiveness impacts and, if warranted, to adjust allocation levels and/or the rate of transition to full auctioning.
- A portion of allowance auction revenue should be earmarked for programs to assist workers and communities in cases where GHG constraints are demonstrated to have caused dislocation.
- Transition assistance should be curtailed for a given sector upon entry into force of a multilateral or sectoral agreement establishing reasonable obligations for foreign producers, or upon a Presidential determination that such measures have been instituted domestically.
We believe this approach addresses the transitional competitiveness concerns likely to arise under a mandatory cap-and-trade program, while maintaining the environmental integrity of the program and providing an ongoing incentive for producers to improve their GHG performance. We commend the Committee for focusing the attention of the Senate on this critical issue, and would be happy to work with you as you develop legislation to address this and other dimensions of the climate challenge.
I thank you for your attention and would be happy to answer your questions.
1 For more information on the Pew Center on Global Climate Change, please visit http://www.c2es.org
2 For a discussion of how best to encourage strong climate action by other countries, see the testimony on The Roadmap from Poznan to Copenhagen – Preconditions for Success by Elliot Diringer, Vice President for International Strategies for the Pew Center on Global Climate Change, submitted to the Select Committee on Energy Independence and Global Warming, U.S. House of Representatives, February 4, 2009. (http://www.c2es.org/testimony/diringer/02-04-09)
3 EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress 6/23/09: Data Annex http://www.epa.gov/climatechange/economics/economicanalyses.html
4 Jaffe, A.B., S.R. Peterson, P.R. Portney, and R.N. Stavins, “Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?,” Journal of Economic Literature, Vol. 23, March 1995.
5 Aldy, J.E. and Pizer, W. A., The Competitiveness Impacts of Climate Change Mitigation Policies, Pew Center on Global Climate Change, May 2009. http://www.c2es.org/international/CompetitivenessImpacts.
6 EPA Analysis of the American Clean Energy and Security Act of 2009 H.R. 2454 in the 111th Congress 6/23/09http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf .
7 S.3036 of the 110th Congress.
8 The cap in a “cap-and-trade” system determines its environmental stringency by setting the number of emission allowances that are available. These allowances are equal to the amount of emissions that are permitted under the cap and their number declines over time as the cap is tightened. From an environmental perspective, it doesn’t matter how the emission allowances are distributed. They could be auctioned or freely distributed or any combination of the two. All that matters is the total number of emission allowances that are distributed -- the environmental goal is determined by the cap itself and is not in any way impacted by whether the allowances are auctioned or distributed freely. A company that is included in the cap-and-trade program but given free allowances still has an incentive to reduce its emissions because that would free up allowances that the company could sell.
9 Houser, Trevor et al., Leveling the Carbon Playing Field: International Competition and US Climate Policy Design, Peterson Institute for International Economics and World Resources Institute, May 2008.
10 H.R. 7146 in the 110th Congress.
11 Greenwald, Judith M., Brandon Roberts, and Andrew D. Reamer, Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001.
12 Barrett, Jim, Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001.
13 For a discussion of WTO-related issues, see Bordoff, Jason E., International Trade Law and the Economics of Climate Policy: Evaluating the Legality and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns, Brookings Institution, June 2008.
14 Remarks of U.S. Trade Representative Susan C. Schwab to U.S. Chamber of Commerce, January 17, 2008.
15 Bodansky, Daniel, International Sectoral Agreements in a Post-2012 Climate Framework, Pew Center on Global Climate Change, May 2007.
The U.S. House of Representatives passed the American Clean Energy and Security Act of 2009 (H.R. 2454 of the 111th Congress) on June 26, 2009, by a vote of 219 to 212. The (ACES, Waxman-Markey) Act is a comprehensive national climate and energy legislation that would establish an economy-wide, greenhouse gas (GHG) cap-and-trade system and critical complementary measures to help address climate change and build a clean energy economy. The House Energy and Commerce Committee voted 33-25 to approve Waxman-Markey on May 21, 2009. Committee Chairman Henry Waxman (D-CA) and Rep. Edward Markey (D-MA), chairman of a key subcommittee, introduced the bill on May 15, after floating a discussion draft in March.
- Short Summary of the ACES Act
- Detailed Summary of the ACES Act as passed by the House
- Graph: Distribution of Allowances under the ACES Act
- Graph: GDP Impacts of U.S. Energy-Climate Legislation
- Comparison Chart: Clean Energy Standard Provisions in Climate and Energy Legislation for the 111th Congress
- Comparison Chart: Energy Efficiency provisions in Energy and Climate Legislation for the 111th Congress
- Comparison Chart: Plug-In Electric Vehicles in Climate-Energy Legislation for the 111th Congress
- The Center's Statement on Passage of the ACES Act
- In Brief: Economic Insights from Modeling Analyses of H.R. 2454
- In Brief: What Pending Climate Legislation Does for Nuclear Power
- In Brief: What the ACES Act Does for Coal
- In Brief: Agriculture Under the ACES Act
- Policy Memo: Cost Containment and Offset Use
- Policy Memo: Addressing Competitiveness Issues in Climate Legislation
- Policy Memo: Distribution of Allowances under the ACES Act
- Policy Memo: Cost of the ACES Act of 2009 Found to Be Small According to Government Analyses
- Policy Memo: Eight Myths about the ACES Act
- Statement on Costs of Climate Legislation
- Statement on Committee's Passage of the ACES Act
- Legislative Recommendations
Committee Documents and other External Resources
Opening Remarks by Eileen Claussen, President, Pew Center on Global Climate Change
June 24, 2009
I join with our cosponsors in welcoming all of you to our annual workshop on state-federal interactions. The Pew Center on Global Climate Change is delighted to be working with the Georgetown Climate Center, the Pew Center on the States, and the National Association of Clean Air Agencies to present what we hope will be a very engaging and informative program over the next two days.
It’s wonderful to be here at the Newseum. The Newseum, of course, is home to such exhibits as the News Corporation News History Gallery, the NBC News Interactive Newsroom and the Cox Enterprises First Amendment Gallery. I understand that the Newseum has plans for several new exhibits in the months ahead. These include:
The Fox News Gallery of Fairness and Balance … except you’re the one who has to keep your balance because everything is a little bit slanted to the right.
The Hall of Cheerleading Journalism … brought to you by CNBC and its friends on Wall Street. Led by the cheer: Two, four, six, eight … how much can we make stocks appreciate!
And then there is a great exhibit on the Future of Newspapering … it’s sponsored by the Boston Globe, although I understand that the New York Times is trying to shut the exhibit down.
In all seriousness, as we consider the innovative approaches to climate change policy that are the focus of this workshop, I want to set the stage with some observations about where we stand on this issue right now, how far we’ve come, and where things are headed in the months and years ahead. Given the focus of this workshop on state-federal interactions, I also want to talk about the varying yet complementary roles of the state and federal governments in addressing this issue, especially given the increased appetite for real action on climate change here in Washington.
Last year, I opened this workshop with the observation that states were beginning to act on the climate issue because of an absence of federal leadership. Well, it’s one year later and the tide is turning. Now we are entering a period when the federal government is finally moving to address this issue. And we need to think about what this means for the states.
Does it mean the states will have a smaller role now in addressing climate change, presuming that the federal government comes through with a serious program? Or does it mean something else? Well, count me as a vote for “something else.” Because I continue to believe the states have an essential role to play when it comes to addressing this issue.
I will be discussing the intersection of state and federal roles in more detail, but first I’d like to share a couple of observations about the science of climate change. Because every week, it seems there is new data or a new study that adds to our understanding of the seriousness of the problem we face. U.S. Energy Secretary Steven Chu recently gave a commencement address at Harvard and in that address, he said: “For the first time in human history, science is now making predictions of how our actions will affect the world fifty or a hundred years from now.”
And what science is predicting is something that should be of grave concern to each and every one of us. According to the Intergovernmental Panel on Climate Change, the earth is on track to warm by as much as 2 to 11.5 degrees Fahrenheit over the next century – that’s in addition to the 1.5-degree rise we already experienced in the century gone by. As Secretary Chu pointed out at Harvard, a few-degree rise in temperature may not sound like much on a given day, but the Earth was only 11 degrees colder during the last ice age than it is now – the same amount of warming projected at the upper range for the end of this century. Clearly, a few degrees can and will make an enormous difference.
Scientists also have reached a high level of consensus about what the temperature projections mean, and the federal report released last week, “Global Climate Change Impacts in the United States,” confirms this. Whether it is increases in the number and intensity of rainstorms (in the northeastern United States heavy storms have become 67% heavier over the last century); or sea levels, which are already rising and are projected to rise from two to three feet along the Eastern seaboard of the United States, the risks to our health, environment and economy are huge. And every region and sector of the country are vulnerable.
Without immediate and aggressive climate action, the West will experience reduced snowpack, less available water, and more wildfires. More intense heat waves will plague the Midwest while the water levels in the Great Lakes will decline. Extreme weather, including more flash floods and longer droughts, will hit the Great Plains. And in parts of the South, the average number of 90-plus-degree days could jump from 60 to 150 by 2100. And Washingtonians complain about our muggy summers now.
Clearly, the science tells us we have an enormous problem on our hands, and have no choice but to take action to reduce these very real risks. And it is largely because of the science that public opinion on this issue has shifted in recent years.
A national survey conducted earlier this spring found that 77 percent of voters now favor action to reduce greenhouse gas emissions. Further evidence of the shift in public opinion came in another spring poll showing that 59 percent of voters believe efforts to tackle global warming will create new American jobs.
Now, my intention is not to stand up here and paint a completely rosy scenario of public support for climate action. While public opinion has shifted, there is still some pretty significant polling that shows we have a ways to go.
For instance, earlier this year, in a widely touted poll, global warming ranked last in a survey of the nation’s top 20 policy priorities. Among Republican voters, only 16% considered it a priority. And while this polling has gotten a lot of mileage in particular policy circles – what is important to know is this: In the same survey, 60% identified energy as a top policy concern – a 20% increase from six years ago. And as we know, energy and climate change are inextricably linked – so I am OK with 60% of respondents listing energy among their top priorities – a win for energy could well be a win for climate. And the climate-energy connection is being made by more and more policymakers at the state level and in Washington.
We’re meeting in Washington at a crucial moment for this nation’s efforts to address climate change. We have a President and Cabinet that are fully committed to action on this issue – with cap and trade legislation being their preferred approach. We have an EPA that is poised to regulate greenhouse gas emissions – in response to the recent Supreme Court ruling in Massachusetts v. EPA. And we will be hearing more about the EPA’s approach to these issues later today from EPA Assistant Administrator Gina McCarthy, and tomorrow from EPA Administrator Lisa Jackson.
The White House’s commitment to action on this issue is matched at the other end of Pennsylvania Avenue. Most recently, on May 21st, the House Energy and Commerce Committee achieved something extraordinary – passage of a climate and energy bill out of committee that has the potential to set the United States on a path to tackle climate change in a serious way. This bill will be debated on the House floor beginning Friday, when it may reach a vote by the full House. (The bill passed the House on June 26, 2009 by a vote of 219-212).
Looking beyond Washington, we have teams of negotiators around the world preparing for a December meeting in Copenhagen. Their hope is to reach agreement this year on a new framework for global action on climate change. And, of course, in addition to all of these other developments, we have a number of state and regional initiatives moving forward around the United States – and we will be talking a lot about these in the course of the next two days.
I believe the states have an essential role to play in the nation’s effort to address climate change. As the federal government begins to assert itself as a force for change, I believe we are entering a new phase in the state-federal relationship where the two levels of government are working as partners to tackle our nation’s energy and climate challenges. It’s not about one level assuming control over the other, or about one level filling gaps that are there because the other level isn’t doing its job. No, it’s about the two levels working in tandem, working together … with each side playing to its strengths.
Which then begs the question: What are the strengths of the states as we enter this new phase in our nation’s effort to respond to climate change? What is the role of the states in addressing this issue when you have the federal government on the verge of making cap-and-trade the law of the land, and on the verge of adopting other national policies aimed at reducing emissions and spurring the development of cleaner sources of energy?
As I look at it, I believe there are three ways to think about the role of the states in this new environment.
First, states are laboratories for learning about what works (and what doesn’t) as we develop policies and programs aimed at reducing emissions and spurring the development of clean energy technologies. In fact, states have played this role quite well in influencing federal cap-and-trade legislation. For example, the Waxman-Markey bill draws heavily from the northeast Regional Greenhouse Gas Initiative’s auction design and standards-based approach to offsets, that under the federal bill will be administered by EPA. The federal bill also takes an economy-wide cap-and-trade approach, much like the design put forward by the Western Climate Initiative.
Now that we are poised to enact a national cap-and-trade program, the role states play as learning labs will change. This is not to say their role disappears. Rather, I see ample opportunity for states to continue to serve as centers of innovation and learning. But going forward, the most critical information-sharing will occur between states themselves – not between states and the federal government. Because it will be states that are responsible for setting building standards, reducing vehicle miles traveled, ensuring renewable electricity and efficiency goals are achieved, and adapting to climate change. And when the time comes to reauthorize federal climate legislation, states will again be in the best position to help shape an effective policy.
The national renewable electricity standards being debated in the House and Senate are also modeled on renewable portfolio standards enacted by 30 states and the District of Columbia. But until federal climate and energy policy is enacted, states continue to pursue a broad range of initiatives. For example, on June 8th Nevada Governor Jim Gibbons signed a comprehensive energy bill that increased the state’s renewable portfolio standard. Nevada is now set to generate 25 percent of its electricity from renewables by 2025.
And on the same date, June 8th, members of the Midwestern Greenhouse Gas Reduction Accord released their draft final recommendations for the design of a regional cap-and-trade program covering six states and the Canadian province of Manitoba. Tomorrow, Governor Jim Doyle of Wisconsin will share his thoughts on actions being taken in his state and across the Midwest to address our climate and energy challenges, and what the Midwest needs from national climate and energy policy.
The second way to think about the role of the states in addressing climate change is to think of them as offering a Plan B in case federal actions fall short. Regional cap-and-trade initiatives like RGGI aim to achieve real, verifiable reductions in greenhouse gas emissions. In the case of RGGI, the states involved are committed to reducing CO2 emissions from the power sector by 10 percent by 2018. These states are already working toward this goal, and they will continue doing so if we can’t get quick agreement on a national cap-and-trade program, and if the national program does not deliver the reductions it promises down the line.
The same goes for other state policies such as renewable portfolio standards. As federal lawmakers continue to haggle over the details of a national standard, many states already have ambitious RPS programs in place. For instance, Texas is expected to avoid 3.3 million tons of CO2 emissions annually with its RPS, which requires 5,000 megawatts of new renewable generation by 2015. This is going to happen whether or not we ultimately have a national standard. What’s more, if the national standard is not sufficiently strong or ambitious, Texas and many other states will have their own stronger standards to assure that, within their borders at least, folks are doing what’s needed to develop and deploy renewables. That’s an important fallback, a Plan B, as we try and calibrate the specific elements of a federal climate and energy program.
The third and final way to think about state roles is to remember that states have the authority to take action in some areas where the federal government cannot. And states also are better suited than the feds to do certain things. For example, states can promote clean electricity and energy efficiency with policy tools such as net metering, green pricing, and public benefit funds. States also have authority to adopt building efficiency codes, which can have a major impact when you consider that energy use in buildings produces about 38 percent of U.S. carbon dioxide emissions. States also have great control over smart growth policies and transportation policies aimed at reducing emissions from cars and trucks. These are examples of things that fall within a state’s authority and in many instances, outside the authority of the federal government.
States as a laboratory for innovative solutions and information-sharing, especially between each other. States as a Plan B in case federal actions fall short. And states as entities with unique authority to take action themselves on these issues. These are three ways to think about the role of the states as we enter a new phase in the state-federal effort to address climate change.
But, of course, a national role is important as well. It’s crucial. For example, certain actions, if they are taken nationally, can be more cost-effective. And we also have to keep in mind that there is no guarantee that all states would act individually. In order to reduce emissions of greenhouse gases, and to do so both cost-effectively and to the levels scientists say are necessary, I believe we need the federal government to step up to the plate at the same time that the states are doing their part.
Let’s look at cap-and-trade as an example. This is a solution that works best when it covers many emission sources. The more states, or the more countries, that are part of the system, the more you can achieve efficiencies of scale and the more you can lower the cost of reducing emissions. This is why many states are reaching across their borders to establish regional cap-and-trade programs. They understand that the economics of cap-and-trade get better when more states and more communities are involved. But if regional approaches are better than going state-by-state, it is also true that a national approach is better than doing this on a region-by-region basis.
Ultimately, we need a national cap-and-trade program. And this is why the developments in Washington over the last several weeks are so important. Last month’s vote of the House Energy and Commerce Committee on the American Clean Energy and Security Act marks the first time that a serious climate bill has made it this far in the House.
The Waxman-Markey bill combines ambitious but achievable greenhouse gas emission reduction targets with a market-based cap-and-trade program. It is a good bill that protects consumers and provides the certainty businesses need to make substantial investments in clean energy technologies.
Of course, the Senate is an entirely different matter. Majority Leader Harry Reid and Senator Barbara Boxer, who chairs the Environment and Public Works Committee, have made cap-and-trade legislation a priority for 2009. Last week, the Senate Energy and Natural Resources Committee approved a broad energy measure that among its many provisions includes a 15% national renewable electricity standard. But action in the Senate on a combined energy and cap-and-trade bill will be far more difficult than in the House, and while Senator Reid has said he hopes for a vote this year, it’s nowhere near certain this will happen. Although a bill can pass the House along partisan lines, this is not a possibility in the Senate. Sixty votes is a high hurdle, and bipartisan leadership will be needed. I also believe a bill can only move through the Senate if there is active engagement from the White House in mobilizing support from both Republican and Democratic senators.
But it’s hard to dispute the fact that serious climate legislation is on the move and that the United States will have a cap-and-trade policy in place before long – maybe not this year but perhaps in 2010. When this happens, Washington finally will be doing its part to begin to build a true partnership with the states on climate and energy issues.
As passed by the committee in the House, the American Clean Energy and Security Act enables states to reserve the right to take action to reduce emissions should federal efforts fall short. More specifically, states must suspend any cap-and-trade program until 2018 … but they are within their rights to act after that date if the federal program is not getting the results states had hoped for. States and businesses and others overwhelmingly prefer a federal program to a patchwork of state efforts, and the idea of suspending state efforts is to provide an incentive for the federal program to work. But if the federal effort is not working as promised, then the states can step in after 2017. States can be Plan B.
The legislation also includes many other provisions that highlight how both the federal government and the states have important roles to play in this work. For example, the bill supports state and local adoption of advanced building codes, it supports state building retrofit programs, and it instructs states to submit goals for transportation-related reductions in greenhouse emissions.
At the beginning of the cap-and-trade program, states will receive 9.5 percent of federal emission allowances for investments in renewable energy and energy efficiency – this figure would decline over time and hold at 4.5 percent after 2021. In addition, funds raised through the federal efficiency and renewable electricity standard in the bill would be given directly to states for use in renewable energy and energy efficiency programs.
Last but not least, the House bill allows for the exchange of state and regional emission allowances for federal allowances. This is limited to allowances issued by California, the Regional Greenhouse Gas Initiative, or the Western Climate Initiative.
In conclusion, I want to say that U.S. states are acting in the best traditions of federalism by advancing an array of solutions to climate change that showcase the states as laboratories of democracy, as a Plan B solution when federal efforts fall short, and as entities with unique authority to bring about real changes in energy use and emissions. Today, as we anticipate a more active federal role in addressing this issue, the challenge is to create a more balanced state and federal partnership. If we can do it right, such a partnership will bring much-needed certainty to the question of how we as a nation are going to address the most critical global issue of our time.
Thank you very much.
Climate Policy Hill Briefing on Carbon Market Design & Oversight in a U.S. Greenhouse Gas (GHG) Cap-and-Trade System
Briefing on Carbon Market Design & Oversight in a U.S. Greenhouse Gas (GHG) Cap-and-Trade System
June 26, 2009
The Pew Center on Global Climate Change and the Nicholas Institute for Environmental Policy Solutions at Duke University held a briefing on the design and oversight of a successful carbon market. The briefing was jointly hosted by the Senate Environment and Public Works Committee, and the Committee on Agriculture, Nutrition and Forestry.
As Congress debates climate change legislation, one of the most critical yet least discussed issues is the development and oversight of a well-functioning carbon commodity market. This briefing framed and discussed many of the central issues in this process, including: overall market design, options for the choice of regulator, the role and importance of the derivatives market, the role of the Over-the-Counter (OTC) market, and the types of rules and enforcement necessary to prevent market manipulation and abuses.
This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the opinions expressed herein are solely those of the presenters.
Watch the video of each panelist below:
Vice-President of Markets & Business Strategy, Pew Center on Global Climate Change (moderator)
|Presentation: Windows Media|
Managing Director, Government Relations, CME Group
|Presentation: Windows Media Slides (pdf)|
Managing Director and Associate General Counsel, JP Morgan Chase
|Presentation: Windows Media Slides (pdf)|
|Presentation: Windows Media|
Co-Director, Duke University Climate Change Partnership
|Presentation: Windows Media Slides (pdf)|
|Presentation: Windows Media Slides (pdf)|
|Question & Answer Session|
|Presentation: Windows Media|
– This statement was issued following passage of the American Clean Energy and Security Act of 2009 by the U.S. House of Representatives. –
Statement of Eileen Claussen
President, Pew Center on Global Climate Change
June 26, 2009
Today’s vote is an historic turning point for climate action in the United States. For far too long we have abdicated our responsibility as a leader on an issue of epic proportions. Today the U.S. Congress has signaled a willingness to take responsibility for our past – and show leadership for our future. The passage of the American Clean Energy and Security Act of 2009 (ACES Act) by the U.S House of Representatives sends a clear signal to families, workers, and businesses that a clean energy future is possible. The ACES Act will help tackle climate change, drive our economic recovery, and advance energy independence.
The ACES Act combines ambitious but achievable targets for reducing U.S. greenhouse gas emissions with a market-based program that will reward business leaders for deploying clean energy technologies as quickly and inexpensively as possible. The science is clear that human-induced climate changes are already occurring and are projected to increase. The benefits of taking action now far outweigh the manageable costs.
The Congressional Budget Office estimates that the ACES Act would in 2020 have an average annual cost of $175 per household and that households in the lowest 20 percent by income would actually receive a net benefit of $40 per year. The Environmental Protection Agency projects that the bill would cost American households $80 to $111 a year. Neither of these estimates account for the benefit the ACES Act would provide to the U.S. public and economy by avoiding the costs of increased climate change. Nor do they account for the fact that the ACES Act will help U.S. businesses lead the race already under way to develop clean energy technologies – a race that will dominate the 21st century global economy.
As this legislation moves to the Senate, it is also important to consider its international implications. Enactment of a comprehensive energy and climate bill along the lines of the ACES Act will finally allow the United States to help lead the efforts toward a global agreement in which the major economies of the world, both developed and developing, play their part to address the climate challenge.
I commend Speaker Pelosi, Chairmen Waxman and Markey, and their colleagues who have seized their opportunity to begin building a stronger U.S. economy and a better, safer world. Climate change presents an unprecedented challenge – but it is one we must tackle now. I urge the Senate to build on this work to advance strong climate and energy legislation.
Pew Center Contact: Tom Steinfeldt, 703-516-4146
On June 24th and 25th, 2009, the Pew Center on Global Climate Change, National Association for Clean Air Agencies (NACAA), Georgetown State-Federal Climate Resource Center, and Pew Center on the States hosted a workshop on state and federal action on climate change. The event brought together executive and legislative officials and stakeholders from both the state and federal levels to share their experience developing climate policies and discuss the appropriate roles of each level of government in addressing climate change. A series of panels and keynote speakers spoke about a wide range of issues, including the outlook for federal action—particularly the American Clean Energy and Security Act of 2009—, complementary policies for greenhouse gas emission reductions, and new research on U.S. clean energy jobs.
The following materials were made available during the workshop:
- Wind and Solar Electricity: Challenges and Opportunities, Pew Center on Global Climate Change
- The Clean Energy Economy: Repowering Jobs, Businesses, and Investments Across America, Pew Center on the States
- Overview of State-Related Provisions, American Clean Energy and Security (ACES) Act of 2009, Georgetown State-Federal Climate Resource Center
- Global Warming Principles, NACAA
- Testimony of Bill Becker before the House Committee on Energy and Commerce on the March 31, 2009 Discussion Draft of the American Clean Energy and Security Act of 2009, NACAA
Speaker and panelist presentations can be viewed by clicking on the presenter's name below.
Wednesday, June 24, 2009
Welcome from the Co-sponsors:
- Arturo Blanco, Bureau Cheif, Bureau of Air Quality Control, Houston Department of Health and Human Services, and Co-President of NACAA
- Colleen Cripps, Deputy Administrator, Nevada Deivision of Environmental Protection, and Co-President of NACAA
- Susan Urahn, Managing Director, Pew Center on the States
- Vicki Arroyo, Executive Director, Georgetown State-Federal Climate Resource Center
Opening Address: Eileen Claussen, President, Pew Center on Global Climate Change
Panel 1: U.S. Congressional Update and Outlook
Moderator: Bill Becker, Executive Director, NACAA
- Chris Miller, Senior Policy Advisor, Office of U.S. Senator Harry Reid (D-Nevada)
- Todd Johnston, Senior Policy Advisor, Office of U.S. Senator George Voinovich (R-Ohio)
- Manik Roy, Vice President of Federal Government Outreach, Pew Center on Global Climate Change
- Bill Tyndall, Senior Vice President of Federal Government and Regulatory Affairs, Duke Energy
Panel 2: Federal Regulatory Authorities and Tools
Moderator: Vicki Arroyo, Executive Director, Georgetown State-Federal Climate Resource Center
- Gina McCarthy, Assistant Administrator for Air and Radiation, U.S. Environmental Protection Agency
- Andy Ginsburg, Administrator, Air Quality Division, Oregon Department of Environmental Quality
- Dianne Nielson, Energy Advisor to Utah Governor Jon Huntsman, Jr.
Panel 3: Green Jobs
Moderator: Susan Urahn, Managing Director, Pew Center on the States
- Jeremy Kalin, Representative, Minnesota House of Representatives
- William Coleman, Partner, Mohr Davidow Ventures
- Chris Adamo, Senior Policy Advisor for Environment and Energy, Office of U.S. Senator Debbie Stabenow (D-Michigan)
Panel 4: Cap and Trade Design and Lessons from Regional Programs
Moderator: Judi Greenwald, Vice President of Innovative Solutions, Pew Center on Global Climate Change
- Janice Adair, Special Assistant to the Director, Washington Department of Ecology
- Laurie Burt, Commissioner, Massachusetts Department of Environmental Protection
- Doug Scott, Director, Illinois Environmental Protection Agency
Thursday, June 25, 2009
Keynote Speaker: Governor Jim Doyle, Wisconsin
See an interview with Gov. Doyle
Panel 5: Electricity: Energy Efficiency and Renewables
Moderator: Mark Shanahan, Executive Director, Ohio Department of Environmental Quality and Energy Advisor to Governor Ted Strickland
- Karl Rábago, Vice President, Distributed Energy Services, Austin Energy
- Frank Murray, President and CEO, New York State Energy Research and Development Authority (NYSERDA)
- Marsha Smith, Commissioner, Idaho Public Utilities Commission
Keynote Speaker: Lisa Jackson, Administrator, U.S. EPA
Panel 6: Transportation: Fuels, Vehicles, System Efficiency, and VMT
Moderator: Larry Greene, Executive Director, Sacramento Metropolitan Air Quality Management District
- Margo Oge, Director, U.S. Environmental Protection Agency Office of Transportation and Air Quality
- Eileen Tutt, Deputy Secretary for Climate Change and Environmental Justice, California Environmental Protection Agency
- Bill Northey, Secretary, Iowa Department of Agriculture and Land Stewardship
- Beverly Swaim-Staley, Acting Secretary, Maryland Department of Transportation
Panel 7: Adaptation
Moderator: Stephen Seidel, Vice President for Policy Analysis and General Counsel, Pew Center on Global Climate Change
- Daniel Ashe, Science Advisor to the Director, U.S. Fish and Wildlife Service
- Richard Leopold, Director, Iowa Department of Natural Resources
- Adam Freed, Deputy Director, New York City Mayor's Office of Long-Term Planning and Sustainability
- Larry Hartig, Commissioner, Alaska Department of Environmental Conservation
Closing: Judi Greenwald, Vice President of Innovative Solutions, Pew Center on Global Climate Change
On June 26, 2009, the American Clean Energy and Security Act (ACES Act) was passed by the U.S. House of Representatives by a vote of 219 to 212. The bill contains five distinct titles: I) clean energy, II) energy efficiency, III) reducing global warming pollution, IV) transitioning to a clean energy economy and V) agriculture and forestry related offsets. Title I contains provisions related to a federal renewable electricity and efficiency standard, carbon capture and storage technology, performance standards for new coal-fueled power plants, R&D support for electric vehicles, and support for deployment of smart grid advancement. Title II includes provisions related to building, lighting, appliance, and vehicle energy efficiency programs. Title IV includes provisions to preserve domestic competitiveness and support workers, provide assistance to consumers, and support for domestic and international adaptation initiatives. The following is a brief overview of the proposed greenhouse gas (GHG) cap-and-trade program contained in Title III and Title V.
Scope of Coverage
The bill covers seven GHGs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3). Entities covered by the proposal would include: large stationary sources emitting more than 25,000 tons per year of GHGs, producers (i.e., refineries) and importers of all petroleum fuels, distributors of natural gas to residential, commercial and small industrial users (i.e., local gas distribution companies), producers of “F-gases,” and other specified sources. The proposal also calls for regulations to limit black carbon emissions in the United States.
The bill establishes emission caps that would reduce aggregate GHG emissions for all covered entities to 3% below their 2005 levels in 2012, 17% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050. Commercial production and imports of HFCs would be addressed under Title VI of the existing Clean Air Act and are covered under a separate cap. The bill also establishes economy-wide goals for all sources, including but not limited to those covered by the cap-and-trade program. These goals are the same percentage reduction and timetables as the cap-and-trade program, except that the 2020 target is 20% rather than 17% below 2005 levels.
Distribution of Allowances
The bill utilizes the value of emission allowances to offset the cost impact to consumers and workers, to aid businesses in transitioning to clean energy technologies, to support technology development and deployment, and to support activities aimed at building communities that are more resilient to climate change. Consumers are protected from higher energy prices by providing allowances to electricity and natural gas local distribution companies with a clear mandate that the value of such allowances be used for the benefit of consumers. Low and moderate income households will also receive a refundable tax credit or rebate. In the initial years of the cap and trade program, approximately 20 percent of allowances are auctioned. This percentage increases over time to about 70 percent by 2030 and beyond.
Emission allowances are also provided to energy intensive, trade-exposed businesses, merchant coal generators, and oil refineries to aid in their transition away from carbon-based fuels. To support investment in clean technologies, allowance value is used to support advanced vehicle technology and is allocated to states to establish State Energy and Environmental Development (SEED) Accounts to spur renewable energy and energy efficiency programs. Allowances are also provided to support programs aimed at cutting emissions by reducing deforestation in developing countries and for emission reductions from agriculture and forestry sources in the United States. Overall the vast majority of value created through emission allowances will be used to protect consumers and to support technological advances.
Offsets and Other Cost Containment Measures
The bill would allow up to 2 billion tons of offsets to be used for compliance system wide—1 billion from domestic sources and 1 billion from international sources. If the domestic supply of offsets is insufficient, EPA can raise the international limit up to 1.5 billion, but the 2 billion total still applies. The President can recommend to Congress that the limits on offsets should be increased or decreased. For international offsets, beginning in 2018, 1.25 offset credits would be required to be surrendered for each ton of emissions compliance, but there is no such discount for domestic offsets. The EPA would determine the list of eligible offset projects based on recommendations from an Offsets Integrity Advisory Board. Title V of the bill establishes an offset program specific to domestic agriculture and forestry sources. This program would be administered by the Secretary of Agriculture.
Other cost containment measures in the bill include a two-year rolling compliance period with unlimited banking, unlimited next-year borrowing with no interest, and borrowing of up to 15% of a compliance obligation from years 2-5 beyond the current calendar year at 8% annual interest. To further contain costs, the bill also creates a strategic allowance reserve auction using a small percentage of allowances from future years. The initial minimum price level for the auction would be set at $28 in 2012, and rise at 5% plus inflation for 2013 and 2014. Beginning in 2015, the reserve auction trigger price would be 60% above the three year rolling average of the market price of allowances.
The Congressional Budget Office’s (CBO) analysis of the bill concluded that it would impose costs of $175 per household and that households with incomes in the lowest 20% would receive a net benefit of $40 annually. EPA’s analysis of the bill estimated that it would cost households between $80-111 per year. None of these estimates include the savings that would result from reducing the damages that would be caused by climate change.
Carbon Market Oversight
The bill would require the Federal Energy Regulatory Commission to regulate the cash market in allowances and offsets, and assigns the Commodity Futures Trading Commission the responsibility for regulation and oversight of any derivatives markets unless the President decides otherwise. The bill also prohibits over-the-counter trading of derivatives.
Interaction with State and Regional Programs
The bill provides that states could enact more stringent climate regulations with the exception of cap-and-trade programs. State trading programs would be put on hold from 2012 - 2017 to give the federal system a chance to get started. Holders of allowances issued by California, the Western Climate Initiative or RGGI before December 31, 2011 can exchange these state allowances for federal allowances.
Download short summary (PDF)
June 24, 2009
I write to express the support of the Pew Center on Global Climate Change for the American Clean Energy and Security Act of 2009 (ACES Act), H.R.2454. The ACES Act will help tackle climate change, drive our economic recovery, and advance energy independence. I strongly urge you to vote in favor of this landmark legislation.
The science is clear. As the U.S. Global Change Research Program recently reported, human-induced climate changes are underway in the United States and are projected to grow. We are already experiencing increases in heavy downpours, rising temperature and sea level, rapidly retreating glaciers, thawing permafrost, lengthening growing seasons, lengthening ice-free seasons in the ocean and on lakes and rivers, earlier snowmelt, and alterations in river flows. These changes are projected to grow. In addition, climate change-related threats to human health are expected to increase, including heat stress, waterborne diseases, poor air quality, extreme weather events, and diseases transmitted by insects and rodents.
The ACES Act combines ambitious but achievable targets for reducing the greenhouse gas emissions that cause climate change with a market-based program that will reward business leaders for deploying clean energy technologies as quickly and inexpensively as possible. Enactment of the ACES Act will allow the United States to help lead the efforts toward a global agreement in which the major economies of the world, both developed and developing, play their part to address the climate challenge.
Because of its market-based program and other cost containment measures, the ACES Act carries only a small cost. The Congressional Budget Office estimates that the ACES Act would in 2020 have an average annual cost of $175 per household and that those households in the lowest twenty percent by income would actually receive a net benefit of $40 per year. The Environmental Protection Agency projects that the bill would cost American households $80 to $111 a year. For a comparison of these analyses, see the Pew website. Neither of these estimates account for the benefit the ACES Act would provide to the U.S. public and economy by avoiding the costs of increased climate change. Nor do they account for the fact that the ACES Act will help U.S. businesses lead the race underway to develop clean energy technologies – a race that will dominate the 21st century global economy.
In the days ahead, you will no doubt hear other views of the ACES Act, including many verging on mythology. For example, according to one recently advertised myth, gasoline prices could rise by as much as 77 cents per gallon over the next decade. In fact, EPA projects that under the ACES Act, gasoline prices would be only 25 cents per gallon higher by 2030 – an average increase of less than three pennies per gallon per year. Meanwhile, gasoline prices have swung by more than two dollars per gallon over the last year alone. For more of this myth-busting, see the attached Pew Center paper on “Eight Myths about the Waxman-Markey Clean Energy Bill.” A debate this important should be based on fact, not fiction.
The Energy and Commerce Committee has seized its opportunity to begin building a stronger U.S. economy and a better, safer world. It will not be an easy task – but it is one we must begin now. I urge you to build on this work by moving the bill forward. If you have any questions, please have your staff contact Nikki Roy.
Pew Center on Global Climate Change
Climate Policy Memo #3: Cost of the American Clean Energy and Security Act of 2009 Found to Be Small According to Government Analyses
For more information on this subject and other memos in this series, click here.
Economic analysis by its nature is better suited to providing insights and not absolute predictions of the future and when these insights are confirmed by more than one analysis, the results are typically considered more credible. With this in mind, two recent government analyses that looked at the costs of the cap and trade portion of the American Clean Energy and Security Act of 2009 (ACES) have found that the likely impact of this portion of the bill would be fairly small. Taking into account the included cost containment provisions and that much of the revenue raised by the bill would be returned in some fashion to households, both EPA and CBO suggest that household impacts would be less than $200 per year.
The following table and bullets are intended to provide a short summary of key results from these two analyses.
Key Results from EPA and CBO Analyses of American Clean Energy and Security Act1
|Allowance Price ($/tCO2e)|
|Annual Household Cost ($)||EPA|
|Annual Economy-wide Cost (billions of $)*||EPA|
*EPA and CBO compute net economy-wide costs using different methodologies. EPA’s cost estimates reflect the change in GDP from business-as-usual levels and are computed using general equilibrium models. CBO’s cost estimate includes international offsets, production cost of domestic offsets, resource costs, and allowance value going overseas, and does not capture the entire impact on GDP nor certain general equilibrium effects.
- EPA results highlight the relatively small carbon price impacts on future gasoline prices ($0.13 in 2015, $0.25 in 2030, and $0.69 in 2050). For context, EIA reports that in the past year alone, gasoline prices have swung over $2 per gallon.2 EPA also reports that that these small price impacts are not sufficient to significantly change consumer driving or vehicle choice behavior.
- EPA results suggest that with the energy efficiency provisions, allocation to local electricity distribution companies (LDC’s) and rebates to energy intensive manufacturers, electricity prices will be unchanged in 2020 but will increase 13% by 2030. EPA also notes however, that if allocating to LDC’s shields consumers from all price impacts, the cost of the cap-and-trade policy will be more costly since other sectors of the economy will need to achieve greater emission reductions.
- CBO looked at how ACES would impact different household income groups. They found that households in the lowest income quintile would see an average net benefit of $40 in 2020 from the program. Households in the middle and top income quintiles would see a net cost of $235 and $245, respectively. These net impacts reflect the cost of higher energy and goods prices and the share of allowance value returned to households in their roles as consumers, workers, and investors.
- CBO has also estimated the budgetary impacts of Waxman-Markey. For the cumulative period 2010-2019, the increase in estimated revenues would be $845.6 billion. The increase in direct spending would be $821.2 for the same period. The net impact for this period would therefore be a decrease in the deficit of $24.4 billion. These changes in revenues and direct spending stem mainly from the process of auctioning and freely distributing allowances. CBO also estimated that discretionary federal spending would increase by $49.9 billion over this period.
- In these analyses all assessments of the cost of cap and trade, deployment of low carbon technology is critical. Greater expansion of nuclear power, renewable generation, biofuels and carbon capture and storage capacity reduces the program costs.
1 EPA’s recent analysis of ACES can be found at http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis.pdf and CBO’s recent analysis can be found at http://www.cbo.gov/ftpdocs/103xx/doc10327/06-19-CapTradeCosts.htm.
2 EIA’s analysis of gasoline price movements is available at http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp.
This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the views expressed herein are solely those of the Pew Center on Global Climate Change and its staff.
Climate Policy Memo #2 – Eight Myths about the Waxman-Markey Clean Energy Bill
For more information on this subject and other memos in this series, click here.
No bill is perfect. Certainly not one that contains a thousand pages and seeks to overhaul the way our nation uses energy. But many of the recent attacks on the American Clean Energy and Security Act (ACES) proposed by Representatives Waxman and Markey go beyond fact-based policy disagreements and venture more into the realm of mythology. Below is a list of a few of these myths, along with an attempt to set the record straight.
Myth #1. By giving away emission allowances, the bill is less effective at protecting the environment.
Reality: The cap in a “cap-and-trade” system determines its environmental stringency by setting the number of emission allowances that are available. These allowances are equal to the amount of emissions that are permitted under the cap and their number declines over time as the cap is tightened. From an environmental perspective, it doesn’t matter how the emission allowances are distributed. They could be auctioned or freely distributed or any combination of the two. All that matters is the total number of emission allowances that are distributed -- the environmental goal is determined by the cap itself and is not in any way impacted by whether the allowances are auctioned or distributed freely.
Myth #2. The Waxman-Markey bill will cost the average household thousands of dollars in higher energy costs.
Reality: A few widely touted studies purport to show that climate legislation will impose costs of $1,600 - $4,300 per household. But a closer look at these studies shows that they do not actually model the key provisions in the Waxman-Markey bill. Others have suggested that the changes required under the bill would not cost consumers any money or would even save consumers hundreds or even thousands of dollars. These claims also fail to fully account for costs. One study that does specifically model the core elements of the bill concludes that household costs are likely to increase by $80-111 annually.
The Congressional Budget Office (CBO) testified before a Congressional hearing in May 2009 that household costs would be $1,600 per household. But this number was based on a CBO study done nine years ago when energy prices and economic growth were very different. Nor did this statement take into consideration the potential to lower costs through the use of offsets and the use of allowance value to reduce household costs as specified in the Waxman-Markey bill. In June CBO released a new analysis that states that costs in 2020 would average $175 per household and that those households in the lowest twenty percent by income would actually receive a net benefit of $40 per year. A study by MIT is being used by some to argue that the climate bill would cost $3,100 per household. But the author of this study has written that this number misrepresents the conclusions of his study and that estimated household costs would actually be far less. Finally, the Heritage Foundation recently issued a memo claiming that the Waxman-Markey bill would cost households $4,300 annually. But this analysis fails to consider many of the key provisions of the bill including its extensive use of offsets to reduce overall costs and its use of the value of emission allowances to reduce costs to consumers.
Others have claimed that the bill will have no cost impact, but this ignores the very real economic costs of shifting to a clean energy economy. A study of the bill by the American Council for an Energy Efficient Economy concludes that the energy efficiency provisions would save consumers $750 per household in 2020 and $3,900 per household by 2030. This study focuses only on the changes in energy use associated with specific energy efficiency provisions and doesn’t include other requirements contained in the bill.
One study that does seek to estimate the costs of Waxman-Markey was released recently by Environmental Protection Agency (EPA). This analysis takes offsets and the use of allowance value into consideration and concludes that costs could be on the order of $80-111 per household annually for the period from 2012-2050.
Given the limitations of economic modeling, no analysis should be assumed to give a correct answer. But certainly it is critical that any credible analysis that is used in the policy debate should faithfully represent what is actually required by the bill.
Myth #3. The Waxman-Markey bill will significantly increase gasoline prices.
Reality: According to one recently advertised myth, gasoline prices could rise by as much as 77 cents per gallon over the next decade. In fact, EPA projects that gasoline prices would be only 25 cents per gallon higher by 2030 – an average increase of less than three pennies per gallon per year. Meanwhile, gasoline prices have swung by more than two dollars per gallon over the last year alone.
Myth #4. The bill creates windfall profits for industries by giving 85% of the total emission allowances available to them for free.
Reality: The bill does not give away most of the allowances freely for industry’s benefit. The bill does provide emission allowances to help consumers, workers, businesses and communities transition to cleaner sources of energy. Over the lifetime of the bill, about 80 percent of the total available allowances are used to protect consumers from higher energy prices and for other public purposes such as clean energy research and climate change adaptation efforts. For example, 15 percent of allowances are returned as a rebate to low- and moderate-income households. In addition, over the period covered by the bill, approximately 22 percent of allowances are given to electric utility and natural gas local distribution companies, primarily in the early years of the program, expressly for the purpose of being passed on to consumers to offset higher energy bills. The approximately 20 percent of allowances that are distributed freely to private industry includes about 12percent for energy intensive industries, oil refineries and merchant coal plants to facilitate their transition to clean energy technologies. But even here provisions are included stating that such allowances should not result in windfall profits. Providing allowances to energy-intensive industries that compete in international markets also has an environmental objective. It prevents emission leakage – the potential for increases in production and emissions abroad from competing companies not facing similar restrictions. The ability to use the value of emission allowances to offset price impacts on consumers and others impacted by efforts to shift away from fossil fuels is one important advantage of a cap-and-trade policy.
Myth #5. The bill relies heavily on a cap-and-trade regime, the same policy approach that was tried and failed miserably in the European Union.
Reality: The European Union (EU) has instituted a cap-and-trade program as the cornerstone of its efforts for reducing greenhouse gas emissions. It began using this mechanism in 2005, starting with a 3 year trial period aimed at developing the institutions required for an effective trading system. This trial period demonstrated the importance of good emissions inventories and the need for consistent rules across all member nations making up the EU. Over time the EU’s trading system has tightened its emissions cap and is moving toward greater use of auctions. The EU system has demonstrated that a market price for emission allowances will develop and serve as an incentive for achieving cost effective reductions in greenhouse gas emissions. It is currently effectively reducing emissions at 12,000 sources and enabling cost-effective compliance through the trading of millions of EU allowances. Because of its success, it remains the policy instrument of choice for the European Union.
A detailed experts’ review of the initial implementation of the European Union’s emissions trading system is available here.
Myth #6. The bill creates a new class of unregulated financial derivatives.
Reality: Given the recent problems in the financial sector, due in part to unregulated mortgage-backed derivatives, some have suggested that the market in emissions allowances and the types of financial instruments that could be developed under the bill could lead to the same types of problems. Creating a market that allows companies to hedge against the risk of future price changes can reduce costs over time and help manage the transition to a clean energy economy. What it should not do is create a new unregulated market. The bill contains extensive provisions calling for the Federal Energy Regulatory Commission to monitor and regulate developments in energy markets and for the Commodity Futures Trading Commission to play a similar role in monitoring and regulating derivatives that may develop under any cap-and-trade program.
Myth #7. The bill will result in huge job losses or, alternatively, will create thousands of new green jobs.
Reality: While these statements taken together may in fact be true, either one by itself is misleading. Given the size of our economy and the changes that occur over time, new jobs are constantly being created and existing jobs are constantly being lost. Twenty years ago fewer jobs existed in the telecommunications industry, but there were more in the auto manufacturing industry. This process of job creation and loss will continue whether the Waxman-Markey bill becomes law or not. What is less clear is whether the net impact of the bill on total jobs will be positive or negative. None of the models used to look at economic impacts is well suited for predicting both the number of jobs lost and the number gained. But for those losing their jobs, it is of little comfort that new jobs may be created elsewhere in the economy. The Waxman-Markey bill contains provisions for assisting workers and communities in meeting the challenges of shifting to a clean energy economy.
Myth #8. Regardless of the costs of Waxman-Markey, the benefits in reduced climate change from the bill itself are so small it isn’t worth it.
Reality: Climate change is a global problem and will require nations of the world to work together to reduce greenhouse gas emissions. It is true that the United States has recently been overtaken by China as the largest source of greenhouse gas emissions, but the United States still contributes 20 percent of global emissions, so what we do is critically important. It is also true that if the United States acts alone, we cannot solve climate change. The key point is that all major emitting nations must contribute to those efforts and the bill both lays out what actions domestically the United States would pursue, while also providing a framework which encourages other nations to act. Nor is the United States alone in moving forward in this process. Other nations are at various stages of developing and implementing national programs and all are also actively engaged in international treaty negotiations under the United Nations Framework Convention on Climate Change. The reductions from the Waxman-Markey bill are a significant step in reducing emissions from the United States, but should be viewed in the context of what all nations must do to contribute to this global effort to limit climate change.
This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the views expressed herein are solely those of the Pew Center on Global Climate Change and its staff.