The Center for Climate and Energy Solutions seeks to inform the design and implementation of federal policies that will significantly reduce greenhouse gas emissions. Drawing from its extensive peer-reviewed published works, in-house policy analyses, and tracking of current legislative proposals, the Center provides research, analysis, and recommendations to policymakers in Congress and the Executive Branch. Read More
Download a pdf version of our ARRA summary.
The American Recovery and Reinvestment Act (ARRA) included a total of $787 Billion in new spending and tax incentives. The new spending involves about $42 billion in energy related investments, $21 billion in vehicles/transportation spending (transit assistance, energy efficient fleets, etc.), and about $570 million in climate science research spending. In addition, there are about $21 billion in energy-related tax incentives such as extending the renewable energy production tax credit and an additional $1.6 billion in Clean Renewable Energy Bonds.
The Administration released a memo to Heads of Departments and Agencies that served as the first installment of government-wide guidance for carrying out the programs and activities funded by the ARRA.
Click here to read the memo.
Information on how agencies and states will be using their funds
The discussion draft of the American Clean Energy and Security Act (ACES Act), released on March 31, 2009 by Representatives Waxman (D-CA) and Markey (D-MA) includes four distinct titles: I) clean energy, II) energy efficiency, III) reducing global warming pollution, and IV) transitioning to a clean energy economy. Title I contains provisions related to a federal renewable electricity standard, carbon capture and storage technology, performance standards for new coal?fueled power plants, a low carbon fuel standard, and smart grid advancement. Title II includes provisions related to building, lighting, and appliance energy efficiency programs, as well as efficiency standards for mobile sources and other transportation programs. Title IV includes proposals designed to preserve domestic competitiveness and support workers, provide assistance to consumers, and support domestic and international adaptation initiatives while transitioning to a clean energy economy. The following is a brief overview of the proposed greenhouse gas (GHG) cap-and-trade program contained in Title III.
Waxman-Markey Discussion Draft Materials
EPA Preliminary Analysisof Discussion Draft
Workshop: Assessing the Benefits of Avoided Climate Change: Cost-Benefit Analysis and Beyond
-On the occasion of the release of a discussion draft of climate and energy legislation from House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Energy and Environment Subcommittee Chairman Edward Markey (D-MA)-
Statement of Eileen Claussen
President, Pew Center on Global Climate Change
March 31, 2009
Today’s proposal from Chairmen Waxman and Markey marks a bold new beginning for U.S. climate and energy policy. The Waxman-Markey discussion draft calling for an economy-wide, greenhouse gas cap-and-trade system and critical complementary measures is an ambitious, but achievable approach to our energy and climate future. The draft bill includes aggressive emission reduction targets as well as measures that will protect U.S. consumers and workers, and deploy low- and zero-emitting technologies.
While there is still work to do on a number of issues, including allowance allocation, this draft bill indicates that the Chairmen understand the importance of balancing both the environmental and economic goals of our nation. We look forward to working with the Chairmen and other members of the Energy and Commerce Committee to advance this critical climate and energy legislation.
Read the Discussion Draft here
By: Eileen Claussen and Jim Rogers
March 31, 2009
This article originally appeared in the National Journal's Energy & Environment Experts Blog.
Let’s get one thing straight: Though not perfect, we like the way President Obama and his team are addressing the potential catastrophe of climate change.
The Administration unequivocally accepts the underlying science. They realize that the cost of not acting will be far greater than the cost of taking responsible action – and that the longer we wait, the greater the costs will be for American consumers. Their emissions goals are ambitious but achievable, as is the timetable to meet them. And we agree that cap and trade is the right way to go. It’s based on common sense capitalism: it puts a price on carbon and rewards facilities that can reduce carbon dioxide and other greenhouse gases at the lowest cost, even as it provides incentives for others to find more economic ways to reduce their own emissions.
Where we temporarily part ways is when it comes to the Administration’s proposal calling for a full auction of emission allowances. How these allowances are distributed doesn’t change the overall environmental goal set by the cap. We believe it is critical that a number of them be used to reduce price impacts on households and businesses – in the early years of the program. Just this week Chairmen Waxman and Markey released a discussion draft of energy and climate legislation that leaves open how we can best address this critically important issue.
In all states, electricity is distributed by local companies regulated by public service commissions whose fundamental purpose is to protect consumers and keep electricity rates low. We recommend protecting households and businesses that purchase electricity from utilities by providing allowances to the regulated distribution companies during a transition period.
There is little question that an auction, in which allowances to emit specified amounts of carbon are sold to the highest bidders, will result in a price spike for electricity in some regions. That price spike will hit households and businesses the hardest, and for some, it will be very tough to manage.
We believe we need a climate change plan that protects against price spikes in electricity bills. Our plan would effectively curb carbon, limit the risk of price volatility, target relief to those who need it most, and take advantage of the distribution companies’ and public service commissions’ ability to deliver energy efficiency.
During the transition period from granting allowances to a full auction, there would be no windfall for utility companies or their investors. The legislation itself and actions by public service commissions would guarantee it. On the flipside, there would not be huge price increases for electricity in coal-fueled states and a much smoother transition to a cleaner economy. If this approach is not taken, the whole argument for climate change legislation could be moot – senators and representatives from those states might effectively kill legislation mandating cap and trade.
Overall, we think a cap-and-trade system that shifts from granting allowances to a full auction over time will provide the most reasonable transition to the low-carbon and thriving economy we all desire. To help ensure a smooth transition, granting allowances and auction revenues should be used to help cushion workers, households, and vulnerable industries from volatile prices. It should also support the development of critical low-carbon technologies like carbon capture and storage, and assist in efforts to better adapt to the climate change we are already beginning to experience.
With a price on carbon, energy companies will more rapidly invest in clean technologies, as long as they can be certain that future regulations neither bankrupt them nor mandate that they bet on specific untried technologies. It will also help them look deeper into renewable sources of energy, be they solar, wind, hydropower, or even agricultural waste. They will rethink nuclear power which, despite its scary image, is actually a safe, clean way to generate electricity.
We know that some of those technologies still need the kinks worked out, and that others remain prohibitively expensive. But this is where the government could use some of the revenues that it gets from auctioning allowances to other emitters now, and to utilities and competitively challenged manufacturers down the road.
We’re not ostriches, and we’re not Pollyannas. We know there is a cost to addressing climate change, and that this cost will filter down to big business, to small business, and to households. Utilities that buy carbon allowances or shift to lower-carbon generating options will have to increase their rates, but energy efficiency can lower customer bills even in the face of rate increases. And there will be far less economic upheaval if higher prices come gradually, which our transition program would ensure.
Briefing on Allowance Value in a Greenhouse Gas (GHG) Cap-and-Trade System
March 27, 2009
The Pew Center held a Congressional Briefing on the use of allowance value in a GHG cap-and-trade system. No matter what final form an eventual cap-and-trade system takes, its emissions allowances will represent significant value for decades. The panelists presented different views on how that value should be used, and the key mechanisms for distributing it.
- Judi Greenwald, Vice President for Innovative Solutions, Pew Center on Global Climate Change
Presentation Slides Windows Media Video
- Peter Molinaro, Vice President, Federal and State Government Affairs, Dow Chemical Company
Using Allowance Value to Address Competitiveness
Windows Media Video
- Chad Stone, Chief Economist, Center on Budget and Policy Priorities
Using Allowance Value to Compensate Consumers
Windows Media Video
- Melissa Lavinson, Director, Federal Environmental Affairs and Corporate Responsibility, PG&E
US Climate Action Partnership views on Allowance Distribution
Windows Media Video
- Question and Answer Session: Windows Media Video
Hon. Eileen Claussen, President
Pew Center on Global Climate Change
the Energy and Environment Subcommittee
Energy and Commerce Committee
U. S. House of Representatives
March 18, 2009
Competitiveness and Climate Policy:
Avoiding Leakage of Jobs and Emissions
For a pdf version, please click here.
For a pdf version of Eileen Claussen's oral testimony, please click here.
To read more about this hearing, click here.
For a Review of Proposed Options for Addressing Industrial Competitiveness Impacts, click here.
Mr. Chairman, Mr. Upton, members of the subcommittee, thank you for the opportunity to testify on the topic of competitiveness and climate policy, and avoiding leakage of jobs and 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 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 subcommittee, and before the Congress, 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 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: how best to encourage strong climate action by other countries, and in particular, by the major emerging economies; and 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.1 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
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 not the competitiveness of the U.S. economy as a whole that is at issue. (According to an MIT analysis of the Lieberman-Warner Climate Security Act of 2007,2 the cost of meeting the bill’s emission reduction targets in 2050, by when the U.S. economy is projected to triple in size, would result in GDP being 1% less than would otherwise be the case.3) 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
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 the Resources for the Future. This work, which we will be publishing shortly, 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. The Energy Information Administration’s core case analysis of the Lieberman-Warner cap-and-trade bill estimated a 2012 allowance price of $16.88 per ton CO2.)
The analysis finds an average production decline of 1.3 percent across U.S. manufacturing, but also a 0.6 percent decline in consumption, suggesting a competitiveness effect of 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, 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 an effective climate change policy—not a movement of jobs and production overseas. At the 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 energyintensive, 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 2008,5 the direct “process” emissions of many energy-intensive industries would not be subject to GHG limits. Exclusions would relieve tradeexposed
industries of any of any requirement to hold emission allowances and thereby eliminate direct regulatory costs, shielding them 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 would undermine the goal of reducing GHG emissions economy-wide, and would reduce the economic efficiency of a national GHG reduction program.
They also would 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.
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. The direct, or compliance, cost is the cost of purchasing any allowances needed to cover direct emissions regulated under the cap. 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), and the costs of equipment and process changes to abate emissions or reduce energy use. 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. In the case of direct emissions, allowances could be granted on the basis of historic emissions (“grandfathering”) and energy-intensive sectors could receive a more generous allocation than other emitters. For instance, energy-intensive industries could receive a full free allocation while others receive allocations for 80 percent of their historic emissions. Over time, the energy-intensive sectors could continue to be treated more generously—for instance, continuing to receive a higher proportion of free allowances as the allocation system transitions to fuller auctioning. Because free allocation provides the same economic incentive to reduce emissions as does an auction, keeping energy-intensive sectors under the cap, but providing free allowances, provides for greater environmental effectiveness and economic efficiency than excluding them. Additional allowances could be provided to compensate for indirect costs. However, as future energy prices cannot be predicted, there is no way of determining in advance whether this allocation matches the firms’ actual costs.
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.6
Whatever form the compensation takes, one critical issue is the basis for calculating the appropriate level. In the case of direct compliance costs, 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. Firms could be compensated in full for direct or indirect costs; or an output-based approach could apply a performance standard (i.e., emissions or energy use per unit of production) to encourage and reward lower GHG intensity production. The Inslee-Doyle Carbon Leakage Prevention Act7 introduced in the 110th Congress would have allocated allowances to compensate for both direct and indirect costs based on a facility’s level of output, adjusted by an “efficiency factor” which could be adjusted over time to provide firms an ongoing incentive to switch to lower-GHG processes and energy sources. The compensation would shield them from regulatory costs, lowering the risk of emissions leakage and competitiveness
impacts, while maintaining an incentive for improved environmental performance and continued operation.
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 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.
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 review could focus narrowly on the issue of trade-related impacts or it could be a broadbased review also looking at new science, technology, and economic data.
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 purchases 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.8 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.9
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). An alternative approach, described by proponents as more likely to withstand challenge under international trade rules, would instead require that imports be accompanied by allowances for their associated emissions. The Lieberman-Warner bill would have required allowances for energy-intensive imports from countries not determined by an appointed commission to be undertaking “comparable” action to reduce emissions. To avoid driving up
allowance prices for U.S. firms, importers would buy from an unallocated pool of “reserve allowances” at a price set by the government. In the 110th Congress, the Bingaman-Specter bill, the Dingell-Boucher discussion draft, and Chairman Markey’s ICAP bill all adopted variations of this approach.
One major shortcoming of this approach is its 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.10 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.
Trade measures also present significant administrative challenges—in particular, calculating the GHG intensity of imported goods. Would the imported good’s GHG intensity be calculated at the sector, firm, or plant level? Would such an assessment rely on data from the exporting country? In addition, criteria are needed to determine whether a country is meeting a “comparability” or other standard. Under the Lieberman-Warner bill, “comparable action” would have been defined as either a) a percentage reduction in GHGs equivalent to that achieved by the United States, or b) as determined by the commission, “tak[ing] into consideration… the extent to which” a country has implemented measures and deployed state-of-the-art technologies to reduce emissions. A literal application of a “comparability” standard to developing countries—particularly if border requirements are imposed upon or very soon after mandatory domestic limits are put in place—would likely be viewed internationally as inconsistent with the principle of “common but differentiated responsibilities” agreed to by the United States in the UN Framework Convention on Climate Change (UNFCCC).
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.11 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 negotiated as stand-alone agreements or as part of a comprehensive climate framework.12
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 under the trading system could be based on the GHG standard that is agreed 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.
Recommendations: An Allowance-based Approach
Based on our assessment of the available options, the Pew Center believes that Congress 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, allocations should be based on actual production levels. For indirect costs, allowances 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 the their costs, respectively. This factor should be adjusted over time as an incentive to producers to continually improve their GHG performance.
- Allowance 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 allowance 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 subcommittee for focusing the attention of Congress 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 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)
2 S.2191 of the 110th Congress.
3 Paltsev, Sergey, et al., Assessment of U.S. Cap-and-Trade Proposals, MIT Joint Program on the Science and Policy of Global Change Report 146, Appendix D, February 2008.
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 S.3036 of the 110th Congress.
6 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.
7 H.R. 7146 in the 110th Congress.
8 Greenwald, Judith M., Brandon Roberts, and Andrew D. Reamer, Community Adjustment to Climate Change Policy, Pew Center on Global Climate Change, December 2001.
9 Barrett, Jim, Worker Transition and Global Climate Change, Pew Center on Global Climate Change, December 2001.
10 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.
11 Remarks of U.S. Trade Representative Susan C. Schwab to U.S. Chamber of Commerce, January 17, 2008.
12 Bodansky, Daniel, International Sectoral Agreements in a Post-2012 Climate Framework, Pew Center on Global Climate Change, May 2007.
Hyatt Regency on Capitol Hill, Washington, D.C.
March 16-17, 2009
The U.S. government is considering a range of near-term actions to address the risks of climate change. The Obama administration and key members of Congress intend to make climate legislation a top priority this year. The earliest action, however, may come from federal agencies being pressured by the courts and states to consider limiting CO2 emissions under existing legislative authority. A key element of federal rulemaking is assessing the costs and benefits of proposed policies. While the costs of reducing greenhouse gas emissions have received much attention from analysts and policymakers, far less attention has been directed at quantifying the benefits of such reductions. In spite of remaining uncertainties, the analytical community should offer practical guidance for informing near-term decisions. Drawing from the environmental economics, impacts, vulnerability, and risk assessment communities, this workshop considers what useful insights can be gleaned now about quantifying the benefits of reducing greenhouse gas emissions. The workshop’s objectives are to develop a set of practical recommendations that decision makers can employ in the near-term and to outline a research path to improve decision making tools over time.
Symposium – Assessing the benefits of avoided climate change in government decision making
Eileen Claussen, President, Pew Center on Global Climate Change
Video: WMV PDF
Dina Kruger, Director, Climate Change Division, Office of Air and Radiation, U.S. EPA
Panel 1: Perspectives on Government Decision Making for Climate Change
Moderator: Steve Seidel, Vice President for Policy Analysis, Pew Center
- Martha Roberts, EDF: Incorporating the benefits of climate protection into federal rulemaking
Video: WMV Slides
- Christopher Pyke, CTG Energetics: A proposal to consider global warming under NEPA
Video: WMV Slides
- James Lester/Joel Smith, Stratus Consulting: Case studies on government decisions to limit greenhouse gas emissions – California, Australia, United Kingdom
Video: WMV Slides Paper
- Paul Watkiss, Paul Watkiss Associates: Social cost of carbon estimates and their use in UK policy
Video: WMV Slides
Panel 2: Challenges to Quantifying Damages from Climate Change
Moderator: Jeremy Richardson, Senior Fellow for Science Policy, Pew Center
- Mike MacCracken, Climate Institute: Overview of challenges to quantifying impacts
Video: WMV Slides Paper
- Kristie Ebi, ESS, LLC: Social vulnerability and risk
Video: WMV Slides Paper
- Tony Janetos, Joint Global Change Research Institute: Ecosystems and species
Video: WMV Slides
- Jon O’Riordan, University of British Columbia: Valuation of natural capital
Video: WMV Slides
Panel 3: The Role of Uncertainty in Assessing the Benefits of Climate Policy
Moderator: Jay Gulledge, Senior Scientist/Science & Impacts Program Manager, Pew Center
- Brian O’Neill, NCAR: Uncertainty and learning – implications for climate policy
Video: WMV Slides
- Joel Smith, Stratus Consulting: Dangerous climate change: an update of the IPCC reasons for concern
Video: WMV Slides
- Michael Mastrandrea, Stanford University: Assessing damages with integrated assessment models
Video: WMV Slides Paper
- Chris Hope, University of Cambridge: Social cost of carbon and optimal timing of emissions reductions under uncertainty
Video: WMV Slides Paper
Panel 4: Advances in the Economic Analysis of the Benefits of Climate Policy
Moderator: Liwayway Adkins, Senior Fellow, Economics, Pew Center
- Steve Rose, EPRI: Federal decision making on the uncertain impacts of climate change: Working with What You Have
Video: WMV Slides Paper
- Richard Howarth, E3 Network: The need for a fresh approach to climate change economics
Video: WMV Slides Paper
- David Anthoff, ESRI: National decision making on climate change and international equity weights
Video: WMV Slides
- Steve Newbold, U.S. EPA: Climate response uncertainty and the expected benefits of GHG emissions reductions
Video: WMV Slides Paper
Click here for more information about the workshop, including expert reports and proceedings.
Ministerial Briefing on European Climate Action
Senate Dirksen Building, Room 562
March 17, 2009, 12 - 1:30 pm
Watch a video of this event: Windows Media Player
As Washington debates new efforts to address climate change, many are looking to the experiences of the European Union for lessons to inform U.S. policymaking. In this high-level briefing, three EU Ministers outline the bloc's climate and energy policies, including recent revisions to the EU Emissions Trading Scheme, and offer insights on the EU's experiences to date.
The New EU Energy and Climate Package
Minister for the Environment, Czech Republic (holds current EU Presidency)
Emissions Trading at the Heart of Effective Climate Policy
EU Commissioner for the Environment
Climate Change as an Opportunity
Minister for the Environment, Sweden (to hold next EU Presidency)
President, Pew Center on Global Climate Change
Read the Pew Center's summary: Emissions Trading in the European Union: A Brief History
Climate Policy Memo #1: Cap and Trade vs. Taxes
Cap and trade and a carbon tax are two distinct policies aimed at reducing greenhouse gas (GHG) emissions. Each approach has its vocal supporters. Those in favor of cap and trade argue that it is the only approach that can guarantee that an environmental objective will be achieved, has been shown to effectively work to protect the environment at lower than expected costs, and is politically more attractive. Those supporting a carbon tax argue that it is a better approach because it is transparent, minimizes the involvement of government, and avoids the creation of new markets subject to manipulation. This note explores both the fundamental similarities between cap and trade and tax regimes, but also the important differences between them.
IMPORTANT SIMILARITIES BETWEEN CAP AND TRADE AND TAXES
Both correct a market failure. Both cap and trade and a tax have as their objective the correction of an existing market failure. Currently, sources responsible for GHG emissions do not have to pay for the damages they impose on society as a whole. The failure to internalize these costs leads to greater levels of emissions than would be socially optimal.
Both put a price on carbon. By placing a price on carbon, and thus correcting the market failure, both approaches create an incentive to develop and invest in energy-saving technologies. This will encourage the shift to a lower carbon economy.
Both take advantage of market efficiencies. Unlike direct regulations, both harness market forces to achieve the lowest cost reductions in GHG emissions.
Both can generate revenue. A tax by definition is designed to raise revenue, but a cap-and-trade system, to the extent that allowances are auctioned, can also raise similar amounts of revenue. How such revenues are used becomes an important issue in both systems. Some proposals rebate the revenue directly back to consumers, some use part of the revenues to ease the transition to a low carbon economy (e.g. for consumers, energy-intensive manufacturers, research development and deployments, etc.) and some combine both approaches.
Both impose a compliance obligation on a limited number of firms. Depending on who pays the tax or is responsible for holding allowances, the number of firms directly impacted by these systems can be large or small. Most proposals focus on a limited number of firms with the goal of maximizing emissions coverage and reducing administrative costs.
Both necessitate special provisions to minimize adverse impacts. By putting a price on carbon, both systems raise concerns about adverse impacts on energy-intensive firms and manufacturing states, and on workers and communities that historically have been dependent on fossil fuels. For example, both could result in large wealth transfers from coal and manufacturing states to other parts of the country. However, through special tax provisions or the use of allowance value, either can be designed in a way to mitigate adverse impacts on disadvantaged groups. Similarly, both systems would require special provisions to avoid imposing requirements on GHGs that are consumed as feedstocks or to provide credit for reductions that result from capturing and storing carbon or expanding carbon sinks.
Both require monitoring, reporting and verification. Both systems require similar data on emissions, reporting and verification of that data, and enforcement in the event of noncompliance.
Cost certainty v. environmental certainty. By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces. In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces.
Compliance flexibility for firms. A tax requires a firm each year to decide how much to reduce its emissions and how much tax to pay. Under a cap-and-trade system, borrowing, banking and extended compliance periods allow firms the flexibility to make compliance planning decisions on a multi-year basis.
Impact of economic conditions. Changes in economic activity impact a firm’s behavior under either system. Under a cap-and-trade system, reduced economic growth would lower allowance prices. Under a tax, government action to lower the amount of the tax, not market forces, would be required to reduce the carbon price seen by firms. In times of economic expansion, the opposite would be true – under cap and trade, allowance prices would rise based on market forces, but taxes would remain the same unless adjusted through government action. In this sense, cap and trade can be seen as providing a self-adjusting price, high when the economy is doing well and low when the economy is in a downturn. A tax in contrast is not self-adjusting.
Linkage to other systems. Ideally, a global price for carbon would develop and allow cost efficiencies to be realized across borders. While we are a long way from a global system, several trading regimes are already operating, expanding, or are planned which could allow international linkages across systems in the future. Far fewer jurisdictions have either instituted or are considering carbon taxes and the notion of an international carbon tax has been considered but generally rejected as not realistic.
Experiences to date: Cap and trade has become the cornerstone of successful efforts to achieve low-cost reductions in sulfur dioxide emissions in the United States. For GHGs, this same approach is also being relied upon in the European Union (EU). The EU has implemented a GHG cap-and-trade program covering thousands of sources and has created a market with millions of transactions producing a market price for carbon determined through supply and demand. Following a trial period, during which a number of start-up challenges were encountered (e.g., lack of data, different approaches across Member States), the EU has succeeded in establishing the building blocks for a successful trading regime. Cap and trade is also being used in three regional trading programs in the United States and Canada. The use of taxes aimed at reducing GHG emissions has initially been used in several countries, including Norway, Sweden and Germany that are now relying increasingly on emissions trading. Carbon taxes have also been used in a few local governments in the United States and Canada. A carbon tax was considered by the Clinton Administration in 1992, but quickly became loaded down with special exemptions, was redirected away from carbon to be a BTU tax to avoid burdening coal, and was ultimately enacted as a few pennies tax on gasoline.
This review of cap and trade and taxes suggests that many of the longstanding myths about these approaches fail to recognize advances in design options aimed at addressing earlier concerns. While a tax regime sounds simpler in theory, history suggests that special provisions would be added, for example, to avoid adversely impacting specific regions, to exempt feedstocks and to mitigate competitiveness concerns. While a cap-and-trade regime doesn’t directly provide price certainty, recent proposals include temporal flexibility (e.g., banking, borrowing, and multi-year compliance periods) as well as floor prices and offset provisions that would dampen price volatility. In the end, history suggests that it is unlikely that a tax would result in a simpler system. The greater flexibility for firms and greater certainty that environmental objectives will be met appear to be the greatest strengths of a cap-and-trade policy.
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.