Climate change is a global challenge and requires a global solution. Through analysis and dialogue, the Center for Climate and Energy Solutions is working with governments and stakeholders to identify practical and effective options for the post-2012 international climate framework. Read more
Experts from the Pew Center on Global Climate Change offer insights into the latest Congressional and regulatory efforts to reduce U.S. emissions, and outline recommendations for a comprehensive framework agreement in Copenhagen as a foundation for negotiating a ratifiable treaty.
Tuesday November 3
Fira Gran Via Convention Centre, Barcelona
Vice President, Federal Government Outreach
Presentation: U.S. Domestic Climate Legislation - State of Play (pdf)
Vice President, Policy Analysis
Recent U.S. Federal Actions to Address Climate Change (pdf)
Vice President, International Strategies
Presentation: A Copenhagen Agreement (pdf)
- Brief: A Copenhagen Climate Agreement
- Post-2012 Climate Policy Briefs
- U.S. Senate Legislation (under debate)
- U.S. House Legislation (passed House in June)
- Paper: Legal Form of a New Global Climate Agreement
- Report: MRV in Post-2012 Agreement
- U.S. Climate Action Partnership (USCAP)
Post-2012 Climate Policy Brief: Verifying Mitigation Efforts in a New Climate Agreement
A new global climate agreement will be most effective if parties are confident that it enables them to assess how well others are fulfilling their obligations. This can be achieved through a rigorous system of measurement, reporting, and verification. Key elements should include: annual emission inventories for all major greenhouse gas-emitting countries; national verification of mitigation commitments and actions in accordance with international guidelines; regular reports from parties detailing their implementation and verification of their commitments and actions; and expert review of parties’ inventories and implementation reports. Beyond verification, a new agreement should provide for a clear determination of whether a party is in compliance with its commitments. The compliance approach should be largely facilitative, rather than punitive, geared toward helping to identify and overcome obstacles to implementation.
Post-2012 Climate Policy Brief: Comparability of Developed Country Mitigation Efforts
The “comparability” of climate mitigation efforts undertaken by developed countries can be assessed in many different ways. Some relevant factors such as emissions, population, and GDP are readily quantified and compared; others, such as a country’s geography, economic structure, or trade profile, are not. Given the multiplicity of factors at play, parties are unlikely to agree on an explicit formula to determine, or to assess the comparability of, their respective efforts. Rather, efforts are likely to be agreed through political bargaining in which countries emphasize the metrics and national circumstances that most favor their positions. The outcome will likely rest on parties’ mutual assessments of one another’s efforts, employing the criteria they deem most relevant.
LOS ANGELES -- Sub-national leaders from over 50 countries gathered last week in Los Angeles, California as part of Governor Schwarzenegger’s 2nd annual Global Governor’s Climate Summit. Topics ranged from public health impacts of climate change to technological solutions to the role of youth leadership and education. The summit kicked off with a surprise appearance by Harrison Ford, announcing the establishment of a new collaboration convened by Conservation International called Team Earth, which will focus its first effort on global deforestation. Forests emerged as a recurring theme of the discussions here. Motivated by concern that deforestation must not be excluded from the negotiations of a climate treaty this time around, 11 governors from the U.S., Brazil, and Indonesia signed a memo addressed to their nations’ presidents, pressing for a robust deforestation policy mechanism to come out of Copenhagen.
Leaders from across the globe also expressed growing concern about preparing their citizens to adapt to climate change. It is clear that leaders on the local level are worried about the impacts that are already being felt by their citizens and are anticipating their growing role in implementing policies to address adaptation, in addition to greenhouse gas reductions. Some have even begun to classify jobs in climate adaptation as “green jobs” and are working to expand the number of these jobs in their jurisdictions.
Another overarching takeaway is the sense that local and regional governments embrace their important role in combating climate change, repeatedly referring to policies implemented at sub-national levels across the globe as examples for national action.
BANGKOK -- It’s no surprise, in the pre-Copenhagen posturing, that the United States is once again seen by many as the single greatest obstacle to an effective global climate effort. The truth, though, is that the U.S. is hardly alone. On all the key issues – emission targets, developing country commitments, and finance – other key players aren’t ready to strike a final deal either.
In his address last week to a high-level UN climate summit, President Obama offered an impressive list of early accomplishments. Yet as was painfully evident, absent comprehensive legislation from Congress, the administration comes to the negotiating table with loads of good intention, but not yet prepared to take on binding international commitments.
Other countries, meanwhile, appear to be showing some movement.
Both China and India, long viewed as the other principal barriers to agreement, are signaling a new willingness to act - at least domestically. President Hu Jintao told the UN summit that China will set a goal to reduce its carbon intensity by a “notable margin.” India’s government is talking about setting domestic goals to limit its greenhouse gas emissions. These steps are encouraging, and may help inoculate the two countries against blame in the event Copenhagen is a failure. But in neither case has the government offered specific numbers or said it is prepared to translate its actions into international commitments.
Yukio Hatoyama of Japan did come to the summit with a number. Two weeks earlier, fresh from his landmark election victory, the new prime minister had set aside the previous government’s goal of reducing emissions 15 percent below 2005 levels by 2020, a target roughly in line with the numbers being debated in Washington. In its place, he declared a far more ambitious goal of 25 percent below 1990 levels – provided other major economies pony up their fair share.
Speech by Eileen Claussen, President, Pew Center on Global Climate Change
New York, NY
September 29, 2009
Thank you very much. It is a pleasure to be here in New York, and I am honored to be your keynote speaker today. The organizers of this seminar have asked me to provide an overview of what's been happening in Washington, DC on the climate issue in recent months. And I want to preface my remarks with a request. If you happen to disagree with anything I say, please refrain from shouting "You lie."
In all seriousness, I want to commend the organizers of the seminar for their excellent sense of timing. Over the past two weeks, we have seen a whirlwind of activity on the climate issue. As we speak, talks are under way in Bangkok in one of many, many such meetings in preparation for the U.N. climate meeting in Copenhagen at the end of the year. Two weeks ago, there was a meeting in Washington of representatives of the nations that are part of the Major Economies Forum. This was followed by the September 22nd U.N. summit on climate change here in New York that included President Obama, Prime Minister Hatoyama and many other heads of state.
It is a wonder we don't all have climate meeting fatigue. And whether all of this meeting and all of this talking will lead to definitive action is really the question of the hour when it comes to climate change.
In his remarks at the UN last week, President Obama captured the urgency and challenges facing global climate action. He said: "Difficulty is no excuse for complacency. Unease is no excuse for inaction. And we must not allow the perfect to become the enemy of progress."
Later in my remarks, I will talk in more detail about the progress taking shape on the international scene on the climate issue. I also will address the significance of the steps already taken by the Obama administration to tackle our climate and clean energy challenge. Finally, any discussion of U.S. policy by definition means a discussion of U.S. politics. So we may be here for awhile.
The Science and the Polls
But before talking about the prospects for climate action in the United States, I want to open with a look at the science. And I do this because I believe very strongly that it is important to preface any assessment of where we stand in addressing the climate issue - either domestically or internationally - with a clear illustration of why we are having this discussion.
We have gathered here at the Japan Society not because of the delicious breakfast buffet or because they're offering free coffee (well, maybe one or two of us are here for these reasons). But the main reason why we are here is because climate change is real, and we need to do something about it.
It is so easy for many of us, including myself, to get caught up in the politics and policy discussions around this issue. And, in the process, we can forget about the magnitude of the problem we are trying to solve. In every debate about this issue, in every panel discussion, in every engagement with those who might disagree with us on the details of how to respond, we must always put the science first.
And the science is clear: Climate change is happening now, it is happening in our own backyards and across the globe, and it is happening much faster than predicted.
In recent years, we've observed significant melting in the Arctic and Antarctic, more intense storms wreaking havoc on small island nations and on global powers like the United States and China, and greater occurrences of severe drought in certain regions and floods in others that devastate crops and infrastructure. These problems will only worsen without significant action to cut back global emissions of greenhouse gases.
But while the science is one clear reason to act, there is another imperative, one that is particularly important in a time of economic recession. If we are to build ourselves out of this economic downturn, we must do it by creating a new economy, and the economy that is ripe for rebuilding is the energy economy.
This is a point on which you can find broad agreement among Republicans, Democrats, and Independents. The American people understand that our energy status quo is unsustainable. Among the biggest problems: we rely too much on foreign sources of energy when doing so threatens our security and our economy. And, at the same time, other countries are working hard to develop viable alternatives. We must be a part of this competition. Business leaders, policymakers, entrepreneurs, teachers, students, parents - all of us must capitalize on the opportunity to put American ingenuity to work and make the United States a global leader in advancing a clean energy transformation.
And so we really have no choice but to move forward. Because of the science and the need to grow our economy, we cannot continue doing what we are doing. And guess what? The American people for the most part understand this. Despite all the noise emanating from town hall forums and rallies aimed at painting the climate issue as a political loser, most Americans want action from their government that starts us down the path to a new energy future.
Two ABC News/Washington Post polls in April and June found that 75 percent of Americans support federal action to regulate emissions to address global warming ... 75 percent. And just last month, a 52-percent majority of Americans said they support a cap-and-trade policy to reduce U.S. emissions.
Voters in the U.S. also have a positive view of the potential for job creation under new climate and clean energy policies. For instance, two surveys this summer by Zogby and the Pew Charitable Trusts found that 68 percent and 65 percent of voters, respectively, said climate and clean energy legislation will drive job creation or have no adverse impact on jobs.
Please do not get me wrong: I am not saying that the politics of this issue are a slam-dunk or that it will be easy to pass legislation. What I am saying is that a solid majority of the American people understand the need to act on this issue. And they will support new policies that are cost-effective, that generate new jobs through investments in clean energy, and that start America on a path toward a higher level of energy security.
And the truth is, American policymakers have begun to respond. Despite Washington's deep immersion in the details of health care reform, there has, in fact, been a fair amount of discussion (and action) related to the climate issue this year in Washington.
Will the Administration and Congress reach agreement in 2009 on a comprehensive plan to begin to slow the growth of U.S. greenhouse emissions? Using the language of the health care debate, I would say the prognosis is very doubtful. But at the same time, we know that this is a problem we cannot ignore if we want to see less damage to our environment and future economic growth. Our priority must be to keep building on this effort and to keep moving forward.
For months, everyone involved in the climate issue has been talking about whether the U.S. needs to pass comprehensive legislation before the climate talks in Copenhagen in December - many have suggested that without a completed U.S. plan in place, the international talks will fail.
I don't share this view. I believe what's important right now is that the U.S. be able to show progress in Copenhagen. We need to show: 1) that we are serious about this issue; and 2) that we are indeed taking action to begin to reduce emissions.
Whether the negotiations in Copenhagen will produce anything close to a final agreement is a question I intend to explore later in my remarks. But I do not believe that the talks are destined to fail solely on the basis of whether the U.S. has a cap-and-trade plan in place or not.
The Domestic Picture
With that, I want to address where we stand right now on the climate issue in this country. In the middle of the current health care debate, we often forget that the U.S. House of Representatives did something quite remarkable back in June. It passed by a vote of 219 to 212 a bill that would establish an economy-wide, greenhouse gas cap-and-trade system. And this week a cap-and-trade bill will likely be introduced in the Senate. I'll address the Senate debate in a moment, but the significance of the House's action this summer deserves more than a passing mention.
The House bill, formally known as the American Clean Energy and Security Act, would reduce aggregate emissions for all covered U.S. sources to 83 percent below 2005 levels in the year 2050. Interim reductions would be as follows: 3 percent below 2005 levels in 2012, 17 percent below those levels in 2020, and 42 percent below those levels in 2030.
The House legislation also included a wide range of critical complementary measures to help address climate change and build a clean energy economy. Yes, it was a narrow win ... and yes, it was a difficult vote for many in the House ... and yes, we still have a steep hill to climb in the Senate because there remains a great deal of opposition. But the House effort led by Congressmen Henry Waxman and Edward Markey sent a clear signal to families, workers, and businesses that a clean energy future is possible.
Think back a few years to the early part of this decade - no one in their right mind would have predicted back then that American lawmakers would do this, that they would approve a measure this far-reaching, designed to achieve this level of reductions in U.S. emissions. But they did. And the vote in the House on the American Clean Energy and Security Act is just one in a string of actions taken in Washington in recent months that show a real commitment on the part of our elected leaders.
As we approach the one-year anniversary of the election of President Obama, it is easy to forget how, in his first months in office, he made some crucial decisions that will result in real reductions in U.S. emissions of greenhouse gases, and real changes in how we produce and use energy in the decades ahead.
Going back to February, the economic stimulus package signed by the President that month included more than $80 billion for everything from smart-grid technologies to renewable energy development to energy efficiency improvements and mass transit. This funding represented a relatively small share of the overall stimulus, but it is a start - a down payment on building the clean energy infrastructure that we need to keep our economy strong for decades to come.
Then there was the U.S. Environmental Protection Agency's decision in April, in response to a 2007 Supreme Court decision, to open the door to regulation of greenhouse gases. The EPA's proposed finding is that these gases contribute to air pollution that may endanger public health or welfare. If finalized, as is expected, this would mean that greenhouse gases could be regulated under the federal Clean Air Act. Of course, the Obama administration still prefers a legislative solution to reducing U.S. emissions - but the EPA action is a clear sign to Congress and others that the White House will move forward on this issue in the event that Congress canít agree on a plan. And, in fact, there was an attempt last week to see if the Senate could agree to a rider on an Appropriations bill that would delay EPA action under the Clean Air Act. It never came to a vote because there were not enough votes to pass it, which means that EPA action to deal with greenhouse gases can be expected.
The Administration has, in fact, been quite busy on the climate issue over just the past few weeks. For example, earlier this month the EPA proposed the first regulation under the so-called "endangerment" finding - it's a joint proposal with the Department of Transportation to require cars to achieve 35 miles per gallon by 2016. By acting to reduce vehicle emissions, the Obama administration is acknowledging that we need to work on many fronts on this issue simultaneously if we want to achieve the broad-based reductions that are needed to protect the climate.
Just last week, the EPA finalized a new reporting system that, for the first time, will provide accurate data on all significant greenhouse gas emitters in this country. The new program will cover approximately 85 percent of the nationís GHG emissions and apply to roughly 10,000 facilities. A greenhouse gas registry is the foundation for building a successful and transparent federal program and marks a significant step in the process to U.S. reduce emissions and protect the climate.
Also in September, the White House floated a draft proposal that would set a goal for federal agencies to reduce their emissions by 20 percent by 2020. The federal government is the nation's largest energy consumer. This action, if approved, could help spur the development of clean-energy technologies and make it easier for the private sector to follow suit. It is another clear sign of the White House's commitment to action on this issue, and a sign that we can begin making progress right now.
So let me sum up where we stand: In his statements, his appointments, his stimulus plan, and his early executive actions, President Obama has given every indication that he understands the urgency of the climate challenge and is determined to meet it. And, with the House having passed comprehensive cap-and-trade legislation, the United States is in a very different place on this issue than we were even one year ago.
Adding to the sense that times have changed is the involvement of leading U.S. businesses in the search for solutions. There is a group that many of you may know about called the U.S. Climate Action Partnership. And what's unique about this group is that its leadership includes a range of Fortune 500 companies, in partnership with the Pew Center and leading environmental organizations. And, over the past couple of years, USCAP has become a powerful advocate for strong and swift action on climate change.
A decade ago, it would have been unimaginable for leading businesses to sign on to an agenda advocating cap-and-trade and other measures to achieve dramatic reductions in U.S. emissions. But the USCAP Blueprint for Legislative Action is part and parcel of a campaign that has engaged leading business executives from companies such as Alcoa, GE, Shell and many others to become active and very visible supporters of climate solutions. Their call for strong action and regulatory certainty on this issue has found a receptive audience in Washington and has provided a vital push for Congress.
Of course, now that the House has passed legislation, the focus has shifted to the United States Senate. Getting climate legislation through the Senate would be challenging in any circumstance - but it is especially challenging right now because the Senate is embroiled in a highly contentious debate on another topic: health care. The idea that senators will pick up the mantle of transforming the nationís energy economy while still working on plans to reform the one-sixth of the U.S. economy connected to health care is frankly wishful thinking.
The bottom line is that until health care is resolved it will be hard to get traction for anything else. Indeed, the manner in which health care is resolved could make it harder or easier to achieve progress in the Senate on climate and energy legislation. I donít want to dig too deep into the details of Senate procedures except to note that winning health care through the reconciliation process - in other words, with a simple majority of senators, all of them (or almost all of them) Democrats, would not help the prospects for enactment of a cap-and-trade bill. It might get health care through, but it will be decidedly unhelpful for the climate debate.
And here's why ... Health care reform could potentially draw the support of the entire Democratic caucus in the Senate - or almost the entire caucus. Climate change legislation is different. We can't expect every Democratic senator to vote for cap-and-trade - for example, several Democrats from heavy manufacturing states and states that rely heavily on coal for electricity and jobs are not yet sold on this approach. So cap-and-trade will need at least some solid Republican support - and right now even Republicans with years of leadership on climate change have been reluctant to step into the fray. To the extent that the health care debate widens the partisan divide even further, then getting these Republicans on board for climate legislation will be that much harder.
Adding to the challenge in the Senate are a number of other important items on the legislative calendar - namely financial regulatory reform and the annual spending bills, all of which could further push back the full Senate's consideration of climate legislation.
So where does this leave us?
Well, right now, Senators John Kerry of Massachusetts and Barbara Boxer of California are putting the finishing touches on a cap-and-trade bill to present to the Senate. The bill may include one Republican supporter as well. Along with the majority leader, Harry Reid of Nevada, Senators Kerry and Boxer continue to say they want to see action in this Congress - perhaps by December, perhaps spring of next year - but the bottom line is that the leadership remains committed. And optimistic.
However, getting the 60 votes required in the Senate for a cap-and-trade bill will be very hard. Not only will the Senate need to overcome partisan divisions that will likely harden in the course of the health care debate, but senators also will need to resolve a number of very difficult issues standing in the way of agreement on climate legislation. These include an array of very technical questions, such as the allocation of emission allowances, how we should reduce costs for consumers and businesses, how we should deal with carbon offsets, how much oversight of the carbon market we should insist on, and how we should treat nuclear power.
So given all of these things, it's my belief that Senate passage of an energy and climate bill is unlikely to happen this year. A better bet would be early 2010 - and I say early 2010 because, as we all know, next year is an election year, and the later we get into the year the harder it will be to draw sufficient support from politicians of both parties.
But even in 2010, getting climate legislation through the Senate will still be a heavy lift. Among the keys to success: the White House will have to become much more deeply engaged in the details of the legislation.
We have all seen how the Obama Administration was criticized for its tendency to push onto Congress the responsibility for forging a plan to reform health care. And the opinion among the commentariat is that the President's re-engagement on the health care issue through his address to Congress earlier this month has helped to create new momentum for action. At the appropriate time, there's no doubt that we'll need strong engagement from the White House on climate change as well.
The Obama Administration will need to advance a fairly detailed vision for a climate bill and become more involved in the legislative process. That vision would have to include solid answers to questions like: How will this program help (and not harm) the economy? How will energy intensive manufacturing industries not be disadvantaged? How will this bill advance key low-carbon energy technologies, such as carbon capture and storage, nuclear power, wind, and solar energy?
To beat back the small but vocal anti-climate sentiment and to create enough cover for Republicans and moderate Democrats who are on the fence about supporting climate action in the current political environment, the White House needs to get out there and aggressively make the case for action - and, yes, flesh out the details of exactly what that action should entail.
People want to know how climate and energy legislation can ultimately benefit the economy in their hometowns and in their states. The White House and its allies need to talk about that - and they also need to talk about the costs of not acting on this issue.
This is something we often forget to emphasize in this debate. In the same way that we need to base every discussion of this issue on the science and what it tells us, we also need to remind people that climate change will create very substantial costs for our businesses and our economy if left unaddressed. Consider the costs of having less water available for farming, or of increased wildfires in the West, or of cleaning up and rebuilding after a greater number of floods and more violent storms. All of these are real and substantial costs - and they need to be part of the discussion.
Businesses and families will experience these costs of inaction. For instance, reductions in California's water availability could cost farmers upwards of $3 billion per year by 2050, and increased wildfires in the West could cost homeowners an additional $2 billion annually.
To underscore these financial risks, I want to share with you a short quote from an article about the costs of addressing climate change. The article is by Jeff Sterba, chairman and CEO of PNM Resources, a leading electrical utility company in the southwestern United States.
"Make no mistake," he wrote. "There is a cost to addressing climate change that we will all bear. But the highest cost would come from ignoring climate change, and the lowest cost will come from sound federal legislation."
I repeat: the highest cost will come from ignoring climate change. We need to keep drilling that into people's heads. And, in fact, the costs of ignoring this issue are not limited to the costs of dealing with the impacts of climate change. There are also costs to business associated with not knowing how government is going to act.
Businesses are poised to invest billions in advancing a clean energy economy, but right now, with the regulatory picture so uncertain, businesses will continue to delay making the necessary investments in new energy sources and new low-carbon technologies. The longer they wait to do this, the more expensive it will be. And the more we will cede to others the opportunity to lead the world toward a new energy future.
You can look at this issue from either an environmental or an economic standpoint - or both. And no matter how you look at it, we need to act. President Obama recognized this last year when speaking about climate change. He said: "Now is the time to confront this challenge once and for all. Delay is no longer an option. Denial is no longer an acceptable response. The stakes are too high. The consequences too serious."
And the truth is, we are beginning to act. As I have said, the Obama Administration already has taken important steps that ultimately will bring real reductions in emissions from cars and trucks, buildings, and other sources. Combined with the House legislation and the EPA's proposed greenhouse gas endangerment finding, the U.S. is sending a clear sign that that we are finally starting to give this issue the attention it deserves.
Is all of this activity enough to convince the rest of the world that the United States is intent on doing its part to reduce emissions? Only time will tell. All I can say right now about the international discussions is this: In the same way that we need to be realistic about the prospects for a breakthrough on cap-and-trade in the United States in 2009, we also need to be realistic about what can be achieved this year at the global level.
Last week's U.N. climate summit in New York offered a welcome chance for the leaders of some of the key countries in this dialogue to clarify their positions and their intentions as we look ahead to the Copenhagen meeting in December.
President Hu Jintao of China used the forum to say that his country would set a target to reduce the carbon intensity of its economy. While he did not provide exact figures, or say the government is prepared to make this an international commitment, he said China would cut carbon emissions in relation to gross domestic product by a "notable margin" by the year 2020. He also talked about taking specific steps toward increasing forest coverage and increasing the share of non-fossil fuels in the nationís energy mix.
Japan's new Prime Minister, Yukio Hatoyama, reiterated his pledge that Japan would reduce its emissions 25 percent below 1990 levels by 2020 - a much more ambitious target than the one set by the previous government - provided that all major economies commit to do their fair share.
Both Mr. Hatoyama and Mr. Hu also spoke of the importance of international cooperation in areas from technology transfer to financing for developing country mitigation efforts.
President Obama, for his part, emphasized all the steps taken by his administration in just eight months to move this issue forward both domestically and internationally. There is still quite a way to go. But even as the administration is working toward an effective program at home, it is reaching out in a constructive way in search of diplomatic solutions. For instance, the United States is leading a revamped Major Economies Forum where 17 of the worldís largest-emitting nations meet to help narrow gaps in the broader global climate talks. The Pew Center, I would note, was among the very first to advocate a major economies dialogue of this type.
The administration also has launched a high-level energy and climate dialogue with China. The two countries recently announced plans for a joint Clean Energy Research Center, and I expect we'll hear about other new partnerships when President Obama visits China in November.
I mention these initiatives to underscore the value of maintaining momentum on the climate issue, and to highlight the fact that the United States and other nations are indeed engaged in serious work to begin to carve out a response. But I also believe in the value being realistic. So while there is indeed much work under way, achieving a full and final outcome in Copenhagen this year is unlikely. Instead, we believe the goal in Copenhagen should be a strong interim deal. Under this scenario, negotiations would continue next year toward the ultimate goal of agreeing to a climate treaty that includes all of the major economies.
The Pew Center has never believed it was likely that we would see a final, ratifiable treaty emerge from Copenhagen. Rather, we have suggested that it would be both important and ambitious for Copenhagen to produce an interim agreement. Such a deal would establish a new international legal structure - including the types of obligations to be taken, by whom, and how they will be verified - so that countries can move on to negotiating specific commitments in a final treaty.
A good Copenhagen agreement must do a number of things. First, it must outline a new legal framework for verifiable mitigation commitments by all major economies. In our view, these commitments should include economy-wide emission reduction targets for developed countries and a broader range of lower-carbon policy commitments for major developing countries. Second, a Copenhagen agreement must establish the nature and scale of support that will go to developing countries to reduce emissions and adapt to climate change. Third, it must include a clear mandate to conclude a final agreement by a date certain. And fourth, it must set an ambitious level of effort. This should include a global goal of cutting emissions at least 50 percent by 2050; an aggregate 2020 target for developed countries; and a collective peaking year for developing countries.
The United States doesnít need final legislation at home in order to negotiate an interim agreement of this type. And once the framework is agreed, the United States and other countries will then be in a much better position to fill in the details, including their specific national commitments.
There's no doubt that anything short of a full and final agreement in Copenhagen will still strike some as a woeful failure. But given how complex the issues are, and how far apart countries remain, achieving even a provisional agreement of this kind in the short time left is a huge challenge. I think we can meet that challenge, and use the Copenhagen meeting as an opportunity to put some of the toughest issues behind us and create positive momentum going forward. Rather than a grand culmination, Copenhagen could be a powerful springboard toward a final deal.
And the United States can and must play a leadership role in making this happen.
For those of us who are involved in this debate, the important thing right now is to keep our eyes on the prize. The United States and other nations may not get everything done this year that we believe is necessary, but as long as we can continue to move forward, and as long as we can continue to see policymakers at all levels embracing steps that can result in real progress on this issue in the months and years ahead, then we are indeed getting somewhere.
Does the dreamer in me hope we can do more this year? Of course. My dream is that health care moves forward in a bipartisan fashion and the economy shows clear signs of turning up ... and Congress then comes together across partisan lines to pass a robust cap-and-trade plan that then positions the United States to lead the way to a final agreement in Copenhagen. What a year that would be.
But I am also a realist, and the realist in me says stop dreaming. And perhaps all of us involved in this discussion need to adjust our expectations and work to ensure that the process continues moving forward in a substantive way. We have a great number of accomplishments to point to, and there has been a great deal of progress on this issue in the last year alone. This is something to celebrate, and to build on, in the weeks and months ahead.
Thank you very much.
Whenever the UN climate change negotiations convene these days, as they will again later this month in Bangkok, an oversized digital timer glares at delegates from the front of the hall, methodically counting down the days, hours, minutes, even seconds until the upcoming climate conference in Copenhagen. (The online version at the website of the UN climate secretariat reads at this writing 81:13:02:28.)
This staged countdown is a stark, if superfluous, reminder of the expectations looming for Copenhagen, arguably the most pivotal moment in climate diplomacy since Kyoto 12 years ago. With the dangers of global warming more clear and present today than any had foreseen then, countless are not only eager but desperate for Copenhagen to deliver what Kyoto did not – an effective global response.
But with the days quickly ticking away, it is becoming clearer to all that the time is too short. A blitz of high-level diplomacy might yet conjure a miracle, but less than three months out, the odds of a final, ratifiable deal by the time the clock hits zero appear virtually nil.
Welcome to our new blog. This blog presents ideas and insights from the Center and its experts on topics critical to the climate conversation. These topics include domestic and international policy, climate science, low-carbon technology, economics, corporate strategies to address climate change, and communicating these issues to policymakers and the public. Our bloggers include policy analysts, scientists, economists, and communication specialists – all of whom are working to advance solutions to our climate and energy challenge.
Thank you for visiting our blog, and check back often for more timely posts.
Tom Steinfeldt is Communications Manager
The article originally appeared in the Council on Foreign Relations, August 2009
Interviewee: Eileen B. Claussen, President, Pew Center on Global Climate Change
Interviewer: Stephanie Hanson, Associate Director and Coordinating Editor, CFR.org
In June 2009, the House of Representatives approved legislation that would establish a cap-and-trade program to reduce U.S. greenhouse-gas emissions. The bill now awaits action by the Senate. Meanwhile, a controversial program (NYT) for trading in used vehicles for new cars with higher fuel efficiency standards has been extended by Congress. Eileen Claussen, president of the Pew Center on Global Climate Change, says Congress might pass U.S. climate legislation in 2010, after it finishes dealing with health care reform. In the interim, the Obama administration is "moving forward in a very deliberate way under the Clean Air Act because in fact they have to. They don't actually have much of a choice." She stresses the importance of U.S. domestic policy for making progress on global climate talks, set for December 2009 in Copenhagen. "Everything globally is dependent upon [U.S. domestic legislation] before all the other pieces can fall into place, which might take a considerable amount of time. But until you at least get this, it's not clear that you can get any of the other pieces."
The cash for clunkers program has been billed as partly an environmental plan and partly an economic stimulus. In your opinion how does this program rate as climate policy?
One of the important parts of the climate policy is to deal with transportation. The cash for clunkers program moves vehicles in the right direction. This particular legislation doesn't move them, I think, as far as they need to be moved or as far as they will be moved when the rulemaking is done [i.e. when new national fuel efficiency standards are set] and there are specific standards for automobiles. But you do have to trade in a vehicle with poor mileage for one with better mileage. The statistics on the first phase of this program, the one that would have just run out, had an average trade-in mileage of just under sixteen miles per gallon, and the cars that people then bought [had an average of] twenty-five miles per gallon, which is actually a 61 percent improvement. That will cut down on greenhouse-gas emissions from vehicles within the transportation sector. It's a big first step for the climate.
In any future kind of iteration of the program, are there specific recommendations that you would make for modifying it to be more beneficial in terms of climate policy?
The bigger the gap between the car you bring in and the car you go away with, the better it is in terms of climate. Here the requirement, I think, was four miles per gallon but it turns out that people actually traded in [for] cars that were considerably more efficient than that. The more you can move that up to make sure that you only get more efficient vehicles, the better it is for the climate. It isn't clear to me that they're actually going to do that. They're just going to put more money into the existing program, which still makes a significant difference.
The administration has been spending a lot of political capital on health care reform, something that a lot of Americans consider a priority. With climate change, there was a Pew poll late last year that found that nearly 40 percent of those polled didn't think that climate change should be a policy priority. What does this mean for the U.S. Congress and climate policy? Will Congress be able to pass legislation, or will the Obama administration need to resort to using the Environmental Protection Agency or the Clean Air Act to make progress on greenhouse-gas reduction?
Health care is much more difficult than the administration thought it would be. I don't think they thought it would be easy, but it looks like it's going to be very very difficult to pass something. Then the administration would be in the position of asking Congress to take on another difficult, controversial issue, which can also [be] relatively partisan in how Congress looks at it. There's no question that everyone in the administration would prefer a legislated solution to moving forward with the Clean Air Act, but they also don't have that much choice. They're going to have to move forward with the Clean Air Act in the absence of legislation. So, I don't think it's the first choice. They're going to try to push Congress pretty hard after health care is done to pass something. There's a fair chance that you might get something passed in 2010. But they're moving forward in a very deliberate way under the Clean Air Act because in fact they have to. They don't actually have much of a choice.
How does that timing of potentially moving climate legislation forward in 2010 mix with the UN climate meeting in Copenhagen in December 2009?
If I were the administration, I would want much more certainty than just having a bill through the House before I negotiated a target. And the odds of the Senate actually passing something and having a conference before Copenhagen are very small. I just don't think that's going to happen. But it's important to understand that there are a whole set of issues that have to be resolved in Copenhagen and it isn't entirely clear that any of them could be resolved. There is of course the issue of what the developed countries agree to in terms of an absolute reduction [in greenhouse-gas emissions]. But there is also the issue of what the major developing countries would agree to, which I think is not going to be targets. There would have to be some fairly robust policy, and I'm not sure that we're that close to figuring out what these kinds of policies might be. And then there's a third issue which has to be resolved in Copenhagen and that is what kind of money the developed countries are going to put on the table to help developing countries move to a less carbon-intensive economy. This is not an easy year for any of the developed countries to come forward with significant sums of money, certainly not in the range that the developing countries are now asking for.
So, yes, what the United States is willing to do is crucial to a deal, but so is the resolution of all of these other issues. I myself think that the best we can get from Copenhagen given the complexities and where countries are is a framework, and then try to spend 2010 filling in the details. Hopefully by then we will have a better idea in the United States of the kinds of details that we ourselves can fill in.
How important do you think the United States is in that Copenhagen process? If what you felt to be the best-case scenario for U.S. climate policy unfolded in the next year, how much effect will that have on global climate talks?
The United States is crucial. There cannot be and there will not be another global agreement without the United States. I mean there just won't. We are too big a contributor to the problem and we're a big economy. I don't think any other country would agree to anything unless the United States was a full participant. We have to work very hard to see if we can pass legislation in the United States, which means working very hard on the Senate to see if you can find a piece of legislation and sixty votes that are a good step for the climate. I don't think it's impossible to do that, but we have to work very hard on it, to figure out what the compromises are and whether you can do it. If health care is really difficult, there's a question of whether the Senate wants to take up something else that is really difficult after they do that, assuming that they actually come to a conclusion on that.
But [U.S. climate change legislation] would be the highest priority. Everything globally is dependent upon that step before all the other pieces can fall into place, which might take a considerable amount of time. But until you at least get this, it's not clear that you can get any of the other pieces. To me the most important thing is getting a domestic policy in place.
Can you outline three or four things that are critical components of any kind of U.S. legislation on climate policy?
Obviously we need to have targets that are ambitious but achievable. The House bill did have targets that are ambitious but achievable. Once you have that which is environmentally the most important thing you can have, you have to work very hard to find ways to make sure that the costs are manageable. That can be done through a variety of different means. One issue is how you allocate allowances, assuming it's a cap-and-trade [program] which it probably will be, how you allocate so that people do not experience sharp increases in electricity prices or in gasoline prices, so that companies do not have electricity increases that they can't deal with. You can do that through allocation; you can do it through a cost-containment mechanism; you can do it through the use of offsets. You probably need to do it through some kind of combination of all of those. And all of those, by the way, are controversial.
A final issue--you have to tie U.S. domestic action to the international picture, and there the House bill included some trade measures which the Obama administration has said they do not support, and actually we at the Pew Center do not either. There's now been a letter sent by a group of moderate Democrats in the Senate saying that they must have something like that [trade measures] because of the possible competitiveness impact from countries that don't have significant climate change programs. How you work that out and how you find a compromise there that can still get you sixty votes is extremely hard.
If something like that does go through in the Senate, what effect do you think that will have on global climate talks?
It depends on exactly what it looks like, but if for example it is somewhat automatic, which it is in the House bill, that's going to have a very negative effect internationally. If, on the other hand, the president has a fair amount of discretion, that would be helpful. If the trigger for the trade measures is [climate] programs that are similar to what we do, that's a huge problem because the developing countries, and this is [who] the measures would be directed toward, need to do something that is significant, but it's not going to be the same as what we do. So if the test is the same, or equivalent to, or something like that, that's a huge problem as well. Clearly those are the two things that are most important if you're going to have [trade measures]. We don't like them, but if you're going to have them, [it's important] to make sure that they're not automatic and that they're not triggered by something which developing countries would find impossible to meet.
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.