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The Future of U.S. Climate Policy

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.

Interview with Eileen Claussen, President-- Appeared in the Council on Foreign Relations, August 2009
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Congressional Testimony of Eileen Claussen - Climate Change Legislation: International Trade Considerations

Testimony of
Hon. Eileen Claussen, President
Pew Center on Global Climate Change

Submitted to
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. 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.

Policy Options

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.

Recommendations

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
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.

Outlook on Climate Policy: Answering a U.S. and Global Imperative

OUTLOOK ON CLIMATE POLICY: ANSWERING A U.S. AND GLOBAL IMPERATIVE


Keynote Speech by Eileen Claussen
President, Pew Center on Global Climate Change
Carbon Finance North America
New York, New York

June 11, 2009

It is an honor to be here to present your keynote address this morning. We are here to talk about emissions trading … and forgive me for saying that I wouldn’t trade this opportunity for anything.  I was wondering about something this morning, and realized I should have checked with the conference organizers on this: If my speech ends up shorter than advertised, would it be possible for me to sell the unused minutes to someone who is much more verbose?

Just imagine the possibilities if we could create a system like this.  It would be a whole new market in public speaking credits.  And, to the delight of conference-goers everywhere, perhaps we could once and for all address a very different emissions problem – yes, I am talking about far too many speakers going on for far too long.   

In all seriousness, the conference organizers have put together a very impressive and packed agenda for the next two days.  And I cannot imagine a more opportune time to be having this discussion.

These are exciting times in the energy and climate world.  We have a President and Cabinet that are fully committed to addressing climate change – with cap and trade legislation being their preferred approach.  We have an EPA that is poised to regulate greenhouse gas emissions – in response to the recent Supreme Court ruling in Massachusetts v. EPA.  We have a number of state and regional initiatives in place and operational. We have teams of negotiators around the world preparing for the December meeting in Copenhagen, and we have ever increasing  numbers in the business community that are ready – really ready for the certainty that regulatory frameworks will offer them.

Most recently, on May 21st, the House Energy and Commerce Committee achieved something extraordinary – passage of a climate and energy bill that has the potential to set the United States on a path to tackle climate change in a serious way.   This bill could reach a vote by the full House as early as the end of this month – but almost certainly before the fall.

Einstein once said that “the only reason for time is so that everything doesn’t happen all at once.”  But right now, it seems that everything is happening all at once. 

And our job here at this workshop is to try and make sense of all these simultaneous goings-on – and to look ahead to another time, not far in the future, when cap and trade becomes an integral part of our national economy, a fait accompli.

What will this system look like?  When will it take hold?  And what does it mean for the organizations you represent, for American business in general, and for the American consumer?  These are the questions you are here to explore over the next two days.  And you will be hearing from a remarkable line-up of experts on finance, policy, trading and other topics. 

My role this morning is to kick things off with a brief overview of where we stand today on the climate issue from a political and policy perspective.  The Pew Center, both in its own right and as a participant in the U.S. Climate Action Partnership, remains very deeply engaged in the work of helping to forge domestic and international solutions to climate change.  And I want to share with you some reflections based on this work, and some ideas about where this issue may be headed in the weeks and months ahead. 

Please understand, however, that the climate issue is still very much in flux.  Therefore, I will borrow from the latest statement I received from my investment advisor and say that this speech “contains forward-looking statements that reflect our beliefs, judgments and current expectations … these statements are not guarantees of future performance.”

And you can take that straight to the bank!

With that caveat out of the way, I want to start with some observations on how far we have come on this issue in what is actually a fairly short amount of time.  For those of us in the trenches, of course, it feels like we have been at this forever.  Trying to get our elected leaders, the general public, business executives and other audiences engaged in the work of addressing this enormous problem, and coming up with creative solutions that use the power of markets to reduce emissions, has required years of exertion, frustration and worse.  But when you look at where we were just ten years ago, and then at where we are now, you see a transformation in how we think about this problem of climate change, and also in how we think about solving it. 

And, of course, the main reason why we are thinking differently about the climate problem today is because the science is clear: there is no longer any doubt that climate change is real, that it is largely caused by humans, and that addressing this problem must be an urgent priority.

The Nobel Prize-winning Intergovernmental Panel on Climate Change said in its landmark 2007 report that the warming of the climate system is – I quote – “unequivocal.” In just the two years since the IPCC issued that report, it has become increasingly clear that the impacts of climate change are happening much sooner than scientists had projected.  There is also growing concern among scientists that the 2007 estimates understate the potential level and pace of climate change, and that these changes will not happen gradually but potentially in fits and starts that will give the world far less time to adapt. 
 
For example, projections from recent studies indicate a total rise in sea level of anywhere from one-and-a-half to six-and-a-half feet, compared to the maximum of two feet in the IPCC report.  Recent studies also indicate that the melting of the Greenland ice sheet is accelerating, and that ice shelves in the Antarctic, which help prevent the rapid flow of land-based ice into the sea, are collapsing more rapidly than expected. To our North, the dramatic decline in Arctic summer sea ice has stunned scientists, who had not expected to see this level of ice loss for decades.  These sorts of changes are happening right now and they are happening faster than anyone predicted.

The bottom line is that the science shows we have no choice but to take action on this issue.  And it is largely because of the science that public opinion on this issue has shifted in recent years. 

A national survey conducted earlier this spring found that 77 percent of voters now favor action to reduce greenhouse gas emissions.  Further evidence of the shift in public opinion came in another spring poll showing that 59 percent of voters believe efforts to tackle global warming will create new American jobs. 

Now, my intention is not to stand up here and paint a completely rosy scenario of public support for climate action. While public opinion has shifted over the past decade – there is still some pretty significant polling that shows we have a ways to go. 

For instance, earlier this year, in a widely touted poll, global warming ranked last in a survey of the nation’s top 20 policy priorities. Among Republican voters, only 16% considered it a priority. And while this polling has gotten a lot of mileage in particular policy circles – what is important to know is this:  In the same survey, 60% identified energy as a top policy concern – a 20% increase from six years ago. And as we know, energy and climate change are inextricably linked – so I am OK with 60% of respondents listing energy in the top three priorities – a win for energy could well be a win for climate.   So part of our challenge has been to help make the energy-climate connection more clear to more people.


Yet another factor in the growing support for climate action in the nation’s capital is a profound change in the stance of leading businesses toward this issue.  I mentioned the U.S. Climate Action Partnership already.  With leadership from a range of Fortune 500 companies, in partnership with the Pew Center and other NGOs, USCAP has become a powerful advocate for strong and swift action on climate change. 

A decade ago, it would have been unimaginable for so many 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 CEOs from companies such as Alcoa, GE, Duke Energy, Shell and many others to become active and very visible supporters of mandatory climate solutions.  Their plea for strong action and regulatory certainty on this issue has found a very receptive audience in Washington and has provided a vital push for Congress.

Another push has come from the states, which continue to act on their own in the absence of a federal program to reduce emissions.  The first regional effort, of course, is the Regional Greenhouse Gas Initiative, under which ten Northeastern and Mid-Atlantic states will cap and reduce emissions from the power sector by 10 percent by the year 2018.  But the Western states, and the states in the Midwest are also getting ready to implement cap and trade programs.  And in May, a coalition of Governors of 27 states and three U.S. territories signed an agreement calling on Congress to enact energy efficiency and clean energy legislation and to cap greenhouse gas emissions to levels that scientists consider necessary to protect the climate.

So the pressure for action is coming from all directions: from the science, from public opinion, from business leaders and from the states.  And it is therefore no wonder that we’ve seen Congress and the Administration engage on this issue in such a determined fashion this year.

But make no mistake – there are still some very real obstacles to cap-and-trade becoming law in the U.S., and there are also considerable obstacles to overcome before we will see effective international action on this issue – and I will address that later.  But as never before, the stars are aligned for the United States and the world to finally develop solutions to tackle this problem. 

With that, I want to get to exactly what’s been happening on this issue over the past few months, and what it means as we look ahead.  Domestically, the Obama administration and Congress have made climate and energy policy a signature issue.  And I say this not just because of where we are with cap and trade.  It’s easy to forget that President Obama, in his first months in office, 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. 

The economic stimulus package signed by the President in February included more than $80 billion in new spending and incentives for everything from smart-grid technologies to renewable energy development to coal with carbon capture and storage to energy efficiency improvements and mass transit.   This investment represents a down payment on building the clean energy infrastructure that we need to keep our economy strong for decades to come. 

And then there was the President’s budget proposal, which called for an economy-wide cap-and-trade program to reduce U.S. emissions 14% below 2005 levels by 2020, and 83% below 2005 levels by 2050.  Then, in response to a Supreme Court ruling, the EPA in April opened the door to regulation of greenhouse gases with its proposed finding that greenhouse gases contribute to air pollution that may endanger public health and welfare.  And, one month later, the White House forged a groundbreaking agreement to increase the average fuel efficiency of cars and light trucks by 30 percent by 2016.

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 the President’s engagement has been reciprocated on Capitol Hill.  The most obvious evidence of this is the May vote of the House Energy and Commerce Committee on the American Clean Energy and Security Act.  This bill combines ambitious but achievable greenhouse gas emission reduction targets with a market-based cap and trade program.  It passed the Committee after roughly 37 hours and 94 amendments, by a vote of 33 to 25.  It is a good bill – it protects consumers and provides the certainty businesses need to invest in a clean energy future for America.  And now it will go before other committees – primarily the Agriculture Committee and Ways and Means -- for their consideration before it is taken up by the full House this summer.  Given the support it received in Energy and Commerce – where Members represent a broad range of geographic regions with coal, oil, auto, and manufacturing concerns – the prospects are good for the bill’s passage by the full House.

Of course, the Senate is an entirely different matter.  Majority Leader Harry Reid and Senator Barbara Boxer, who chairs the Environment and Public Works Committee, have made cap-and-trade legislation a priority for 2009.  But action in the Senate will be far more difficult than in the House, and while Senator Reid has said he hopes for a vote this year, it’s nowhere near certain that this will happen.  Although a bill can pass the House along partisan lines, this is not a possibility in the Senate.  And so the White House will have to play a much more prominent role in mobilizing support from both Republican and Democratic senators.   

The main challenge to fast action on this issue, of course, is the state of the U.S. and global economies.  We should keep in mind that everything I have discussed is happening in the context of a serious economic downturn. In my view, President Obama is absolutely right when he says that tackling energy and climate change will not only help with the immediate challenge of economic recovery, but also will provide a new foundation for strong, sustainable economic growth.  But the fact that he is right does not necessarily make our challenge easier to overcome.  The opponents of strong climate action are using current economic conditions as reason for delay – and they are sure to ratchet up their opposition, and their rhetoric, as Congress continues its work. 

In fact, the debate over climate policy in the U.S. in the coming months will in reality be a debate over costs – we will hear a lot about overall costs to the economy, costs for households, and possible job losses.  And so the task facing those of us who support climate solutions is to do our best to make sure the debate is comprehensive and honest. 

We cannot accept the numbers that are cited as the costs of the Waxman-Markey bill when they are not based on what is actually in the bill. We cannot accept cost estimates where the assumptions in the models used to generate those estimates are not transparent.  And we need to make sure that the costs of solving this problem are balanced against the ultimate costs of the problem itself; that the clean energy jobs we will create as we transition to a lower-carbon economy are also accounted for; and that the costs of deferred investments in new technologies because of the uncertainty created by a lack of policy are not ignored.  Only then will we be able to win the arguments against the opponents of serious action on this issue.  And only then will we be able to develop policies that face up to the true scope of the climate problem.    

These have to be our talking points in the weeks and months ahead as Congress continues to debate cap-and-trade and other measures.  We must not let the debate rest solely on the costs of moving forward with these measures, although, of course, there will be costs.  But we need to be honest about what these costs might be, and we need to array them against the benefits of acting  – for workers, businesses, investors and, of course, the general public for whom climate change poses very serious consequences now and in the future. 

Consider the costs of drought and other weather extremes.  Reductions in water availability in the Central Valley of California could cost farmers $3 billion by 2050 and increased wildfires in the State could cost homeowners an additional $2 billion annually.

Making this discussion balanced and honest will not be easy. Given the severity of the economic crisis we are in, the debate about the costs of domestic action on climate will be a high-volume, highly contentious affair.   As a result, even if we work very hard to pass national climate legislation in 2009, I do not believe we can count on a bill reaching the President’s desk this year.  We can try, and we must.  But at the same time, we also must be realistic about what’s possible to achieve in the current political climate here in Washington.   And so my prediction – and remember: this is a forward-looking statement and not a guarantee – is that climate change legislation will pass Congress and be signed by the President sometime in 2010. 

When this occurs, the implications for carbon markets will be profound.  I know you will be discussing this throughout the conference, but let me just say that effective oversight of carbon markets will be essential to the success of any domestic cap-and-trade system.     We need to make absolutely certain this market delivers what it promises: real reductions in overall emissions. 

Our current economic conditions have caused many to rightfully question the future role of markets. So more than ever, we must ensure that a market for greenhouse gases is created with the rules and enforcement necessary to prevent manipulation and abuses. Getting it right from the start is critical, and much progress is already being made to ensure its success.  As a member of the Energy and Environmental Markets Advisory Committee of the Commodity Futures Trading Commission, I look forward to consulting with many of you as we set out to design an effective carbon trading system for the U.S.

Under a mandatory national climate program, the U.S. will have the largest carbon market in the world. Considering the size of the carbon market is important, because as the cap-and-trade program’s scope increases, so do opportunities to lower the overall program costs for the economy. Containing costs, and protecting consumers and businesses from price volatility, is critical both for the economy and for the program’s political viability.
 
It’s no surprise, then, that cost containment mechanisms are critical to the Waxman-Markey bill. In addition to sensible rules for banking and borrowing allowances, the legislation allows up to 2 billion tons of offsets to be used for compliance—up to 1 billion tons domestic and 1 billion tons international. Offsets availability is one of the most important tools for containing the cost carbon allowance prices—indeed, EPA’s analysis of the Waxman-Markey discussion draft found that without international offsets, allowance prices would be 96% higher.  And above all else, we must ensure that offsets, whether international or domestic, deliver real, verifiable and additional emission reductions.

This is especially true when considering international offsets.  One advantage of international offsets is their ability to engage developing countries in climate change mitigation.  And these countries do need to be engaged proactively in developing and implementing measures and programs to reduce emissions.    

And this leads us to a discussion of where we stand in the international negotiations on this issue.  The Pew Center believes that, ultimately, a multilateral treaty is not only the best solution, but is a requirement if we are going to seriously address climate change.   Over the past two weeks, officials from 182 countries for the first time debated the “draft text” for a Copenhagen agreement. Their goal is extremely ambitious: they want to reach a new global climate agreement this year.  And this is where we can see a clear connection between domestic and international action on climate change.  Because without a solid blueprint for domestic action, it will be difficult for the United States to help craft an international plan to reduce emissions. 

We simply cannot afford to repeat the mistake we made in negotiating the Kyoto Protocol.  Despite the fact that the Clinton administration signed Kyoto in 1997 with much fanfare, it was never sent to the U.S. Senate for ratification.  The problem was that there was a major disconnect between our domestic and our international policy.  We were promising things on the international stage that we simply were not prepared to deliver at home. 

Does this mean we should sit out today’s international negotiations until the President signs a comprehensive domestic climate bill?   Of course not.  The world can make substantial progress in Copenhagen.  With a lot of hard work, I believe it is possible to achieve an interim agreement, one that sets the stage for a ratifiable agreement in 2010.  But the chances for such an agreement will improve markedly to the extent that the United States is engaged in a serious discussion of what we intend to do here at home, and to the extent that we reach consensus this year on such critical issues as domestic targets and the assistance we are willing to provide to developing countries as they tackle this challenge. 

Todd Stern, the U.S. special climate envoy, understands the delicate balance the United States must strike, and the challenges we face.  He knows that we have to balance our interest in achieving an effective post-2012 global climate agreement with a realistic appraisal of what the world can expect from the U.S. in terms of mitigation commitments and financial support.  The next 6-12 months will require the ultimate in political and diplomatic skill.

Stern has repeatedly highlighted the need for the U.S. to enact a domestic cap-and-trade program and invest in clean energy technologies that can help drive economic growth in the 21st century – suggesting – I believe rightly so –  that the United States’ leverage in the negotiations will depend heavily on the pace of domestic climate legislation. The Waxman-Markey bill will allow the United States to help lead the efforts toward a global agreement in which the major economies of the world, both developed and developing, play their part to address the climate challenge.

But, in the same way that we must be honest with ourselves about the prospect of completing work on national legislation this year, we also must also be honest with ourselves about the prospect of wrapping up work this year on an international agreement.  Reaching even an interim global agreement presents its own set of very serious challenges.  What target levels are appropriate for the United States and other developed countries as they set out to reduce their emissions, especially in the midst of a global economic downturn?  What’s the best way to ensure that developing countries like China and India are doing their part?  How can we make certain that developing countries have the resources they need to invest in clean energy and other emissions-reducing technologies?

These are not easy questions.  Answering them in a way that yields real progress toward an effective international climate agreement will take perseverance and a lot of hard work.  And we will not get far, as I said, unless the United States is working hard to address this issue here at home. 

Ultimately, we need a legally binding, post-2012 global agreement that includes commitments from all major economies, while respecting the common but differentiated responsibilities of developed and developing countries. The good news is that the major developing economies are indeed making progress on this issue – including China, India, Mexico, South Africa, and Brazil.  But in the context of an international agreement, it’s critical to ensure the efforts of these countries are verifiable, and that they put the world on a path to stopping and reversing the growth in global emissions.  Binding emissions targets are out of the question for developing countries at this time.  And so the central challenge is to determine how to incorporate and enhance their national policies and actions, such as renewable energy and energy intensity targets, efficiency standards, and forestry goals, into an effective international framework.

At the same time, we also need to resolve the pressing question of financing for developing country efforts.  There is an enormous need for technology and new investments in developing countries’ capacity to reduce emissions and adapt to climate change.  But right now, given the state of the global economy, as well as the increasing portion of public monies dedicated to economic stimulus in the United States and many other nations, it is hard to see where the money comes from. 
Whether the developed world, in 2009, will be able or willing to agree to mechanisms for providing dependable funding to developing countries on this issue remains unclear at best.  And so money, as is so often the case, is perhaps the major challenge we will face as we move into serious negotiations on a post-2012 global climate agreement.  Add to that the other challenges I have mentioned, and it’s clear that negotiators have their work cut out for them in the run-up to the Copenhagen meeting later this year. 

Of course, the other complication when it comes to international action on climate change is the nature of the U.S. relationship with China.  Of all the bilateral relationships on this issue, this is perhaps the most critical, and the most delicate. While China has shown a greater willingness to engage in climate discussions, and is sensitive to its new standing as the world’s largest greenhouse gas emitter, the Chinese do not want their country cast in a spotlight. So, rather than making an issue of what the Chinese must do to rein in emissions, a better approach for the U.S. at this moment is to pursue closer collaboration on clean coal technology and other energy and climate challenges.  This could produce practical benefits for both countries, build trust, and help pave the way for a multilateral agreement.

In closing, I want to note that I have identified an array of challenges to domestic and international action on the climate issue, a whole host of potential hurdles.  But I want to leave no doubt that I remain optimistic.  The United States is moving ever closer to adopting a domestic cap-and-trade system, and international negotiators are engaged in a determined effort to forge an effective global climate agreement.  We must succeed in both of these endeavors.  And this is something that more and more of our leaders, more and more of the people of this world, understand.  They have seen the science.  They know that the time for action on this issue is now.  And they understand like all of you that, if we do this right, we will leave future generations not only a safer climate but also a stronger economy that rewards innovation and that drives investment to industries and projects that will benefit us all.

I hope I have not gone over my allotted time, and if I have, then perhaps one of your other speakers will allow me to buy a few extra minutes. 

Thank you very much.

Bonn Side Event: U.S. Climate Change Policy Update

Promoted in Energy Efficiency section: 
0
The Pew Center on Global Climate Change held a Side Event at the Bonn Climate talks. The event features perspectives on the latest developments on cap-and-trade legislation and federal regulatory actions, and implications for the international climate negotiations.

Pew Center Side Event at Bonn Climate Talks:
Update on U.S. Climate Change Policy

Monday, June 8 from 7:30-9:00PM

Ministry of Transportation - Room RAILThe event features perspectives on the latest developments on cap-and-trade legislation and federal regulatory actions, and implications for the international climate negotiations.

Presenters include:

  • MANIK ROY, Vice President for Federal Government Outreach, Pew Center (Download Presentation)
  • LEIF HOCKSTAD, U.S. Environmental Protection Agency
  • MARK HELMKE, Foreign Relations Committee, U.S. Senate

Moderated by ELLIOT DIRINGER, Vice President for International Strategies, Pew Center

Related Material

The Competitiveness Impacts of Climate Change Mitigation Policies

The Competitiveness Impacts of Climate Change Mitigation Policies

May 2009

By:
Joseph E. Aldy and William A. Pizer
Resources for the Future


A close look at the historical relationship between energy prices and U.S. production and consumption of energy-intensive goods suggests that energy-intensive manufacturers are likely to face only modest “competitiveness” impacts under a U.S. greenhouse gas cap-and-trade program, according to this report.

 

Press Release

Audio of report release press teleconference

Download the entire report (PDF)

 

Also see Eileen Claussen's Congressional Testimony on Competitiveness

Review of Proposed Options for Addressing Industrial Competitiveness Impacts (PDF)

Joseph E. Aldy
William Pizer
0

Climate Policy Hill Briefing on International Offsets

Promoted in Energy Efficiency section: 
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This briefing focuses on the role and function of international offsets in a mandatory GHG cap-and-trade system.

Briefing on International Offsets in a U.S. Greenhouse Gas (GHG) Cap-and-Trade System
April 24, 2009

The Pew Center held a Congressional briefing on the role and function of international offsets in a mandatory GHG cap-and-trade system. Given the importance of offsets as a cost-containment measure in cap-and-trade system design, the intent of this briefing was to show that international offsets can be a viable and reliable way of acheiving low-cost GHG emissions reductions.    

Video  Watch the video and accompanying slides presented by each speaker listed below.

  • Janet Peace, Vice President for Markets and Business Strategy, Pew Center on Global Climate Change
    Presentation:     Slides (pdf)         Windows Media

 

  • Christiana Figueres, Principal Climate Change Advisor to ENDESA Latinoamérica, the largest private utility in Latin America, and former representative to the CDM Executive Board
    Presentation:     Slides (pdf)          Windows Media

 

  • Graeme Martin, Manager of Business Development, Environmental Products, Shell Energy North America
    Presentation:     Slides (pdf)          Windows Media

 

  • Eric Haxthausen, Director of U.S. Climate Change Policy, The Nature Conservancy
    Presentation:     Slides (pdf)          Windows Media

 

  • Dirk Forrister, Managing Director, Advisory and Research Service, Natsource
    Presentation:     Slides (pdf)         Windows Media

 

 

 Briefing Highlights

  • Offsets can significantly reduce the costs of a cap-and-trade program, deliver a price signal throughout the economy, and stimulate technological innovation in sectors not covered by the cap.
  • International offsets are particularly advantageous because there are numerous low-cost mitigation opportunities in developing countries. Further, by engaging developing countries, international offsets can foster the development of a global carbon market through a common price signal.
  • The existing process for certifying international offsets under the Kyoto Protocol has been alternately criticized as being overly and insufficiently stringent. While the process, known as the clean development mechanism, is not perfect, it has improved over time and has led to important benefits, including cost containment and technology diffusion.
  • Deforestation and forest degradation account for approximately 20 percent of global greenhouse gas emissions, and forest carbon credits (both international and domestic) can be employed to promote preservation and restoration of forest land.

 

Related Materials

Briefing and video on the use of domestic offsets in a U.S. cap-and-trade program

Brief on Offsets in a Domestic Cap and Trade Program

More climate change policy briefs

Back to list of Briefing Videos

 

 

-This series was made possible through a generous grant from the Doris Duke Charitable Foundation, but the opinions expressed herein are solely those of the presenters.-

Congressional Testimony of Elliot Diringer - International Aspects of the American Clean Energy and Security Act

 

Elliot Diringer
Vice President, International Strategies
Pew Center on Global Climate Change

Submitted to
the Energy and Environment Subcommittee
Energy and Commerce Committee
U. S. House of Representatives


April 23, 2009

International Aspects of the
American Clean Energy and Security Act

For a pdf version, please click here.

Chairman Waxman, Chairman Markey, Ranking Members Barton and Upton, members of the committee, thank you for the opportunity to testify on the international aspects of Waxman-Markey discussion draft of the American Clean Energy and Security Act. My name is Elliot Diringer, and I am the Vice President for International Strategies at 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 (USCAP) , 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.

For the United States to effectively address climate change, the enactment by Congress of mandatory market-based legislation to significantly reduce U.S. greenhouse gas emissions is of the utmost priority.  The Pew Center commends Chairman Waxman and Chairman Markey for significantly advancing this effort with their discussion draft.  An essential complement to strong domestic climate legislation is an effective international agreement ensuring that other major economies also contribute their fair share to what must be a global effort.  It is in the strong interest of the United States to ensure that domestic climate legislation is fashioned in ways that maximize prospects for such an agreement.  In the international negotiations now underway under the Bali Action Plan, the United States will be best able to lead efforts toward an effective global agreement if our domestic legislation:

  • Sets a solid foundation for a verifiable international commitment by the United States, and provides means for the U.S. to take additional actions that can encourage strong commitments by others;
  • Creates positive incentives for stronger emission reduction actions and commitments by the major emerging economies;
  • Dedicates resources to addressing the critical adaptation needs of poor and vulnerable countries;
  • Facilitates the linkage of the United States’ emissions trading system in a global greenhouse gas market; and
  • Includes transitional measures to address the potential competitiveness risks to energy-intensive, trade-exposed industries.

The Pew Center believes that, on the whole, the Waxman-Markey discussion draft would establish a strong foundation for effective U.S. engagement in the global climate effort.  In my testimony today, I would like to offer a number of suggestions for strengthening the proposed legislation to better ensure that the very considerable domestic effort it would initiate is maximally leveraged to achieve a fair and effective global climate agreement.

 

Foundation for a Verifiable International Commitment

An effective global response to climate change requires clear and verifiable international commitments by all major greenhouse gas-emitting nations.  Countries can be expected to deliver their strongest possible efforts only if they have confidence that their counterparts and competitors are delivering theirs as well.  The best means of instilling and maintaining this confidence is a treaty, or a set of international agreements, establishing mutual legal commitments with international accountability.  These commitments must be measurable, reportable, and verifiable.

Given the tremendous diversity among the major economies, it is reasonable that their commitments vary not only in stringency but in form as well.  In A Blueprint for Legislative Action, USCAP recommends a framework that would establish “binding absolute economy-wide reduction targets for developed countries while allowing developing countries a range of binding policy commitments, taking into account national capacities, circumstances, and policy approaches.”     

The Pew Center believes the Waxman-Markey discussion draft would create a very strong foundation for U.S. participation in such a framework.  The emission reduction targets it proposes are ambitious and achievable, and would represent a very credible contribution by the United States toward the ultimate goal of safely stabilizing greenhouse gas concentrations in the atmosphere.  In establishing mandatory targets through 2050, the legislation would provide the basis in domestic law for a corresponding commitment, or series of commitments, at the international level.  To be meaningful, these international commitments must be legally distinct from, and in addition to, the domestic law in which they are rooted.  If countries are merely to pledge national actions – even if these actions are “binding” under domestic law – they are accountable only to themselves.  International commitments create international accountability, and the willingness of the United States to assume such a commitment is the only basis on which it can expect the same of other sovereign governments. 

The emission targets set under cap-and-trade legislation will fundamentally guide any U.S. targets agreed internationally.  The United States will have greater leverage in international negotiations, however, if it has the flexibility to take additional actions that can encourage stronger commitments by others.  One way to do this is by committing support for mitigation and adaptation efforts in developing countries, as is discussed below.  Another way is through  mechanisms facilitating emission reductions outside the United States above and beyond those required under domestic cap-and-trade legislation (i.e., not as international emission offsets used for domestic compliance).  The discussion draft would establish one such mechanism by setting aside a portion of emission allowances to support supplemental emission reductions from reduced deforestation in developing countries. We encourage the Committee to consider broadening these provisions to allow the use of allowance value to facilitate other types of mitigation actions in developing countries, or to acquire emission credits meeting U.S. offsetting criteria, and then retire them.

 

Incentives for Developing Country Mitigation

To achieve an effective international agreement, the United States and other developed countries must be prepared to provide effective incentives and support for stronger action by the major emerging economies.  Under the 1992 U.N. Framework Convention on Climate Change, developed countries committed to provide financial and technological assistance to developing countries. This commitment is underscored in the Bali Action Plan adopted in 2007 by the United States and other Convention parties. In framing negotiations toward a new climate agreement, the Bali plan states that future mitigation actions by developing countries are to be “supported and enabled by technology, financing and capacity-building.” Early and sustained action by the United States to deliver this support will greatly enhance prospects for an effective post-2012 agreement.  Broadly speaking, this support can be delivered as direct assistance, either bilateral or multilateral, and through market-based mechanisms.

 

Public Finance

There is broad recognition that the majority of investment for mitigation will come from private financial flows, in part through greenhouse gas markets, as discussed below. But additional public finance is needed to supplement these market flows.  We believe the United States must be prepared to commit such support, and that these incentives will be most effective if: a) the support provided is adequate and predictable; and b) it is structured as a phased-in program providing some immediate assistance for capacity-building and technology deployment, and greater support for technology deployment once countries commit to effective climate policies. This assistance should be provided through bilateral programs and multilateral mechanisms, including the Clean Technology Fund recently established at the World Bank.

We believe the International Clean Technology Fund proposed in the discussion draft could be an important element of an effective funding strategy.  It would allow support to be delivered through both bilateral programs and multilateral mechanisms, and would establish eligibility criteria providing a clear incentive for developing countries to adopt and commit to effective climate mitigation policies.  However, we would recommend strengthening the provision in several respects.

First, it is critical that a clear, reliable, and predictable source of revenue be designated for these purposes.  We believe the legislation should authorize immediate appropriations for two purposes: a) to support capacity-building activities, as discussed further below; and b) to fulfill the United States’ pledge to help fund the World Bank’s new Clean Technology Fund.  These efforts would immediately demonstrate the United States’ commitment to support developing countries and would help position those countries to undertake stronger efforts.  For the longer term, the legislation should designate a portion of allowance value to provide sustained support for technology deployment.  As proposed in the discussion draft, this further support should be conditioned on a recipient countries’ ratification of an effective international climate agreement, or on the President’s determination that it is undertaking nationally appropriate mitigation activities.  The funds generated through this portion of allowance value could be held in reserve until such time as these eligibility criteria are met.

Second, we believe as a general matter that support for technology deployment should be technology-neutral, so that each dollar invested can achieve maximum return in emissions reduction.  We are concerned that, as written, the discussion draft may exclude funding for more efficient coal-fired electrical generating facilities.  Given the very strong likelihood that many countries will continue to rely on coal as a major energy source, and will continue building substantial new coal-fired generating capacity, we favor using technology support to ensure that these new facilities are as efficient, and least GHG-intensive, as possible.  Eligibility criteria should require that supported facilities deploy the best available combustion technologies and achieve substantial efficiency improvements and emission reductions beyond business as usual.

Third, we believe the legislation should provide explicit and immediate support for a range of capacity-building activities in developing countries.  These should include:

  • Emissions measurement – Strengthening capacity to accurately monitor and measure GHG emissions in key sectors and, ultimately, economy-wide as a basis for policy development, crediting and other market-based responses, and assessing progress.
  • Economic modeling – Strengthening capacity to project emissions and economic conditions under different scenarios, and to evaluate the costs and emission reduction potentials of alternative mitigation approaches.
  • Policy development – Strengthening capacity to design, implement, and enforce nationally appropriate policies that would contribute to emission reduction and could form the basis of international commitments.
  • Technology assessment – Strengthening capacity to assess available mitigation
    technologies and to identify those best suited to national circumstance.

 

Market-based Incentives

Access to the U.S. greenhouse gas market can provide another important incentive for stronger action by developing countries.  The Pew Center strongly supports the use of international emissions offsets, both as an incentive for developing country action and as a mechanism to contain costs in a U.S. cap-and-trade system.  EPA’s recent modeling analysis of the Waxman-Markey discussion draft found that the exclusion of international offsets could increase allowance prices by 96 percent.

USCAP recommends allowing up to 1.5 billion tons of international offsets per year within the cap-and-trade system.  Criteria must be established for all offsets, domestic and international, to ensure they are environmentally additional, verifiable, permanent, measurable, and enforceable.  In the case of international offsets, USCAP recommends that EPA be directed to establish a process to evaluate and approve proposed offsets, and that over time developing countries be required accept climate mitigation commitments to remain eligible for GHG crediting.  In addition, USCAP favors the use of emission offsets from reduced deforestation to supply a strategic emissions reserve available to covered entities to help reduce compliance costs. The overall aim of these recommendations is to encourage developing countries to move rapidly to curb their emissions, while providing verifiable emission offsets to help contain costs for U.S. emitters. 

Although the discussion draft allows fewer offsets (domestic and international) than favored by USCAP, the Pew Center believes that it is in many ways consistent with these recommendations.  Its offsetting provisions would provide a strong positive incentive for developing countries to undertake stronger efforts and to assume reasonable climate commitments.  By allowing crediting on a sectoral basis, the proposed legislation would help mobilize larger-scale reduction efforts in key sectors, while the provisions on reduced deforestation would establish the safeguards needed to ensure the integrity of forest-based offsets. 

Importantly, the draft would allow for the recognition of credits issued by an international body under the UN Framework Convention, or a new climate agreement, provided they meet U.S. offsetting criteria.  A well-functioning international crediting mechanism is important to the efficiency of the global greenhouse gas market.  By potentially allowing offsets from an international mechanism, Congress would help position the United States to strongly influence the restructuring of the existing Clean Development Mechanism or the design of a successor mechanism.

 

Supporting Adaptation Efforts

As noted in the discussion draft, the United States committed under the UN Framework Convention and the Bali Action Plan to provide “new and additional” resources to help poor and vulnerable countries adapt to climate change, and such assistance must be predictable and sustainable.  Consensus among governments on the appropriate means and levels of adaptation support will be critical to achieving a comprehensive climate agreement.

Conceptually, the discussion draft would provide a sound basis for significantly enhanced U.S. support for adaptation efforts in the least developed countries, small island states, and other especially vulnerable countries.  It would establish a stronger framework for delivering direct bilateral assistance, and importantly, it would reserve 40 percent to 60 percent of the support available for U.S. contributions to any international adaptation funds established or designated under a new climate agreement.

To be effective, and to help secure a strong climate agreement, the legislation must establish a clear, predictable, and sustained source of funding for these international adaptation efforts.  The Pew Center strongly supports designating an appropriate portion of allowance value for these purposes.

 

Linking Trading Systems

Emission reduction efforts in the United States and elsewhere will be more cost-effective if linked through a global greenhouse gas market.  It is critical, therefore, that domestic U.S. legislation anticipates and facilitates the linkage of a U.S. cap-and-trade system to existing and emerging market-based systems in other countries and regions, provided they are of comparable environmental integrity. 

The discussion draft appears to lay the necessary foundation for linkage to other market-based systems.  It would establish sound criteria for determining qualifying programs, including the requirement of absolute emission limits, and of comparable stringency with respect to compliance, enforcement, and offset quality.  By also allowing the recognition of allowances from programs establishing sectoral targets, the draft would provide another strong incentive for stronger efforts by countries not yet prepared to take on economy-wide targets.

 

Addressing Competitiveness Concerns

In recent testimony before the Energy and Environment Subcommittee, Pew Center President Eileen Claussen outlined our views and recommendations concerning potential competitiveness impacts on trade-exposed, energy intensive industries.   In brief, our analysis indicates that these potential competitiveness impacts are modest and manageable through a range of policy options. 

We believe that in the long term, concerns over competitiveness and associated emissions leakage are best addressed through effective international climate commitments, and that the overriding objective should therefore be to facilitate their establishment.  In the interim, we favor the use of transitional measures such as output-based emission allocations or rebates to vulnerable industries, and transition assistance to affected workers and communities.  We strongly discourage the use of unilateral trade measures.  Such measures would not fully counter competitiveness risks; as they 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.  Further, they risk retaliatory trade measures, and put climate relations on the path to confrontation rather than cooperation.

On the whole, we believe the discussion draft takes a very sound approach to addressing competitiveness concerns.  As we favor, it relies primarily on an output-based approach to compensate firms in qualifying sectors for the direct and indirect costs of greenhouse gas regulation.  Also consistent with our recommendations, the draft would: structure the compensation so as to provide an incentive for investments in energy efficiency; phase down the level of compensation over time; provide for Presidential review to slow this phase-down if necessary; and end compensation if 70 percent of global output is subject to commensurate greenhouse gas regulation.  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.

Critically, the draft contemplates the use of trade measures against other countries only as a last resort if the President finds that, despite the rebate program, regulatory costs have harmed production or employment by energy-intensive U.S. manufacturers, or that emissions from competitors in countries without commensurate climate obligations have increased.  This approach preserves trade measures as an option, but defers their use to allow a reasonable period to assess the efficacy of the rebate program and to achieve effective international agreements.

In conclusion, the Pew Center believes that the Waxman-Markey discussion draft would provide the foundation for a strong U.S. contribution to the global climate effort, and that with further refinements, the proposed legislation would well position the United States to lead efforts toward an equitable and effective international agreement.  We appreciate the opportunity to provide our input on the discussion draft, and look forward to working with the Subcommittee and the Committee as this critical legislation moves forward.  

Side Event Features New MRV and Legal-Form Reports

Promoted in Energy Efficiency section: 
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Pew Center Side Event
UN Climate Change Talks - Bonn, Germany
April 2, 2009

The Pew Center released the following two publications on the sides of the first round of UNFCCC climate change negotiations in 2009: Measurement, Reporting and Verification in a Post-2012 Climate Agreement; and Legal Form of a New Climate Agreement: Avenues and Options. The event included presentations by the report authors and a discussion with experts.

Download the publications:

Presenters:

Discussants:

  • Sebastian Oberthur, Institute for European Studies, Vrije Universiteit Brussel
  • Harald Winkler, University of Cape Town

Legal Form of a New Climate Agreement: Avenues and Options

Legal Form of a New Climate Agreement: Avenues and Options

April 2009

Parties to the UN Framework Convention on Climate Change (UNFCCC) and parties to its related legal instrument, the Kyoto Protocol, are engaged in dual track negotiations aimed at reaching a new agreement or agreements to address global climate change.

This paper identifies the potential legal avenues for an outcome or outcomes under the Bali Action Plan and the Kyoto Protocol Article 3.9 process.

The Pew Center released Legal Form of a New Climate Agreement: Avenues and Options at a side event held during the April 2009 international climate negotiations in Bonn, Germany.

Paper (pdf)

Presentation (pdf)

 

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