1. Climate Change Policy: The Rise of Market Mechanisms
Presented by
Kevin Fay
CCELP-Global Commons Project
February 2007
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2. ICCP 2007 Membership List 3M Company
Air-Conditioning and Refrigeration Institute
Alliance for Responsible Atmospheric Policy
Association of Home Appliance Manufacturers
Association of International Automobile Manufacturers
Arkema
Boeing BP
Carrier
CH2M Hill
Dow Chemical
DuPont
European Chemical Industry Council (CEFIC) - European Fluorocarbon Technical Committee (EFCTC) Sector
General Electric
General Motors
Halliburton Industries
Honeywell
Intel Corporation
Japan Fluorocarbon Manufacturers Association
Natsource
United Technologies
York International
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3. ICCP
Organized in 1991
View that Science is Credible and Issue is Durable
Goal to Establish Credible Business Voice
Obtain Seat At Policy Table
Make Process go Smarter, Not Necessarily Faster or Slower
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4. International Climate Change Partnership
The ICCP Mission Statement:
- The International Climate Change Partnership (ICCP) is a global coalition of companies and trade associations from diverse industries committed to constructive and responsible participation in the international policy process concerning global climate change.
The ICCP recognizes that the continued growth in emissions of greenhouse gases is an important concern for all nations and that efforts are underway internationally and in national governments to develop policies that address this concern.
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5. International Climate Change Partnership
ICCP Core Beliefs:
- Climate change is an important global environmental issue that requires participation of all nations developed and developing.
- International efforts must be guided by sound and credible scientific information and supported by a credible technology and economic assessment process.
- Climate change issues are most effectively addressed at the global level.
- Parties to the Framework Convention on Climate Change must balance environmental concerns associated with greenhouse gas emissions with the need to promote the continued economic growth necessary for the benefit of all nations.
- Climate change policies should be comprehensive and market-based and should not single out or disadvantage specific industries.
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7. Climate Policy Debate Not That Old Considering…
Hard tasks take time
Modern environmental policy regime only started in late 1960s
13 yrs between Clean Air Act Amendments
17 yrs since last amendment
Leaded gasoline phase-out proposed in U.S. – 1972, adopted in EU – 2000
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8. Progress is Relative UNFCCC – 1992 Kyoto Protocol – 1997
Kyoto EIF and first MOP – 2005
Kyoto first budget period – 2008
Beyond Kyoto
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9. Policy Community General consensus on issue’s importance
Mixed signals on policy approach
Conflicting signals on near term action, particularly mandatory vs. voluntary approach
Few signals on long term objective
Little public education
Economic Policy issues key
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10. Business Community – Cautious Approach
Engaged in Policy Discussion
Remain Educated
Responsible for Kyoto outline
If mandatory target Kyoto contains much of what was requested
Devil is in the details
Needs:
Clarity, Certainty, Transparency, Equity
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11. Kyoto Framework Binding Commitments Single basket of gases
Developed countries reduce 5.2% below 1990 levels
Single basket of gases
Flexible market mechanisms
No harmonized policies and measures
CDM for developing countries
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12. Effective Global Climate Policy Requires
Better consensus on long term objective
Policy process that includes all major emitters – developed and developing economies; key industrial sectors
Better education of public on climate protection role and responsibilities
Reliance on suite of initiatives – voluntary and mandatory – to achieve reductions in atmospheric loadings
Support for technology evolution in near term and revolution in long term
Commitment to market-based, cost effective approaches
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14. Rise of Market Mechanisms
Dramatic shift in focus on market-based approaches
Introduction of European trading system
Implementation of Kyoto mechanisms
Success of mechanisms critical to future steps
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15. GHG Emissions Trading Systems
EU CO2 Emissions Trading System
State Trading Programs
Northeast and Mid-Atlantic Program
California
US Domestic Proposals
National Commission on Energy Policy (NCEP)
McCain-Lieberman
USCAP
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16. Key Design Elements Who is regulated and at what point?
Economy-wide or only certain sectors?
All GHGs or only CO2?
Upstream vs. downstream?
How are emissions allocated?
Auction, grandfathered, vs. output-based?
Are offsets allowed and how?
At 100% or discounted?
Int’l or only domestic?
All non-covered sources or limited?
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17. Economy-wide or only certain sectors?
All GHGs or only CO2
No single sector accounts for all GHG gases
CO2 is dominant gas, but other gases are also relevant
US GHG Emissions
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18. Upstream vs. downstream?
Upstream requires smaller number of regulated sources and can cover larger source of emissions
Transportation has millions of downstream sources
Mismatch b/t the actors that influence emissions and the regulated sources?
Downstream system only likely for certain sectors (e.g., large point sources) in order to limit number of regulated sources
Transportation difficult to capture downstream
Upstream-Downstream Hybrid can cover point sources at point of emissions and other sources at the point of import or production of carbon containing products

19. How are emissions allocated?
Allowances are $$$$
Current US GHG emissions (allowances) would be $177 billion per year at $25 t/CO2
And as a result has implications on:
Business relation to their competitors
If you get allowances and your competitors have to purchase them
Politics
Members of Congress care about how their states fair (e.g., Acid Rain Law)
The signals that are sent to certain actions:
Allowances or revenues from allowances can be used to provide incentives for certain actions such as renewables or advanced technologies
To reduce “distortionary” taxes on salaries
To minimize impacts on certain sectors by giving certain amount of allowances free to:
Hold equity value of impacted industries whole (e.g., debate over amount of allowances needed)
Help with worker transition (e.g., coal industry, etc.)
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20. EU Emissions Trading Scheme (EU ETS)
Around 11,500 installations in 25 European Union member states
45-50% of the EU’s CO2 emissions
Direct link to the Kyoto Mechanisms
Possibility to link with other schemes
Trades include CO2 only
Various Phases:
First phase:
Second phase: (the Kyoto phase)
Continuation: Directive allows for and the Commission has consistently stressed that the system will continue beyond 2012
Allocation
: 2,100 MMTCO2e/year
: in progress (6% cut needed for EU-25)
2005: over 460 MMTCO2e traded (brokers, exchanges, bilateral), total value > EUR 7 billion
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21. US National Proposals: National Commission on Energy Policy (NCEP)
Establish market-based emissions trading program to reduce US GHG intensity per unit of GDP by 2.6% annually from and 3% annually after 2021
Target calls for annual reduction of 500 to 1,000 MMTCO2e, with a “safety valve”
In 2005, Senator Bingaman developed NCEP-based proposal (declining intensity cap at 2.4% starting in 2010 and price cap of $7 per MT)
Intensity target developed into allowance-based trading program
Covering “upstream” fuel producers and other entities including manufacturers, importer & emitters of non-fuel GHGs
2006 Sens. Bingaman and Domenici “White Paper” discussed key questions & issues for domestic trading program
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22. US National Proposals: Climate Stewardship Act
Climate Stewardship Act proposed by Sens. McCain and Lieberman
Establish emissions trading program covering major sources
All large point sources >10ktCO2 “downstream”
e.g., electricity and large industrial plants required to hold allowances equivalent to capped emissions levels
Transport fuels regulated “upstream”
e.g., oil refineries that produce or import products used for transportation that would emit >10,000 MTCO2e required to hold allowances for the carbon content of their fuels
Produced or imported HFC, PFC and SF6 that would emit more than 10,000 MTCO2e
Doesn’t regulate direct emissions from agriculture and residential sectors
GHG emissions capped at 2004 levels by 2012
Gradually lowered to reach one third of 2004 levels by 2050
Commerce Dept. determines how many allowances given for free versus to the Climate Change Credit Corporation
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23. State GHG Trading Programs: Regional Greenhouse Gas Initiative
The nine-state Regional Greenhouse Gas Initiative (RGGI) includes Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont
Maryland has essentially opted-in
Caps emissions from electric power sector only. Cap equal to CO2 levels (~110 MMT) in , declining to 10% below 1990 by 2018
Covers 1.7% of total US GHG emissions
Emission offsets allowed (up to 3.3% of each generating unit’s emissions)
Allowance prices < $7: allows offsets to be used from across the United States, offsets outside RGGI discounted at 50%
> $7 (“Offset Trigger”): offsets allowed from across North America at a 1:1 ratio; offsets may cover up to 5% of unit emissions
> $10 (“Safety Valve Offsets Trigger”): offsets from international projects allowed; offsets to cover up to 20% of unit emissions
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24. State GHG Trading Programs: California
Governor Schwarzenegger Executive Order S-3-05 set GHG emission reduction targets for California
AB 32 Sets Economy-Wide GHG Emissions cap--reduce to levels by 2020
Role and extent of emissions trading to be allowed in program
not yet decided
CARB Initiating Process for Development of Market Mechanisms as Program Component
Role of “Cap and Trade” Significant Political Issue
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25. Conclusions International Trading Success Key to post-2012 period
GHG emissions trading likely to be key component of future US domestic response to climate change
Some GHG emitting sources fit easily within an emissions trading system
e.g., stationary sources
Others more complicated
e.g., Transportation and residential sectors
Non-CO2 gases?
Key design issues have important economic and political implications, including:
In cap or offset?
Upstream vs. downstream?
Allowances allocated free vs. auctioned?
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26. Kevin Fay, Executive Director
Contact
Kevin Fay, Executive Director
Additional Reading:
--Center for Clean Air Policy,
--Congressional Budget Office,
--Pew Center on Global Climate Change,
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