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2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net Climate Change Policy: The Rise of Market Mechanisms.

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Presentation on theme: "2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net Climate Change Policy: The Rise of Market Mechanisms."— Presentation transcript:

1 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Climate Change Policy: The Rise of Market Mechanisms Presented by Kevin Fay CCELP-Global Commons Project February 2007

2 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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

3 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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

4 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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.

5 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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.

6 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703)

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

8 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Progress is Relative UNFCCC – 1992 Kyoto Protocol – 1997 Kyoto EIF and first MOP – 2005 Kyoto first budget period – 2008 Beyond Kyoto

9 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Policy Community General consensus on issues 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

10 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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

11 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Kyoto Framework Binding Commitments – Developed countries reduce 5.2% below 1990 levels Single basket of gases Flexible market mechanisms No harmonized policies and measures CDM for developing countries

12 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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

13 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703)

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

15 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) GHG Emissions Trading Systems EU CO 2 Emissions Trading System State Trading Programs » Northeast and Mid-Atlantic Program » California US Domestic Proposals » National Commission on Energy Policy (NCEP) » McCain-Lieberman » USCAP

16 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Key Design Elements Who is regulated and at what point? Economy-wide or only certain sectors? All GHGs or only CO 2 ? Upstream vs. downstream? How are emissions allocated? Auction, grandfathered, vs. output-based? Are offsets allowed and how? At 100% or discounted? Intl or only domestic? All non-covered sources or limited?

17 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) Economy-wide or only certain sectors? All GHGs or only CO 2 No single sector accounts for all GHG gases CO 2 is dominant gas, but other gases are also relevant US GHG Emissions

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 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) How are emissions allocated? Allowances are $$$$ Current US GHG emissions (allowances) would be $177 billion per year at $25 t/CO 2 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.)

20 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) EU Emissions Trading Scheme (EU ETS) Around 11,500 installations in 25 European Union member states 45-50% of the EUs CO 2 emissions Direct link to the Kyoto Mechanisms Possibility to link with other schemes Trades include CO 2 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 MMTCO 2 e/year : in progress (6% cut needed for EU-25) 2005: over 460 MMTCO 2 e traded (brokers, exchanges, bilateral), total value > EUR 7 billion

21 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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 MMTCO 2 e, 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

22 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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 >10ktCO 2 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 MTCO 2 e required to hold allowances for the carbon content of their fuels Produced or imported HFC, PFC and SF 6 that would emit more than 10,000 MTCO 2 e Doesnt 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

23 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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 1990 CO 2 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 units 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

24 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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 1990 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

25 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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-CO 2 gases? Key design issues have important economic and political implications, including: In cap or offset? Upstream vs. downstream? Allowances allocated free vs. auctioned?

26 2111 Wilson Blvd, 8th Floor, Arlington, VA Phone: (703) Fax: (703) 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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