INCENTIVES MATTER: Designing an Effective Credit for Early Action Program Stephen Harper Intel Corporation UNFCCC COP5 Bonn, Germany October 1999

2 WSC REDUCTION AGREEMENT Intel and US semiconductor industry signed MOUs with US EPA to find ways to reduce PFC emissions In 1999, Intel and SIA led World Semiconductor Council (WSC) toward globally-harmonized agreement: –10% real, total emissions reductions by 2010

3 Objectives of Crediting Early Action Public policy objectives include: –Spurring technological innovation –Reducing the business as usual emissions trajectory –Making good on past promises to reward early actors Private company objectives include: –Insurance against potential future regulatory requirements

4 Voluntary Programs Need Volunteers Without removal of disincentives and adequate incentives to participate, few companies will sign up Paltry participation will yield paltry results In everyones interest, then, to design meaningful incentives

5 What Will Discourage Volunteers? Failure to remove disincentives before offering incentives The devil truly is in the details –Overly-detailed program begins to look like a regulatory approach –Perfect as the enemy of the good Uncertainty is the enemy of capital budgeting –Major new investments in new technologies require some certainty re return

6 Necessary, but not Sufficient, Market Conditions Credible threat of some form of future climate regulations –Sufficient #s of companies must feel high-probability that they will face some type of GWG constraint Belief that early action credits will be transferable by companies that do not end up being regulated to others who are regulated Baseline protection -- without this you potentially have a debit for early action program

7 Build It This Way and They Might Come A compelling early action crediting program would include several key features: –First, do no harm –Reasonable verification procedures –Low transactions costs –Credits at corporate, subsidiary, or project level –Credits for product-driven GWG reductions –Credits for real, verifiable by-product reductions

8 Reasonable Verification Procedures Objectives of verifications should include: –Crediting only real reductions –Avoiding double counting –Avoiding leakage Avoid a belt and suspenders approach that will raise transaction costs and disqualify real reductions Establish general verification procedure and creditability criteria –Publish examples of approved verification protocols to provide guidance

9 Low Transactions Costs Transactions costs will be driven significantly by verification process Third-party certification optional Combine template approach with option for case-by-case review of custom credits –Template could be a set of prototypical GWG reducing actions that would have verification process and credit calculation procedure spelled out in advance –Custom option needed to ensure experimentation and learning; todays custom reductions could become templates tomorrow

10 Credits at Multiple Levels of Activity Companies should be able to make creditable reductions at the corporate, subsidiary, and project levels Corporate level-only requirement may preclude participation by large,diversified firms due to expense of accounting Concern about leakage of emissions from one part of company (e.g., individual project) to another can be addressed by a general requirement for company to demonstrate no leakage occurring

11 Crediting Product-Driven Reductions Product innovations offer great potential for future decline of GWG emissions For many companies, products offer greatest opportunity for achieving reductions Crediting product-driven GWG emissions reductions is an opportunity to involve consuming public in tackling the climate problem Can establish simple, transparent protocols to ensure no double counting of emissions reductions between product producers, consumers, and power utilities

12 Credits for By-Product Reductions What matters is whether a GWG reduction is real and surplus to the baseline, not why it was undertaken Real, surplus GWG reductions (achieved, e.g., as a by-product of SIP-driven actions to reduce VOC or Nox emissions) should receive credit –Encourages pollution prevention and pollution control approaches that solve multiple problems