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Crafting a Climate Change Policy That Works for Business and the Environment

As legislation to mitigate the consequences of climate change wends its way through the U.S. Congress, policy discussions have focused heavily on the potential for a “cap-and-trade” system to reduce greenhouse gas emissions. In such a system, Congress would impose an overall limit or “cap” on total U.S. greenhouse gas emissions. Major emitters would be given limits (allowances) on the amount of carbon emissions they can emit from burning fossil fuels; if they come in below their allowances, they could sell (trade) what remains of the allowances to other companies that are unable to meet their caps, or the emitters could buy allowances from other firms if that would cost them less than reducing their own emissions further.

But current legislative proposals are not limited to cap-and-trade. They also contain other provisions for reducing greenhouse gas emissions, from subsidies for new technology to regulatory constraints that promote energy efficiency and renewable energy.

To ensure that any policy can be implemented effectively, several issues need to be resolved, according to the participants in a recent RAND panel discussion held for congressional staff and the interested public. Moderated by RAND adjunct economist Michael Toman, the panel included Peter Molinaro, vice president of The Dow Chemical Company; David Hawkins of the Natural Resources Defense Council; and William Kovacs, vice president of the U.S. Chamber of Commerce.

Not Just a Domestic Challenge

All panelists were adamant in asserting that U.S. domestic policy alone will not solve the problem of global climate change. “Even if we eliminated the entire economic activity of the United States, carbon dioxide emissions would continue to rise because of emissions from the developing world,” noted Kovacs. “A ton of carbon going up in the air in China is just as important as a ton going up in the air in the United States.”

Kovacs and Molinaro also cited the problem of “leakage” — that if the United States imposes a domestic cap, it can make U.S. energy and manufacturing less competitive with countries that do not impose caps, resulting in higher production and emissions in those countries. Concerns about leakage could also motivate some U.S. policymakers to consider trade sanctions to level the playing field for products entering the country. “When you have to start tinkering with world trade,” Kovacs said, “you are looking at many unintended consequences.”

The world's first real-time carbon counter outside Madison Square Garden.
The world’s first real-time carbon counter, outside Madison Square Garden and Pennsylvania Station in New York City, helps viewers keep track of the amount of greenhouse gases in the atmosphere.

Cap-and-Trade Plus

The panelists also agreed that a cap-and-trade system alone will not suffice even for domestic policy. This view is reflected in a consensus document developed by the U.S. Climate Action Partnership, made up of 25 corporations and five nongovernmental organizations, including Dow Chemical and the Natural Resources Defense Council. The consensus is that instituting caps to reduce the amount of carbon emissions from domestic energy sources, such as coal-fired power generation, will increase America’s overall cost of energy, requiring a move toward other technologies and energy resources. The panelists favored subsidies and other incentives for investing in still-maturing technologies — such as carbon capture and sequestration, which would enable coal to remain an important energy source without adding to greenhouse gas emissions — as well as incentives for developing commercially viable renewable energy.

Hawkins suggested that nuclear power could be part of the low-carbon energy resource mix as well, especially given advances in the nuclear power industry, but he stressed that such investments should come from the private sector. “Fifty years of subsidies is enough. We should not be diverting resources to a mature nuclear industry and away from other less mature technologies.” He also argued that if the United States decides to embark on a nuclear power renaissance, “it needs to get the sequence of actions right up front, working to put in place first the global regimes needed to prevent the diversion of enriched uranium for weapons purposes.”

Molinaro, meanwhile, emphasized the importance of policies pushing for energy efficiency in office buildings. “Energy use in buildings accounts for 40 percent of greenhouse gases,” he said, “and you are not going to affect that problem with a cap-and-trade program in the near term.”

“Energy use in buildings accounts for 40 percent of greenhouse gases, and you are not going to affect that problem with a cap-and-trade program.”

– Peter Molinaro,
vice president, The Dow Chemical Company

Kovacs acknowledged the potential impact of the U.S. economic stimulus package in investing in new technologies to promote alternative sources of energy, but he also argued that “we don’t just need government money; we need regulatory certainty that such new technologies will not go through 20 years of litigation.” He cited examples of promising new technology projects that were undermined by what he called “insidious factors” within the regulatory process.

Making Allowances

One goal of the cap-and-trade system, according to Hawkins, is to ensure that the price paid for greenhouse gas emissions is set high enough both to prevent wrong-headed, high-carbon investments and to provide incentives needed for low-carbon investments. But, he said, the price that is likely to result from legislation now being discussed is “lower than what is needed to stimulate the best mix of long-term investments.”

This concern goes to the heart of the implementation challenge. In proposed legislation, the emphasis has been on giving away most of the credits first and then making a transition to a full auction system later. Doing so could expose policymakers to the criticism that they are giving windfall profits to those receiving them. But Molinaro contended that giving away the credits up front is part of a “compromise that will allow us to have fairly robust targets early on and thus show progress.” Also, if the United States held auctions at the outset of a cap-and-trade regime, it might make coal use so expensive so as to lead to economic disruptions in some markets.

Another challenge at the outset of a cap-and-trade regime is to avoid creating undesirable substitution incentives that could drive some consumers away from coal toward natural gas because of its lower carbon content, rather than implementing needed technologies to reduce emission from all fossil fuels. Additional provisions in current legislative proposals are designed to target the allocation of emissions allowances in ways that hold down retail utility costs — so the benefits go to customers, not suppliers — and to support energy research and development.

Despite concerns about the details of domestic climate change policy, there was consensus across the panel that action must be taken now. “There is a conviction on the part of businesses and nongovernmental organizations that it is urgent to limit greenhouse gases, that it can be done at reasonable costs to the economy, and that waiting will increase the cost to the economy of climate change and commit us to more climate disruption,” Hawkins concluded. square

Related Reading

Evaluating Options for U.S. Greenhouse-Gas Mitigation Using Multiple Criteria, Nicholas Burger, Liisa Ecola, Thomas Light, Michael Toman, RAND/OP-252-RC, 2009, 52 pp.