CHAPTER
1
Taking the Lead on Climate Change
Mr. President, I urge you to propose and, after wide-ranging debate, to implement a beginning framework for control of U.S. greenhouse gas emissions. This framework, which would include a modest but firm cap on major emissions sources, would help American businesses and consumers by creating a more predictable domestic investment environment. As important, it would provide U.S. leadership in the evolution of international controls on these emissions. Taking this first step need not commit the United States to a longer-range program and could leave time as necessary for further study of the extent and impact of climate change.
The Policymakers’ Dilemma
Since ratifying the United Nations Framework Convention on Climate Change in 1992, U.S. policy has largely resisted imposing mandatory controls on domestic greenhouse gas emissions. The rejection of the Kyoto Protocol on the grounds of its adverse economic impact has been the most visible example. This hesitation to impose greenhouse gas controls is understandable, but inaction has its own costs as well. The dilemma for policymakers is how to balance the costs of doing something against the costs of doing nothing.
Dealing with the prospect of climate change is a formidable policy problem, both scientifically and institutionally. Although the basic physics of the effects of increasing concentrations of greenhouse gases is clear, the climate system itself is exceedingly complex. Scientists do not yet understand all of these complexities, nor can they construct computer models of the system to predict with precision the effects of a changing climate. Still, while agreeing that more research is needed, most scientists believe that enough is known now to warrant action to limit greenhouse gas emissions. The problem science creates for policymakers is thus that it is becoming clear that we need to do something before science can tell us exactly what needs to be done.
A changing climate is global in its effect, which means that no one country can do enough on its own to solve the problem.
The scale of the climate issue also creates a daunting problem of governance—the institutional framework within which policy works. A changing climate is global in its effect, which means that no one country can do enough on its own to solve the problem. Even if all countries began to pull together now to contain greenhouse gas emissions, a control regime would have to operate for decades to successfully limit greenhouse gas concentration in the atmosphere. This means that our generation must pass along to succeeding ones the management of the climate issue. The world does not now have institutions that are particularly effective in managing global cooperation, much less on issues that span several generations.
Thus policymakers can find solid reasons in both science and governance for hesitating to impose a greenhouse gas control regime. Setting the right controls is a hard thing to do, and indeed the costs of being wrong could be high. If the necessary level of control turns out to be significantly greater or smaller than estimated, the world could easily spend too little or too much on this problem. Similarly, if the institutions of governance inequitably allocate the burden of controlling greenhouse gas emissions, major emitters such as the United States or China could reap major but undeserved economic gains or face severe losses.
But inaction also is costly, so waiting for scientific certainty or frictionless governance is not necessarily a good policy. Climate change issues are already creating immediate issues for U.S. businesses and consumers, regardless of what long-term policy on climate change may turn out to be. Here are some examples of the real costs that are being incurred right now:
■ Businesses producing significant greenhouse gas emissions abroad are in some cases already subject to mandatory controls. For example, the United Kingdom and the European Union have, or are actively seeking to have, caps on green-house gas emissions, coupled with trading of emissions allowances among firms. The cap-and-trade policy is widely regarded as a sensible mechanism, as it helps ensure the most efficient allocation of resources. But a U.S. company that finds its least-cost way of meeting a U.K. cap is to reduce emissions at a U.S. plant needs a U.S. policy that lets it take credit for that action. Otherwise the firm is at a competitive disadvantage.
■ Electric utilities and other major domestic sources of greenhouse gas emissions make investments that are designed to last for decades. Over that span of time, however, the possibility that government may impose a mandatory greenhouse gas control regime is, though not a certainty, at least a very real risk. Factoring that future risk into today’s investment decisions is more difficult without steady guidance from policymakers.
■ Other entities becoming involved in the greenhouse issue are creating costs and uncertainty. States are rolling out their own greenhouse gas controls in the form of emissions limits or renewable energy portfolio standards. Insurance companies are debating whether and how to handle climate risks in their policies. Shareholders are proposing resolutions in corporate proxy statements asking for disclosure of the business risks of potential climate liability. Although the value of these kinds of actions is open to debate, each is a real cost or risk today.
American businesses and consumers must respond to these facts of life whether or not they believe that climate change is occurring. And the absence of a U.S. framework for controlling greenhouse gas emissions makes their responses more uncertain and therefore more costly. Some companies might want to experiment with early action to explore ways of cutting greenhouse gas emissions, but they would be more likely to do so if they knew that they would get credit for their efforts down the road. And companies that find themselves responding to multiple, uncoordinated requirements almost certainly would be able to control costs more efficiently within a single national framework.
Some companies might want to experiment with early action to explore ways of cutting greenhouse gas emissions, but they would be more likely to do so if they knew that they would get credit for their efforts down the road.
Another risk exists in the possibility that the United States will someday subscribe to an international control regime. The costs to the nation of that regime will depend importantly on the details of its design. For example, access by U.S. emitters to low-cost emissions reductions in other countries is essential to minimizing U.S. costs, not to mention the overall cost of the program. Similarly, how the rights to emit greenhouse gases initially are allocated among nations has a major effect on the costs of compliance. Thus, if and when global climate controls become necessary, a regime that at least does not unfairly disadvantage the U.S. economy serves the national interest.
The United States should take a leadership position now in international forums on the design of these controls for two reasons. First, no one else is going to protect the country’s interest. Indeed, experience with the Kyoto negotiations and other discussions has already demonstrated that some countries and advocacy groups would like to limit U.S. flexibility in achieving the lowest-cost solution.
The other reason is that policymakers usually seem to make major environmental policy decisions—such as adopting a serious greenhouse gas control regime—very quickly. When that happens, the quality of the policy that goes into place will depend almost entirely on the quality of thinking that has gone before. To illustrate, the negotiation of the Montreal Protocol to control emissions that destroy atmospheric ozone took place quite soon after the establishment of the scientific smoking gun made it clear that something had to be done. That the protocol was a success testifies to the fact that the international community had engaged in more than a decade of discussions about the problem of ozone depletion. Similarly, the sulfur oxide control program in the United States came into being in just a few months because of an exceptional alignment of political interests. But in the background was a long history of both scientific and economic research that enabled its framers to design a complicated program that actually worked.
The odds are good that the climate issue will evolve similarly. Some precipitating event will cause the international community to take serious action, and to do so quickly, before the stimulus to action recedes. And when the flag drops, the time for careful thought will be over; therefore, the policy process up to that point is critical. For the United States not to be a leading player in this process is to risk a control regime that is less efficient and more inimical to our national interests.
Recommendations for Action
This situation calls for a more certain environment in which businesses and consumers can prudently account for the growing pressure for greenhouse gas controls in today’s decisions. Absolute certainty is not possible, because the climate issue still involves both scientific and institutional uncertainties. But it is possible to signal the likely direction of policy, thus reducing the risks to more manageable levels.
Accordingly, your administration should propose a policy framework for greenhouse gas controls that addresses three major goals:
■ The design and initial implementation of an initial U.S. control regime.
■ Forceful advocacy of the U.S. position in forums about the international control regime for greenhouse gases.
■ Development of transition rules that, to a reasonable degree, hold harmless early actions to reduce greenhouse gas emissions.
Absolute certainty is not possible, because the climate issue still involves both scientific and institutional uncertainties. But it is possible to signal the likely direction of policy, thus reducing the risks to more manageable levels.
It should be clear in proposing this framework that you intend to open a debate among all stakeholders aimed at reaching a consensus within two years on specific proposals, which would then be offered for implementation. This focus is important to ensure that the actions you recommend are both effective and prudent. Although the content of your proposals will depend on the outcome of this process, the framework should at a minimum include the following elements:
A modest cap-and-trade program for major emitters of all greenhouse gases. This program would provide experience with the functioning of a national market for greenhouse gas allowances, creating a solid foundation for U.S. policy formulation. The Chicago Climate Exchange and trading regimes being implemented in the United Kingdom and the European Union are examples of how such markets are designed and function. These existing markets also reveal some degree of price discovery for greenhouse gas emissions allowances. These data will be useful in establishing an initial cap that allows the trading market to operate effectively without creating unnecessary costs to the participants.
A similarly modest cap on transportation fuels to encourage development of tools for managing upstream control programs would also be desirable. It is unlikely that the cap would affect the fuel price to the consumer very much, but gaining experience with controls on fuels rather than emissions sources is important for the likely design of a full-scale greenhouse gas control program.
Banking of credits for early action would reduce the risks of experimenting with solutions to the emissions problem. It is already clear that companies will want to experiment with various forms of offsets to learn how to make measurable and verifiable emissions reductions outside their own facilities. Sequestering carbon in forests and helping a developing country reduce its emissions are examples of these offsets. It is up to the private sector to try these experiments, and if they are successful, the participants should get credit in any future control regime.
Rules for international offsets earned from participating in emissions reduction programs abroad should be specified. These offsets might arise from trading in non-U.S. allowance markets and from cooperating with developing countries though programs such as the Clean Development Mechanism. In some cases, countries may bank the emissions reductions from these steps for future use.
Technology-forcing programs that go beyond the usual government research and development goals are essential. The Department of Energy is pursuing research programs to create a hydrogen economy and a zero-emissions coal plant. These technologies will limit greenhouse gas emissions over the long term, but policymakers should also have a technological hedge against the possibility of controls in the somewhat nearer future. For example, gaining operational experience in electric utility service is critical for the successful introduction of integrated gasification combined cycle technology, so the government might want to find a way to encourage the early deployment of a few operational units well in advance of the zeroemissions coal plant. Another possibility would be to replace the current Corporate Average Fuel Economy program based on the efficiency of gasoline use with one based on the level of CO2 emissions, thus guiding future automotive technology development in a direction that anticipates greenhouse gas controls.
The central issue you need to deal with is balancing the costs of action on climate change against the costs of inaction. The recommendations given here aim to strike that balance by suggesting actions that do not imply a premature commitment to a long-term climate goal or to the substantial costs that meeting such a goal would incur. Indeed, it is not necessary, and perhaps not even wise, to have such a goal in mind in order to reach agreement on what a sensible control framework would look like. Nor is it necessary to incur large costs to gain the experience needed to assure policymakers that reliable tools will be at hand.
The central issue is balancing the costs of action on climate change against the costs of inaction.
What is needed is leadership that reduces uncertainty and increases confidence that however the climate issue develops, our government is actively shaping it with both the long-term national interest and the nearer-term imperative of prudent management in mind. My experience leads me to believe that such leadership would be welcomed by the many U.S. organizations that are already dealing with climate change as part of their daily business.
R.W.F.