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FOIA Number: 2017-1095-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
Council of Economic Advisers
Series/Staff Member:
Alicia Munnell
Subseries:
OA/ID Number:
10103
FolderID:
Folder Title:
Environment: Climate Change [1]
Stack:
Row:
Section:
Shelf:
Position:
S
20
3
2
3
I
EPA:
al Mc Gartland
260-3354
Wan abbasi
260-4332
I
10/09/36
19:00
2026470217
Tier, 10/15/16, 11-12pm 001/004
United States Department of State
Assistant Secretary of State for Oceans and
International Environmental and Scientific Affairs
Washington, D.C. 20520
Chip
CLIMATE CHANGE MEETING PRINCIPALS ONLY
TUESDAY, OCTOBER 15 - 11:00 - 12:00n
NAME
FAX
Alicia Munell
395-6958
Rosina Bierbaum
456-6025
Elgie Holstein
456-2223
T.J. Glauthier
395-4639
Everett Ehrlich
482-0432
Jeffrey Honker
482-4636
Lois Schiffer
514-0557
Doug Hall
482-6318
Brooks Yeager
208-4561
David Shark
395-4579
Mark Chupka
586-0861
Charlie Rawls
720-5437
Dirk Forrister
586-9626
Mary Nichols
260-5155
David Gardiner
260-0275
Frank Kruesi
366-3997
Joshua Gotbaum
622-2633
Steve Seidel
456-6546
David Sandalow
456-2170
Pete Jordan
456-9500
Attached is the agenda paper for the climate change meeting
that Eileen Claussen would like to have on Tuesday, October 15
from 11:00-12:00 in Room 7835, Department of State. Please
call Ms. Wiggins at 647-1554 regarding your attendance.
Thank you.
10/09/96
19:01
2026470217
002/004
Climate Change: Next Steps
1. Decision Process
Interagency Working Group (IWG chair: Amb. Mark Hambley, technical level staff from agencies)
Principal tasks: develop workplan, prepare analyses, develop/recommend policy options, staff U.S
delegation to Climate Convention and related negotiating sessions
Claussen Group (chaired by A/S Eileen Claussen, A/S level from agencies)
Principal tasks: manage process; take policy decisions on most issues
Interagency Analysis Team (IAT chair: U/S Everett Ehrlich; technical staff from analytic agencies)
Principal tasks: develop analytic toolbox to assess policy options; evaluate selected options
Deputies Committee (co-chairs Katie McGinty and Dan Tarullo, U/S and Cabinet level)
Principal tasks: approve/modify Claussen Group decisions as appropriate, make final major policy
decisions
11. U.S. Framework
Announced in Geneva at second session of convention Conference of Parties (by Tim Wirth); includes:
legally binding target and timetable (rejecting common/harmonized policies and measures)
medium term emissions target (rejecting short term, i.e., 2005), and long term concentration goal
flexibility (e.g., emissions trading and/or Joint Implementation (JI))
requirement of a compliance regime
inclusion of developing countries
III. Negotiating Timeline
September/October:
Claussen Group Meeting: October 15. Review proposed submission to convention secretariat
Submission to convention secretariat (due Oct. 15): propose elements of a protocol/legal instrument, to
include: JI/trading, legally binding/compliance, non-Annex 1 involvement, targets (written by IWG,
cleared by Claussen Group/Deputies)
November
U.S. positions prepared by IWG, cleared by Claussen Group and Deputies. Position to be based on
elaboration of October submission, to include:
emissions trading/JI (including underlying principles, but no operational details)
developing country commitments (developing countries must take part in agreement)
target design (with no numbers)
=
legally binding/compliance issues
Claussen Group Meeting: November 24. Review U.S. positions prior to December AGBM; possible
agreement on demarche to other countries
December
AGBM (Geneva):
Concept for and structure of instrument to be tabled/discussed;
Meeting output will likely take form of outline for agreement
February /March 1997
AGBM (Bonn):
Initial tabling of language for agreement
FCCC Secretariat to compile bracketed text based on December discussion and interim submissions
U.S. will need actual draft agreement language (rather than concepts) on:
-
emissions trading/JI,
10/09/96
19:01
2026470217
003/004
developing country commitments,
compliance issues.
Given short time between conclusion of December session and February opening, little new work can
be anticipated in U.S. on these beyond that developed or December; however, we may be able to
announce completion of some IAT results with respect to targets at this session. (IWG to drail
language, IAT to prepare analyses, Claussen Group to clear)
April/May
Submission of negotiating text to FCCC:
Submission date not yet set; however, can be anticipated to be needed to insure compliance with 6-
month rule;
Expect Secretariat to compile as single "bracketed text" on basis of submissions; U.S. will need to
insure that any options we are still considering be submitted and included in this text
May/June (7) 1997
AGBM (tentative; Bonn):
Expect a session to be held late Spring/early Summer to insure compliance with 6 month rule
Focus on discussion of/revision to bracketed text;
All issues at play;
Seek resolution of least contentious matters, possibly including final clauses
October (?) 1997
AGBM (tentative; Bonn)
Expect to need at least one Fall session prior to Kyoto/COP-3; none now scheduled, and would require
additional financial support
Focus on further resolution of bracketed text for instrument, possibly including with respect to trading.
compliance and institutional issues
December 1997
COP-3 (Kyoto):
Likely to need high level bilateral discussions prior to session to resolve final disagreements such as
targets, developing country activities, and possibly Rules o Procedure
Expect both officials' and ministerial-level session at COP-3;
Focus at former will be to resolve all brackets - but will likely leave some issues unresolved pending
arrival of ministers
Anticipate adoption, but no formal signing ceremony in Kyoto
May also require "interim operating agreement"- - to allow for additional technical details to be
resolved (e.g., on trading).
10/09/98
19:02
2026470217
004/004
IV. Other Meetings: Timeline
September/October:
OECD Meetings (Paris, September 30-October 3): discussion of elements of protocol/legal instrument:
possible EU focus on policies and measures; additional discussion of developing countries
November
Annex I Countries of the Asia Pacific (ACAP: US, Canada, Australia, Japan and New Zealand)
(Hawaii, October 31 - November 1): all issues related to December Ad Hoc Group on the Berlin
Mandate (AGBM: negotiating body for next steps)
Developing country contact group (Paris, tentative): issues related to technology, Global Environment
Facility (GEF), Article 4.1
April/May
Second Climate Action Report due to FCCC (April)
Will require announcement of anticipated shortfall in meeting 1990 ghg emission levels by 2000, as
well as anticipated additional measures being taken to reduce emissions
IWG to draft, Claussen Group/Deputies to clear; will require financial support from agencies to
prepare and publish; will be circulated internationally at Spring/Summer AGBM
September/October
IPCC to begin Third Assessment Report
THE WHITE HOUSE
WASHINGTON
aAM
October 15, 1996
RP
MEMORANDUM FOR DISTRIBUTION
FROM:
Michael Warren, Executive Director
National Economic Council
SUBJECT: Climate Change Deputies Meeting
The joint NEC-CEA deputies meeting on climate change scheduled for
October 16 at 6:00 pm is cancelled. We will contact you if and when it is
rescheduled. We apologize for any inconvenience.
Distribution:
Charles Curtis, DoE
Ev Ehrlic, Commerce
Jack Gibbons, OSTP
Jamie Gorelick, DoJ
Jeff Lang, USTR
Jack Lew, OMB
Richard Rominger, USDA
Joe Stiglitz, CEA
Nancy Soderberg, NSC
Larry Summers, Treasury
Tim Wirth, State
10/15/96 08:01
202 456 7132
WHITE HOUSE/NEC
002
ANM
THE WHITE HOUSE
WASHINGTON
Ray
October 15, 1996
MEMORANDUM FOR DISTRIBUTION
FROM:
Michael Warren, Executive Director
National Economic Council
SUBJECT: Climate Change Deputies Meeting
There will be a joint NEC-CEA deputies meeting on climate change on
October 16 at 6:00 pm in room 231. The meeting will be co-chaired by Dan Tarullo
and Kathleen McGinty. The agenda is as follows:
1.
Interagency process (McGinty/Tarullo)
2.
Update
-status of negotiations (Wirth)
-status of analytic work (Ehrlich)
3.
Schedule of upcoming events (Wirth)
Deputies plus one are invited to attend. Please call Kristen Panerali at the
NEC at 456-5353 with your clearance information.
Distribution:
Charles Curtis, DoE
Ev Ehrlic, Commerce
Jack Gibbons, OSTP
Jamie Gorelick, DoJ
Jeff Lang, USTR
Jack Lew, OMB
Richard Rominger, USDA
Joe Stiglitz, CEA
Nancy Soderberg, NSC
Larry Summers, Treasury
Tim Wirth, State
Perspectives on the Choice of Models for
Global Climate Change Analysis
Presented by
Roger Brinner
Executive Director and Chief Economist
DRI/McGraw-Hil
prom, 10/7/96, 5pm
/Agric luster wfg
Perspectives on the Choice of Models for
Global Climate Change Analysis
Key Aspects of the Policy Environment
- Huge Scale of Economic Intervention
- Long Time Horizon
- Short-run Impacts Politically, Environmentally and Economically important
-
Speeds of Adjustment
- Emphasis on Price Incentives in US Discussion
- Command/Control Policies Often Favored in Europe
- New Technologies
- Regime-shifts and Forward-Looking Expectations
- Industry-Specific Responses
- International and Regional Complexity
- Uncertainty about the Costs of Non-Intervention
- Economic Welfare beyond Official GDP
Page 1
The Truth about Modern Macro/Energy Model Systems
such as DRI's System
The serious "macro" modelers have listened to and learned from the debates of the past three decades. On the
other hand, most of the academic model builders and GEQ promoters have not had access to this work and
thus compare their "GEQ" models to macro models as they existed in the 1960s and 1970s.
With extensive testing, innovative structures, and appropriately constrained core coefficients, DRI's modern
systems centered on macro-econometric models are, in fact, genuine general equilibrium models.
A robust long-run growth model is at the core, reliably regulating long-run answers.
Most key expectation structures are "rational" and "forward-looking" in a realistic, tested manner.
An extremely detailed, forward-looking energy model is fully integrated into macroeconomic cyclical and growth
scenarios.
Microeconomic fundamentals are fully respected in constrained long-run price elasticities in both macro and
energy models.
Technological change is endogenous, driven by R&D activities with literature-benchmarked rates of return.
International feedback loops are built in, combining good microeconomics, historical testing, and user options for
sensitive parameters.
Continuous testing against actual experience has allowed identification of robust, sustained behavior and of
structural shifts that need to be endogenized or specifically managed by the analyst.
The models have been tested in a wide range of policy applications to reduce the risk of blind spots and short
circuits in any specific policy situation.
Well-documented model allows user to anticipate basic results and to understand valuable, initially paradoxical
results.
Sophisticated software implementation allows for constraining results further on a scientific basis to match other
model insights, bridge to additional resource supply and industrial or regional models, or implement
command/control changes as desired.
Page 2
Specific Examples of Key Lessons Embodied in DRI Macro/Energy Model System:
Tied to the Key Aspects of the Environmental Policy Environment
-
Long Time Horizon
Production function with diverse capital inputs (each with appropriate rate of return and depreciation).
Careful re-specification of the role of energy inputs in intermediate and final production as substitute for capital or
labor.
- New Technologies
Factor-augmenting technical progress driven by R&D. First implemented in 1976, and continuously tested, validated
since then.
- Emphasis on Price Incentives in US Discussion
Neoclassical investment/cost-of-capital functions in business fixed investment, housing, and consumer durable
spending models with appropriate short- and long-run elasticities.
Accelerationist wage-price models with no long-run inflation/unemployment trade-off.
Stage-of-processing price model with appropriate long-run elasticities and import price sensitivity.
- Command/Control Policies Often Favored in Europe
Software environment of model greatly facilitates matching adjustments to durable goods spending(on new
technology or higher-efficiency models)and related energy consumption.
- Huge Scale of Economic Intervention &..
-
.Short-run Impacts Politically, Environmentally and Economically important
Reliable financial-real-price sector interactions, including multiple options to invoke alternative, endogenous central
bank reactions.
Detailed government sector to track endogenous inflation, growth, finance budget repercussions on a short-and long-
run basis.
- Speeds of Adjustment
Great care is taken during estimation to estimate the time profile of demand responses.
Page 3
Specific Examples of Key Lessons Embodied in DRI Macro/Energy Model System:
Tied to the Key Aspects of the Environmental Policy Environment
(continued)
- Regime-shifts and forward-looking expectations
Linked energy model has detailed capital stock choice models for transportation, residential, commercial,
and utility sectors with explicit forward-looking life-cycle costs and probabilistic selection of least
cost options.
Financial market expectations based on the accelerationist model, structural deficits; and global
conditions.
- Industry-Specific Responses
Detailed energy prices now feed relative prices of final demand elements driving industrial and service
sector outputs by industry.
Full linkage between energy and macro model simulations.
- International Complexity
Automated, tested feedback loops involving world bond yields, oil prices, import prices, export demands.
The OECD and developing nation trade variables are entered as separate, distinct price, exchange rate,
and volume inputs to U.S. export and import model equations. This will facilitate handling of
differential policies and production responses,
- Uncertainty about the Costs of Non-Intervention & Economic Welfare beyond Official GDP
The GDP, Consumption, Income and price answers can be exported to other models to estimate broadly
defined consumer welfare measures.
These features and improvements combine to give answers that should be respected by Keynesians,
Monetarists and Neoclassical economists.
Page 4
Integration of the DRI Macro, Energy, I-O and Regional Models
The DRI Macro and I-O Models take key inputs from the Energy Model
- fuel price by type
- non-utility final demand for fuel use by type
- consumer usage of energy by type
- utility use of fuel use by type
- energy production by type
- energy imports and exports
- light vehicle miles per gallon, new and weighted-average stock
The DRI Energy Model takes key inputs from the Macro and I-O Models
- Residential: housing starts and stock
- Commercial: building square footage by type of construction, discount rates
- Industrial: real output/production by 2-4 digit SIC codes
- Utility: capital costs, wage rates, construction costs
- Transportation: vehicle sales and stocks, prices, foreign trade (for bunker fuels)
- All Sectors: real income, inflation components, capital costs
DRIs U.S. Regional Model is also fully integrated into this system
- The DRI Energy Model starts at Census and NERC regions and sums to national totals
- For example, housing starts and stocks are distributed regionally, with differentiated energy
requirements
- National production and employment are distributed on a consistent basis across regions, states,
and metro/non-metro areas---a potentially valuable political input
Page 5
Problems Specific to Many "General Equilibrium" Models
Only rough calibration to starting points and realistic base lines.
No testing of historical validity and little testing of applicability to a broad range of policy situations,
thus leaving severe blind spots and short-circuits even in their own principal policy area.
Transition periods are ignored or handled roughly. Long- versus short-run elasticity demand and
supply differences are paid scant attention.
A central price is often set as numeraire, thus no policy guidance on inflation impact in all its
dimensions.
Simplistic, counter-factual expectation formation, not even recognizing Lucas/Sargent concept of the
richness of expectation formation.
No central bank, hence real cost of capital invariant in many circumstances where it should be
expected to change substantially for a prolonged period of time.
Full employment assumed, hence no policy guidance on job losses or gains.
No business cycle, hence no capital formation losses or gains in very important transition periods.
High degree of aggregation.
Limited international feedback.
Limited software environment to facilitate linkages to other models on a simultaneous basis.
In short and to be blunt, in contrast to their names, as a class the so-called GEQ models actually
tend to be Very Partial Equilibrium Models with a penchant for elegant math and little
resemblance to real world economies.
Page 6
Expectations and "Regime Shift" Changes
The phrases "rational expectations" and "perfect foresight" try to bring powerful, positive images in support of some
"general equilibrium" models and, by contrast to criticize other models with different approaches. However, consider
a few recent examples to see what the most reasonable and realistic interpretations of expectations should be.
I. New monetary policy regimes:
-
Thatcher: monetarist/rational expectation promise of painless end of inflation thoroughly refuted
-
Volcker : bond markets expected sustained inflation and real credit scarcity, not immediate transition.
-
In both cases, no labor or financial market moderation occurred only after traditional information (i.e., higher
unemployment and lower inflation) confirmed policy.
-
France and the EMS/EMU: French yields remain far higher than German in spite of policy change and, indeed,
years of delivery on the new policy.
II New fiscal policy regimes
-
Some evidence exists of temporary 3-6 month benefit from balanced budget announcements, followed y
relapse until actual deficit reduction produced.
-
No evidence of capital spending acceleration or deceleration in response to policy changes until the change
takes place.
III New energy policy regimes
-
Capital spending decisions made with great skepticism about endurance of long-run policy, given quick
changes in official preferences for nuclear, then coal, and now natural gas.
-
Consumers behave in extremely short-sighted manner with regard to auto and appliance efficiency choices.
-
Phase I of Clean Air Act: Utilities behaved as if past coal prices would persist, and thus installed scrubbers.
Perfect foresight would have foreseen price reductions for low sulfur coal and avoided heavy investment in
scrubbers.
-
Government efficiency standards and programs: CAFE standards, electric vehicle requirements, Montreal
protocol on CFCs, etc. presumed not to be binding or to be evaded, thus technology development did not
accelerate to match desired norms.
IV. Surveys of expectations confirm backward-looking expectations with significant lags.
Therefore, the DRI model system uses appropriate, not fanciful or untested, representations of rational or forward-looking
expectations.
Page 7
A Set of Policy Experiments
to Highlight the Theoretical Integrity and Flexibility
of the DRI Macro/Energy System
and the Potential Blind Spots of New "GEQ" Models
The Fiscal Policy Experiment:
- Substitute payroll taxes for personal and corporate income taxes
- Target the original full-employment federal deficit
The Monetary Policy Alternative Assumptions, highlighting the role of the central bank as a major
participant in the capital markets and the financial / real / price interations--economic elements
ignored or handled poorly by newer GEQ models
- Constant nominal reserves
- Constant real interest rate ( a la many GEQ models)
The Labor and Goods Markets Alternative Assumptions
- Normal reactions of individual agents as historically observed
- "Perfect foresight" assumption such that nominal base wages are adjusted to keep price level
unchanged if nonborrowed reserves are unchanged
Or, think of this option as the equivalent of assuming a fixed price numeraire
Comparison of results for output, employment, capital formation, prices, wages, capital costs
- Short-run
- Medium- and long-run
- Note: think of "the long-run" in many climate change scenarios as the integration of a sequence
of overlapping, ever-increasing fiscal initiatives
Page 8
Perspectives on the Choice of Models for
Global Climate Change Analysis
A modern macro and energy model system is calibrated to perform with robust general equilibrium
properties.
Because these models have been developed and maintained over decades with policy analysis as the
key focus, they avoid the short-circuits and blind spots of recent alternatives.
However, the best insights from new models can be incorporated into the simulations of the
macro/energy system. The software environment greatly helps the user to input alternative
theoretical or empirical assumptions about key parameters and then to observe the sensitivity of the
key results to such assumptions.
Page 9
EDF
EDF
2
ENVIRONMENTAL
Daniel J. Dudek, Ph.D.
ENVIRONMENTAL
Joseph Goffman
DEFENSE FUND
Senior Economist
DEFENSE FUND
Senior Attorney
257 Park Avenue South
1875 Connecticut Avenue, N.W.
New York, NY 10010
Washington, DC 20009
(212) 505-2100
(202) 387-3500
Fax: 212-505-0892
Fax: 202-234-6049
e-mail: [email protected]
100% Post-Consumer Recycled Paper
100% Post-Consumer Recycled Paper
Thees, 9/26/96, 1:30Pm
EDF
ENVIRONMENTAL
DEFENSE FUND
Capital wills Office
1875 Connecticut Ave N. W.
Washington, DC 20009
(202) 387-3500
Fax 202-234-6049
September 23, 1996
Alicia Munnell, Ph.D.
Council of Economic Advisors
Old Executive Office Building
17th and Pennsylvania Avenues, N.W.
Room 314
Washington, D.C. 20500
Dear Dr. Munnell:
Thank you for agreeing to meet with us on Thursday, September 26, 1996 at 1:30 p.m. on
the issue of climate change. Please find enclosed materials describing our proposal for
managing greenhouse gas emissions in an international context.
Sincerely,
Jaseph Joseph Goffman
Daniel Dudek
Senior Attorney
Senior Economist
National Headquarters
Project Office
257 Park Avenue South
5655 College Ave.
1405 Arapahoe Ave.
128 East Hargett St:
44 East Avenue
6 Faneuil Hall Marketplace
New York, NY 10010
Oakland, CA 94618
Boulder, CO 80302
Raleigh, NC 27601
Austin, TX 78701
Boston, MA 02109
(212) 505-2100
(510) 658-8008
(303) 440-4901
(919) 821-7793
(512) 478-5161
(617) 723-2996
100% Post-Consumer Recycled Paper
EOF
EMISSION BUDGETS:
Creating Rewards,
Lowering Costs
and Ensuring Results
Daniel J. Dudek
Senior Economist
ENVIRONMENTAL DEFENSE FUND
New York, New York
paper presented
Climate Change Analysis Workshop
Springfield, Virginia
June 6-7.1996
INTRODUCTION
Change is a dominant aspect of environmental problems. Change can come
from the growth of populations, economies, or production processes. While societies
have developed sophisticated institutions to manage change, few of the environmental
management strategies that have been developed are dynamic in operation. Most
policies are static tools which even fail to account for natural variabilities particularly as
these may affect the environment's capacity to absorb emissions. More often than not,
emission limitations are conservatively designed for worst case scenarios. This design
deficiency is increasingly important as we consider problems with significant
uncertainties either in scientific understanding of the environmental problem's
mechanism or in the consequences of ineffective action. For example, the problem of
global climate change has significant uncertainties as to the distribution, intensity, and
timing of impacts. These uncertainties complicate the international problem of agreeing
upon a set of actions to take -- whether to wait to respond for improved scientific or
technical information, to simply adapt to the changes as they arrive, or to begin the
process of reducing the discharge of greenhouse gases to the atmosphere.
Institutional innovations in policy have often been at the heart of resolving
difficult environmental questions. In a sense, the history of environmental management
has been one of institutional innovations. After all, environmental policy making itself is
barely 25 years old. However, neither economic theory nor policy analysts have placed
much emphasis on the role of institutional innovations in the process of transforming
externalities into relevant corporate decision factors. While may policies have been
straightforward, even pedestrian, in their solution of the problem, others have employed
considerable ingenuity to achieve their aims. Compare for example the typical policy of
setting emission limitations for individual industries with debt-for-nature swaps. The
former took a the time-honored path of creating laws and regulations to achieve its
ends while the latter assessed the problem, the resources available and hamessed
self-interest in the service of the environment. The former case imposes a legal burden
on the firm while the latter creates an opportunity for mutual profit while preserving the
environment.
This paper will identify, review, and assess a variety of institutional innovations in
environmental policy that have evolved in the process of developing and extending the
concept and practice of marketable permits. Particular emphasis is given to the
analogy of marketable permits as environmental currency. The particular focus is the
problem of climate change and its challenges. The message is that these challenges
are not unique and that we have a reservoir of existing and evolving experiences to
guide our choice of policy strategy. These environmental lessons have established
the importance of flexibility in timing, the reward for early reductions, and
geographic scope as critical determinants of both environmental and cost
effectiveness. Using these lessons is critical as the U.S. moves into a new round of
negotiations on the Berlin Mandate.
-1-
ENVIRONMENTAL INSTITUTIONAL INNOVATION:
THE BANKING OF MARKETABLE PERMITS
The neoclassical view of environmental problems characterizes them as arising
from market failure. In particular, environmental damage is not taken into account in
the process of making production decisions. The usual policy prescription is to
internalize the externality through regulation either on the firm's production process
directly or indirectly on the prices paid for inputs. Most environmental policy around the
world has been direct regulation in the form of emission norms frequently coupled with
fees levied on the discharges. While seemingly following the economist's prescription,
these policies in practice have suffered from both a lack of enforcement as well as fee
levels below marginal control costs. In the latter case, any stimulus to innovate on the
part of the firm to avoid the fees is completely lost. Furthermore, while this system has
had some success in reducing emission loads, it has been more successful in
perpetuating itself.
The Offset Policy and the Origins of Banking
Frustration with the inflexibility and cost of the command-and-control approach to
environmental policy in the United States has led to a series of policy experiments to
increase flexibility and performance.¹ Several fundamental insights motivated these
experiments. The first was the realization that emissions reductions from one plant
can be used either to augment control or as compensatory compliance for emissions at
another so long as the discharges had the same environmental effect. This insight led
to the development of the offset policy. Offsets were first applied in the case of new
plant construction within regions in which total emissions were greater than allowed by
law, so-called ozone nonattainment areas. By requiring new emission sources to
purchase more reductions from existing sources than they themselves would add to the
atmosphere, economic growth was hamessed as to reduce rather than increase
emissions.
While offsets represented a significant step toward the creation of markets for
emission reductions, the institutional innovation that enabled this policy to practically
function was the development of emission reduction credit banks. By creating the
opportunity for firms to pre-certify emissions reductions with regulators, a ready supply
of offsets was established. In environmental terms, this institutional change
accomplished what neither regulation nor bureaucrats could achieve -- the identification
of cost-effective emission control opportunities. By transforming the environmental
management problem from one of punishment to reward, companies were encouraged
to identify emission reductions which could be produced and sold at a profit.
The experience with banking under the set of emission trading policies focused
on urban air quality has been mixed.² Each state, or in some cases local air districts,
1 For an overview of the variety of state-based emissions trading programs see Dudek,
Wade and Goffman.
2 See Dudek and Palmisano for a discussion of the issues raised in the development of
-2-
developed their own set of rules and procedures. In some cases, banked emission
reductions were confiscated by regulators needing to "produce" additional reductions to
meet the legal requirements for attainment demonstrations. In other cases, the rules
for banking were so restrictive that the supply of available offsets was similarly
constrained. This varied experience left both regulators and firms frustrated with the
emissions trading policy. While the banking function was introduced as a necessary
element to achieve the smooth functioning of the offset policy and to reduce the drag
on growth from environmental policy, it was so unevenly implemented that the first
decade of emissions trading has been largely characterized by supply uncertainty.
Banking as an Integral Design Feature
This early experience with banking laid the critical foundation for integrating
banking more fully into the design of marketable permit programs. While the early
experiments with emissions trading involved the introduction of optional flexibility for
firms, later designs were developed to be the primary vehicle for compliance. For
example, in the design of the acid rain program in the United States, the total annual
discharge of SO₂ from electric power generating stations is limited. This limitation or
cap is implemented by issuing each firm an annual allotments of SO₂ emission
entitlements called allowances. In addition, new entrants must purchase sufficient
quantities of allowances to completely offset the emissions resulting from their
operations. Each firm must report its annual emissions as measured through the use of
continuous emission monitoring systems. Compliance with the program is determined
by the Environmental Protection Agency (EPA) by comparing the discharge reports with
the number of allowances held by the firm. Under this system, the firm's legal
responsibility is to hold a number of allowances greater than or equal to total
discharges. In this sense, the firm's participation in the trading program is not optional
since compliance is defined in terms of the program's basic design. While the firm has
no choice about participation in the acid rain control program, the firm is free to decide
whether it will participate in the SO2 allowance trading market. Since compliance is
defined in terms of the relationship between allowance holdings and emissions, the firm
is free either to reduce emissions through conventional means or to acquire allowances
from other firms.
Since the acid rain problem in physical terms is cumulative involving the
depletion of natural buffering capacity from soils, this dynamic aspect of the problem
was included in the basic program design. Specifically, the SO₂ allowances issued to
firms have an indefinite life, i.e. they are good until used to compensate for emissions.
The practical consequence of this design feature is to provide firms with the possibility
of "banking" or saving extra SO₂ allowances for future use in compliance or for sale into
the market at a future date. Extra SO₂ allowances can be produced by controlling
emissions more than required, by purchase at the annual auction, or by purchase from
other firm or broker. As shown in Figure 1, the emissions consequences of this
program design element have been enormous. The EPA has estimated that
overcontrol by firms could be as high as 40%. In environmental terms, this overcontrol
emissions trading.
-3-
and banking is quite significant since it is being produced early in the program at a time
when the marginal benefits from control are highest in terms of relief to acid-stressed
ecosystems.
Figure 1. SO₂ Allowance Banking
EARLY REDUCTIONS
ACID RAIN CON
22
Business as Us
20
Millions of Tons of SO:
18
19
16
14
12
Phase I
10
Overcontrol and Saving
a
1980
1985
1990
1995
200
The banking provisions of the acid rain program have also had critical
implications for the evolution of the SO₂ allowance market. As indicated above, up to 6
million tons of extra SO₂ reductions are expected in the first phase of the program. The
practical result of this extensive banking has been to depress allowance prices. The
March 1996 auction of approximately 250,000 allowances produced winning bids in the
$60-70 per ton range.³ These market results stand in sharp contrast to the preprogram
forecasts of $500-750 per ton for allowance values in the first phase. In fact, in debates
over critical design elements of the program, independent power producers planning to
construct new power plants expressed fears that allowances would not be available to
them in sufficient supplies to offset their new emissions even at the $1500 per ton level.
As a result, a special Administrator's Reserve was created for administrative purchases
at $1500 per ton. From recent market values (roughly $60 per ton), these fears seem
unfounded in the extreme.
These unexpectedly low allowance prices are a direct result of the banking
opportunities provided in the program and the large supply of overcontrol. The
3 One of the precedent-setting aspects of the acid rain program is its use of an auction
to reallocate allowances. The novelty of this program prevented the most efficient
design from adopted and it has been widely criticized. Nonetheless, the auction has
provided not only a mechanism for redistribution, but also a very visible public signal
concerning the operation of the program in the form of widely reported prices.
-4-
underlying economic factors contributing to the supply of allowances include intense
competition between railroads from the western U.S. which has reduced freight costs
for low sulfur coal and the tremendous economies of scale in coal production in the
Powder River Basin. Since the program is to be implemented in two discrete phases,
firms have used these cost factors to stockpile extra reductions which could be used
either to delay second phase capital expenditures or to sell into the market if prices
improve. In any event, the implication for the allowance market has been a large
supply of available allowances, unexpectedly low prices, and relatively few inter-firm
transactions compared with expectations.4
In contrast to the late 70's and 80's, this period of experience with emissions
trading has been characterized by demand uncertainty. In part, this reluctance on the
part of firms to rely on market transactions for legal compliance in the face of potential
criminal penalties is understandable. Emissions trading remains a novelty and firms are
unsure both of market availability and public acceptability. This problem is heightened
by the fact that the electric utilities in the acid rain program are still regulated
monopolies and therefore their expenditures are subject to public review prior to
recovery from the public through rates.
Applying the Banking Paradigm
Throughout the development of the acid rain program it was apparent that the
flexibility in control decisions would create the opportunity for firms to choose options
which would simultaneously reduce several emissions at once. Of particular concern
was the reduction of greenhouse gases.⁵ For example, some analysis at the time
evaluated the cost-effectiveness of energy efficiency investments as pollution control
options.⁶ However, it remained until after the negotiation of the Framework Convention
on Climate Change (FCCC) in Rio in 1992 that firms took the problem of managing
GHG seriously. After this time, strategic planning analyses by electric utilities of the
implications of CO2 control options began to be developed.
4 This outcome should not be surprising given the discrete nature of the two phases.
The first phase of the program involves only 111 individual plants while the second will
add more than a thousand sources. The significant aspect of the phases, however, is
the legislatively mandated requirement for separation. Specifically, representatives of
high sulfur coal mining regions concerned about employment insisted that plants to be
controlled in the second phase could not enter into the program early. As a result, firms
could not optimize control investments over all of their operations, except through
overcontrol in phase I plants.
5 A primary strategic motivation for the advocacy of marketable permits for SO₂ by the
Environmental Defense Fund was the fact that conventional flue gas desulfurization
devices (FGD) imposed an efficiency penalty and therefore increased greenhouse gas
(GHG) production. FGD was also the highest marginal cost control option. Therefore,
an efficient policy like marketable permits would minimize the investment in FGD and
therefore reduce the commitment to future increases in GHG.
6 Dudek, LeBlanc, and Miller identified and evaluated a set of control options which
reduced SO2, CO2, and NOx.
-5-
One such study was conducted by the Tennessee Valley Authority (TVA), the
fourth largest electric utility in the U.S. TVA, a publicly owned utility was prodded by
Congress to evaluate the relative impact of alternative CO2 control policies on system
investments, compliance costs, and electricity rates. The study used the Dynamic
Energy and Greenhouse Emission Evaluation System (DEGREES) a linked optimal
control and linear program developed by ICF, Inc. A variety of scenarios and policies
were developed for analysis by a peer review group which included emission cap and
trade policies with:
- limited flexibility (plant by plant control)
- flexible (within system control only but trading among plants)
- flexible with offsets (including international acquisitions)
- flexible with offsets and banking (to include the banking of
early reductions).
In addition, a variety of carbon tax policy options to stabilize emissions at 1990 levels by
the year 2000 and to reduce 20% below 1990 levels by 2010.
Figure 2. GHG Emissions Profiles with Banking
MANAGEMENT OVER
TENNESSEE VALLEY AUTHORITY
3,400
3,200
MILLIONS OF TONS CO2
3,000
2,800
2,800
2,400
2000
2005
2010
2015
2020
2025
YEARS
No Saving Saving
The most interesting results from this study concerned the optimal emission
profiles for the utility when the banking of early reductions was allowed (shown above in
Figure 2). Without the option to bank early reductions, TVA would produce exactly the
reductions required at the time required irrespective of reduction scenario. However, if
the banking of early reductions was allowed the utility would generate more than 3
billion tons of early reductions. These extra reductions would be supplied by avoiding
the use of FGD, fully implementing energy efficiency programs, substituting natural gas,
and acquiring offsets from other sectors. Owing to computational limits and a bank
-6-
exhaustion constraint in the ICF model, the calculated trajectories imply gradual
withdrawals from the bank up to the year 2025. Depending upon the path of future
reduction responsibilities and future marginal costs, these withdrawals could occur
more slowly over a longer period of time. In each case, however, the cumulative
emissions profiles are constant at 95.5 billion tons to 2025.
Figure 3 presents the results of several policy scenarios and control levels in
terms of the increases in electricity rates that would have to be charged customers in
order to pay for the control investments. On system stabilization at 1990 levels would
require rate hikes of 15% by 2025. However, if both banking and international
reduction transfers (also known as joint implementation) were allowed, cost increases
to electricity consumers would be only 8%. This level of cost reduction is very
consistent with experiences under the acid rain program. Of course this analysis is
conditioned on a number of critical assumptions including emission reduction
responsibilities assigned to other sectors and nations, the growth of electricity demand,
and the supply of international GHG offsets.
Extending the Banking Paradigm - QELROs
Despite the entry into force of the FCCC last year, international action to control
GHG emissions has not matched the intensity of debate. The Rio agreement contained
soft targets of 1990 CO2 emission levels by 2000 which are likely to be met only by a
few nations such as Germany and the United Kingdom. However, with the publication
of the Intergovernmental Panel on Climate Change's current assessment of the
problem, scientific understanding is increasingly a consensus of serious concern. At
Figure 3. Electricity Rate Increases
VALUE OF FLEXIBILITY
SCENARIO
ELECTRICITY
RATE INCREAS
IN 2010
Stabilize at 1990 Levels by
2%
2000
20% Reductions Below 1990
10%
Levels by 2010
With 20% Reductions, Allow
3%
International Cooperation
With 20% Reductions, Allow
Cooperation and Saving
1%
8%
-7-
the first Conference of the Parties in Berlin last April, negotiators agreed to develop a
protocol for GHG control by 1997. Discussions are presently occurring on two tracks --
policies and measures to control GHG emissions and quantitative emission limitation
and reduction objectives (QELROs). The development of QELROs seems to offer
much greater potential for both effective and efficient policy development.
Figure 4. The Costs of Alternative Cumulative Emission Paths
THE VALUE O
14
12
BILLION TONS OF CARBON
$0.5
10
$2
6
0
2000
2010
2020
2030
2040
2050
2075
210
QELROs have generated substantial interest among negotiators as a result of
several recent policy analyses. These analyses have been very similar to that
presented for TVA above except that global emission profiles were assessed from the
vantage of minimizing the cost of hitting specific atmospheric concentration limits (e.g.
450 or 550 ppmv of CO₂). One example is shown above in Figure 4. These analyses
have shown very dramatic cost reductions from shifting both the timing and location of
emission reductions. The graph in Figure 4 shows 2 different cumulative emissions
trajectories each of which have the same cumulative emissions and result in a 550
ppmv concentration in 2200.⁷ However, there is more than a 5 fold increase in cost
associated with the uniform emission profile. This result focuses attention on the critical
role of the timing of reductions in determining costs. The flexible emissions trajectory
allows global emissions to rise largely along a business-as-usual path until
approximately 2050 at which time a low carbon intensity energy alternative is presumed
to be developed and diffused over the next 25 years. Emissions would ultimately fall to
roughly half present levels.
The cost differences are significant between these two emission profiles,
but the critical question is how to secure the cost savings and protect the
7 The 550 ppmv curve is shown for illustrative purposes only. EDF believes that a 450
ppmv concentration target is required in order to meet the objectives of the Framework
Convention on Climate Change.
-8-
climate. While there is much to discuss about the validity of assumptions and
methodology, these modeling studies have emphasized the importance of taking an
intertemporal approach to a problem with a long time horizon. This approach
emphasizes the concept that a QELRO structured over a fixed period of time, e.g. as a
"cumulative emissions" objective, would embed flexibility in its structure. However,
QELROs can imply everything from a real regulatory constraint to no effective limitation
upon emissions depending upon specification. Clearly, the specification of the QELRO
depends upon both the ultimate and interim objectives needed to "prevent dangerous
anthropogenic interference with the climate system" -- the objective of the FCCC.
Figure 5. Periodic Carbon Emissions Budgets
PERIODIC CARBON
2000
2010
2020
2030:
2040
2050
2075
from
One proposal for the effective structuring of a QELRO is to specify it as a set of
emission budgets for fixed periods of time in order to provide both incentives and
rewards for early reductions and the critical engine for producing cost-saving
innovations over time. The budgets themselves would increase transparency and
ensure that the QELROs are attained. These periodic carbon budgets, shown for
example in Figure 5, would result from a periodic process of assessing the state of
scientific knowledge concerning the climate, an assessment of the developments in
GHG avoiding or reducing technologies, and a review of the progress of Parties.
An additional aspect that we would include is a premium, i.e. an extra reward, for
early reductions that would help keep us on lower emissions paths.⁸ Savings, i.e. extra
reductions below the budget, would be granted a premium (i.e. an interest rate) as an
incentive to produce early reductions. The environmental benefit would be slower
8 This is viewed as an extra reward since firms would likely undertake some degree of
early reductions banking both to minimize costs and as a hedge against unexpectedly
large future reduction requirements, poor GHG reduction investment performance, or
profitable emission reduction prices.
-9-
decadal rates of temperature change which we take to be the critical damage
parameter.⁹ Figure 6 depicts the reduced decadal temperature changes from lower
emissions profiles. The introduction of a natural rate of interest based on avoided
damages from reduced emissions would significantly extend the environmental
currency and banking paradigm.
The explicit introduction of a dynamic policy structure is critical both to
effectively harnessing private investment, stimulating R&D, as well as to
accommodating constantly changing economies.
ENVIRONMENTAL INSTITUTIONAL INNOVATION:
MATCHING MARKET SCOPE AND CONTROL AUTHORITIES
Figure 6. Premiums for Early Banked GHG Reductions
A PREMIUM FOR SAVING
2000
2020
2040
2060
2080
2100
2120
Year
The effectiveness and efficiency of environmental policies is often constrained by
the mismatch between the political boundaries for existing control authorities and the
actual physical scope of the problem. This section of the paper explores the
opportunities and strategies for improving coherence between the scale of solutions
and problems with reference to the problem of climate change and for urban air
pollution.
9 Most damage studies have identified ecosystems as the most susceptible to damage
from rapidly changing climates. For example, extrapolations from pollen studies have
evaluated the ability of forests to respond to historic climatic changes. Expected rates
of climate change could exceed the ability of many forests to migrate in response to
the changed environmental conditions.
-10-
Reaching Global Control through Joint Implementation
The Framework Convention on Climate Change included a controversial
provision for explicit international cooperation between nations in achieving its goals.
The vagueness of these provisions have led to disputes about its interpretation and
application. Specifically, the issues raised have concerned eligible participants and
projects, uncertainties in estimating the reductions from investments, the incentives and
motivations of participants, and the distribution of benefits. Of particular concern has
been the relationship between so-called Annex I countries which can be understood as
the developed nations and non-Annex I nations broadly construed to be the developing
nations. Developing nations have expressed the view that joint implementation (JI)
would effectively transfer emissions reduction responsibilities to them from developed
nations. Developed nations view JI both as an integral element of cost-effectiveness as
well as a necessary ingredient to increase participation in the FCCC. Given the
differentiated responsibilities between developed and developing nations in the
convention and the distribution of emissions shown in Figure 7 below, expanding
emissions control responsibilities beyond the developed nations is critical for the
effectiveness of any international agreement to limit climate change.
Clearly, the problem of climate change is global in nature. Certainly, the effects
of climate change will be felt globally. Impacts on regions and nations will vary in timing
and intensity with any beneficial effects likely to be ephermeral. Given this global
characteristic, reductions can be made anywhere in the world with an equal impact on
slowing the growth of concentrations in the atmosphere. Unlike many other pollutants,
there is currently no cost effective or feasible way to remove CO2 from stack or tailpipe
gases. However, CO2 can be removed from the atmosphere once emitted through the
action of forests that synthesize and store carbon from CO2 in biomass and soils.
Nonetheless, there are a wide array of options for reducing or removing
greenhouse gas emissions many of which provide or have the potential to provide
additional economic and environmental benefits. For example, increased energy
efficiency will result in less fossil fuel burned and fewer emissions of other pollutants. It
will often result in lower energy costs for the same level of use and will foster the
development and distribution of state-of-the-art technology. To the extent that nations
can link their interests in producing reductions, reducing costs, and promoting
sustainable development, we can simultaneously improve both the environment and
human well-being. Joint implementation provides just such an opportunity. As the
table below indicates, expected growth in energy production among the developing
nations is very high. JI offers the opportunity for extra investment in more efficient and
less carbon intensive development for many of these nations.
However, JI is presently held hostage in the international negotiating process
and restricted to a pilot phase without the opportunity for either nations or private
investors to receive credit for the results of their extra investments. The most serious
of the issues raised in the debate about JI is the question of whether the
-11-
incentive and enforcement structure of JI are sufficiently incompatible to either
allow or encourage strategic behavior by participants.¹⁰ For example, what would
prevent investing or receiving nations from overstating the carbon value of "transferred"
credits? This problem is frequently hypothesized due to the lack of specific baselines
for either nations or projects. In fact, the FCCC sets no binding target, but de facto
targets have been announced in most countries. For example, in an Earth Day speech
in 1993, President Clinton pledged to return the U.S. to 1990 emission levels by 2000.
This ambiguity in commitments amplifies the problem of accurately reporting the
results of JI investments. Nonetheless, credibility problems of this type do have a
DISTRIBUTION OF
GLOBAL EMISSIONS
60
Percent of World Total
55
50
45
40
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992
Year
Non-OECD OECD
Figure 7. The Global Distribution of Emissions
variety of solutions.¹¹ For example, the validity of any transaction presented by any
nation to its international peers will depend to a significant extent upon the credibility of
the proposing nation itself. If country A has an aggressive GHG reduction program
backed by tough domestic regulations, the credibility of its program is likely to
be transferred to any JI investments it may undertake. JI derived credits could also
be viewed as a type of currency albeit in environmental terms. These credits created
by the actions of sovereign states would be valued not only by the technical aspects of
the underlying investment projects, but also on the basis of the reliability of the parties
to the transactions. Non-Annex I parties that establish baselines would significantly
enhance the credibility of their reduction claims and transfers by in effect providing a
sovereign guarantee for these credits. In this sense, reliance on markets to properly
value assets is the primary source of acountability for inflated carbon claims.
It is not clear that JI will emerge anytime soon as a successful innovation and an
effective policy step in the creation of an efficient greenhouse gas management policy.
¹⁰Bohm (1994).
"Jones (1994) and Dudek and Tietenberg (1992).
-12-
However, without JI it is difficult to imagine a strategy for expanding the scope of
control responsibilities beyond Annex I parties.
Creating New Regional Institutions
Matching the geographic scope of institutional control with the spatial
geography of the underlying environmental problem is a common problem in
designing both effective and efficient solutions. This problem has been regularly
addressed in the context of resource management particularly for water resources
crossing numerous jurisdictional boundaries. Both states and nations have evolved
institutions to coordinate the allocation and use of these stochastic resources.
However, this process is not universal as evidenced by debate over the management of
the Danube River for example. So while there is a reasonable body of experience with
institutions established for river basins, there is much less experience with managing
airsheds. Transboundary flows of atmospheric emissions are most often managed
exclusively within jurisdictional boundaries irrespective of the ability of the jurisdiction to
solve the problem. Fortunately, at the global level in cases such as those involving
stratospheric ozone depletion and climate change, new management institutions are
evolving with the potential scope to effectively address the source of the problem.
However, there remain a class of problems largely characterized as
transboundary for which no geographically corresponding management institution
exists. For example, given the structure of government in the U.S., environmental
legislation is generally established at the federal or national level with implementation
conducted by the states. Increasingly, the gap in geographic scope between the
national level and the state level which reaches its extreme in the eastem part of the
country, is recognized as constraining the development of efficient control strategies.
This problem has become particularly acute in the case of reducing tropospheric ozone
concentrations over urbanized areas. Up until recently, this problem was conceived as
one requiring local emission controls in the broad vicinity of the affected city. However,
as scientific understanding of the behavior of the atmosphere has improved, the
problem of tropospheric ozone is now conceived as a problem of reducing total
emission loading over broad regions rather than one of localized control.
To a limited extent this problem was recognized by the Clean Air Act
Amendments of 1990 with the creation of the Ozone Transport Commission (OTC) for
the 12 states in the Northeast. The OTC was designed to provide an explicit
institutional mechanism for the coordinated development of policies to control ozone
and to bring the region into compliance with the National Ambient Air Quality Standards
(NAAQS). 12 The precursors of ozone are nitrogen oxides (NOx) and volatile organic
compounds (VOCs) each of which originate from a wide variety of stationary, mobile,
and area sources. The commission has adopted 2 broad control strategies. The first
focused on vehicles would require the introduction of lower emitting automobiles. The
complicated compromise reached with the automobile manufacturers will introduce a
12 Cities not in compliance with NAAQS are termed nonattainment areas.
-13-
49-state car (to be sold everywhere but California) by 1998 with emissions rates lower
than those mandated by the CAAA of 1990.
The second broad control approach has been to reduce NOx emissions from
electric utilities through the implementation of a region-wide budget to limit emissions.
The intent is to create a system analogous to the SO₂ allowance trading system for acid
rain. 13 However, increasingly both regulators and sources within the region are
recognizing that even this newly formed region is too constrained to effectively grapple
with the transport problem. In fact, other areas of the country, using independent
modeling efforts have demonstrated the importance of considering both the quantity,
timing, and chemical composition of emission flows into nonattainment areas. These
are the so-called boundary conditions both for modeling as well as policy purposes. For
example, the Illinois Environmental Protection Agency was able to demonstrate to the
US EPA that the Chicago nonattainment area should be allowed to take NOx emission
reduction actions outside the boundaries of the city upwind within the state. 14 These
NOx reductions would reduce the flows of both precursors and photochemically formed
ozone into the city.
As indicated in the figure below, from the recognition of the importance of
boundary conditions within a state to flows between states was a short step. In 1995,
the Environmental Council of the States (ECOS), established the Ozone Transport
Assessment Group (OTAG) consisting of the chief environmental administrators of the
37 state region east of the Mississippi to focus on super-regional transport issues, the
scientific assessment of transport, and the policy opportunities and needs.¹⁵
Recommendations from OTAG to the region's governors and to EPA are due in the Fall
of this year. Recently, the importance of creating a robust policy for emissions
transport was highlighted by the debate over increasing competition in the electric utility
industry. That debate identified the mismatch between state-based control systems
and a dynamically evolving industry which could result in both increased and altered
pollutant flows including CO2.¹⁶
13 Nitrogen oxides are also acid rain precursors. However, the acid rain title of the
Clean Air Act focused primarily on SO₂ control with NOx to be controlled through burner
modifications at electric utilities.
14 Under the rules of the game of the Clean Air Act, states are required to develop
plans consisting of control measures and their timing whose emissions reductions
which when evaluated through atmospheric modeling would reduce concentrations to
legally allowed levels.
15 The western states also have a atmospheric transport problem involving NOx, SO2,
and particulates which impairs visibility. This problem has been particularly acute in the
Grand Canyon region. The Western Governors' Association and the Grand Canyon
Visibility Commission are addressing this problem. However, the sources of these
emissions are far fewer in number and less homogenous.
16 See Dudek and Goffman (1996) for a review of the issues and proposed solutions.
-14-
Figure 8. Pollutant Flows Between Regions
TRANSPORT-BASED
ATTAINMENT STRATEGY
Potential NOx Reduction Flows
While the policy group has been pursuing the design of an SO2-style cap and
allowance trading system with modifications for NOx and the physical character of the
problem, the interesting institutional question will be the legal mechanism for
implementing this approach. 17 This question is a critical determinant of both the cost
and feasibility of adopting a region-wide management approach. It is especially critical
for the use of emission reduction markets which require a secure legal foundation for
their operation. One possible approach under consideration is to develop an interstate
compact to allocate the stochastic disposal services of the atmosphere. This approach
has been used in the allocation of surface water resources and in fisheries
management, but its application to atmospheric pollution problems has been much
more limited.
In the international transboundary context, the recent El Paso-Juarez air quality
management agreement signed earlier this year is the world's first bilateral agreement
to create a local air quality management district that spans an international boundary.
The El Paso-Juarez agreement provides an economically and environmentally sensible
approach to cleaning up the air in a very dirty region along the U.S.-Mexico border.
Developed with strong grassroots support on both sides of the border, the agreement
also serves as an important model for the development of new institutions to address
regional and global air pollution issues. These new developments in atmospheric
17 The modifications for NOx have primarily centered on the banking provisions. Since
the nonattainment problem is seasonal in nature and being redefined in terms of
seasonal loads, some governor needs to be placed on emissions withdrawn from the
bank, i.e. on reductions in one season being used to compensate for emissions in
another. The present solution is to require sources withdrawing more than 10% of
present emission entitlements to deposit 2 allowances for every ton discharged. In
effect, this is a type of peak load pricing.
-15-
emissions policy illustrate the critical importance of the geographic scope of
control both for environmental effectiveness and cost-effectiveness
CONCLUSIONS
Institutional innovations have played a large role in improving the performance
and cost-effectiveness of environmental policy and therefore have contributed to its
ultimate sustainability. However, innovation in institutions has often been ignored both
in economic theory and in policy development. To be fair, innovation in general is a
complex and poorly understood phenomena. All too often we resort to the deus ex
machina of exogenous annual rates of change to represent technical change for
example. Institutions themselves have been primarily studied in their behavior in the
public choice setting. When economists have looked at the issue of institutional
innovations, they have most often focused on changes in property rights or in the
development of institutions to reduce transactions costs. 18
Institutional innovations have played a large role both in achieving agreement on
addressing environmental problems and in reducing costs. Of course, it is always an
interesting question about whether the guarantee of cost-effectiveness is essential to
agreement. Of particular note in institutional innovations has been the set of
finance-like services that have developed in the context of emissions trading markets.
Chief among these innovations has been the development of a banking or saving
capability. Many mainstream analysts have ignored the added flexibility that banking
affords firms in the management of environmental obligations. In fact, many have been
skeptical about whether firms would even utilize these opportunities. Nonetheless, the
banking of early extra emissions reductions has been extensively used by firms wishing
to take advantage of favorable economic factors and to diversify the tools available for
managing emission reduction obligations.
Institutional innovations like banking have been critical to environmental
sustainability. The banking of SO₂ allowances by electric utilities in the U.S. has
demonstrated the capacity of market incentives not only to operate in concert with the
underlying environmental problem, but to deepen their effectiveness. This experience
has helped to build public support for the use of markets to solve environmental
problems. To the extent that present and future environmental challenges involve
diffuse emission sources and costly control investments which require public
support, cost reducing innovations such as banking are critical to the solution of
these problems. In addition, the opportunity for the banking of early reductions can
produce information concerning costs and help to build the necessary constituency for
policy action. This strategy is particularly critical in the case of global climate change.
18 While transactions costs have typically been used as a catchall term for the various
frictions of doing business, in this context they are taken to be comprised of search,
negotiation, approval, monitoring, enforcement and insurance costs.
-16-
As marketable permits continue to evolve, they are being provided with the same
array of services developed to facilitate commodity and currency transactions. At the
present, these have principally involved brokerage and insurance services. As these
environmental management tools are increasingly fungible, they are being deployed as
a part of more complex business strategies. For example, one coal mining company in
the U.S. sells its high sulfur coal bundled with SO₂ allowances to create a product
whose net environmental impact (and cost) is reduced. As the currency analogy for
marketable permits is exploited more deeply, banked emissions reductions could earn a
premium (interest rate) based upon the incremental benefit of early reductions. In the
case of greenhouse gases, this benefit is the reduced environmental damage from
slower decadal rates of temperature change. The currency model may also be
extended to the problem of monitoring and enforcing sovereign transactions in
greenhouse gas reductions (Dudek and Tietenberg).
Dynamic institutional changes of the sort discussed in this paper -
budgets, banking, and premiums - are necessary if environmental and economic
sustainability are to coexist. In order to secure their advantages, however, we
need credible domestic policy actions by large sources such as the U.S. and
agreement on international cooperation for reductions by developing nations.
REFERENCES
Bohm, Peter, "On the Feasibility of Joint Implementation of Carbon Emissions
Reductions", paper presented to IPCC Working Group III Workshop on Policy
Instruments and their Implications, Tsukuba, Japan, 17-20 January, 1994.
Dudek, Daniel J. and Joseph Goffman, "Electricity Regulation: A Vision for the Future",
House Subcommittee on Energy and Power, 15 pp. May 15, 1996.
, Alice LeBlanc and Peter Miller, "SO2 and CO2: Consistent Policy in a
Greenhouse", Environmental Defense Fund, New York, New York, January 1990, 31
pp.
-17-
and John Palmisano, "Emissions Trading: Why is this Thoroughbred
Hobbled?", Columbia Journal of Environmental Law, Vol. 13(2), pp. 217-256, October
1988.
and Tom Tietenberg, "Monitoring and Enforcement of Greenhouse
Gas Permit Trading", in Climate Change: Designing a Tradable Permit System,
Organization for Economic Cooperation and Development, Paris, 1992, pp. 251-82.
, Sarah Wade, and Joseph Goffman, "Emissions Trading in
Nonattainment Areas: Potential, Requirements, and Existing Programs", Market-Based
Approaches to Environmental Policy, R.F. Kosobud, W.A. Testa, and D.A. Hanson
(eds.), University of Illinois Press, forthcoming, 31 pp.
Jones, Tom, "Comments on 'Legal and Institutional Aspects of Joint Implementation
Under the UN FCCC,' Nico Schrijver et al.," presented to Groeningen Conference on
Joint Implementation, Netherlands, 1-3 June, 1994.
-18-
PERIODIC BUDGETIN
Science Assessn
Technology Asse
Review Progress
Establish Decadal Budget
EDF
PERIODIC CARBON
IUDGETING
10
BILLION TONS OF CARBON
8
6
4
2
2000 2010 2020 2030 2040 2050 2075 2100
YEAR
450 ppmv from WRE Periodic Budge
EDF
page 13-14 - Greenhouse Gas Budget System - September 1996,
A PREMIUM FOR
S
2
Temperature Change (c)
1.5
1
0.5
0
2000 2020 2040 2060 2080 2100 2120
Year
EDF
Widley Richets & Edmonds
CRITICAL ELEMENT
INTERNATIONAL AG
SEMENT
Transparent Tracking
Joint Implementation
including non-Annex I natio
including full crediting
All Sources and Sinks
intergas trading
carbon sequestration and
Banking
EDF
page 15-16 - Greenhouse Gas Budget System - September 1996
CONCLUSI
Intergenerational Problem
Intertemporal Framework
For an Effective Solution
For a Low Cost Solution
Innovation is a Primary Eng
Reductions Over Time
Expectations about the Future
Policy Framework Conditions
spectations
Opportunity and Reward Kevito
Indi vidual Actio
EDF
page 17-18 - Greenhouse Gas Budget System - September 1996
MEMORANDUM
COUNCIL OF ECONOMIC ADVISERS
Christe Chargel
August 12, 1996
TO:
JOE STIGLITZ, ALICIA MUNNELL
FROM:
RAY PRINCE
SUBJECT: UPDATE ON WORKPLAN FOR EV EHRLICH'S ECONOMIC ASSESSMENT
GROUP
A group of people from White House agencies met on Aug 6 to develop an workplan for Ev's
assessment group that would be consistent with the concerns expressed in Aug 2 Principal's meeting
at State. Those attending the Aug 6 meeting were Elgie Holstein (NEC), Mark Mazur (NEC/CEA),
Dave Sandalow (NSC/CEQ), Steve Seidel (CEQ), Rosina Bierbaum (OSTP), Jerry Melillo (OSTP),
Dave Sundig (CEA) and myself. The workplan identifies seven topics that need to be analyzed to
determine the economic impact of climate change policies: Revenue reflow, Modeling, Identifying
winners and losers, Implementation, Technological innovation and diffusion, International linkages, and
Targets.
There was unanimous agreement that analysis of revenue reflow and targets should be put on
hold for the near term. On the other hand, the group sentiment was inclined to having some work
continue on the five other topics in order to build up the stock of expertise that will eventually be
required to conduct policy analysis but that the work be done on a selective basis. For example, on the
modeling topic it was felt that it is appropriate to continue efforts to identify the best models and resolve
questions about the assumed value of key parameters, but that no actual simulations should be made.
Below is a brief description of the near-term activities under the four other topics.
Identifying winners and losers - Summarize available information into sector-specific reports with
review by government experts by early Sept.
Implementation issues - Develop discussion papers on the choice of regulatory regimes, which gases
should be covered, whether sinks should count toward meeting goals, alternative definitions a target
(emissions per GDP or per capita, annual or moving average, etc.), and advantages and disadvantages
of banking and borrowing.
Technological innovation and diffusion - Develop discussion papers on what determines rates of
technological change, diffusion and capital stock turnover as well as the potential importance of no-
regrets policies.
International linkages - Discussion papers on the potential role of joint implementation, and the pros and
cons of international emissions trading.
c: M. Mazur
D. Sundig
ECONOMIC IMPLICATIONS OF STABLIZING CO2 EMISSIONS AT 1990 LEVELS BY
AUCTIONING CO2 PERMITS AND RECYCLING REVENUES
1990 LEVEL OF CO2 FROM ANTHROPOGENIC SOURCES - 1,336 million metric
tons per year (USG p. 6)
MARKET CLEARING PRICE OF PERMITS TO STABILIZE EMISSIONS AT 1990
LEVEL - $60-125 per metric ton (USG p. 12)
REVENUES IF AUCTIONED - $80 - 167 billion per year
CORPORATION INCOME TAXES IN 1994 - $140 billion
PERSONAL INCOME TAXES IN 1994 - 543 billion (ERP '96, p. 370)
REDUCTION IN TAXES SCENARIORI (60% REDUCTION IN CORPORATE, 40%
REDUCTION IN PERSONAL) (USG p. 10)
CORPORATION - $48-100 BILLION (34-71% decrease)
PERSONAL - $32 - 67 BILLION (6-12% decrease)
indusing will In answers
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AUG-01-1996 13:20
OASIA/INL
202 622 1273
P.01/01
Copyts
Concerns re: Interagency Analysis Team on Climate Change
1.
Options under analysis have not been checked for political feasibility or
Prime
consistency with tax policy in general
EPA analysis gets favorable results in large part because carbon tax tax revenues
are used to reduce taxes on corporations, which leads to a lot of investment (in
the DRI model), which increases the growth rate of the economy. In some cases,
the corporate income tax is eliminated entirely; this doesn't seem likely in this
Administration.
2.
Leaks could be a big problem. Players on both sides have incentives to leak talk
of $100 billion carbon tax:
industry would like to discredit Administration proposal before it's out of the
chute
enviros wold like to cement the President into a hard-line position
3.
EPA model results claim to show that we can have our climate cake and eat it too
-- i.e. that big carbon reductions can be achieved at no cost to gdp, as long as a
large part of the revenues are used to reduce taxes on investment. This result
requires dynamic scoring, which we have rejected in many other contexts. Do we
really want to reopen the door to dynamic scoring in other areas as well?
to Rubin
(By the way, in a memo last night, Tax Policy recommends against any consideration of
new taxes by the IAT, and recommends moving oversight of the IAT to the NEC).
pages
7671
Date 811
From
Ray
SQUITIERI
Post-It Fax Note
TO Alicia Munnel
CO.
Treasury
Phone
Co./Dept. CGA
622-11301 1294
Fax #
Phone #
Fax 395-6947 6947
TOTAL P.01
06/03/98
13:05
202 252 0275
OPPE
001
2
FAX TRANSMISSION
U.S. EPA
401 M STREET, 9.W. (MAILCODE 2111)
WASHINGTON, D.C. 20460
(202) 260-4332
FAX: (202) 280-0275
To:
Steve Seidel
Date:
June 3, 1996
Rosina Bierbaum
Ray Prince
Fax #:
456-6546, 456-6025, 395-6853,
Pages:
23, including this cover sheet.
From:
Daniel R. Abbasi, U.S. EPA
SA
Subject:
Latest draft of USG paper for climate analytic workshop
discobers
COMMENTS:
Attached for your review and comment is the latest draft of the USG paper for the June 6-7
analytic workshop on climate change.
I am still resolving several issues between EPA and DOE, as noted in brackets in the text.
Please call me as soon as possible with any comments: 260-4332. We are aiming to finalize the
text by the end of today, if possible. Sorry for the late circulation; I worked with staff throughout
last night and into this morning, so it was not available earlier.
Thank you very much.
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U.S.G. ANALYSES OF PROPOSALS FOR CLIMATE CHANGE PROTOCOL
Table of Contents
I
1. Introduction
2. Preliminary Lessons Learned from Analyses
3. Benefits of Policies to Reduce Greenhouse Gas Emissions - Or the Costs of Inaction
4. Greenhouse Gas Emission Trends
Global Trends
U.S. Emissions Trends
5. Domestic Technological Costing Analyses
Past Studies: National Academy of Sciences and Office of Technology Assessment
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U.S.G. ANALYSES OF PROPOSALS FOR CLIMATE CHANGE PROTOCOL
Table of Contents
1. Introduction
2. Preliminary Lessons Learned from Analyses
3. Benefits of Policies to Reduce Greenhouse Gas Emissions -- Or the Costs of Inaction
4. Greenhouse Gas Emission Trends
Global Trends
U.S. Emissions Trends
5. Domestic Technological Costing Analyses
Past Studies: National Academy of Sciences and Office of Technology Assessment
Domestic Institutional, Organizational and Technological Analyses
6. Domestic Macroeconomic Analyses
Four Emissions Reduction Scenarios
General Outline of Model
Implementation Timing
Five Modeled Permit Allocation Policies
Results of Domestic Macroeconomic Models
7. International Analyses
GDP impacts
Carbon emissions leakage
Where and When Flexibility
8. Lessons from Previous Policies
Sulfur Dioxide Allowance Trading
CFC Phase-out
9. The Role of Advanced Energy Technologies
10. Next Steps: From Analysis to Policy
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1. INTRODUCTION
International negotiations to address the risk of climate change have been underway for
more than seven years. At the Earth Summit in Rio de Janciro in 1992 formally known as the
U.N. Conference on Environment and Development 154 nations signed the Framework
Convention on Climate Change (FCCC). Article Two of the FCCC states its guiding objective:
"to stabilize atmospheric concentrations of greenhouse gases at a level that would prevent
dangerous anthropogenic interference with the climate system."
The FCCC obligates the United States and other industrialized nations - known in FCCC
parlance as "Annex 1" nations to aim to return greenhouse gas emissions to 1990 levels by the
year 2000. In 1993, President Clinton unveiled the Climate Change Action Plan (CCAP), which
included over 50 actions intended to bring the U.S. to the emissions level called for by the
FCCC. Although the CCAP programs have in fact cost-effectively reduced emissions over the
past three years, it now seems likely that the U.S. will fall short of the goal by over 100 million
metric tons of carbon equivalent (MMTCE), due to substantial funding cuts by Congress,
stronger than expected economic growth, and lower energy prices. A review of the CCAP is
being completed for release in fall, 1996, and will include an update of baseline trends, a review
of the effectiveness of current actions, and recommendations for additional actions.
At the first Conference of the Parties to the FCCC in Berlin in March 1995, the Parties
decided that the provisions and goals of the FCCC were not adequate to address the long-term
challenges of climate change. They recognized the FCCC commitments as an important first
step but noted their silence with respect to emissions after the year 2000.
Accordingly, in the Report of the Conference, dubbed the "Berlin Mandate", the Parties
agreed to launch a process to define actions to be taken by the industrialized Annex 1 nations in
the post-2000 period, and to promote implementation of commitments by all nations. The U.S.
successfully urged the Parties to include in the Berlin Mandate a call for an initial phase of
analysis and assessment to inform the negotiation of a Protocol specifying post-2000 obligations.
The adopted language follows:
The process will include in its early stages an analysis and assessment to identify possible
policies and measures for Annex I parties that could contribute to limiting and reducing
emissions by sources and protecting and enhancing sinks and reservoirs of greenhouse
gases. (FCCC/CP/1995/7/Add.1)
The U.S. Government is participating actively in the series of international negotiation
sessions intended to fulfill the Berlin Mandate and conclude with a legally binding Protocol to
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the FCCC in time for signing at the Third Conference of the Parties in Kyoto, Japan in late 1997.
Three formal negotiating sessions have been held since the Berlin Mandate was issued at the
First Conference of the Parties. In these sessions, a number of countries, as well as multilateral
associations of countries, have proposed draft protocols under which the Annex I countries
would be required to reduce their emissions by specific amounts by specific years -- goals that
have customarily been called "targets and timetables", but have since been technically labeled
Quantified Emissions Limitation and Reduction Objectives (QELRO's). In addition to these
proposed targets and timetables -- which would by themselves permit Parties to select their own
policy instruments for fulfilling the targets some countries have also proposed mandatory,
internationally coordinated "policies and measures".
The United States Government has to date proposed neither a QELRO for reducing
greenhouse gas emissions, nor a specific sct of policies and measures. Instead, the U.S.
Government is analyzing and assessing the proposals offered by other countries as a critical
foundation for its own development of a policy and negotiating position.
This paper is the U.S. Government's first public document describing the partial and
interim results of its ongoing analyses of climate change proposals advanced by. other countries.
The paper presents key findings from our analyses to date, with some reference to analyses by
other stakeholders. These findings are being released on a preliminary basis at the U.S.
Government's Analytic Workshop on Climate Change on June 6-7, 1996, in order to facilitate
maximum feedback by convened experts and stakeholders.
The U.S. Government's Interagency Analytic Team (IAT) responsible for most of the
analysis underlying this paper is composed of analysts from many of the U.S. government
agencies that have a role in developing climate change policy, including the Environmental
Protection Agency, the Department of Energy, the Department of Agriculture, the Department of
Commerce, Department of Transportation, Department of the Treasury, and the White House
Council of Economic Advisors. The IAT has adopted a diversity of perspectives and approaches
- from detailed technology assessments to highly aggregated domestic and international
macroeconomic modeling excrcises- in making progress toward a balanced assessment of the
impacts of climate change mitigation policy alternatives.
Among their other limitations, the partial scope of the analyses discussed in this paper
should be acknowledged up front. Atmospheric greenhouse gas concentrations are a function
both of emissions from a variety of sectors and activities and of available sinks. The U.S.
Government continues to mainain that international commitments should be comprehensive,
addressing both sources and sinks of all greenhouse gases. However, most of the analyses
described in this paper focuses on energy-related greenhouse gas emissions. This focus reflects
the availability of modeling tools that can be used to assess the relationships linking energy use
and economic performance, as well as the fact that energy-related emissions account for over 86
percent of total U.S. greenhouse gas emissions and 70 percent of global greenhouse gas
emissions.
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It bears emphasis that this paper marks the beginning, not the end, of a process of
analysis, assessment and development of climate change response strategies. Beyond the June 6-
7 Analytic Workshop, many other opportunities will be provided to potentially affected
stakeholders to comment on U.S. Government analysis and to submit additional analyses for
consideration.
2. PRELIMINARY LESSONS LEARNED FROM ANALYSES
The balance of this paper will discuss the strengths, weaknesses and findings of
alternative models that have been enlisted to analyze the economic effects of implementing other
countries' proposed climate change protocols. It will offer preliminary numerical results from
the models in both textual and graphical form. It should, at this point, be noted that non-
practitioners of economic modeling tend to attribute more significance to the absolute values of
numerical results than do modelers themselves. Modelers tend to focus instead on qualitative
lessons for policy formulation, derived from cases where a particular policy design or strategy
shows consistently superior results under a variety of modeling frameworks and assumptions.
Accordingly, this section distills key lessons that the U.S. Government has derived on a
preliminary basis from its initial analytic work. The lessons follow:
Rigorous assessment of the impacts of greenhouse gas mitigation requires a variety of
analytic approaches since no single model is capable of capturing all relevant aspects of
the economy. Each approach has its own strengths and weaknesses. Therefore, it is
imperative to understand and reconcile insights gained from a diversity of analytic
approaches in arriving at an informed and balanced assessment.
The overall costs of emissions control depend critically on the stringency of the target and
on the structure of the policy.
Modest emissions reductions can be achieved with macroeconomic impacts ranging from
mildly negative to slightly positive. More stringent targets will impose higher costs. The
range of analytic results depends on the modeling framework used as well as the type of
policy intervention simulated.
Lower costs are associated with policies that are broad-based, flexible and phased. Such
policies can help avoid disruptions and allow for rational planning by businesses and
consumers.
Responsibility for addressing the climate change problem rests on the global community,
and will require unprecedented international cooperation. Cost-effective global solutions
will require flexibility in the timing and location of greenhouse gas reductions, as well as
institutions able to accommodate and promote such flexibility.
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Technological development and dissemination is critical to addressing climate change. In
the short run, we need to understand and overcome the institutional barriers that slow the
deployment of energy-saving technologies that pay for themselves. In the longer term,
we need to encourage the development and dissemination of new energy-saving and low-
carbon technologies.
In the past, regulatory compliance costs have often been overestimated because of
at
reliance on analytic tools that fail to account for dynamic technological, institutional and
organizational innovations. Such responses have greatly reduced compliance costs from
original estimates for some regulations, and future analyses of climate change policies
should take this potential bias into account.
A balanced assessment of climate change policies must account for the benefits that
would accrue from their ability to avert the myriad economic dislocations projected to
occur in a rapidly changing climate. Significant progress needs to be made in monetizing
the range of impacts so that the costs of action can be compared not to the status quo, but
more appropriately to the substantial costs of inaction.
3. BENEFITS OF POLICIES TO REDUCE GREENHOUSE GAS EMISSIONS - OR
THE COSTS OF INACTION
[TEXT ON MONETIZED IMPACTS FORTHCOMING FROM EPA/OPPE]
None of the models discussed in this paper measure the environmental and economic
benefits of mitigating emissions in terms of reduced climate change impacts. Because the
models do not mcasure these benefits, the fact that a policy is shown to impose significant costs
cannot, by itself, rule out its selection for implementation if the overall benefits of reducing
climate change impacts outweighs those costs.
Global greenhouse gas emissions are projected to increase anywhere from two- to six-
fold over current levels by the end of the next century (i.e., by the year 2100) under the set of
possible "business as usual" futures considered in the recent report of the Intergovernmental
Panel on Climate Change (IPCC). Atmospheric greenhouse gas concentrations will ultimately
have to be stabilized in order to achieve the FCCC's objective of preventing dangerous human
interference with the climate. Even in the "business as usual" IPCC scenarios, the scientists
asserted that the rate of warming due to human emissions will be, in their words, "greater than
any seen in the last 10,000 years." In other words, since before the first human city was built.
Therefore, it will ultimately be necessary to reduce emissions to achieve the goal of the
Convention.
The most striking conclusion in the IPCC Second Assessment Report, drawing on the
work of 2,500 scientists from around the world, was their consensus finding that: "The balance
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007
of evidence suggests that there is a discernible human influence on global climate." For the first
time, this diverse group of highly respected scientists stated their belief that human beings have
already begun to disrupt the planet's life-supporting climate system, a statement that is based on a
multiplicity of peer-reviewed studies. This finding has reinforced the urgency that Parties attach
to additional actions under the Berlin Mandate.
4. GREENHOUSE GAS EMISSION TRENDS
Global Trends: During the first half of the 1990s, greenhouse gas emissions grew in the U.S.
and most of the rest of the world. However, due to the restructuring of the former Soviet Union
and Eastern Europe, global emissions have been roughly stable. Nearly all of the countries of the
Organization for Economic Cooperation and Development (OECD) are experiencing rising
greenhouse gas emissions. The important exceptions are the U.K., which is climinating its
inefficient coal production in favor of cheap natural gas; and Germany, which is benefitting from
the dramatic cut in emissions in the former East Germany. Projected U.S. emissions growth is
expected to be slightly higher that the OECD average. Emissions are expected to grow
somewhat more slowly in OECD-Europe, somewhat faster in OECD-Asia.
Over the next century, the bulk of emissions growth will occur in the non-OECD
developing countries. While OECD carbon emissions are expect to grow by about 26% over the
next twenty years, developing country carbon emissions are expected to double [Energy
Information Administration's International Energy Outlook, 1996]. This observation
underscores why the climate change problem can be solved only through international
cooperation, and why U.S. leadership in addressing the issue is critical.
Figure 1: Relative growth within OECD
Figure 2: Long-term emissions trends
U.S. Emissions Trends: Total US emissions of greenhouse gases were 1,595 million metric
tons of carbon equivalent (MMTCE) in 1990, of which 1,336 MMTCE. By 1994, the US was
emitting 1,666 MMTCE of greenhouse gases. Of this total, 85% were carbon dioxide emissions,
about 11% were methane (CH4), 2% were nitrous oxide (N₂O), and 2% from other gases
including the chloroflourocarbons HFC, PFC, and SF6. The transportation and industrial scctors
of the U.S. economy were responsible for most of the CO₂ emissions, landfills and agricultural
production were the greatest sources of CH4 emissions, and the agricultural sector was the largest
emitter of N₂O. Automotive air conditioning was largely responsible for the remaining emissions
from HFC-134a.
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Without additional policy intervention, U.S. greenhouse gas emissions are expected to
rise by at least 20 percent by 2010. Seventy five percent of the emissions growth will be in the
encrgy sector, mainly in electricity generation and transportation. Emissions of HFCs -
substitutes for chemicals being phased out under the Montreal Protocol - are expected to increase
substantially. Carbon sequestration in American forests is expected to decline.
Figure 3: US Greenhouse Gas Emissions 1990-1995. With baseline projections
through 2020
Figure 4: Sectoral Energy-Related U.S. Carbon Emissions 1990-2020
5. DOMESTIC TECHNOLOGICAL COSTING ANALYSES
Past Studies: A number of studies have suggested that greenhouse gas emissions can be
reduced significantly at net economic savings. Two of the more prominent studies endorsing this
conclusion are the National Academy of Sciences (NAS) report, Policy Implications of
Greenhouse Warming (NAS 1991) and Changing by Degrees. Steps to Reduce Greenhouse
Gases, by the U.S. Office of Technology Assessment (OTA 1991). The NAS study found that
100 to 480 million metric tons of greenhousc gas emissions could be reduced at negative or no
cost. The OTA study identified a greenhouse gas emissions reduction potential of up to 472
million metric tons at negative cost or net benefit.
[ADD TEXT ON 1995 EPA STUDY CITED IN CHUPKA TESTIMONY - 330 MMTCE)
[EPA/OPPE WILL ADD TEXT SUMMARIZING NAS AND OTA STUDIES]
To help provide additional insights into individual policies and measures that might be
used to reduce emissions, DOE is now completing an update of its 1989 report A Compendium
of Options for Government Policy to Encourage Private Sector Response to Potential Climate
Change. This update summarizes, on a sector-by-sector basis, the results regarding individual
policies and measures to mitigate emissions reported in the literature since issuance of the
original report. The report considers the extent to which each of the factors affecting the end-user
adoption of relevant technologies are incorporated in the analysis and which appear to be most
relevant for successful introduction of measures in each specific sector.
'The strength of the technology costing approach is that it demonstrates the extent of
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009
technological opportunities available to save energy and reduce greenhouse gas emissions. The
primary weakness of this approach is that it fails to address the institutional and organizational
reasons why businesses and consumers do not take full advantage of these obvious opportunities.
[Mark: delete this - Domestic Institutional, Organizational and Technological Analyses:
The large store of potentially profitable energy-saving investments suggests that an effective
policy must include the institutional and organizational change necessary to unlock these
profitable opportunities and promote the diffusion of higher efficiency technologies. A new EPA
study focuses on the impact of policies that would resolve market failures in the commercial,
residential, industrial, transportation and electric sectors. The study confirms the findings of
earlier reports, finding even greater greenhouse gas emissions reductions at net economic
savings.
The study examines institutional and organizational changes that would ensure that
households and businesses receive the information, technical assistance, and financing they need
to purchase and profit from proven higher efficiency technologies. The institutional and
organizational changes would also be structured to give equipment manufacturers and building
owners the opportunity to capture some of the profit from the higher efficiency technologies,
thus stimulating diffusion and innovation. The study finds that successful implementation of
institutional and organizational change could yield greenhouse gases reductions of up to 39%
over baseline 2015 levels (or 21% over 1990 levels) with a positive GDP impact of 0.5%.]
Figure 10 (OAR graph labeled 8)
6. DOMESTIC MACROECONOMIC ANALYSES
CGF
vs
[DOE TO PROPOSE ADDITIONAL MODIFICATIONS TO THIS SECTION]
Four Emissions Reduction Scenarios: The U.S. Government's domestic macroeconomic
analysis has focused almost exclusively on proposals that have already been advanced by other
nations in the international negotiating process, including by the Alliance of Small Island States
(AOSIS), Germany and the United Kingdom. The four scenarios follow:
(1) Stabilization Proposal: Annex I Parties stabilize emissions at 1990 levels in 2010;
(2) United Kingdom Proposal: Annex I Parties reduce emissions 10 percent below their
1990 levels by 2010;
(3) German Proposal: Annex I Parties reduce emissions 10 percent below 1990 levels
by 2005; 20 percent below 1990 levels by 2010;
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(4) Alliance of Small Island States (AOSIS) Proposal: Annex I Parties reduce
emissions 20 percent below 1990 levels by 2005.
As noted earlier, the U.S. Government does not favor or endorse any of these proposals at this
time. Rather, the Government is analyzing their economic consequences for the U.S. and for the
rest of the world.
General Outline of Model: The U.S. Government has analyzed the economy-wide impacts of
these targets and timetables using two distinct energy models linked to the DRI/McGraw Hill
Macroeconomic Model of the U.S. Economy. The analysis assumes that America's OECD
trading partners implement similar policies, and that the Federal Reserve reacts to the resulting
changes in prices and employment in same way that it has reacted to these changes over the past
decade. These models were used to estimate the potential economic impacts for a range of policy
scenarios, including impacts on gross domestic product (GDP), consumption, investment,
employment, and inflation; as well as regional, industrial, and energy market impacts.
Macroeconomic models have the advantage of representing economy-wide adjustments
and responses to policies, particularly business cycle responses. Their weakness is that they do
not provide detailed representation of specific markets and specific technologies. Furthermore,
their characterization of the long-run determinants of economic growth is relatively limited.
To represent energy markets and technologies, the macroeconomic model is coupled with
an energy sector model. The analysts have estimated price increases for the four emission target
scenarios using the DRI/McGraw Hill Energy Market Model and the IDEAS model. These
models incorporate different assumptions about the price responsiveness in energy demand and
different characterizations of energy technologies. These assumptions yield different estimates
of the magnitude of changes needed to achieve a given target in the energy sector.
Energy sector models constrain greenhouse gas emissions either by limiting the supply of
fossil fuels or by directly increasing their price. Given these constraints, the models forecast
changes in fossil fuel energy prices and consumption, and related changes in behavior. In
addition, higher fuel prices result in higher revenues that circulate through the economy. These
revenues can be redistributed to ameliorate the negative impact of price inflation on economic
growth.
Implementation Timing: The analysis assumes that policies are phased in after 2000. Energy
prices gradually increase throughout the period, and emissions generally decline to the target by
the end of the phase-in (2005 for AOSIS and German proposals; 2010 for all others).
Five Modeled Permit Allocation Policies: For each emission target, the IAT assumed that the
government would introduce a tradeable permit system, distributing or selling a fixed number of
permits to sell fossil fuels based on their carbon content. Those receiving or purchasing the
permits would have the right to sell fuels that contain carbon or to sell their permits. Primary
fossil fuel producers would be required to obtain permits reflecting the carbon content of their
fossil fuel sales.
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A system of marketable tradable permits is considered one of the most cost-effective and
flexible policies for reducing emissions. The ability to trade permits in a market assures that
permits are put to their highest-value use. Given the limit imposed by the number of permits,
fossil fuel consumers can be expected to make the least-cost emission reductions available, thus
minimizing overall costs. Another reason why the IAT has analyzed international proposals with
a permit trading scheme is that this type of policy readily lends itself to analysis in the available
large-scale economic models. However, despite these virtues, the analysis of marketable permit
systems should not be taken as an endorsement by the U.S. Government. The U.S. Government
continues to examine a variety of options to achieve climate goals.
The IAT examined five very different schemes for allocating the permits to analyze their
economic and distributional impacts. The fundamental insight from the analysis is that the
economic impacts of mitigation depend to a very great extent on how the permits - and thus the
costs - are allocated across different sectors of the economy. If the permits are simply handed
out, their allocation creates a type of property right that has value. On the other hand, of the
permits were auctioned off by the government, their sale would generate revenues for the
government. How the government uses the revenues can have profound impacts on the economy.
The IAT analyzed three distinct auction scenarios to determine the impacts of various
mechanisms for redistributing the revenue:
1) Auctioned Permits, Revenues to Consumers Only: distributing revenue to
consumers by increasing the personal income tax exemption;
2) Auctioned Permits, Revenues to Consumers and Business: sharing revenue
between consumers and producers by reducing personal and corporate marginal income.
tax rates; and
3) Auctioned Permits, Revenues Used to Reduce Deficit: using the revenue to reduce
the Federal budget deficit and retire Federal debt.
In addition, we analyzed two distinct allocation scenarios:
4) Permits Distributed to Consumers: all permits are allocated to individual
households, who in turn sell their permits to primary fossil fuel producers; and
5) Permits Distributed to Consumers and Business: permits are allocated to both
consumer and businesscs, based on their historical energy use.
Results of Domestic Macroeconomic Models: Figure 5 shows the GDP impacts from 2000
through 2015 of different levels of GHG emissions abatement. In each case, the target is
achieved by auctioning off permits and returning roughly 40% of the revenues to consumers
through an increase in the personal income tax exemption and 60% to businesses through a
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reduction in marginal corporate income tax rates. The rationale for this approach is that
households consume roughly 40% of all energy directly, while 60% of all energy is used by
businesses in the production of goods and services.
For all of the targets, the initial effect of the permit and revenue recycling systems is to
raise fossil fuel prices, generating a rise in the general price level and reducing demand. In
response to inflation, the Federal Reserve Bank restricts the money supply to offset the
inflationary impacts of the policy, further slowing the economy. GDP declines slightly in the
near term - through at least 2008. However, by reducing business taxes, this permit allocation
and revenue recycling system encourages business investment. In the long run, this boosts
economic growth. GDP increases above the no-policy case throughout the rest of the forccast
period. With more stringent targets, output dips more in the near term but rebounds more
strongly in the out years.
Figure 5. Range of GDP impacts relative to the baseline for each scenario -- using
the results from the latest DRI model. Permit Auction 40% 60% split.
How do different permit designs affect the economy? Figure 6 illustrates the GDP impact
of alternative methods of distributing or auctioning marketable permits and recycling any
revenues, using the stabilization target as an example. It is clear that the design of the permit
system can significantly influence the GDP impacts of a given target. Every approach causes
near term GDP losses as the economy adjusts to higher energy prices. However, the long term
impacts depend critically on the permit distribution and revenue recycling scheme. When the
revenues from selling permits are distributed to consumers and businesses based upon historical
patterns of spending on energy - i.e., 40% to consumers and 60% to producers - higher
investment actually raises economic activity above what it would have been without any policy.
Alternatively, when the permits (or the revenues from selling permits) are distributed only to
households, the economy's aggregate savings are lower. With fewer savings available for
investment, GDP is lower even in the the later years of the forecast.
These results highlight not only to the importance of the permit system design, but the
importance of the distribution of the permits or the disbursement of revenues from permit
auctions. If the value of permits accrues mainly to households- whose aggregate savings are
relatively low - there will not be sufficient investment to offset higher energy prices. In contrast,
if the value of permits accrues mainly to businesses - which tend to retain and reinvest profits-
there may be enough additional investment to offset the loss of energy inputs. Well-designed
policies can thus actually enhance economic activity; while policies that are not targeted to
alleviate the impacts of higher energy prices can dampen economic growth.
Figure 6. Comparison of allocation and auction of permits for stabilization scenario.
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The IAT used two different versions of the DRI Macro model to project the
macroeconomic impacts of greenhouse gas policies. In one - an older version - the economy's
productive capacity is determined by the capital stock, the labor force, and the total quantity of
energy consumed. In the more recent version, productive capacity (also called "potential GDP")
is directly influenced by domestic oil and natural gas production rather than by total energy
demand. While this change may seem minor, it has profound impacts on the model's predictions
of the impacts of reducing the amount of energy available. Further research is underway to
determine which of these approaches is most appropriate, or whether another approach is needed.
All of the above results use the most recent version of the DRI model.
Figure 7 Impact of potential GDP stabilization for stabilization scenario.
Figure 7 shows the different GDP impacts, using the two model versions, of a single
target and policy: an auctioned permit system with revenues returned to both consumers and
businesses. The figure illustrates that the form of this one equation in the model can significantly
influence the estimate of the economic impact of a given policy.
Another source of uncertainty is the energy sector impacts of the a marekteable tradeable
permit system. The key consequence of the permit system is to raise energy prices by limiting
fossil fuel use. How consumers and businesses respond to these price changes is one of the
critical determinants of any policy's costs. If consumers and businesses respond very strongly to
price signals, then relatively small price increases - and thus relatively low permit prices - will
be necessary to achieve a given emissions target. On the other hand, it consumers and businesses
are not very responsive to price signals - if they have "low energy demand elasticities" - then it
will take large price hikes to achieve the same target.
[DOE PROPOSING TO DELETE REFERENCE TO AVERAGE ELASTICITY
DERIVED FROM LITERATURE SURVEY AND SUBSTITUTE MORE CREDIBLE
BENCHMARK] The Department of Energy has sponsored research on how consumers and
businesses respond to enrgy price increases. The DOE research seems to suggest that energy
users are more responsive to changes in energy prices - they have higher demand elasticities -
than is suggested by the DRI model.]
As a sensitivity analysis, we replaced DRI's own long-run energy elasticities with
average estimates from the Department of Energy literature. This minor change had a dramatic
effect on permit prices. In the current version of the DRI model, the value of permits must rise to
roughly $125 per metric ton of carbon in order to stabilize greenhouse gas emissions in 2010.
With the higher elasticities, the value of permits had to risc only to $60 per ton in order to
stabilize GHG emissions in 2010. The projected permit prices are shown in Figure 8.
The lower estimate is roughly in line with the average of estimates derived from a large
number of cconomic models in the Stanford Energy Modeling Forum 12. It is also consistent
with results obtained from the technology-rich ICF Integrated Planning Model of the electric
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014
utility sector, which projects similar carbon emissions reductions at lower energy price increases
than DRI's utility sector model. The IAT will continue to assess this issue so that the best
forecast of energy sector impacts from alternative greenhouse gas policies can ultimately be
developed.
Figure 8. Price elasticity sensitivity analysis.
The macroeconomic impacts presented here are generally lower than those presented in
other studies, even those using the DRI model. For example, when the Electric Research Power
Institute (EPRI) examined the same GHG targets using the DRI model, it conluded that the
losses in GDP could be quite large - - up to 4.3% (see Figure 9).
A crucial questions remains. Why are the U.S. Government's current results so different
from the EPRI-sponsored results? There are three major reasons for these conclusions. First, in
the U.S.G. analysis, the permit system has been phased in, so as to allow energy users more time
to adjust to the policy change. By contrast, the EPRI-sponsored work "shocked" the system by
imposing a carbon tax all at once. This greatly increases the GDP impacts. Second, in the EPRI
study, carbon tax revenues were recycled only through an increase in the personal income tax
exemption- - the worst case for GDP. Third, EPRI assumed that the U.S. is pursuing a unilateral
emissions reduction strategy, rather than cooperating with the rest of the OECD. Fourth, in the
EPRI study, the Federal Reserve was assumed to pursue exactly the same monetary policy that it
would have in the absence of the carbon tax. This has the effect of contracting the money supply
- and causing output to decline - more than would be the case if the Federal Reserve responded
as it normally does.
Figure 9. Comparison with EPRI analysis.
Taking account of the above factors, the U.S. Government's preliminary macroeconomic
results show a wide range of impacts on the economy, although the results tend to show smaller
impacts on output in the U.S. economy than the results obtained in several earlier studies that
purported to show substantial negative impacts. Moreover, as discussed elsewhere in this paper,
the impacts depend fundamentally on what kind of policy is implemented; intelligent policy
design can dramatically reduce costs. The U.S. Government's analysis indicates that the U.S.
economy will continue to grow at a healthy pace through the first decades of the next century
under all of the options examined. The IAT is still synthesizing the results of these studies and
exploring the how the timing, implementation, and the size of the emissions reductions may
explain the range of outcomes.
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7. INTERNATIONAL ANALYSES
The IAT is also pursing a variety of analyses using a diverse set of models of the
international economy, including the Oxford and G-Cubed models that are being discussed in
separate papers prepared for the June 6-7, 1996 Analytic Workshop. A wide range of results has
been obtained, with review and synthesis still pending. It is possible, however, to draw three
tentative conclusions.
1. GDP impacts: There may be significant differences across OECD countries in the
costs of meeting any specific target. Some countries, such as Germany and the United Kingdom,
face special circumstances that will make it relatively inexpensive to reduce emissions during the
next decade. Countries expected to grow relatively rapidly, such as Japan, should find it more
difficult to meet particular targets. Low-carbon economies such as France, which rely on nuclear
power for much of their electricity, will have fewer opportunities to reduce emissions.
2. Carbon emissions leakage: Some analysts argue that if the developed nations
constrain the use of fossil fuels in order to reduce greenhouse gas emissions, two confounding
effects could lead to an offsetting increase in developing country fuel use and greenhouse gas
emissions. First, reduced demand could cause world oil prices to decline, thereby potentially
spurring increased oil demand in the developing world. Second, over the longer term, energy-
intensive industries facing higher energy prices in developed countries might migrate to
developing countries that are not controlling cmissions. Taken together, these two influences are
called the "leakage effect."
[An increase in emissions in the developing world could eviscerate an emissions program
pursued only by developed countries, so that their energy-intensive industries would make a
sacrifice with no ultimate benefit. However, the U.S. Government's initial modeling results
suggest that although reduced energy demand in OECD countries would lead to lower world oil
prices, a decrease in OECD emissions would not be significantly offset by an increase in non-
Annex I countries' emissions. Also, the analysis did not find that energy-intensive industries are
likely to migrate from industrialized to developing countries as a result of control regimes
implemented in the former. These results, however, are preliminary and await more detailed
analysis in the future.]
3. "Where" and "When" Flexibilities: Some of the preliminary international results
illustrate how both the level, design and timing of commitments could affect the costs of
greenhouse gas mitigation. One recent study used four different models to evaluate the extent to
which flexibility in the international location and timing of emission reductions should reduce
costs. The results suggested that costs of achieving the same cumulative emissions reductions
over the next fifty years could be significantly reduced by allowing reductions anywhere in the
world and by allowing a slower pace of early emission reductions which are then "made up" with
more extensive reductions later. According to this analysis, the cost reduction for locational
flexibility alone could be roughly 70 percent, timing flexibility alone 40 percent, and both types
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of flexibility together 85 percent. The cost reductions from timing flexibility are significantly
reduced as the time horizon over which higher initial emissions must be "made up" is shortened.
These results are very dependent on a number of important assumptions built into the
models. The models assume a fixed path of technological development, and do not make
allowance for technological developments in response to control regimes. This means that they
do not consider the effect of early signals to induce a technological response. Moreover, the
models assume perfect foresight, so that economic actors know with certainty what technologies
will be available in the future, and what the ultimate emissions limit is. Finally, the analysis
assumes that the institutional infrastructure need to undertake emissions trades internationally
can be implemented without cost, negotiated effectively, and that no countries will "game" the
system. Relaxing any of these assumptions would reduce the gains from "where and when"
flexibility.
8. LESSONS FROM PREVIOUS POLICIES
Past practice reveals common biases in the analyses of costs of pursuing control policies.
The private sector has demonstrated an ability to respond to market-based policy signals with
technological innovation that reduces the costs of meeting environmental and other goals. A
change in greenhouse gas policy would also be likely to stimulate a private sector effort to
develop low-carbon energy technologies. The U.S. Government recognizes that differences
between the climate change problem and either acid rain or stratospheric ozone destruction limit
the transferability of lessons from those cases. Nevertheless, insights gained from previous
regulatory experiences may be suggestive of analytic biases.
Lessons may be drawn from two successful and innovative American environmental
policies: the acid rain control program and the Montreal Protocol, designed to limit the release of
ozone-depleting chemicals into the atmosphere. Our experiences with the phase-out of ozone-
depleting CFCs and with implementation of the 1990 Clean Air Act Amendments demonstrate
that when the government sends a clear signal concerning its environmental goals and preserves
operational flexibility for businesses, innovative technologies tend to emerge and costs tend to
fall well below early projections.
Sulfur Dioxide Allowance Trading: The price of sulfur dioxide emissions permits under the
Acid Rain market trading mechanism has plummeted far below initial industry estimates,
demonstrating that the.projected costs of meeting the goal had been exaggerated. In 1989,
industry projected that they would have to pay $1,500 for the right to emit one ton of sulfur
dioxide. Due to such factors as improved methods of blending coal types to meet emission limits
and innovations in smokestack scrubber technology, the actual price of a one-ton permit on the
Chicago Board of Trade in 1996 is just $66.
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CFC Phase-out: Similarly, initial industry cost estimates for car air conditioning retrofits of
CFC substitutes were between $800 and $1,500. These retrofits are now available at a cost of
$200-800.
[OAR MAY ADD ADDITIONAL NARRATIVE ON CFC EXPERIENCE, INCLUDING 2
CHARTS]
Analyses of proposed climate policies may tend to underestimate these types of dynamic
responses because they are difficult to quantify. Much better modeling of innovation and
technological change is needed. On the other hand, it should also be noted that precisely because
they are hard to quantify, the impact of such technological responses on control costs will always
be difficult to forecast.
19. THE ROLE OF ADVANCED ENERGY TECHNOLOGIES
[DOE PROPOSES FOLDING THIS SECTION INTO SECTION 8]
One weakness of all of the modelling approaches described above is that they cannot
describe the technological innovation response to the proposed policies analyzed in this paper.
Policies that limit energy use will tend to stimulate investment in research that will produce
technologies that cannot be predicted in advance. The modeling approaches discussed above
assume a relatively fixed path of technological change that does not respond to policies.
This analytic blindspot in the models becomes especially important when one considers
that over the long term, global energy demand will be driven by expanding economic growth and
a rapidly growing population. These factors drive current projections of ever increasing
greenhouse gas emissions. Ultimately, it is difficult to envision how humanity can meet the twin
goals of raising global living standards and reducing energy-related emissions without
developing advanced energy technologies.
Both government and the private sector have legitimate, complementary roles to play in
fostering the development of advanced, clean energy technologies. While the private sector
should take the lead role in commercial development activities, government-supported energy
research can play a complementary role in overcoming market failures that lead to systematic
underinvestment in research and development activity.
For the climate change issue, electricity and transportation fuels and technologies are of
particular importance. A wide variety of projections show electricity generation and
transportation to be the major sources of growth in energy-related emissions in throughout the
world over the foreseeable future. Recent activities at the National Renewable Energy
Laboratory -- focusing on biofuels, wind and solar energy - are excellent examples of the types
of research and development that can help provide attractive long-run answers to the challenge of
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emissions mitigation.]
10. NEXT STEPS: FROM ANALYSIS TO POLICY
While a significant amount of analysis has been conducted to date, much remains to be
done. Among the remaining questions to be addressed over the next several months are:
How can a policy best be designed to harness market forces and induce technological
change?
How can improved performance be stimulated in renewable energy and energy
efficiency?
How can the impacts of proposed policies be effectively specified with regard to sectors
and regions?
How can the employment impacts, both positive and negative, of policy options best be
assessed, both in the aggregate economy and in specific sectors?
What are the proper criteria for selecting between alternative policy mechanisms and
implementation strategies?
The United States is committed to ensuring that the process of developing and negotiating
further commitments, and advancing those already made, is based on a solid analytical
foundation. Analysis and assessment is helping to guide the way toward an appropriate level of
commitment and, equally or more important, toward a structure of commitments and domestic
implementation approaches that will cost-effectively meet our environmental goals.
Analysis and assessment together constitute an evolutionary process that informs policy
development. Together, these two functions account for the costs and benefits - both economic
and environmental -- associated with alternative policy strategies. Analysis provides a neutral
picture of the range of possible outcomes that would result from implementation of alternative
domestic and international policies. Assessment, by contrast, weighs the range of analytic results
and identifies those that are most plausible. Policy development then formulates positions based
on the conclusions of the assessment process.
The U.S. Government is presently focused on analysis - gathering the set of policy-relevant
results from analysts inside and outside of the Government. The Analytic Workshop on June 6-
7, 1996 is a significant milestone in the analytic phase, in that it will provide the U.S.
Government an opportunity to hear more than 50 diverse presentations from a wide range of
sources., Over time, the balance of U.S. Government activities will shift to a greater emphasis on
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019
assessment, i.e., the consideration of which analytical results are most plausible and which
should receive the most consideration in the policy development phase.
The U.S. Government recognizes the need for further refinement of its continuing analytic
work. This paper marks the beginning, not the end, of a process of analysis, assessment and
development of climate change response strategies. The U.S. Government intends to rcly on a
range of experts and stakeholders to provide high-quality input on the difficult analytical
problems that must be resolved in order to craft a cost-effective and forceful policy capable of
preventing dangerous human interference with the Earth's climate.
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Permit Price Needed to Stabilize GHG Emissions in 2010
-
$140
Lower Elasticities Yield Higher Estimate of Price
Higher Elasticities Yield Lower Estimate of Price
20202 13:20 08/03/96
$120
252 0275
$100
$1995
$80
OPPE
$60
$40
$20
$-
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
002
003
GDP Impact of Different GHG Targets
(Permit Auction, Consumer/Business Recycling)
20% GHG Reduction in 2010
8200
10% GHG Reduction in 2010
GHG Stabilization in 2010
7700
OPPE
Billions ($87)
No Policy
7200
CO2 Stabilization in 2010
0275
06/03/96 13:20 T202 252
6700
6200
2000
2005
2010
2015
GDP Impact of GHG Stabilization in 2010
Five Different Implementation Policies
Auctioned Permits, Revenues to
8200
0275 2020 06/03/96 252
13:20
Consumers and Business
Auctioned Permits, Revenues
Used to Reduce Deficit
7800
Permits Distributed
to Consumers
No Policy
Billions ($87)
7400
Auctioned Permits,
OPPE
Revenues to
Consumers Only
7000
Permits Distributed to
Consumers and Business
6600
6200
2010
2015
2000
2005
f00
GDP Impact of GHG Stabilization in 2010
Different Model Versions w/ Permit Auction, 60/40
8200
Newer DRI Version
06/03/98 13:21 6202 252 0275
7700
Billions ($87)
OPPE
7200
No Policy
Older DRI Version
6700
6200
2000
2005
2010
2015
005
Change
Francisco
ECONOMIC IMPLICATIONS OF STABLIZING CO2 EMISSIONS AT 1990 LEVELS BY
AUCTIONING CO2 PERMITS AND RECYCLING REVENUES
1990 LEVEL OF CO2 FROM ANTHROPOGENIC SOURCES - 1,336 million metric
tons per year (USG p. 6)
MARKET CLEARING PRICE OF PERMITS TO STABILIZE EMISSIONS AT 1990
LEVEL - $60-125 per metric ton (USG p. 12)
REVENUES IF AUCTIONED - $80 - 167 billion per year
CORPORATION INCOME TAXES IN 1994 - $140 billion
PERSONAL INCOME TAXES IN 1994 - 543 billion (ERP '96, p. 370)
REDUCTION IN TAXES SCENARIORI (60% REDUCTION IN CORPORATE, 40%
REDUCTION IN PERSONAL) (USG p. 10)
CORPORATION - $48-100 BILLION (34-71% decrease)
PERSONAL - $32 - 67 BILLION (6-12% decrease)
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2
Recending
FAX TRANSMISSION
U.S. EPA
401 M STREET, 9.W. (MAILCODE 2111)
WASHINGTON, D.C. 20460
(202) 260-4332
FAX: (202) 260-0275
To:
Steve Seidel
willing
Date:
June 3, 1996
Rosina Bierbaum
Ray Prince
Fax #:
456-6546, 456-6025, 395-6853,
Pages:
23, including this cover sheet.
From:
Daniel R. Abbasi, U.S. EPA
S.A
Subject:
Latest draft of USG paper for climate analytic workshop
discoment
COMMENTS:
Attached for your review and comment is the latest draft of the USG paper for the June 6-7
analytic workshop on climate change.
I am still resolving several issues between EPA and DOE, as noted in brackets in the text.
Please call me as soon as possible with any comments: 260-4332. We are aiming to finalize the
text by the end of today, if possible. Sorry for the late circulation; I worked with staff throughout
last night and into this morning, so it was not available earlier.
Thank you very much.
1612
for made Eap. g'
V
20
U.S.G. ANALYSES OF PROPOSALS FOR CLIMATE CHANGE PROTOCOL
Table of Contents
1. Introduction
2. Preliminary Lessons Learned from Analyses
3. Benefits of Policies to Reduce Greenhouse Gas Emissions - Or the Costs of Inaction
4. Greenhouse Gas Emission Trends
Global Trends
U.S. Emissions Trends
5. Domestic Technological Costing Analyses
Past Studies: National Academy of Sciences and Office of Technology Assessment
5. Domestic Technological Costing Analyses
Past Studies: National Academy of Sciences and Office of Technology Assessment
Domestic Institutional, Organizational and Technological Analyses
6. Domestic Macroeconomic Analyses
Four Emissions Reduction Scenarios
General Outline of Model
Implementation Timing
Five Modeled Permit Allocation Policies
Results of Domestic Macroeconomic Models
7. International Analyses
GDP impacts
Carbon emissions leakage
Where and When Flexibility
8. Lessons from Previous Policies
Sulfur Dioxide Allowance Trading
CFC Phase-out
9. The Role of Advanced Energy Technologies
10. Next Steps: From Analysis to Policy
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U.S.G. ANALYSES OF PROPOSALS FOR CLIMATE CHANGE PROTOCOL
Table of Contents
1. Introduction
2. Preliminary Lessons Learned from Analyses
3. Benefits of Policies to Reduce Greenhouse Gas Emissions -- Or the Costs of Inaction
4. Greenhouse Gas Emission Trends
Global Trends
U.S. Emissions Trends
5. Domestic Technological Costing Analyses
Past Studies: National Academy of Sciences and Office of Technology Assessment
Domestic Institutional, Organizational and Technological Analyses
6. Domestic Macroeconomic Analyses
Four Emissions Reduction Scenarios
General Outline of Model
Implementation Timing
Five Modeled Permit Allocation Policies
Results of Domestic Macroeconomic Models
7. International Analyses
GDP impacts
Carbon emissions leakage
Where and When Flexibility
8. Lessons from Previous Policies
Sulfur Dioxide Allowance Trading
CFC Phase-out
9. The Role of Advanced Energy Technologies
10. Next Steps: From Analysis to Policy
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1. INTRODUCTION
International negotiations to address the risk of climate change have been underway for
more than seven years. At the Earth Summit in Rio de Janciro in 1992 formally known as the
U.N. Conference on Environment and Development 154 nations signed the Framework
Convention on Climate Change (FCCC). Article Two of the FCCC states its guiding objective:
"to stabilize atmospheric concentrations of greenhouse gases at a level that would prevent
dangerous anthropogenic interference with the climate system."
The FCCC obligates the United States and other industrialized nations - known in FCCC
parlance as "Annex 1" nations - to aim to return greenhouse gas emissions to 1990 levels by the
year 2000. In 1993, President Clinton unveiled the Climate Change Action Plan (CCAP), which
included over 50 actions intended to bring the U.S. to the emissions level called for by the
FCCC. Although the CCAP programs have in fact cost-effectively reduced emissions over the
past three years, it now seems likely that the U.S. will fall short of the goal by over 100 million
metric tons of carbon equivalent (MMTCE), due to substantial funding cuts by Congress,
stronger than expected economic growth, and lower energy prices. A review of the CCAP is
being completed for release in fall, 1996, and will include an update of baseline trends, a review
of the effectiveness of current actions, and recommendations for additional actions.
At the first Conference of the Parties to the FCCC in Berlin in March 1995, the Parties
decided that the provisions and goals of the FCCC were not adequate to address the long-term
challenges of climate change. They recognized the FCCC commitments as an important first
step but noted their silence with respect to emissions after the year 2000.
Accordingly, in the Report of the Conference, dubbed the "Berlin Mandate", the Parties
agreed to launch a process to define actions to be taken by the industrialized Annex 1 nations in
the post-2000 period, and to promote implementation of commitments by all nations. The U.S.
successfully urged the Partics to include in the Berlin Mandate a call for an initial phase of
analysis and assessment to inform the negotiation of a Protocol specifying post-2000 obligations.
The adopted language follows:
The process will include in its early stages an analysis and assessment to identify possible
policies and measures for Annex I parties that could contribute to limiting and reducing
emissions by sources and protecting and enhancing sinks and reservoirs of greenhouse
gases. (FCCC/CP/1995/7/Add.1)
The U.S. Government is participating actively in the series of international negotiation
sessions intended to fulfill the Berlin Mandate and conclude with a legally binding Protocol to
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the FCCC in time for signing at the Third Conference of the Parties in Kyoto, Japan in late 1997.
Three formal negotiating sessions have been held since the Berlin Mandate was issued at the
First Conference of the Parties. In these sessions, a number of countries, as well as multilateral
associations of countries, have proposed draft protocols under which the Annex I countries
would be required to reduce their emissions by specific amounts by specific years -- goals that
have customarily been called "targets and timetables", but have since been technically labeled
Quantified Emissions Limitation and Reduction Objectives (QELRO's). In addition to these
proposed targets and timetables which would by themselves permit Parties to select their own
policy instruments for fulfilling the targets -- some countries have also proposed mandatory,
internationally coordinated "policies and measures".
The United States Government has to date proposed neither a QELRO for reducing
greenhouse gas emissions, nor a specific set of policies and measures. Instead, the U.S.
Government is analyzing and assessing the proposals offered by other countries as a critical
foundation for its own development of a policy and negotiating position.
This paper is the U.S. Government's first public document describing the partial and
interim results of its ongoing analyses of climate change proposals advanced by. other countries.
The paper presents key findings from our analyses to date, with some reference to analyses by
other stakeholders. These findings are being released on a preliminary basis at the U.S.
Government's Analytic Workshop on Climate Change on June 6-7, 1996, in order to facilitate
maximum feedback by convened experts and stakeholders.
The U.S. Government's Interagency Analytic Team (IAT) responsible for most of the
analysis underlying this paper is composed of analysts from many of the U.S. government
agencies that have a role in developing climate change policy, including the Environmental
Protection Agency, the Department of Energy, the Department of Agriculture, the Department of
Commerce, Department of Transportation, Department of the Treasury, and the White House
Council of Economic Advisors. The IAT has adopted a diversity of perspectives and approaches
- from detailed technology assessments to highly aggregated domestic and international
macroeconomic modeling excrcises - in making progress toward a balanced assessment of the
impacts of climate change mitigation policy alternatives.
Among their other limitations, the partial scope of the analyses discussed in this paper
should be acknowledged up front. Atmospheric greenhouse gas concentrations are a function
both of emissions from a variety of sectors and activities and of available sinks. The U.S.
Government continues to mainain that international commitments should be comprehensive,
addressing both sources and sinks of all greenhouse gases. However, most of the analyses
described in this paper focuses on energy-related greenhouse gas emissions. This focus reflects
the availability of modeling tools that can be used to assess the relationships linking energy use
and economic performance, as well as the fact that energy-related emissions account for over 86
percent of total U.S. greenhouse gas emissions and 70 percent of global greenhouse gas
emissions.
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It bears emphasis that this paper marks the beginning, not the end, of a process of
analysis, assessment and development of climate change response strategies. Beyond the June 6-
7 Analytic Workshop, many other opportunities will be provided to potentially affected
stakeholders to comment on U.S. Government analysis and to submit additional analyses for
consideration.
2. PRELIMINARY LESSONS LEARNED FROM ANALYSES
The balance of this paper will discuss the strengths, weaknesses and findings of
alternative models that have been enlisted to analyze the economic effects of implementing other
countries' proposed climate change protocols. It will offer preliminary numerical results from
the models in both textual and graphical form. It should, at this point, be noted that non-
practitioners of economic modeling tend to attribute more significance to the absolute values of
numerical results than do modelers themselves. Modelers tend to focus instead on qualitative
lessons for policy formulation, derived from cases where a particular policy design or strategy
shows consistently superior results under a variety of modeling frameworks and assumptions.
Accordingly, this section distills key lessons that the U.S. Government has derived on a
preliminary basis from its initial analytic work. The lessons follow:
Rigorous assessment of the impacts of greenhouse gas mitigation requires a variety of
analytic approaches since no single model is capable of capturing all relevant aspects of
the economy. Each approach has its own strengths and weaknesses. Therefore, it is
imperative to understand and reconcile insights gained from a diversity of analytic
approaches in arriving at an informed and balanced assessment.
The overall costs of emissions control depend critically on the stringency of the target and
on the structure of the policy.
Modest emissions reductions can be achieved with macroeconomic impacts ranging from
mildly negative to slightly positive. More stringent targets will impose higher costs. The
range of analytic results depends on the modeling framework used as well as the type of
policy intervention simulated.
Lower costs are associated with policies that are broad-based, flexible and phased. Such
policies can help avoid disruptions and allow for rational planning by businesses and
consumers.
Responsibility for addressing the climate change problem rests on the global community,
and will require unprecedented international cooperation. Cost-effective global solutions
will require flexibility in the timing and location of greenhouse gas reductions, as well as
institutions able to accommodate and promote such flexibility.
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Technological development and dissemination is critical to addressing climate change. In
the short run, we need to understand and overcome the institutional barriers that slow the
deployment of energy-saving technologies that pay for themselves. In the longer term,
we need to encourage the development and dissemination of new energy-saving and low-
carbon technologies.
In the past, regulatory compliance costs have often been overestimated because of
reliance on analytic tools that fail to account for dynamic technological, institutional and
organizational innovations. Such responses have greatly reduced compliance costs from
original estimates for some regulations, and future analyses of climate change policies
should take this potential bias into account.
A balanced assessment of climate change policies must account for the benefits that
would accrue from their ability to avert the myriad economic dislocations projected to
occur in a rapidly changing climate. Significant progress needs to be made in monetizing
the range of impacts so that the costs of action can be compared not to the status quo, but
more appropriately to the substantial costs of inaction.
3. BENEFITS OF POLICIES TO REDUCE GREENHOUSE GAS EMISSIONS - OR
THE COSTS OF INACTION
[TEXT ON MONETIZED IMPACTS FORTHCOMING FROM EPA/OPPE]
None of the models discussed in this paper measure the environmental and economic
benefits of mitigating emissions in terms of reduced climate change impacts. Because the
models do not mcasure these benefits, the fact that a policy is shown to impose significant cosis
cannot, by itself, rule out its selection for implementation if the overall benefits of reducing
climate change impacts outweighs those costs.
Global greenhouse gas emissions are projected to increase anywhere from two- to six-
fold over current levels by the end of the next century (i.e., by the year 2100) under the set of
possible "business as usual" futures considered in the recent report of the Intergovernmental
Panel on Climate Change (IPCC). Atmospheric greenhouse gas concentrations will ultimately
have to be stabilized in order to achieve the FCCC's objective of preventing dangerous human
interference with the climate. Even in the "business as usual" IPCC scenarios, the scientists
asserted that the rate of warming due to human emissions will be, in their words, "greater than
any seen in the last 10,000 years." In other words, since before the first human city was built.
Therefore, it will ultimately bc necessary to reduce emissions to achieve the goal of the
Convention.
The most striking conclusion in the IPCC Second Assessment Report, drawing on the
work of 2,500 scientists from around the world, was their consensus finding that: "The balance
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of evidence suggests that there is a discernible human influence on global climate." For the first
time, this diverse group of highly respected scientists stated their belief that human beings have
already begun to disrupt the planet's life-supporting climate system, a statement that is based on a
multiplicity of peer-reviewed studies. This finding has reinforced the urgency that Parties attach
to additional actions under the Berlin Mandate.
4. GREENHOUSE GAS EMISSION TRENDS
Global Trends: During the first half of the 1990s, greenhouse gas emissions grew in the U.S.
and most of the rest of the world. However, due to the restructuring of the former Soviet Union
and Eastern Europe, global emissions have been roughly stable. Nearly all of the countries of the
Organization for Economic Cooperation and Development (OECD) are experiencing rising
greenhouse gas emissions. The important exceptions are the U.K., which is climinating its
inefficient coal production in favor of cheap natural gas; and Germany, which is benefitting from
the dramatic cut in emissions in the former East Germany. Projected U.S. emissions growth is
expected to be slightly higher that the OECD average. Emissions are expected to grow
somewhat more slowly in OECD-Europe, somewhat faster in OECD-Asia.
Over the next century, the bulk of emissions growth will occur in the non-OECD
developing countries. While OECD carbon emissions are expect to grow by about 26% over the
next twenty years, developing country carbon emissions are expected to double [Energy
Information Administration's International Energy Outlook, 1996]. This observation
underscores why the climate change problem can be solved only through international
cooperation, and why U.S. leadership in addressing the issue is critical.
Figure 1: Relative growth within OECD
Figure 2: Long-term emissions trends
U.S. Emissions Trends: Total US emissions of greenhouse gases were 1,595 million metric
tons of carbon equivalent (MMTCE) in 1990, of which 1,336 MMTCE. By 1994, the US was
emitting 1,666 MMTCE of greenhouse gases. Of this total, 85% were carbon dioxide emissions,
about 11% were methane (CH4), 2% were nitrous oxide (N₂O), and 2% from other gases
including the chloroflourocarbons HFC, PFC, and SF6. The transportation and industrial scctors
of the U.S. economy were responsible for most of the CO₂ emissions, landfills and agricultural
production were the greatest sources of CH, emissions, and the agricultural sector was the largest
emitter of N₂O. Automotive air conditioning was largely responsible for the remaining emissions
from HFC-134a.
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Without additional policy intervention, U.S. greenhouse gas emissions are expected to
rise by at least 20 percent by 2010. Seventy five percent of the emissions growth will be in the
energy sector, mainly in electricity generation and transportation. Emissions of HFCs -
substitutes for chemicals being phased out under the Montreal Protocol - are expected to increase
substantially. Carbon sequestration in American forests is expected to decline.
Figure 3: US Greenhouse Gas Emissions 1990-1995. With baseline projections
through 2020
Figure 4: Sectoral Energy-Related U.S. Carbon Emissions 1990-2020
5. DOMESTIC TECHNOLOGICAL COSTING ANALYSES
Past Studies: A number of studies have suggested that greenhouse gas emissions can be
reduced significantly at net economic savings. Two of the more prominent studies endorsing this
conclusion are the National Academy of Sciences (NAS) report, Policy Implications of
Greenhouse Warming (NAS 1991) and Changing by Degrees. Steps to Reduce Greenhouse
Gases, by the U.S. Office of Technology Assessment (OTA 1991). The NAS study found that
100 to 480 million metric tons of greenhouse gas emissions could be reduced at negative or no
cost. The OTA study identified a greenhouse gas emissions reduction potential of up to 472
million metric tons at negative cost or net benefit.
[ADD TEXT ON 1995 EPA STUDY CITED IN CHUPKA TESTIMONY - 330 MMTCE]
[EPA/OPPE WILL ADD TEXT SUMMARIZING NAS AND OTA STUDIES]
To help provide additional insights into individual policies and measures that might be
used to reduce emissions, DOE is now completing an update of its 1989 report A Compendium
of Options for Government Policy to Encourage Private Sector Response to Potential Climate
Change. This update summarizes, on a sector-by-sector basis, the results regarding individual
policies and measures to mitigate emissions reported in the literature since issuance of the
original report. The report considers the extent to which each of the factors affecting the end-user
adoption of relevant technologies are incorporated in the analysis and which appear to be most
relevant for successful introduction of measures in each specific sector.
'The strength of the technology costing approach is that it demonstrates the extent of
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technological opportunities available to save energy and reduce greenhouse gas emissions. The
primary weakness of this approach is that it fails to address the institutional and organizational
reasons why businesses and consumers do not take full advantage of these obvious opportunities.
[Mark: delete this - Domestic Institutional, Organizational and Technological Analyses:
The large store of potentially profitable energy-saving investments suggests that an effective
policy must include the institutional and organizational change necessary to unlock these
profitable opportunities and promote the diffusion of higher efficiency technologies. A new EPA
study focuses on the impact of policies that would resolve market failures in the commercial,
residential, industrial, transportation and electric sectors. The study confirms the findings of
earlier reports, finding even greater greenhouse gas emissions reductions at net economic
savings.
The study examines institutional and organizational changes that would ensure that
households and businesses receive the information, technical assistance, and financing they need
to purchase and profit from proven higher efficiency technologies. The institutional and
organizational changes would also be structured to give equipment manufacturers and building
owners the opportunity to capture some of the profit from the higher efficiency technologies,
thus stimulating diffusion and innovation. The study finds that successful implementation of
institutional and organizational change could yield greenhouse gases reductions of up to 39%
over baseline 2015 levels (or 21% over 1990 levels) with a positive GDP impact of 0.5%.]
Figure 10 (OAR graph labeled 8)
MI-5
6. DOMESTIC MACROECONOMIC ANALYSES
CGE
S
[DOE TO PROPOSE ADDITIONAL MODIFICATIONS TO THIS SECTION]
Four Emissions Reduction Scenarios: The U.S. Government's domestic macroeconomic
analysis has focused almost exclusively on proposals that have already been advanced by other
nations in the international negotiating process, including by the Alliance of Small Island States
(AOSIS), Germany and the United Kingdom. The four scenarios follow:
(1) Stabilization Proposal: Annex I Parties stabilize emissions at 1990 levels in 2010;
(2) United Kingdom Proposal: Annex I Parties reduce emissions 10 percent below their
1990 levels by 2010;
(3) German Proposal: Annex I Parties reduce emissions 10 percent below 1990 levels
by 2005; 20 percent below 1990 levels by 2010;
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(4) Alliance of Small Island States (AOSIS) Proposal: Annex I Parties reduce
emissions 20 percent below 1990 levels by 2005.
As noted earlier, the U.S. Government does not favor or endorse any of these proposals at this
time. Rather, the Government is analyzing their economic consequences for the U.S. and for the
rest of the world.
General Outline of Model: The U.S. Government has analyzed the economy-wide impacts of
these targets and timetables using two distinct energy models linked to the DRI/McGraw Hill
Macroeconomic Model of the U.S. Economy. The analysis assumes that America's OECD
trading partners implement similar policies, and that the Federal Reserve reacts to the resulting
changes in prices and employment in same way that it has reacted to these changes over the past
decade. These models were used to estimate the potential economic impacts for a range of policy
scenarios, including impacts on gross domestic product (GDP), consumption, investment,
employment, and inflation; as well as regional, industrial, and energy market impacts.
Macroeconomic models have the advantage of representing economy-wide adjustments
and responses to policies, particularly business cycle responses. Their weakness is that they do
not provide detailed representation of specific markets and specific technologies. Furthermore,
their characterization of the long-run determinants of economic growth is relatively limited.
To represent energy markets and technologies, the macroeconomic model is coupled with
an energy sector model. The analysts have estimated price increases for the four emission target
scenarios using the DRI/McGraw Hill Energy Market Model and the IDEAS model. These
models incorporate different assumptions about the price responsiveness in energy demand and
different characterizations of energy technologies. These assumptions yield different estimates
of the magnitude of changes needed to achieve a given target in the energy sector.
Energy sector models constrain greenhouse gas emissions either by limiting the supply of
fossil fuels or by directly increasing their price. Given these constraints, the models forecast
changes in fossil fuel energy prices and consumption, and related changes in behavior. In
addition, higher fuel prices result in higher revenues that circulate through the economy. These
revenues can be redistributed to ameliorate the negative impact of price inflation on economic
growth.
Implementation Timing: The analysis assumes that policies are phased in after 2000. Energy
prices gradually increase throughout the period, and emissions generally decline to the target by
the end of the phase-in (2005 for AOSIS and German proposals; 2010 for all others).
Five Modeled Permit Allocation Policies: For each emission target, the IAT assumed that the
government would introduce a tradeable permit system, distributing or selling a fixed number of
permits to sell fossil fuels based on their carbon content. Those receiving or purchasing the
permits would have the right to sell fucls that contain carbon or to sell their permits. Primary
fossil fuel producers would be required to obtain permits reflecting the carbon content of their
fossil fuel sales.
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A system of marketable tradable permits is considered one of the most cost-effective and
flexible policies for reducing emissions. The ability to trade permits in a market assures that
permits are put to their highest-value use. Given the limit imposed by the number of permits,
fossil fuel consumers can be expected to make the least-cost emission reductions available, thus
minimizing overall costs. Another reason why the IAT has analyzed international proposals with
a permit trading scheme is that this type of policy readily lends itself to analysis in the available
large-scale economic models. However, despite these virtues, the analysis of marketable permit
systems should not be taken as an endorsement by the U.S. Government. The U.S. Government
continues to examine a variety of options to achieve climate goals.
The IAT examined five very different schemes for allocating the permits to analyze their
economic and distributional impacts. The fundamental insight from the analysis is that the
economic impacts of mitigation depend to a very great extent on how the permits - and thus the
costs - are allocated across different sectors of the economy. If the permits are simply handed
out, their allocation creates a type of property right that has value. On the other hand, of the
permits were auctioned off by the government, their sale would generate revenues for the
government. How the government uses the revenues can have profound impacts on the economy.
The IAT analyzed three distinct auction scenarios to determine the impacts of various
mechanisms for redistributing the revenue:
1) Auctioned Permits, Revenues to Consumers Only: distributing revenue to
consumers by increasing the personal income tax exemption;
2) Auctioned Permits, Revenues to Consumers and Business: sharing revenue
between consumers and producers by reducing personal and corporate marginal income.
tax rates; and
3) Auctioned Permits, Revenues Used to Reduce Deficit: using the revenue to reduce
the Federal budget deficit and retire Federal debt.
In addition, we analyzed two distinct allocation scenarios:
4) Permits Distributed to Consumers: all permits are allocated to individual
households, who in turn sell their permits to primary fossil fuel producers; and
5) Permits Distributed to Consumers and Business: permits are allocated to both
consumer and businesscs, based on their historical energy use.
Results of Domestic Macroeconomic Models: Figure 5 shows the GDP impacts from 2000
through 2015 of different levels of GHG emissions abatement. In each case, the target is
achieved by auctioning off permits and returning roughly 40% of the revenues to consumers
through an increase in the personal income tax exemption and 60% to businesses through a
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reduction in marginal corporate income tax rates. The rationale for this approach is that
households consume roughly 40% of all energy directly, while 60% of all energy is used by
businesses in the production of goods and services.
For all of the targets, the initial effect of the permit and revenue recycling systems is to
raise fossil fuel prices, generating a rise in the general price level and reducing demand. In
response to inflation, the Federal Reserve Bank restricts the money supply to offset the
inflationary impacts of the policy, further slowing the economy. GDP declines slightly in the
near term - through at least 2008. However, by reducing business taxes, this permit allocation
and revenue recycling system encourages business investment. In the long run, this boosts
economic growth. GDP increases above the no-policy case throughout the rest of the forccast
period. With more stringent targets, output dips more in the near term but rebounds more
strongly in the out years.
Figure 5. Range of GDP impacts relative to the baseline for each scenario -- using
the results from the latest DRI model. Permit Auction 40% 60% split.
How do different permit designs affect the economy? Figure 6 illustrates the GDP impact
of alternative methods of distributing or auctioning marketable permits and recycling any
revenues, using the stabilization target as an example. It is clear that the design of the permit
system can significantly influence the GDP impacts of a given target. Every approach causes
near term GDP losses as the economy adjusts to higher energy prices. However, the long term
impacts depend critically on the permit distribution and revenue recycling scheme. When the
revenues from selling permits are distributed to consumers and businesses based upon historical
patterns of spending on energy - i.e., 40% to consumers and 60% to producers - higher
investment actually raises economic activity above what it would have been without any policy.
Alternatively, when the permits (or the revenues from selling permits) are distributed only to
households, the economy's aggregate savings are lower. With fewer savings available for
investment, GDP is lower even in the the later years of the forecast.
These results highlight not only to the importance of the permit system design, but the
importance of the distribution of the permits or the disbursement of revenues from permit
auctions. If the value of permits accrues mainly to households - whose aggregate savings are
relatively low - there will not be sufficient investment to offset higher energy prices. In contrast,
if the value of permits accrues mainly to businesses - which tend to retain and reinvest profits -
there may be enough additional investment to offset the loss of energy inputs. Well-designed
policies can thus actually enhance economic activity; while policies that are not targeted to
alleviate the impacts of higher energy prices can dampen economic growth.
Figure 6. Comparison of allocation and auction of permits for stabilization scenario.
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The IAT used two different versions of the DRI Macro model to project the
macroeconomic impacts of greenhouse gas policies. In one - an older version - the economy's
productive capacity is determined by the capital stock, the labor force, and the total quantity of
energy consumed. In the more recent version, productive capacity (also called "potential GDP")
X
is directly influenced by domestic oil and natural gas production rather than by total energy
demand. While this change may seem minor, it has profound impacts on the model's predictions
of the impacts of reducing the amount of energy available. Further research is underway to
determine which of these approaches is most appropriate, or whether another approach is needed.
All of the above results use the most recent version of the DRI model.
Figure 7 Impact of potential GDP stabilization for stabilization scenario.
Figure 7 shows the different GDP impacts, using the two model versions, of a single
target and policy: an auctioned permit system with revenues returned to both consumers and
businesses. The figure illustrates that the form of this one equation in the model can significantly
influence the estimate of the economic impact of a given policy.
Another source of uncertainty is the energy sector impacts of the a marekteable tradeable
permit system. The key consequence of the permit system is to raise energy prices by limiting
fossil fuel use. How consumers and businesses respond to these price changes is one of the
critical determinants of any policy's costs. If consumers and businesses respond very strongly to
price signals, then relatively small price increases and thus relatively low permit prices - - will
be necessary to achieve a given emissions target. On the other hand, it consumers and businesses
are not very responsive to price signals - - if they have "low energy demand elasticities" - then it
will take large price hikes to achieve the same target.
[DOE PROPOSING TO DELETE REFERENCE TO AVERAGE ELASTICITY
DERIVED FROM LITERATURE SURVEY AND SUBSTITUTE MORE CREDIBLE
BENCHMARK] The Department of Energy has sponsored research on how consumers and
businesses respond to enrgy price increases. The DOE research seems to suggest that energy
users are more responsive to changes in energy prices - they have higher demand elasticities -
than is suggested by the DRI model.]
As a sensitivity analysis, we replaced DRI's own long-run energy elasticities with
average estimates from the Department of Energy literature. This minor change had a dramatic
effect on permit prices. In the current version of the DRI model, the value of permits must rise to
roughly $125 per metric ton of carbon in order to stabilize greenhouse gas emissions in 2010.
With the higher elasticities, the value of permits had to risc only to $60 per ton in order to
stabilize GHG emissions in 2010. The projected permit prices are shown in Figure 8.
The lower estimate is roughly in line with the average of estimates derived from a large
number of cconomic models in the Stanford Energy Modeling Forum 12. It is also consistent
with results obtained from the technology-rich ICF Integrated Planning Model of the electric
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utility sector, which projects similar carbon emissions reductions at lower energy price increases
than DRI's utility sector model. The IAT will continue to assess this issue so that the best
forecast of energy sector impacts from alternative greenhouse gas policies can ultimately be
developed.
Figure 8. Price elasticity sensitivity analysis.
The macroeconomic impacts presented here are generally lower than those presented in
other studies, even those using the DRI model. For example, when the Electric Research Power
Institute (EPRI) examined the same GHG targets using the DRI model, it conluded that the
losses in GDP could be quite large- - up to 4.3% (see Figure 9).
A crucial questions remains. Why are the U.S. Government's current results so different
from the EPRI-sponsored results? There are three major reasons for these conclusions. First, in
the U.S.G. analysis, the permit system has been phased in, so as to allow energy users more time
to adjust to the policy change. By contrast, the EPRI-sponsored work "shocked" the system by
imposing a carbon tax all at once. This greatly increases the GDP impacts. Second, in the EPRI
study, carbon tax revenues were recycled only through an increase in the personal income tax
exemption- the worst case for GDP. Third, EPRI assumed that the U.S. is pursuing a unilateral
emissions reduction strategy, rather than cooperating with the rest of the OECD. Fourth, in the
EPRI study, the Federal Reserve was assumed to pursue exactly the same monetary policy that it
would have in the absence of the carbon tax. This has the effect of contracting the money supply
- and causing output to decline - more than would be the case if the Federal Reserve responded
as it normally does.
Figure 9. Comparison with EPRI analysis.
Taking account of the above factors, the U.S. Government's preliminary macroeconomic
results show a wide range of impacts on the economy, although the results tend to show smaller
impacts on output in the U.S. economy than the results obtained in several earlier studies that
purported to show substantial negative impacts. Moreover, as discussed elsewhere in this paper,
the impacts depend fundamentally on what kind of policy is implemented; intelligent policy
design can dramatically reduce costs. The U.S. Government's analysis indicates that the U.S.
economy will continue to grow at a healthy pace through the first decades of the next century
under all of the options examined. The IAT is still synthesizing the results of these studies and
exploring the how the timing, implementation, and the size of the emissions reductions may
explain the range of outcomes.
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7. INTERNATIONAL ANALYSES
The IAT is also pursing a variety of analyses using a diverse set of models of the
international economy, including the Oxford and G-Cubed models that are being discussed in
separate papers prepared for the June 6-7, 1996 Analytic Workshop. A wide range of results has
been obtained, with review and synthesis still pending. It is possible, however, to draw three
tentative conclusions.
1. GDP impacts: There may be significant differences across OECD countries in the
costs of meeting any specific target. Some countries, such as Germany and the United Kingdom,
face special circumstances that will make it relatively inexpensive to reduce emissions during the
next decade. Countries expected to grow relatively rapidly, such as Japan, should find it more
difficult to meet particular targets. Low-carbon economies such as France, which rely on nuclear
power for much of their electricity, will have fewer opportunities to reduce emissions.
2. Carbon emissions leakage: Some analysts argue that if the developed nations
constrain the use of fossil fuels in order to reduce greenhouse gas emissions, two confounding
effects could lead to an offsetting increase in developing country fuel use and greenhouse gas
emissions. First, reduced demand could cause world oil prices to decline, thereby potentially
spurring increased oil demand in the developing world. Second, over the longer term, energy-
intensive industries facing higher energy prices in developed countries might migrate to
developing countries that are not controlling cmissions. Taken together, these two influences are
called the "leakage effect."
[An increase in emissions in the developing world could eviscerate an emissions program
pursued only by developed countries, so that their energy-intensive industries would make a
sacrifice with no ultimate benefit. However, the U.S. Government's initial modeling results
suggest that although reduced energy demand in OECD countries would lead to lower world oil
prices, a decrease in OECD emissions would not be significantly offset by an increase in non-
Annex I countries' emissions. Also, the analysis did not find that energy-intensive industries are
likely to migrate from industrialized to developing countries as a result of control regimes
implemented in the former. These results, however, are preliminary and await more detailed
analysis in the future.]
3. "Where" and "When" Flexibilities: Some of the preliminary international results
illustrate how both the level, design and timing of commitments could affect the costs of
greenhouse gas mitigation. One recent study used four different models to evaluate the extent to
which flexibility in the international location and timing of emission reductions should reduce
costs. The results suggested that costs of achieving the same cumulative emissions reductions
over the next fifty years could be significantly reduced by allowing reductions anywhere in the
world and by allowing a slower pace of early emission reductions which are then "made up" with
more extensive reductions later. According to this analysis, the cost reduction for locational
flexibility alone could be roughly 70 percent, timing flexibility alone 40 percent, and both types
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of flexibility together 85 percent. The cost reductions from timing flexibility are significantly
reduced as the time horizon over which higher initial emissions must be "made up" is shortened.
These results are very dependent on a number of important assumptions built into the
models. The models assume a fixed path of technological development, and do not make
allowance for technological developments in response to control regimes. This means that they
do not consider the effect of early signals to induce a technological response. Moreover, the
models assume perfect foresight, SO that economic actors know with certainty what technologies
will be available in the future, and what the ultimate emissions limit is. Finally, the analysis
assumes that the institutional infrastructure need to undertake emissions trades internationally
can be implemented without cost, negotiated effectively, and that no countries will "game" the
system. Relaxing any of these assumptions would reduce the gains from "where and when"
flexibility.
8. LESSONS FROM PREVIOUS POLICIES
Past practice reveals common biases in the analyses of costs of pursuing control policies.
The private sector has demonstrated an ability to respond to market-based policy signals with
technological innovation that reduces the costs of meeting environmental and other goals. A
change in greenhouse gas policy would also be likely to stimulate a private sector effort to
develop low-carbon energy technologies. The U.S. Government recognizes that differences
between the climate change problem and either acid rain or stratospheric ozone destruction limit
the transferability of lessons from those cases. Nevertheless, insights gained from previous
regulatory experiences may be suggestive of analytic biases.
Lessons may be drawn from two successful and innovative American cnvironmental
policies: the acid rain control program and the Montreal Protocol, designed to limit the release of
ozone-depleting chemicals into the atmosphere. Our experiences with the phase-out of ozone-
depleting CFCs and with implementation of the 1990 Clean Air Act Amendments demonstrate
that when the government sends a clear signal concerning its environmental goals and preserves
operational flexibility for businesses, innovative technologies tend to emerge and costs tend to
fall well below early projections.
Sulfur Dioxide Allowance Trading: The price of sulfur dioxide emissions permits under the
Acid Rain market trading mechanism has plummeted far below initial industry estimates,
demonstrating that the projected costs of meeting the goal had been exaggerated. In 1989,
industry projected that they would have to pay $1,500 for the right to emit one ton of sulfur
dioxide. Due to such factors as improved methods of blending coal types to meet emission limits
and innovations in smokestack scrubber technology, the actual price of a one-ton permit on the
Chicago Board of Trade in 1996 is just $66.
DRAFT
- 15
June 3, 1996 (1:38pm)
06/03/96
13:15
202 252 0275
OPPE
4
017
CFC Phase-out: Similarly, initial industry cost estimates for car air conditioning retrofits of
CFC substitutes were between $800 and $1,500. These retrofits are now available at a cost of
$200-800.
[OAR MAY ADD ADDITIONAL NARRATIVE ON CFC EXPERIENCE, INCLUDING 2
CHARTS]
Analyses of proposed climate policies may tend to underestimate these types of dynamic
responses because they are difficult to quantify. Much better modeling of innovation and
technological change is needed. On the other hand, it should also be noted that precisely because
they are hard to quantify, the impact of such technological responses on control costs will always
be difficult to forecast.
19. THE ROLE OF ADVANCED ENERGY TECHNOLOGIES
[DOE PROPOSES FOLDING THIS SECTION INTO SECTION 8]
One weakness of all of the modelling approaches described above is that they cannot
describe the technological innovation response to the proposed policies analyzed in this paper.
Policies that limit energy use will tend to stimulate investment in research that will produce
technologies that cannot be predicted in advance. The modeling approaches discussed above
assume a relatively fixed path of technological change that does not respond to policies.
This analytic blindspot in the models becomes especially important when one considers
that over the long term, global energy demand will be driven by expanding economic growth and
a rapidly growing population. These factors drive current projections of ever increasing
greenhouse gas emissions. Ultimately, it is difficult to envision how humanity can meet the twin
goals of raising global living standards and reducing energy-related emissions without
developing advanced energy technologies.
Both government and the private sector have legitimate, complementary roles to play in
fostering the development of advanced, clean energy technologies. While the private sector
should take the lead role in commercial development activities, government-supported energy
research can play a complementary role in overcoming market failures that lead to systematic
underinvestment in research and development activity.
For the climate change issue, electricity and transportation fuels and technologies are of
particular importance. A wide variety of projections show electricity generation and
transportation to be the major sources of growth in energy-related emissions in throughout the
world over the foreseeable future. Recent activities at the National Renewable Energy
Laboratory -- focusing on biofuels, wind and solar energy - are excellent examples of the types
of research and development that can help provide attractive long-run answers to the challenge of
DRAFT
- 16
June 3, 1996 (1:38pm)
06/03/98
13:15
202 252 0275
OPPE
018
emissions mitigation.]
10. NEXT STEPS: FROM ANALYSIS TO POLICY
While a significant amount of analysis has been conducted to date, much remains to be
done. Among the remaining questions to be addressed over the next several months are:
How can a policy best be designed to harness market forces and induce technological
change?
How can improved performance be stimulated in renewable energy and energy
efficiency?
How can the impacts of proposed policies be effectively specified with regard to sectors
and regions?
How can the employment impacts, both positive and negative, of policy options best be
assessed, both in the aggregate economy and in specific sectors?
What are the proper criteria for selecting between alternative policy mechanisms and
implementation strategies?
The United States is committed to ensuring that the process of developing and negotiating
further commitments, and advancing those already made, is based on a solid analytical
foundation. Analysis and assessment is helping to guide the way toward an appropriate level of
commitment and, equally or more important, toward a structure of commitments and domestic
implementation approaches that will cost-effectively meet our environmental goals.
Analysis and assessment together constitute an evolutionary process that informs policy
development. Together, these two functions account for the costs and benefits - -- both economic
and environmental - associated with alternative policy strategies. Analysis provides a neutral
picture of the range of possible outcomes that would result from implementation of alternative
domestic and international policies. Assessment, by contrast, weighs the range of analytic results
and identifies those that are most plausible. Policy development then formulates positions based
on the conclusions of the assessment process.
The U.S. Government is presently focused on analysis -- gathering the set of policy-relevant
results from analysts inside and outside of the Government. The Analytic Workshop on June 6-
7, 1996 is a significant milestone in the analytic phase, in that it will provide the U.S.
Government an opportunity to hear more than 50 diverse presentations from a wide range of
sources., Over time, the balance of U.S. Government activities will shift to a greater emphasis on
DRAFT
- 17 -
June 3, 1996 (1:38pm)
06/03/96
13:16
202 252 0275
OPPE
1
019
assessment, i.e., the consideration of which analytical results are most plausible and which
should receive the most consideration in the policy development phase.
The U.S. Government recognizes the need for further refinement of its continuing analytic
work. This paper marks the beginning, not the end, of a process of analysis, assessment and
development of climate change response strategies. The U.S. Government intends to rely on a
range of experts and stakeholders to provide high-quality input on the difficult analytical
problems that must be resolved in order to craft a cost-effective and forceful policy capable of
preventing dangerous human interference with the Earth's climate.
DRAFT
- 18 -
June 3, 1996 (1:38pm)
Permit Price Needed to Stabilize GHG Emissions in 2010
$140
Lower Elasticities Yield Higher Estimate of Price
Higher Elasticities Yield Lower Estimate of Price
$120
06/03/96 13:20 6202 252 0275
$100
$1995
$80
OPPE
$60
$40
$20
$-
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
002
003
GDP Impact of Different GHG Targets
(Permit Auction, Consumer/Business Recycling)
20% GHG Reduction in 2010
8200
10% GHG Reduction in 2010
GHG Stabilization in 2010
7700
OPPE
Billions ($87)
No Policy
7200
CO2 Stabilization in 2010
06/03/98 13:20 6202 252 0275
6700
6200
2000
2005
2010
2015
GDP Impact of GHG Stabilization in 2010
Five Different Implementation Policies
-
Auctioned Permits, Revenues to
8200
Consumers and Business
Auctioned Permits, Revenues
06/03/96 13:20 20202 252 0275
Used to Reduce Deficit
7800
Permits Distributed
to Consumers
No Policy
Billions ($87)
7400
Auctioned Permits,
OPPE
Revenues to
Consumers Only
7000
Permits Distributed to
Consumers and Business
6600
6200
2010
2015
2000
2005
00
GDP Impact of GHG Stabilization in 2010
Different Model Versions w/ Permit Auction, 60/40
06/03/96 13:21
8200
Newer DRI Version
20202 252 0275
7700
Billions ($87)
OPPE
7200
No Policy
Older DRI Version
6700
6200
2000
2005
2010
2015
005
02/12/96
12:07
United States Department of State
Bureau of Oceans and International
Environmental and Scientific Affairs
Emin
Washington, D.C. 20520
menia
DATE: 2-12-96
TIME: 10:20
days
1
NUMBER OF PAGES TO FOLLOW:
FAX TO:
Group of Six Plus
TELEPHONE:
FAX:
OFFICE:
FAX FROM:
Lilly R. Roots-Wiggins
TELEPHONE:
647-1554
FAX:
:
647-0217
OFFICE:
MESSAGE:
There will be another Climate Change Meeting with Eileen
Claussen on Thursday, February 15 at 2:00 Please RSVP
to-me. The meeting will be at the Dept. of State in Room
7835.
2/12/2020
2
arupt
DISTRIBUTION: PRINCIPALS ONLY (No Substitutes)
OSTP
Bob Watson
FAX: 456-6025
CEA
Alicia Munnell
FAX: 395-6947
NEC
Dorothy Robyn
FAX: 456-2223
OMB
T.J. Glauthier
FAX: 395-4639
Justice Lois Schiffer
FAX: 514-0557
Commerce Jeffrey Hunker
FAX: 482-4636
NOAA
Doug Hall
FAX: 482-6318
Treasury Joshua Gotbaum
FAX: 622-2633
Interior Brooks Yeager
FAX: 208-4561
USTR
Jennifer Havercamp
FAX: 395-4579
Agriculture - Charlie Rawls
FAX: 720-5437
DOE
Dirk Forrister
FAX: 586-9626
Dan Reicher
FAX: 586-0861
EPA
Mary Nichols
FAX: 260-5155
David Gardiner
FAX: 260-0275
DOT:
Frank Kruesi
FAX: 366-7127
OVP:
Pete Jordan
FAX: 456-9500
Copyts
Concerns re: Interagency Analysis Team on Climate Change
1.
Options under analysis have not been checked for political feasibility or
Prime
consistency with tax policy in general
EPA analysis gets favorable results in large part because carbon tax tax revenues
are used to reduce taxes on corporations, which leads to a lot of investment (in
the DRI model), which increases the growth rate of the economy. In some cases,
Emmi
the corporate income tax is eliminated entirely; this doesn't seem likely in this
Administration.
2.
Leaks could be a big problem. Players on both sides have incentives to leak talk
of $100 billion carbon tax:
industry would like to discredit Administration proposal before it's out of the
chute
enviros wold like to cement the President into a hard-line position
3.
EPA model results claim to show that we can have our climate cake and eat it too
-- i.e. that big carbon reductions can be achieved at no cost to gdp, as long as a
large part of the revenues are used to reduce taxes on investment. This result
requires dynamic scoring, which we have rejected in many other contexts. Do we
really want to reopen the door to dynamic scoring in other areas as well?
to Rubin
(By the way, in a memo last night, Tax Policy recommends against any consideration of
new taxes by the IAT, and recommends moving oversight of the IAT to the NEC).
pages
Date 8 81
7671
From
Post-It Fax Note
Ray
SQUITIERI
TO Alicia Munnell
Co.
Phone #
Treasury 622-1301
Co./Dept. CGA
1294
Fax #
Phone #
Fax 395-6947
TOTAL P.01
MEMORANDUM to David Sandalow
Wes Warren
Elgie Holstein
Ray Prince
Alicia Munnell
Joe Stiglitz
Diane Regas
chg)
Linda Lance
From: Rosina Bierbaum
Subject: Global Climate Change U.S. Government Public Information Packet
FYI, we are sending you the U.S. Government Public Information Packet developed for the
ongoing conference of parties meeting on climate. We will also send copies to members of
Congress next week.
Climate
nange
July
1996
State of Knowledge
The Earth's climate is predicted to change because
The Greenhouse Effect
human activities are altering the chemical
composition of the atmosphere. The buildup of
Some of the intrared
greenhouse gases-primarily carbon dioxide,
Some solar radiation
radiation passes through
is reflected bv the Earth
the atmosphere, and
methane, nitrous oxide and chlorofluoro-
and the atmosphere.
some is absorbed and
carbons— is changing the radiation balance of the
SUN
re-emitted in all directions
by greenhouse gas molecules.
The effect of this is to
planet. The basic heat-trapping property of these
warm the Earth's surface and
the lower atmosphere.
greenhouse gases is essentially undisputed.
Although there is considerable scientific
Solar
radiation
ATMOSPHERE
uncertainty about exactly how and when the
passes
through
Earth's climate will respond to enhanced
the clear
atmosphere
greenhouse gases in the future, observations
EARTH
indicate that detectable changes are underway.
The direct effects of climate change will include
Most radiation' is absorbed
:Infrared radiation
by the Earth's surface and
is emitted from the
changes in temperature, precipitation, soil
warms it.
Earth's surface.-
moisture and sea level. Such changes could have
adverse effects on ecological systems, human
health and socio-economic sectors.
Source: U.S. Department of State 1992
Human-induced climate change is a complex
problem, which can impact the economy and the
contribute about 40 percent of global carbon dioxide
quality of life for this and future generations. The
emissions. Future growth in emissions from OECD countries is
lag time between emission of the gases and their
predicted to be significantly smaller than growth in developing
impact is on the order of decades to centuries; so
countries and countries with economies in transition.
too is the time needed to reverse any effects. Thus,
policy decisions in the near term will have long-
Since the pre-industrial era, atmospheric concentrations of
term consequences.
carbon dioxide have increased by nearly 30 percent, methane
concentrations have doubled and nitrous oxide concentrations
have risen by 15 percent. These increases result in a radiative
forcing or heat-trapping of energy equivalent to about 2.8
The Climate System
watts per square meter (Wm²). About half of the radiative
forcing may have been masked by increased levels of
A natural greenhouse effect keeps the Earth about 33°C (91°F)
traditional air pollutants-sulfates and carbonaceous aerosols,
warmer than it otherwise would be. Without this greenhouse
particularly in the northern hemisphere-which cool the
effect, life as we know it would not be possible. Water vapor,
atmosphere by reflecting incoming solar radiation and altering
carbon dioxide and other trace gases trap heat as it is re-
the reflective properties of clouds, Aerosols are short-lived and
radiated from the Earth back to space. However, since pre-
vary regionally, hence they should not be regarded as a simple
industrial times, human activities have added to the natural
offset to greenhouse gas forcing. In addition, due to their
greenhouse effect by releasing additional greenhouse gases to
health effects, buildup will likely be limited. Calculations
the atmosphere. The burning of fossil fuels (coal, oil and gas)
suggest that the projected increases in atmospheric
for energy is the primary source of emissions; changing land-
concentrations of greenhouse gases alone will result in an
use patterns through agriculture and deforestation also
additional radiative forcing of about 3-8 Wm² by 2100. For a
contribute a significant share. Current global emissions of
given concentration of greenhouse gases, the resulting
carbon dioxide from energy use are approximately 6 gigatons
increase in radiation can be predicted with precision; but the
of carbon (GtC) per year.
resulting impact on climate is more uncertain.
Future greenhouse gas emissions are sensitive to changes in
Model calculations, based on plausible ranges of future
demographic, economic, technological, policy and institutional
emissions and climate sensitivities, suggest that the global
developments. By the year 2025, world emissions could range
surface temperature could increase an average of 1.0 3.5°C
from 8 to 15 GtC per year. In the year 2100, world emissions
(1.8-6.3°F) by 2100, with significant variation by region. This
are projected to range from 5 to 36 GtC per year, depending
estimate accounts for the offset from aerosols, which has
on energy use, populations, technologies and other factors. The
lowered earlier estimates somewhat. Global-average
United States and the rest of the OECD countries currently
temperature changes of this magnitude would be greater than
Climate Change July 1996
ey Findings of the Second Assessment Report of the
tergovernmental Panel on Climate Change
U.S. Government finds the IPCC
The reliability of regional-scale predictions is still
ond Assessment Report to be an
low, and the degree to which climate variability may
remely useful document. It has
change is uncertain.
ieved the goals of being scientifically
dible and policy relevant, without
Sea level is projected to rise by 15-95 cm (6-38
ng policy prescriptive.
inches) by 2100.
key findings of the IPCC can be
The long atmospheric lifetime of many greenhouse
ply summarized:
gases, coupled with the thermal inertia of the
oceans, means that the warming effect of
ional and global climate and sea level
anthropogenic emissions will be long-lived.
Human activities are increasing the atmospheric
Even with a stabilization of greenhouse gas
concentrations of carbon dioxide and other
concentrations in the year 2100, temperatures
greenhouse gases that tend to warm the atmosphere
would continue to increase for several decades, and
ind, in some regions, of aerosols that tend to cool
sea level would continue to rise for centuries.
he atmosphere.
Potential health and environmental
The Earth's climate is changing. The surface
consequences of climate change
emperature this century is as warm or warmer than
ny other century since at least 1400 AD; the
Human-induced regional and global changes in
emperature has increased by 0.3 to 0.6°C (about
temperature, precipitation, soil moisture, and sea
.5 to 1°F) over the last century; the last few
level add important new stresses on ecological and
lecades have been the warmest this century; sea
socio-economic systems that are already affected by
evel has risen 10 to 25 cm (about 4 to 10 inches);
pollution, increasing resource extraction, and non-
nd mountain glaciers have retreated world-wide
sustainable management practices.
Act
his century.
9134
Most systems are sensitive to both the magnitude
Models that account for the observed increases in
and rate of climate change.
he atmospheric concentrations of greenhouse
ases and sulfate aerosols are simulating the recent
The projected changes in climate include potentially
istory of observed changes in surface temperature
disruptive effects that will affect the economy and
nd its vertical distribution with increasing realism.
the quality of life for this and future generations:
363-3732
he balance of evidence suggests that there is a
- Human Health will be adversely affected
iscernible human influence on global climate.
through an increase in the rate of heat-related
mortality and in the potential for the spread of
Vithout specific policies that reduce the growth of
vector-borne diseases such as malaria, dengue,
reenhouse gas emissions, the Earth's average
yellow fever, and encephalitis and non-vector-
urface temperature is projected to increase by
borne diseases such as cholera and
bout 1 to 3.5°C (about 2 to 6.5°F) by 2100, a rate
salmonellosis.
ister than anything observed over the last 10,000
ears.
- Food Security will be threatened in some
regions of the world, especially in the tropics
and subtropics, where many of the world's
poorest people live, even though the effects of
The U.S. Climate Change Action
50 programs and 5,000 partners
Buildings
Forestry Sector
ENERGY STAR Buildings 1-888-782-7937
Reduce Depletion and Accelerate Tree
Non-Industrial Private Forests (202) 2
Rebuild America 1-800-363-3732
Promote Recycling and Pollution Prev
"Cool Communities" Program (202) 586-6501
Paper Industry (202) 205-1565
ENERGY STAR Office Equipment 1-888-782-7937
Industrial Sector
ENERGY STAR Product Labeling 1-888-782-7937
Climate Wise (202) 260-4407 or (202)
Enhanced Appliance Standards (202) 586-7140
Accelerate Source Reduction, Pollutio
Home Energy Rating Systems and Energy Efficient Mortgages
Recycling 1-800-EPA-WISE
(202) 586-9204
NICE3 1-800-363-3732
Upgrade Residential Building Codes and Standards
WasteWise 1-800-EPA-WISE
(202) 586-0517
ENERGY STAR Homes (202) 233-9786
Motor Challenge 1-800-862-2086
Green Lights 1-888-782-7937
Industrial Assessment Centers (202) :
Cost Shared Demonstrations for Emerging Technologies
Reduce Pesticide Use (202) 720-7173
(202) 586-5253
Energy Efficiency and Renewable Energy Information &
Transportation Sector
Training, Customer Service 1-800-363-3732
Federal Parking Cash Out (202) 260-9
Technology Introduction Partnerships (202) 586-5253
Transportation Efficiency Strategy (2
Promote Telecommuting (202) 366-4.
Energy Sector
Develop Fuel Economy Labels for Tir
Climate Challenge (202) 586-2588
Clean Cities (202) 586-1885
Commercialize High-Efficiency Gas Technologies
(301) 903-2832
HFC, PFC, and NOx Emissior
Promote Integrated Resource Planning (202) 586-1491
Create Partnerships to Eliminate HF(
Improve Hydroelectric Generation at Existing Dams
(202) 233-9061
(202) 586-5659
Voluntary Aluminum Industrial Partr
Energy Efficient Electric Transformers (202) 586-8119
Improve Efficiency of Fertilizer Nitro
EPA's Energy Star Transformers (202) 233-9002
Narrow Use of High GWP Chemicals U-
Increase Natural Gas Share of Energy Use through Federal
and Product Stewardship to Reduce Er
Regulatory Reform (202) 586-6690
Promote Seasonal Gas Use for Control of Nitrogen Oxides
Methane Reduction and Rec
(NOx) (202) 260-2784
Natural Gas Star (202) 233-9044
Renewable Energy Commercialization (202) 586-2588
Landfill Rule and Landfill Methane o
Reduce Electric Generation Losses Through Transmission
(202) 233-9631
Pricing Reform, Office of Electricity Policy (202) 586-4871
Coalbed Methane Outreach Program
International, State and Local Programs
RD&D for Methane Recovery from C
U.S. Initiative on Joint Implementation (202) 426-0072
RD&D for Methane Recovery from L:
State and Local Outreach Program (202) 260-4314
AgStar Program (202) 233-9041
U.S. Country Studies Program (202) 426-0072
Ruminant Livestock Methane Progra
The U.S. Climate Change Action Plan-
A menu of innovative public-private partnerships to com
global warming and strengthen the economy.
limate
ange
July
1996
Climate Challenge
Climate Challenge is a joint initiative of
the U.S. Department of Energy (DOE) and
U.S. Electricity Generation by
the U.S. electric utility industry to obtain
Climate Challenge Partners
voluntary commitments by utilities to
undertake actions to reduce, avoid or
sequester greenhouse gas emissions. DOE
provides technical information and
support, and public recognition to utility
participants. The Climate Challenge
Options Workbook, a joint effort of the
60%
utility industry and DOE, describes more
than 50 options that utilities can use to
meet their commitments, ranging from
generating plant efficiency improvements
to forest management projects.
ach utility partner provides DOE with an
E
"Individual Participation Accord" that outlines
greenhouse gas reduction measures that will be
"This voluntary, flexible initiative is the best way to tap
taken. Partners report their greenhouse gas reductions,
the utility industry's technical skills and problem-solving
Climate Challenge actions and achievements to DOE
capabilities, while obviating the need for costly
annually.
command-and-control requirements."
E. Linn Draper, Jr.,
"In the global warming debate, proactive management,
Chairman
willingness to negotiate and leadership through voluntary
American Electric Power
initiatives are our strongest trump cards Through a series
of positive actions, we can become participants in positive
progress instead of negative rule."
"Our Climate Challenge commitment reflects our
Mark DeMichele
continuing interest in cost-effective environmental
President and CEO
progress. It is good business for us to address both local
Arizona Public Service
and global environmental problems that concern our
customers. This program is an example of how, if given
a chance, significant reductions can be achieved on a
voluntary basis."
Eldon Cotton
Assistant General Manager
Los Angeles Department of Water and Power
Current number of Climate Challenge
participants: 581
Climate Change
CLIMATE WISE
CLIMATE WISE is helping U.S. industries turn
Increase efficiency of insulation, passive cooling
energy efficiency and pollution prevention into
and environmental control systems.
a corporate asset. By encouraging comprehen-
Convert all service vehicles to alternative fuels S
sive, cost-effective industrial energy efficiency
natural gas, electric and solar by the year 2005.
and pollution prevention actions, CLIMATE
Eliminate use of toxic chemicals in all operation
WISE is helping companies realize significant
maintenance practices by 2005.
environmental and economic benefits. Partici-
Improve employee transportation services throu
pating companies expect savings in excess of
power vehicles.
$300 million by the year 2000. Companies par-
ticipate by completing a CLIMATE WISE Action
General Motors has committed to:
Plan detailing the actions that they will under-
Launch a supplier outreach program to inform (
take and by reporting the results of their ac-
of the benefits of resource conservation and pol
tions through the Volun-
prevention practices and of the CLIMATE WISE 1
tary Greenhouse Gas
Accelerate a benc
Reporting program.
Climate Wise Partners
project designed 1
the 10 least energ
CLIMATE WISE also pro-
120
facilities, audit the
vides information on
operations, and in
the full range of U.S.
identified actions.
100
CLIMATE CHANGE
Action Plan programs
number of partnerships
Accelerate power
80
evaluation studies
and encourages com-
50 facilities in 19
pany participation in
60
seeking to identif
opportunities for
these programs as part
40
down or converti
of their comprehensive
boilers to cleaner
CLIMATE WISE
20
fuels and for prov
Action Plan.
heat through mor
0
efficient conversi-
Oct. 1994
Oct. 1995
June 1996
Work with the DO
LIMATE WISE targets the
Laboratories to id
C
industrial sector, which accounts for 30 percent of U.S.
additional cost-eff
energy consumption. Companies often face a broad
energy- efficiency
array of emission reduction opportunities such as process and
equipment improvements. optimizing boiler and air compressor
system efficiency, fuel switching, cogeneration, and employee
and vehicle fleet trip reductions.
Fac is and Figures
CLIMATE WISE provides technical assistance and public
CLIMATE WISE Partners to date: 100
recognition to stimulate the development and implementation
U.S. industrial energy use represented by current
of comprehensive emission reduction Action Plans. CLIMATE
WISE partners: more than 6 percent
WISE also hosts regional business-to-business forums to provide
CLIMATE WISE partners opportunities to share best
States with pilot state CLIMATE WISE programs:
management practices, innovative technologies, and assessment
Nebraska, New York, North Carolina, Ohio,
techniques that will strengthen their corporate energy
Pennsylvania and Wisconsin:
efficiency and pollution prevention programs.
Cities/Counties with Pilot Industrial Demonstrat
Programs*: Austin, TX; Berkeley, CA; Dade
FL; Denver, CO; Portland; OR; Pittsburgh, P
Fetzer Vineyards has committed to:
A partnership initiative with the State and Loca
Reduce power demands by 50 percent, even with projected
Program
growth, by the year 2005.
limate
hange
[d]
Green Lights & ENERGY STAR Buildings
Investing in a building's energy
Carbon Emissions Avoided Because of Green Lights
performance can provide rates of return
6000
well above those of most financial
5000
instruments. Green Lights and ENERGY
programs designed to maximize
million pounds CO2
4000
STAR Buildings are voluntary, partnership
3000
2000
1000
investments in energy-saving and cost-
0
effective pollution prevention measures for
1992
commercial buildings. These buildings
month/year
account for 15 percent of all energy
consumption in the United States.
ENERGY STAR Buildings
E
xpanding on the successful
Green Lights
Green Lights program, EPA
T
hrough the Green Lights
works with individual building
BU
Save
program, the U.S. Environmental
owners, developers and others through
Protection Agency (EPA)
Green
its ENERGY STAR Buildings program to
overcomes informational and other
Lights
encourage more comprehensive building upgr
ENERGY STAR program
barriers to energy efficiency
program leads a building owner through a five
investments in commercial building
strategy to capitalize on system interactions th
lighting. Green Lights partners are reducing their
maximize energy savings at minimum cost. G1
energy consumption through cost-effective,
is the first step of this strategy. EPA has succes
energy-efficient technologies. Investments in these
completed the ENERGY STAR Showcase Build
technologies cut electricity consumption in half and
program, in which 24 charter partners demons
provide an average rate of return of 45 percent. EPA
average energy bill savings of 30 percent. The
provides technical support, recognition and
ENERGY STAR Buildings program was launch
environmental motivation to participants who adopt
1995, and by the end of 1996 EPA expects that
these voluntary and profitable energy-efficiency
have more than 400 partners representing one
measures. Because lighting accounts for 35 percent of
square feet of commercial floor space.
total commercial electricity consumption, Green Lights
has a substantial overall impact on energy consumption
"Our savings from the ENERGY STAR prog
and greenhouse gas emissions in the United States.
translate directly into more funds for cr.
Green Lights currently has more than 2,000 participants,
services such as police and community be
including small and large businesses, public schools,
such as longer library hours."
hospitals and government agencies. These partners have
Paul Tseng, Chief of Engineering and
made commitments to upgrade the lighting in more
Environmental Services
than 5 billion square feet of floor space (equivalent to 1
Montgomery County Government
out of every 14 U.S. buildings) and have already
completed upgrades in more than 1 billion square feet
of floor space.
"Green Lights is an excellent example of good
Participants: 2,100
partnership between business and government. By
encouraging and belping businesses to upgrade
Pollution prevented to date: 2,500,000 tons
lighting, EPA has shown that improving the
21,000 tons SO₂, 9,000 tons NOx
environment is sound business."
Partner Energy Bill Savings: $300 million
Net U.S. jobs created, 1995: 6,000
Flavio Rodrigues
Engineering Manager, PepsiCo, Inc.
limate
nange
Jul
1996
ENERGY STAR Product Labeling
The U.S. Environmental Protection
Agency (EPA) and U.S. Department of
Energy (DOE) are using the ENERGY
STAR label to identify products and
services that save energy, save money,
and help the environment. The goal of
the ENERGY STAR labeling programs is to
provide consumers with clear
information they need about energy-
efficient products to improve purchase
decisions.
nder this initiative, each agency oversees
Consumer education is an important part of these
U
program activities for a specific set of products.
labeling activities. A national consumer education
These program activities include partnership
campaign is planned for the fall of 1996, and is designed
relationships with interested equipment manufacturers
to educate consumers about the important link between
and builders who agree to produce efficient products
energy use and the environment. In addition, each
and to display the ENERGY STAR label on models that
agency will reinforce this general message in targeted
meet the ENERGY STAR specifications. For those
outreach activities to promote specific ENERGY STAR-
products that are covered by minimum federal
labeled products.
efficiency standards, the voluntary ENERGY STAR
specifications are designed to exceed the current federal
In order to reach consumers at the time they actually
standards.
are purchasing products, both agencies are working
with retailers who have agreed to promote ENERGY
The ENERGY STAR label was first awarded to energy-
STAR-labeled products to their customers. In addition,
efficient computer equipment in 1993, and efforts have
electric and gas utilities are interested in promoting
since expanded to include: office equipment, heating
ENERGY STAR products to their customers.
and cooling equipment, appliances, lighting, building
envelope technologies, new homes and financing.
Both agencies also are investigating options for special
financing mechanisms that will make the purchase of
ENERGY STAR products more affordable for consumers.
In response to these efforts, Fannie Mae has agreed to
implement a low-interest loan program for equipment
manufacturers and retailers. ENERGY STAR loans and
1996 Benefits include more than $300 million in
mortgages are available from banks and other financiers
energy savings
to assist the purchase of ENERGY STAR equipment and
homes.
Current Participation:
More than 500 manufacturers, offering 13,000
qualifying product models
More than 20 million ENERGY STAR computers
in use
More than 70 home builders, committed to
building 10,000 ENERGY STAR Homes
Climate
hange
ENERGY STAR Product Labeling
The U.S. Environmental Protection
Agency (EPA) and U.S. Department of
Energy (DOE) are using the ENERGY
STAR label to identify products and
services that save energy, save money,
and help the environment. The goal of
the ENERGY STAR labeling programs is to
provide consumers with clear
information they need about energy-
efficient products to improve purchase
decisions.
nder this initiative, each agency oversees
Consumer education is an important par
U
program activities for a specific set of products.
labeling activities. A national consumer
These program activities include partnership
campaign is planned for the fall of 1996,
relationships with interested equipment manufacturers
to educate consumers about the import:
and builders who agree to produce efficient products
energy use and the environment. In add
and to display the ENERGY STAR label on models that
agency will reinforce this general messa
meet the ENERGY STAR specifications. For those
outreach activities to promote specific I
products that are covered by minimum federal
labeled products.
efficiency standards, the voluntary ENERGY STAR
specifications are designed to exceed the current federal
In order to reach consumers at the time
standards.
are purchasing products, both agencies :
with retailers who have agreed to prom
The ENERGY STAR label was first awarded to energy-
STAR-labeled products to their custome)
efficient computer equipment in 1993, and efforts have
electric and gas utilities are interested ir
since expanded to include: office equipment, heating
ENERGY STAR products to their custom
and cooling equipment, appliances, lighting, building
envelope technologies, new homes and financing.
Both agencies also are investigating opti
financing mechanisms that will make th
ENERGY STAR products more affordabl
In response to these efforts, Fannie Mae
implement a low-interest loan program
manufacturers and retailers. ENERGY S
mortgages are available from banks and
1996 Benefits include more than $300 million in
to assist the purchase of ENERGY STAR
energy savings
homes.
Current Participation:
More than 500 manufacturers, offering 13,000
qualifying product models
More than 20 million ENERGY STAR computers
in use
More than 70 home builders, committed to
building 10,000 ENERGY STAR Homes
limat
hange
July
1996
Green Lights & ENERGY STAR Buildings
Investing in a building's energy
Carbon Emissions Avoided Because of Green Lights Upgrades
performance can provide rates of return
6000
well above those of most financial
5000
instruments. Green Lights and ENERGY
4000
STAR Buildings are voluntary, partnership
million pounds CO2
1000
2000
programs designed to maximize
1000
investments in energy-saving and cost-
effective pollution prevention measures for
1994
1995
commercial buildings. These buildings
month/year
account for 15 percent of all energy
consumption in the United States.
ENERGY STAR Buildings
à
xpanding on the successful
Green Lights
E
Green Lights program, EPA
hrough the Green Lights
works with individual building
BUILDINGS
T
SAVING H EARTH SAMNG MONEY
program, the U.S. Environmental
owners, developers and others through
Protection Agency (EPA)
Green
its ENERGY STAR Buildings program to
overcomes informational and other
Lights
encourage more comprehensive building upgrades. This
an ENERGY STAR program
barriers to energy efficiency
program leads a building owner through a five-stage
investments in commercial building
strategy to capitalize on system interactions that
lighting. Green Lights partners are reducing their
maximize energy savings at minimum cost. Green Lights
energy consumption through cost-effective,
is the first step of this strategy. EPA has successfully
energy-efficient technologies. Investments in these
completed the ENERGY STAR Showcase Buildings
technologies cut electricity consumption in half and
program, in which 24 charter partners demonstrated an
provide an average rate of return of 45 percent. EPA
average energy bill savings of 30 percent. The full
provides technical support, recognition and
ENERGY STAR Buildings program was launched in
environmental motivation to participants who adopt
1995, and by the end of 1996 EPA expects that it will
these voluntary and profitable energy-efficiency
have more than 400 partners representing one billion
measures. Because lighting accounts for 35 percent of
square feet of commercial floor space.
total commercial electricity consumption, Green Lights
has a substantial overall impact on energy consumption
"Our savings from the ENERGY STAR program
and greenhouse gas emissions in the United States.
translate directly into more funds for critical
services such as police and community benefits
Green Lights currently has more than 2,000 participants,
such as longer library hours."
including small and large businesses, public schools,
hospitals and government agencies. These partners have
Paul Tseng, Chief of Engineering and
Environmental Services
made commitments to upgrade the lighting in more
Montgomery County Government
than 5 billion square feet of floor space (equivalent to 1
out of every 14 U.S. buildings) and have already
completed upgrades in more than 1 billion square feet
of floor space.
"Green Lights is an excellent example of good
Participants: 2,100
partnership between business and government. By
Pollution prevented to date: 2,500,000 tons CO₂,
encouraging and belping businesses to upgrade
21,000 tons SO₂, 9,000 tons NOx
lighting, EPA has shown that improving the
environment is sound business."
Partner Energy Bill Savings: $300 million
Net U.S. jobs created, 1995: 6,000
Flavio Rodrigues
Engineering Manager, PepsiCo, Inc.
limate
nange
July
1996
Landfill Rule and Landfill Methane Outreach® Program
Landfills are the largest source of
anthropogenic methane emissions in the
United States. Because methane is a fuel,
landfills also represent a tremendous
energy resource. Through the Landfill
Methane Outreach Program (LMOP),
launched in December 1994, the U.S.
EPA
Environmental Protection Agency (EPA) is
encouraging landfill operators across the
United States to capture and use landfill
gas emissions. This voluntary effort
works hand-in-hand with EPA's landfill
LANDFILL METHANE
gas New Source Performance Standards
OUTREACH PROGRAM
(Landfill Rule) to promote cost-effective
reductions in methane emissions.
Because methane is a potent greenhouse
gas, the landfill rule and LMOP combined
will provide major greenhouse gas
reductions.
T
he Landfill Rule, promulgated in March 1996,
Primers outlining key State regulatory and
requires large landfills to capture and combust
incentive information for several States;
landfill gas emissions. By providing reliable
technical and economic information on the
Software to evaluate the most attractive project
opportunities to use landfill gas as a fuel, connecting
options for specific landfills, including estimation
of costs and benefits; and
project partners, creating innovative financing
opportunities and demonstrating the many benefits of
Fact sheets and issue papers providing guidance
landfill gas-to-energy, the LMOP is helping landfills
on critical issues.
affected by the Landfill Rule to achieve the maximum
benefit at the lowest cost.
In addition, the Landfill Methane Outreach Program has
catalyzed development of several new landfill gas-to-
EPA works with state energy and environmental
energy projects.
agencies, utilities and industry to lower the barriers to
landfill gas-to-energy project development. The LMOP
works with its "Allies" to disseminate reliable
information, identify project opportunities and create
momentum for increasing the economically and
environmentally beneficial use of landfill gas.
Facts and Figures
Through the Landfill Methane Outreach Program, a wide
Allies include:
range of technical assistance products has been
16 State agencies
developed and distributed, including the following:
13 utilities
Project development handbook;
58 industry representatives (project
developers, equipment suppliers, financiers,
Profiles of landfills that are good candidates for
landfill gas end users):
energy recovery in 30 States;
Climat
ange
July
1996
Motor Challenge
Motor Challenge is a voluntary
OE's implementation of
partnership program between the U.S.
D
Motor Challenge involves
five program elements:
Department of Energy (DOE) and U.S.
industry to increase the use of energy-
Showcase Demonstrations
efficient electric motor systems. U.S.
prove the cost-
effectiveness of high-
industry spends more than $30 billion
efficiency electric motors
annually on energy for motor systems.
in various industrial
Electric motors and motor-driven
applications. Lockheed-
equipment such as fans, pumps, blowers
Martin's flagship showcase demonstration has
and compressors account for more than
been a success. Adjustable-speed drive units were
installed in the ventilation system in the
70 percent of all electricity consumed by
company's Burlington Vermont plating plant
industrial facilities. By working with
where initial costs of $98,000 will yield savings of
industry, Motor Challenge can help
$68,000 per year in energy costs.
companies identify opportunities for
The Information Clearinghouse serves as a one-
motor-system improvements.
stop shop to provide access to a toll-free hot line
for technical assistance, an electronic bulletin
board, decision tools, training materials, and
information about upcoming conferences.
The Allied Partner Program provides non-
end-users, working with the Motor Challenge
Program to promote energy-efficient motor
systems, with value-added products they can
provide to their customers.
"The Motor Challenge serves as a model for
public and private teamwork to
The Excellence Partner Program provides
accomplish shared goals in the energy
national recognition to end-user organizations
and environmental arenas."
committed to continuous motor system
improvement.
David Buzzelli
VP and Corporate Director Environmental
The Industry Partnerships program provides
Health and Safety and Public Affairs
partners with materials such as instructional
The Dow Chemical Company
"
videos and decision software tools.
By deploying a team to survey their facilities, 3M
Corporation has already identified opportunities to save
$315,000 annually through motor-system upgrades.
Ultimately, 3M expects to save at least $8 million per
year by increasing the efficiency of their motor systems
corporate-wide.
Facts and Figures
Number of Motor Challenge partners: 1,375
Climate
Change
Natural Gas STAR
Through the Natural Gas STAR program,
"Involvement in Natural Ga
the U.S. Environmental Protection Agency
inspires new cost-effective metb
(EPA) encourages natural gas companies
ideas. These ideas translate into
to overcome barriers and adopt cost-
operating costs and help pre.
environment. Natural Gas STAR
effective technologies and practices that
program. We can cost-effective
reduce emissions of methane, a potent
losses of methane to the enviro
greenhouse gas.
increase system efficien
Deanna Haines
he Natural Gas STAR program was
T
Environmental Engineer
launched in March 1993 with transmission and
Southern California Gas Compa
distribution companies. In 1995, the program
was expanded to include the production sector. EPA
provides guidance on cost-effective best management
practices for companies to employ to reduce methane
emissions. In addition, EPA provides partners with
public recognition and
works to remove regulatory
barriers to STAR program
practices. Companies
Facts and Figures
submit an implementation
Transmission Pipeline Miles Covered: 65 percent
plan and annual progress
Distribution Pipeline Miles Covered: 35 percent
reports to EPA after
Production Covered: 25 percent
becoming a program
Annual Methane Savings: 4.3 trillion BTU's
partner.
The American Gas
Association, the National Association of Regulatory
Utility Commissioners, the Natural Gas Supply
Association, and the Southern Gas Association have
endorsed the Natural Gas STAR Program. In addition,
the Gas Research Institute endorsed the Natural Gas
3
STAR Program in April 1994, pledging $4 million of its
annual budget to projects that reduce methane
emissions.;
Millions
2
1
NaturalGas
EPA POLLUTION PREVENTER
More than 35 billion cubic feet of methane C.
industry-wide when this action is fully under
equivalent of removing about 3 million cars 1
Climate
nange
July
1996
NICE³
The National Industrial
Damage Protection Products is
Competitiveness through Energy,
Environment, Economics
NICE3
substituting pallets used for freight
transport (normally produced from 100
Program (NICE³) is a cost-shared
percent virgin wood) with postconsumer
paper waste with varying amounts of
grant program of the U.S.
mixed paper wastes. Every ton of
Department of Energy. The goals
postconsumer waste substituted for virgin
of the program are to catalyze
wood fiber in the paper production
cleaner production and
process would save 50 percent of the
manufacturing processes, reduce
water and 60 percent of the energy used
wastes in industry, conserve energy and
to make the paper.
energy-intensive feedstocks, and improve
Pegasus Technologies has developed a prototype
industrial cost-competitiveness.
neural network system for improving the thermal
efficiency of large, coal-fired utility plants. For less
than $250,000, Pegasus Technologies can install
ICE3 is implemented through a competitive
the NeuSIGHT for Heat Rate Improvement
N
solicitation process leading to grant awards
system to control combustion of nitrogen oxides,
through which federal funds are matched with a
carbon dioxide and sulfur dioxide emissions from
55 percent cost share minimum. Industry applicants
pulverized-coal-fired boilers.
submit project proposals
through a state energy,
Tri Valley Growers
pollution prevention, or
proposes an innovative
business development
"The NICE3 program has acted as a catalyst to
membrane technology
office. NICE3 awardees then
bring together a partnership of state
for black olive
commercialize the process
governments and industry to work together
processing in which all
or technology developed.
toward common beneficial goals. The format of
water, chemicals, and
Already, several of these
NICE3 proposals, in fact, bas also helped
olive pomace are
technologies have been sold
companies to obtain funding from traditional
recycled into the
internationally as well as
sources (the private sector)."
operation or converted
domestically.
into a useful byproduct.
David Jones, California Energy Commission,
A net energy savings of
Select NICE³
Sacramento, California.
14 percent will result,
program partners
with total energy
savings of 21.2 billion
include:
Btu's each year.
Beta Control Systems, Inc. of Beaverton, Oregon,
which plans to develop an on-site hydrochloric
DuPont-Merck Pharmaceutical Company
acid recovery system for galvanizers and small- to
proposed an ultrasonic tank cleaning method that
medium-sized steel manufacturers. The
uses water as a solvent rather than the volatile
technology will avoid acid waste transport and
organic compound methulene chloride, a toxic
disposal costs and
solvent currently used to
the associated long-
clean tanks. Energy
term liability in
Facts and Figures:
savings of 3.5 billion Btu's
addition to saving an
per year are estimated.
estimated 5 billion
Number of NICE3 partners: 120
Btu's each year.
Number of NICE3 projects: 58
Average private sector investment generated by each
$1 of federal funding: $4-5
Climate
hange
July
1996
Rebuild America
Rebuild America is a U.S. Department of
partnership commitments made by theyear 2000 are
Energy (DOE) program that supports the
expected to save $650 million each year 1995 Rebuild
formation of community and regional
America partnerships are expected to leverage
partnerships to design and carry out
non-federal investments in these communities by 70.1
and are creating 3,000 jobs.
commercial and multifamily building
renovation programs. By capturing
Rebuild Colorado Communities, led by the Governor's
existing energy efficiency opportunities,
Office of Energy Conservation, anticipates FY 1995
private-sector and local government investments of
building owners can reduce their
about $175 million as a result of DOE's $20OK award to
operating costs by hundreds of millions
the partnership to renovate 122 million square feet of
of dollars annually. DOE provides Rebuild
commercial space and multifamily housing.
America partnerships with assistance in
program administration, staffing,
development of technical plans, building
audits, and evaluation and training.
ebuild America partnerships design building
R
renovation programs tailored to the needs of
U.S.
the communities they serve. Partners are
Dept of Energy
conducting four activities:
Rebuild America
Design Programs. Partners design specific
activities to expand significantly the reach
and effectiveness of existing programs for
energy retrofits.
Form Teams. Partners obtain commitments from
"U.S. cities should consider
key leaders of local government and industry and
[energy-efficiency] options as they work to
form teams to carry out partnership programs.
solve fiscal challenges. Too often,
community leaders overlook energy
Identify and Leverage Resources. Partners
efficiency as a great opportunity to
identify resources available from private and
save money."
public sources, both federal and non-federal.
Victor Asbe
Implement Retrofits. Partners carry out retrofit
Mayor of Knoxville, Tennessee
programs that achieve significant energy savings.
President of the U.S. Conference of Mayors
Rebuild America is working with more than 40 national
community partnerships to improve commercial and
"At a time when all levels of government are
multi-family building energy efficiency. Rebuild America
being asked to cut back, Rebuild Colorado
will help both state and private builders
turn energy waste into a new source of
capital. By financing project costs through
future energy savings, building owners will
Percentage of U.S. carbon emissions caused by
be able to completely eliminate the high up-
building energy use: 35 percent
front costs often required to save energy."
Expected cost savings in 2000: $650 million/year
Community Partnerships: 46
Linda Smith
Rebuild Colorado Coordinator
limate Change
Renewable Energy Commercialization
Many potential users of renewable energy
Photovoltaics:
technologies are unaware of the state of
DOE and its partner, the Utility PV Group (UPV
development, economic benefits, high
six-year 50 MW photovoltaic project to acceler
levels of reliability and proper integration
commercialization of PV in the United States. 1
of renewables into their overall energy
is working with other partners such as state W
systems. To overcome this barrier, the
groups, utilities, trade associations, consumer a
Department of Energy's renewable energy
and universities in gathering, researching and
cost-effectiveness information with the public.
programs sponsor technical assistance
and/or technology demonstrations that
Biomass:
help users make informed decisions.
The Vermont Biomass Gasifier Project will prov
term demonstration of high efficiency biomass
otential buyers of renewables are encouraged to
gasification/gas turbine systems and will produ
P
work directly with the renewables industry and
megawatts of generating capacity to Burlingtor
Department of Energy to form market-pull
Electric's existing 50 megawatt wood-fired Mci
partnership consortium to advance common goals
Station. A collaborative DOE/USDA solicitation
toward accepted commercialization targets. Buyer-led
"Biomass Power for Rural Development" is aim
groups work directly with
demonstrating into
their respective renewable
Renewables Enter the Competitiveness Range
use of energy crop
energy industry, with DOE
power production.
cost-sharing at appropriate
25
stages, such as hardware
Photovoltaic
Geothermal:
demonstration projects. Two
20
As part of the "Nati
programs, Wind and
Earth Comfort Pro₂
Photovoltaics, support a
15
e/kWh
DOE is helping the
Design Assistance Center at
Biomass
industry meet the
--
National Laboratories. These
10
goals of achieving
centers provide technical
Geothermal Heat F
Wind
assistance to local
5
market
sales of 55,000 to
governments, other federal
annually. DOE is p
agencies, electric utilities,
0
collaborative techr
private companies and
1990
1995
2000
2005
2010
2015
2020
assistance by spon
occasionally other countries.
national teleconfer
Assistance may include supporting feasibility analyses,
series and by partnering with International Gr
structuring Request for Proposals and assisting in
Source Heat Pump Association Experts.
development of selection criteria.
Examples of CCAP Renewable Energy
Commercialization technical assistance and
demonstrations include:
Wind:
To assist with the construction of wind turbine power
plants in Wyoming and Iowa, DOE will provide technical
assistance through the National Renewable Energy
Laboratory. Project planning advice and performance
Number of partners: 125
reports will be provided for the next five years.
Climate Change
The State and Local Climate Change Outreach I
The State and Local Climate Change
Outreach Program is a capacity-building
program that targets the public sector
and, indirectly, the public. State and local
governments are targeted because they
have regulatory authority over many
direct and indirect sources of greenhouse
gas (GHG) emissions. For example, local
governments define land-use, zoning and
transportation policy, operate landfills,
monitor air quality, pass and enforce
building codes, define procurement
policies and regulate parking. The
Outreach Program staff assists States and
localities in analyzing options and
Hawaii
determining regional impacts
(environmental and economic) of
mitigation policies.
Albuquerque, NM; Atlanta, GA; Austin, TX; Berl
CO; Broward County, FL; Burien, WA; Burlingto
he Outreach Program provides outreach
Chittenden County, VT; Chula Vista, CA; Dade C
T
assistance that includes offering training
CO; Durham, NC; Little Rock, AK; Los Angeles, (
MN; Missoula, MT; Mount Rainier, MD; Oaklan
workshops and reference manuals, preparing
WA; Orange County, FL; Overland Park, FL; Pitt
greenhouse gas emissions reports, developing
Portland, OR; Saint Paul, MN; San Francisco, CA
comprehensive GHG reduction plans, testing innovative
Santa Fe, NM; Santa Monica, CA; Sunnyvale, CA
policies, disseminating results, providing education and
Tucson, AZ; West Hollywood, CA
outreach materials, and examining regional impacts of
mitigation policies. The Outreach Program serves as a
Among the strategies identified in the st:
catalyst for enabling public sector decision-makers to
plans are: emission cap and trade, energy
understand the risks associated with global warming
mortgages, revised building codes, incen
and to provide leadership in reducing greenhouse gas
efficient vehicle purchase, afforestation
emissions to constituency groups.
programs.
At the local level, the Outreach Program
partnership with the International Cour
Environmental Initiatives (ICLEI) to assis
counties. ICLEI operates two programs.
Eacts and Figures
program and the Cities for Climate Pro
States working on greenhouse gas emissions
Campaign. Green Fleets focuses on trai
inventories: 29 (including Puerto Rico)
energy use and the development of inte
States developing mitigation plans: 14
to reduce local demand for travel. The (
States that have completed or are completing
Climate Protection Campaign engages
innovative GHG reduction demonstration
climate change abatement policy. The C
projects: 12
strengthens local commitments to redu-
Cities in the U.S. participating in the Cities for
emissions, develops and disseminates to
Climate Protection Campaign: 34
local capacity, and encourages energy e
practices.
limate
hange
July
1996
U.S. Country Studies Program
The U.S. Country Studies Program (CSP)
Participating Countries
provides financial and technical support
for climate change studies to 55 develop-
ing countries and countries with econo-
mies in transition. These studies include
greenhouse gas emission inventories,
vulnerability and adaptation assessments,
and analyses of mitigation options.
t COP-1 the United States launched a next phase
A
of the Country Studies Program to provide
support for national action plans (SNAP) that
delineate specific response measures (including
technology projects) that countries will implement and
to lay the foundation for the preparation of national
Disseminated the study results (representing one
communications as called for under the Climate
of the most comprehensive international
Convention. The CSP initiated assistance for plan
assessments to date) in more than 20 major
preparation with 9 countries in 1995 and will assist 5 to
synthesis reports and workshop proceedings in
10 additional countries in 1996.
collaboration with the U.S. Global Change
Research Program (USGCRP), the
Accomplishments of the U.S. Country Studies Program
Intergovernmental Panel on Climate Change
include the following:
(IPCC) and others.
Built human, technical and institutional capacity
Created a technical assistance program that is
in 55 developing and transition countries to
often cited as a model of effective cooperation
conduct climate change assessments through
between OECD and developing and transition
training, analytical tools and reference materials
countries and helped guide the design of GEF
provided to more than 1,000 country analysts.
support for enabling activities.
Catalyzed the establishment and strengthening of
The 9 countries currently receiving CSP support
intergovernmental climate change committees in
for the preparation of their plans have already
the 55 countries and helped these countries
identified specific mitigation and adaptation
identify opportunities to implement climate
measures (including technology projects) they
change responses that will contribute to their
wish to implement. Where appropriate, the
sustainable development objectives.
CSP and the U.S.Agency for International
Development are assisting countries with the
development of these measures and their
integration with other sustainable development
plans and programs.
More than 30 additional countries have
Number of participating countries: 55
expressed interest in preparing climate change
Number of countries currently participating in
action plans that will provide the basis for their
the SNAP program: 9
national communications.
limate
hange
July
1996
USIJI
The U.S. Initiative on Joint
gas capture; and sustainable forest management and
Implementation (USIJI) is a pilot program
preservation.
encouraging organizations in the United
When fully implemented, investments from the 15
States to implement projects
approved USIJI projects are estimated to exceed $200
internationally that reduce, avoid or
million.
sequester greenhouse gases. Since its
To further reduce the transaction costs for participating
launch in 1993 as part of the U.S. Climate
in USIJI, the Secretariat is establishing a Technical
Change Action Plan, USIJI has become the
Assistance Program to assist approved and in-
development project partners in calculating emissions
largest effort worldwide to explore
estimates, developing monitoring and verification plans,
options for countries to jointly reduce
and identifying sources of project financing.
greenhouse
Countries with Approved USIJI Projects
To streamline the
gases.
application and
CZECH REPUBLIC
RUSSIAN FEDERATION
review process, the
T
he goals of
USIJI has adopted a
the USIJI
rolling approval
program are to:
process under which
promote technology
proposals may be
submitted to the
cooperation with and
sustainable
USIJI Secretariat at
development in
any time and will be
developing and
BELIZE
evaluated within 90
transition countries;
HONDURAS
days once the
test and evaluate
NICARAGUA
proposal is
COSTA RICA
determined to be
methods to measure,
track and verify
complete.
emissions reductions
The USIJI Secretariat
costs and benefits;
has established and maintains an extensive Information
encourage private sector investment and innovation in
Resource Center that includes: a library of books,
developing and disseminating technologies to reduce or
publications and reports on international JI activities;
sequester GHG emissions; and establish an empirical
manuals, handbooks and other USIJI technical guidance
base for the formulation of international criteria for joint
documents; databases of existing and developing JI
implementation.
projects; and information on project financing.
USIJI Program Accomplishments:
The USIJI Secretariat is expanding its public recognition
The USIJI Secretariat has received 51 project proposals
program to recognize more fully the achievements of
from 23 countries. Of these, the USIJI Evaluation Panel
USIJI project partners and host countries and to help
has approved 15 projects in six countries, including
partners increase the visibility of their participation in
Belize, Costa Rica, the Czech Republic, Honduras,
the program.
Nicaragua and the Russian Federation. Each proposal
has gone through an extensive technical review process
conducted by USIJI Secretariat staff and other technical
experts.
USIJI projects include a wide variety of technologies and
Facts and Figures
practices, including: wind, geothermal, hydroelectric and
Number of project proposals received: 51
solar energy; coal to natural gas fuel switching; methane
Number of approved projects: 15
limate Change July 1996
Voluntary Aluminum Industrial Partnership
The Voluntary Aluminum Industrial
Partnership (VAIP) encourages primary
aluminum producers to reduce emissions
EPA
of potent greenhouse gases through
cost-effective management and
YOUNTARY
technology changes.
T
he U.S. Environmental Protection Agency (EPA) is
INDUSTRIAL PARTNERSHIP
partnering with primary aluminum producers to
achieve reductions in emissions of carbon
tetrafluoride (CF₄) and carbon hexafluoride (C₂F₆),
The program has made great progress in further
which are emitted as byproducts of the primary
understanding the emissions of CF, and C2F₆ from U.S.
aluminum production process. These potent
smelters. The program already has developed CF₁ and
greenhouse gases have global warming potentials of
C₂F₆ gas standards (through the National Institute of
approximately 6,000 and 12,000 times that of CO2,
Standards and Technology) and initiated fundamental
respectively, and lifetimes that exceed 10,000 years.
research on the causes of these emissions (through the
Because factors that cause these emissions are a sign of
Massachusetts Institute of Technology).
efficiency loss, focus by industry to reduce emissions
will result in process enhancements. EPA estimates that
EPA also has conducted measurements of CF₄ and C2F₆ at
emissions of CF₄ and C₂F₆ can be reduced 45 percent
7 smelters in conjunction with primary aluminum
industry-wide.
companies. The results of these and other
measurements will help companies better understand
The program has been embraced by the U.S. primary
and predict their emissions, as well as identify the
aluminum industry: 12 companies representing 94
critical actions needed to reduce emissions.
percent of U.S. primary production capacity have joined
in partnership with EPA.
VAIP Partners Represent 94% of U.S.
VAIP partners include 12 primary aluminum
production companies, which operate 22
Primary Aluminum Production Capacity
primary aluminum smelters.
The Voluntary Aluminum Industrial
Partnership is "an innovative voluntary
environmental improvement program that
also provides cost reduction benefits for the
94%
primary aluminum industry."
Alumax, Inc.
Climate
nange
July
1996
WasteWi$e
WasteWise is a voluntary program
WasteWi$e partners also
developed by the U.S. Environmental
reported expanding or
WASTE
Protection Agency to assist businesses in
improving ongoing company
recycling programs by
taking cost-effective actions to reduce
educating employees,
solid waste. WasteWise partners make
performing community
voluntary commitments to achievements
outreach and collecting new
WISE
in waste prevention, recycling collection
materials. The materials
and the purchase or manufacture of
recycled in the highest
amounts were corrugated
recycled products.
containers and boxes, ferrous
materials, and aluminum and
other non-ferrous metals.
T
he principal waste prevention activity
undertaken by WasteWise partners in 1994 was
Production and consumption
reducing or reusing transport packaging. In
of these materials generate
1994, nearly 140,000 tons of material was conserved
substantial greenhouse gas
through reductions in transport packaging, and for some
emissions. By reducing, reusing and recycling,
companies, this translated into substantial cost savings.
WasteWi$e partners are helping to reduce emissions of
For example, Target Stores, a retail chain of 600 stores,
greenhouse gases.
saved $4.5 million in annual operating costs by
switching to packaging for clothing that requires much
less time to unpack and prepare for display.
"What started out as a nice thing for the
environment ended up saving an impressive
amount of money."
Jim Oberndorfer, Manager Facilities Operations
Perkin-Elmer Corporation
"The WasteWiSe program has the most
comprebensive information on waste
prevention for businesses."
Nancy Hirsbberg, Environmental Coordinator
Stonyfield Farm Yogurt
Facts and Figures
Current number of WasteWiSe Partners: 440
Current number of WasteWi$e membership-based
endorsers: 40
Amount reduced and recycled in 1995: 1.8 million
tons
Clints
DRAFT
7/19
Mr. John F. Smith
Chairman, CEO and President
General Motors Corporation
Dear Mr. Smith:
I appreciate hearing your views and those from other
business leaders in your July 8th letter concerning the
negotiations on possible further international actions to limit
global climate chnage.
This is an issue I believe we have a fundamental
responsibility to address. The scientific community has given us
a clear warning. According to its most recent assessment, if
uncontrolled, future emissions of greenhouse gases will lead to
unprecedented changes in global climate with potentially far
reaching adverse impacts for human health and the environment.
This is simply not an experiment that, in good conscience, we can
allow to unfold with the hope that the advice from our best
scientists proves to be wrong.
At the recent Conference of the Parties of the Climate
Convention, we announced a position that addresses many of your
concerns. First, we stated our support for a new framework for
the negotiations. We rejected the existing proposals on the
table, as you suggested in your letter, and instead called for an
agreement that was based on "realistic, verifiable and binding"
targets. We also supported the use of market-based mechanisms
including trading among nations to achieve cost-effective
reductions. At the same time we rejected the use "one-size-fits-
all" harmonized policies and measures and clearly stated that,
while developed countries must lead this effort, developing
countries must step up and shoulder a share of the responsibility
for reducing emissions.
We were able to put forward this framework based on
extensive analysis and assessment that has been on-going during
the past year. However, because we share your concern that more
work needs to be done on the economic impacts of any specific
proposal, we did not put propose a specific target or timetable.
Once that work is completed and we are in a position to offer a
more detailed proposal, I can assure that we will not take any
actions that jeopardize United States competitiveness or
continued economic prosperity.
Finally, you state your support for accelerated research and
development on alternative technologies and on climate change
causes and effects. I could not agree more that research in
these areas is critical to our national interest. Unfortunately,
the Congress has targeted exactly these areas for substantial
reductions. In Fiscal Year 1996, they reduced my proposed levels
of funding in each of the following areas: global change research
cut by
i money saving voluntary actions under the Climate
Change Action Plan cut by almost 50 percent; the Global
Environmental Facility which encourages actions by developing
countries cut by
; and Partnership for the Generation Vehicle
cut by
.
Ultimately, it will be the creativity of businesses
such as your own that develops and implements the solutions that
reduce greenhouse gases emissions. We need and want your support
in this effort and look forward to working with you in addressing
this critical environmental issue in a manner that assures
continued economic prosperity.
Sincerely,
Attachment: Climate Change Information Packet
JUL
8 1996
July 8, 1996
The President
The White House
1600 Pennsylvania Avenue, N.W.
Washington, DC 20500
Dear Mr. President:
U.S. State Department officials have announced that they will begin UN-sponsored negotiations on
post-2000 climate change commitments this month. It is critical that an analysis and assessment of
the impacts of any such commitments on the U.S. economy be completed before these negotiations
proceed.
We are deeply concerned that such negotiations may lead to premature agreements that will
severely disadvantage the U.S. economy and U.S. competitiveness simply to meet an arbitrary
deadline.
While there is reason for concern about global climate change, the models that are relied upon to
make climate change projections are evolving and there remains great uncertainty about the extent,
Climits
timing and effects. Each time the models have been improved, the estimates of the potential
medals
environmental impact have been significantly scaled back.
The U.S. must take care to avoid commitments that will cost U.S. jobs, retard economic growth or
damage U.S. competitiveness. Moreover, given the long-term nature of the issue, there is time to
determine optimum strategies -- that are economically sound, comprehensive, market-based and
can be adjusted over time as new data and technologies become available. For example, a policy
of accelerated research and development efforts leading to breakthrough technologies may achieve
Ressed
the same or better results with less cost and economic disruption than near-term strategies aimed at
incremental reductions in greenhouse gas emissions.
The U.S. should not accept other nations' agendas. This is a global issue that needs to be
addressed on a global basis. Agreements cannot exempt developing nations, which are expected
JI
to be the major contributors to greenhouse gases in the 21st Century. Policies, instead, should
encourage activities in developing nations to help them limit future greenhouse gas emissions. At
the same time, care must be taken to avoid a one-size-fits-all strategy or acceptance of unilateral
obligations. The U.S. has the most to lose and will pay the highest cost for many of the proposals
currently on the negotiating table.
We urge you to ensure that the U.S. negotiating team recognizes that the unique needs of the U.S.
economy are of the utmost priority and to adopt a negotiating position that protects U.S. interests.
The U.S. should support accelerated research on climate change causes and effects. The U.S.
should demand time for a thorough study of all proposals with respect to their cost effectiveness and
economic, social and international competitiveness impacts. The U.S. should not agree to any of
the three proposed protocols presently on the negotiating table.
Your leadership on this issue is critical to assuring a continuing strong U.S. economy.
Sincerely,
Juch Smith
HL Full Have Baswit
John F. Smith, Jr.
H.L. Fuller
Curtis H. Barnette
Chairman, CEO & President
CEO & Chairman
Chairman & CEO
General Motors Corporation
Amoco Corporation
Bethlehem Steel Corporation
Mike Bawk
my Wimm
Michael R. Bowlin
Peter Hellman
Alex Trotman
Chairman and CEO
President and Chief Operating Officer
Chairman, President & CEO
ARCO Corporation
TRW, Inc.
Ford Motor Company
Drew Jeni
Fred Twelly JohnsF. Fillen
Drew Lewis
Fred Tucker
John F. Fiedler
President & CEO
Executive V.P. and General Manager
Chairman &CEO
Union Pacific
Motorola, Inc.
Borg-Warner Automotive, Inc.
harry Bossidy
W.R. Timben Jr.
Lawrence A. Bossidy
W.R. Timken, Jr.
Donald V. Fites
Chief Executive Officer
Chairman
Chairman and CEO
AlliedSignal
The Timken Company
Caterpillar Inc.
Don H Davis
Juny 5, Dempsey
Don H. Davis
Jerry E. Dempsey
Frank Shrontz
President and Chief Operating Officer
Chairman and CEO
Chairman of the Board
Rockwell International Corporation
PPG Industries, Inc.
The Boeing Company
BobJaton Roberz J. Eaton
Trairs Enger
Mercoll
Travis Engen
Southwood J. Morcott
Chairman & CEO
Chairman, President & CEO
Chairman & CEO
Chrysler Corporation
ITT Industries
Dana Corporation
Barry R. Barry Uber When
Rather
Richard A. Snell
David Whitwam
Vice President
President & CEO
Chairman and CEO
Ingersoll Rand
Tenneco Automotive
Whirlpool Corporation
LeeRRayund
Ken Way RR Iram Dr. Ray Irani
Lee R. Raymond
Kenneth L. Way
Chief Executive Officer
Chairman & CEO
Chairman, President & CEO
Exxon Corporation
Lear Corporation
Occidental Petroleum Corp.
James F. Hardymon H Leighton Sternal
James F. Hardymon
H. Leighton Steward
Robert J. Allison, Jr.
Chairman & CEO
CEO & Chairman of the Board
President, Chairman & CEO
Textron, Inc.
Louisiana Land & Exploration Co.
Anadarko Petroleum Corporation
Janly
Dand N Hong DD man
Stanley C. Gault
David H. Hoag
J.J. Mulva
Chairman
Chairman & Chief Executive Officer
President
Goodyear Tire & Rubber Company
LTV Corporation
Phillips Petroleum Company
Hans a Becter
GBeghini Victor G. Beghini
Hans W. Becherer
Barry J. Galt
Chief Executive Officer
President
Chairman & CEO
Deere and Co.
Marathon Oil Company
Seagull Energy Corporation
Ray
Canoll
Ray L. Hunt
Lee M. Gardner
Philip J. Carroll
Chairman & CEO
President & Chief Operating Officer
President & CEO
Hunt Oil Company
Mascotech, Inc.
Shell Oil Company
I James H H. Keyes Kayes
Jucio ansto Lucio A. Noto
J.E.Clecusin James E. Declusin
President & CEO
President, Chairman & CEO
Chief Operating Officer
Johnson Controls, Inc.
Mobil Corporation
California Steel Industries
Rible
you John R. Hall
Clabome ? Deming Ken Den
Claiborne Deming
Ken Derr
Chairman of the Board & CEO
President & CEO
Chairman & CEO
Ashland, Inc.
Murphy Oil Corporation
Chevron
Ron w Ha dod ThomasE Retry
Ron W. Haddock
Keith Bailey
Thomas E. Petry
President & CEO
Chairman, President & CEO
Chairman & CEO
FINA
Williams Companies
Eagle-Picher Industries, Inc.
Here Frank D. M.Durson
Heinz Prechter
Frank A. McPherson
Fred C. Schulte
Chairman
Chairman & CEO
Chairman, CEO, and President
ASC, Inc.
Kerr-McGee Corporation
Elgin National Industries, Inc.
Robert Calphs. anningham C.E. Bryant to
Robert H. Campbell
Ralph Cunningham
C.E. Bryant, Jr.
Chairman, President & CEO
President & CEO
Chief Executive Officer
Sun Company, Inc.
Citgo Petroleum
Continental Conveyor & Equipment Co.
Pater Bigin
John any
Ma Brun
Peter 1. Bijur
John D. Ong
M. Anthony Burns
Chief Executive Officer
Chairman and CEO
Chairman, President and CEO
Texaco, Inc.
BF Goodrich Company
Ryder Systems, Inc.
R.C. Beads John WSm
B.E. Douglas
Roger C. Beach
John W. Snow
President
Chairman and CEO
Chairman, President and CEO
Truax-Harris Energy
Unocal Corporation
CSX Corporation
Rush Jan. James W. Boyd Boyd
Shund H. Sunth n
Thomas J. Usher
Sherwood H. Smith, Jr.
Chairman & CEO
President
Chairman and CEO
USX Corporation
John T. Boyd Company
Carolina Power and Light Co.
L.O.Ward
Britchfuld
L.O. Ward
Jack B. Critchfield
Jerry R. Davis
President
Chairman and CEO
President and CEO
Ward Petroleum Corporation
Florida Progress Corporation
Southern Pacific Rail Corporation
Bobby E coopee Thoma Fallure
M. Fromas Moore
B.E. Cooper
Thomas V. Falkie
M. Thomas Moore
Chief Executive Officer
President
Chairman and CEO
Kennecott Corporation
Berwind Natural Resources
Cleveland-Cliffs Inc.
Corporation
J.Fanell
S.D. pennett
Robert M. Smith
Joseph C. Farrell
Stephen D. Bennett
Chief Executive Officer
Chairman, President & CEO
President and CEO
Barrick Gold Corporation
The Pittston Company
Acme Metals Incorporated
Cellis P. Chandler in
Black R.D.Krebs
Collis P. Chandler, Jr.
B.R. Brown
Chief Executive
Chief Executive
President and CEO
The Chandler Company
Consol, Inc.
Burlington Northern Santa Fe Corporation
D David R. Goode
DR. a
Edwin A. Lupberger
John C. Grisham
Chairman and President
Chairman, President & CEO
Chief Executive Officer
Entergy Corporation
Norfolk Southern Corporation
Buckeye Industrial Mining Co.
Peter J.Green.
T.Lellin
andrew aloe
Peter J. Green
Paul M. Tellier
Andrew Aloe
Vice President, Technology
President and CEO
Chairman and CEO
SMC Electrical Products, Inc.
Canadian National
Shenango Inc.
R Gam Daway
Pshifle
R. Gene Dewey
J.L. Jackson
J.D. Lefler
Chief Executive Officer
Chairman and CEO
President and CEO
Molycorp, Inc.
Global Industrial Technologies, Inc.
Gulf States Steel, Inc.
AL X. Engelhard
Peter J.Cinesn.
Robert J. Darnall
Irl F. Engelhardt
R. Thomas Green, Jr.
Chairman, President & CEO
Chief Executive Officer
President, Chairman & CEO
Inland Steel Industries, Inc.
Peabody Holding Company, Inc.
Oglebay Norton Company
Chenles 7. Knight
James Q Hunduson
Carl W. Amire
Charles F. Knight
James A. Henderson
Carl W. Smith
Chairman, President & CEO
Chairman & CEO
Chairman & CEO
Emerson Electric Co.
Cummins Engine Company, Inc.
AMVEST Corp.
Leonard Hadley
Thomas Garger
Gay
Leonard A. Hadley
Thomas Garges
Garry N. Drummond
Chairman & CEO
President & CEO
President & CEO
Maytag Corporation
Rochester & Pittsburgh Coal Co.
Drummond Company, Inc.
Wam.
Mrtho Brow
William Carr
Arthur Brown
G.R. Spindler
President & Chief Operating Officer
President & CEO
President & CEO
Jim Walter Resources, Inc.
Hecla Mining Company
Cyprus Amax
Dirk Chiney
Bruce R. Clark
T.2: Supple
Dick Cheney
Bruce R. Clark
T.L. Guzzle
Chairman, President & CEO
President
Chairman & CEO
Halliburton Company
Lake Shore Mining Equipment, Inc.
Teco Energy, Inc.
Represent Regulty
Harry M. Conger
Roger R. Regelbrugge
Chairman & CEO
Chairman & CEO
Homestake Mining Company
GS Industries, Inc.
CC:
Honorable Albert Gore, Jr.,
Vice President of the United States
Honorable Warren Christopher,
Secretary of State
Honorable Mickey Kantor,
Secretary of Commerce
Honorable Hazel O'Leary,
Secretary of Energy
Honorable Carol Browner,
Administrator, Environmental
Protection Agency
Honorable Laura D'Andrea Tyson,
Chair, National Economic Council
U.S. Senate
U.S. House of Representatives
Ralph RE.bifield Fifield
J. chodes
James T. Rhodes
Martin D. Walker
President
President and CEO
Chairman and Chief Executive Officer
USS/Kobe Steel Co.
Virginia Power
M.A. Hanna Company
Edward R. Caine
Rechard G. Holder
William C. Payment
Edward R. Caine
Richard G. Holder
William C. Payne
President and CEO
Chief Executive Officer
CEO and Chairman
WCI Steel
Reynolds Metals Company
Ashland Coal, Inc.
AwDm
A.W. Dahlberg
Michael T. Poskarich
Larry D. Haab
Chairman and CEO
President
Chairman, President & CEO
The Southern Company
Cravat Coal Co.
Illinois Power
D.D David A. Arledge 6.6mg
DGT David J. Tarasevich
W.Huund
W.R. Holland
President and CEO
President and CEO
President and CEO
The Coastal Corporation
Tuscaloosa Steel Corporation
Ohio Edison Company
Harreson
Steven Steven F. Leer 7. Leer Robert Robert G. Spencer
John
Nils
Hanson
Chairman and CEO
Chief Executive Officer
President & CEO
Harnischfeger Industries, Inc.
Arch Mineral Corporation
Hepburnia Coal Company
Fab Hamiton
amain
Frederic C. Hamilton
Edward Watson
Alan J. Noia
Chairman, President & CEO
Vice Chairman
President & Chief Executive Officer
The Hamilton Companies
Texas Utilities Electric Comapny
Allegheny Power System, Inc.
E.R. Agery
Rundled
Paul E. Glaske
E. Linn Draper, Jr.
T.F. Gundlach
Chief Executive Officer
Chief Executive Officer
Chairman & CEO
Blue Bird Corporation
American Electric Power
T.J. Gundlach Machine Company
Joe
Allcia steve Propose Q/A the following RAY
for
EXECUTIVE OFFICE OF THE PRESIDE
/
15-Jul-1996 02:58pm
TO:
Raymond Prince
FROM:
Stephen R. Seidel
Council on Environmental Quality
SUBJECT: Draft Questions on Key assumptions
Q: What if key assumptions (e.g., energy prices, economic
growth) underlying the setting of a target prove wrong making it
much harder and more costly to meet? Shouldn't we condition
meeting any binding target on the validity of these key
assumptions over time?
A: The United States has cautioned that any target should be
realistic, based on a clear view of what can be achieved.
Furthermore, we have urged in our proposed framework, that
flexible, cost-effective approaches be fully utilized including
such possibilities as joint implementation, verifiable banking
and trading, and targets defined as rolling multi-year averages.
Combining realistic targets with flexible implementation should
provide adequate safeguards against unintended impacts of meeting
a binding target.
CiFrancite
(climate change)
7/17/96
Q: The U.S. has recommended a binding, medium-term emissions target which it promises will be
realistic and achievable. But what guarantee do American industry and workers have that the U.S. will
not have to adopt measures to meet target deadlines that will severely impact profits and employment
in certain industries if the Administration's assumptions about growth rates, energy efficiency,
technology and other variables prove incorrect?
A': The United States is committed to providing adequate safeguards against unintended impacts of
meeting our targets. To this end, targets must be realistic and consistent with our environmental and
economic goals. Also, the U.S. will continue to urge reliance on programs such as verifiable trading
with banking and off-sets for joint implementation to provide the flexibility needed to deal with
unforeseen events.
07/16/96 TUE 14:35 FAX 202 456 0753
CEQ
001
July 16, 1996
Smith cha) Primi
MEMORANDUM
SUBJECT:
Background Materials on U.S. Policy at Climate
FROM:
Steve Change Seidel, Negotiations Special Coordinator for Meadel
Climate Change, CEQ
TO:
Joseph Stiglitz/Alicia Munnell, CEA
Jack Gibbons/Rosina Bierbaum, OSTP
T.J. Glauthier/Bob Tucillo, OMB
Laura Tyson/Elgie Holstein, NEC
Jennifer Havercamp, USTR
Leon Fuerth/Pete Jordan, OVP
David Sandalow, NSC/CEQ
Charlie Rawls, USDA
Marc Chupka/Dirk Forrister, DOE
David Gardner/Mary Nichols, EPA
Ev Ehrlich/Jeffrey Hunker, Commerce
Rafe Pomerance, State
Josh Gottbaum, Treasury
Frank Krusei, DOT
Lois Schiffer, Justice
Brooke Yeager, Interior
Attached are Undersecretary Wirth's Ministerial Statement
and related background material for your information. The
statement is embargoed until after it is delivered this Wednesday
morning, July 17 at about 11 am in Geneva. Press inquiries can
be directed to Nick Burns at State Dept.
07/16/96
TUE
14:36
FAX
202
456
0753
07/16/96
11:50
202 647 0753
TALKING POINTS
STATEMENT TO INDUSTRY/NGOs ON U.S. INTERVENTION
AT CLIMATE CHANGE NEGOTIATIONS
This morning, the United States will make a significant statement
outlining future directions for the climate change negotiations that
will take place over the next 18 months.
Under the 1992 Framework Convention on Climate Change (signed by the
Bush Administration) the major industrialized nations agreed to a
non-binding greenhouse gas emissions reduction target. Today, at the
Second Conference of the Parties to the Convention, the U.S. will
propose that negotiations for post-2000 emissions reductions focused
on realistic, binding commitments that will produce real
environmental benefits.
Arriving at the decision to propose this kind of framework - and
deciding upon specific targets in the future -- is the result of
extensive on-going analysis and assessment by the Clinton
Administration. In response to last Spring's agreed Berlin Mandate,
the Administration has embarked on an ambitious analytic review and
outreach effort.
These efforts have included extensive analysis by the major technical
agencies and experts -- including the Department of Energy, EPA,
Commerce, CEA and others. We also have held a major workshop on
analysis and assessment, which included presentations from more than
50 experts from inside and outside of government about technical
issues associated with our emissions trends and capability to reduce
emissions in the next century. Complementing these efforts have been
a series of roundtable discussions that Assistant Secretary Eileen
Claussen has hosted with industry, NGOs and other experts.
Internationally, analysis and assessment that has been undertaken by
the Organization for Economic Cooperation and Development (OECD)
Ongoing efforts have also been underway in other institutions, such
as the IEA.
Together with the on-going international scientific process, our
analytical efforts have led us to today's decision to call for a new
direction in the structure of emissions reduction targets under the
Convention. Let me touch briefly on our rationale behind our
decision.
The first and foremost reason for launching this new direction is the
science. The recently issued second assessment report of the
Intergovernmental Panel on Climate Change has reinforced the strong
concerns already established by the international scientific
community about likelihood and implications of climate change, as
well as the role of human activities in influencing such changes.
Second, the existing framework of non-binding targets has failed.
Most developed nations, including the US will not achieve the goal
07/16/96 TUE 14:36 FAX 202 456 0753
CEQ
003
07/18/96
11:50
5202 647 0753
003
set Ior the year 2000. If we want to be serious about reducing
emissions in the future, we have to face up to the fact that the
current structure has been largely unsuccessful and that we need to
adopt a new course.
Third, non-binding goals lead to uneven results. Countries treat
non-binding goals with varying degrees of effort, seriousness and
success. Clear, realistic and agreed objectives are needed to ensure
that all nations will honor their commitments to reduce emissions.
This is important for environmental and competitiveness reasons.
In view of these points, we are calling for a shift in the Climate
Convention's framework -- from one based on rhetorical, non-binding
goals, to one based on realistic, binding commitments that produce
real environmental benefits. We believe decisions about the most
appropriate measures required to meet the agreed targets should be
left to individual governments. We are calling for the maximum use
of cost-effective and flexible policies (including emissions trading
among nations) to achieve the greatest reductions at the lowest cost;
while opposing rigid, binding policies and measures.
We are convinced that the target must be both realistic and binding
because it is only through the surety of a commitment of this nature
that governments will take their obligations seriously and the only
way we can be assured of progress.
We are also convinced that it. is the target that should be binding,
not the individual measures, thus allowing maximum flexibility in
implementation. Continued use of non-binding targets that are not
met makes a mockery of the treaty process. It leaves the impression
that rhetoric is what counts rather than real emission reductions --
an outcome that is both unacceptable and counterproductive.
We have not yet proposed a specific target and timetable, but intend
to do so following the completion of on-going analysis and
assessment. It is important to note, however, that our analysis has
determined that some of the proposals containing targets and
timetables that have been tabled to date (e.g. the AOSIS protocol)
are unrealistic and unsupportable. Furthermore, we are not wedded to
the current target and timetable structure. A target must set a
clear and binding commitment, but it could be defined in a number of
ways (for example, as a multi-year rolling average).
Finally, let me take this opportunity announce that in order to
coordinate the intensive effort that we anticipate in the weeks and
months ahead, we are pleased that the Undersecretary of Commerce for
Economic Affairs, Dr. Everett Ehrlich, has agreed to chair the
interagency analytic effort. U/S Ehrlich brings extensive public and
private sector experience to this task and we are fortunate to have
him.
07/16/96 TUE 14:37 FAX 202 456 0753
CEQ
004
PRESS GUIDANCE
July 17, 1996
Geneva Climate Change Negotiations
Q: what are the new elements of United States climate change policy announced
in Geneva today by Undersecretary Wirth?
A: -- UNDER THE 1992 FRAMEWORK CONVENTION ON CLIMATE CHANGE, SIGNED BY THE
BUSH ADMINISTRATION, THE MAJOR INDUSTRIALIZED COUNTRIES AGREED TO A
NON-BINDING GREENHOUSE GAS EMISSION REDUCTION TARGET. TODAY, AT THE
SECOND CONFERENCE OF THE PARTIES TO THE CONVENTION, THE UNITED STATES
PROPOSED STRENGTHENING THAT EARLIER AGREEMENT BY SHIFTING THE FRAMEWORK
FROM NON-BINDING COMMITMENTS TO BINDING ONES.
-- WE HAVE ALSO CALLED FOR THE MAXIMUM USE OF COST-EFFECTIVE AND FLEXIBLE
POLICIES TO ACHIEVE THE GREATEST REDUCTIONS AT THE LOWEST COST AND HAVE
OPPOSED THE USE OF RIGID REGULATORY APPROACHES.
-- THIS ROUND OF NEGOTIATIONS IS SCHEDULED TO REACH A NEW AGREEMENT IN THE
FALL OF 1997.
0: why reductions? did the United States call for binding Bargets for future emissions
^: -- THE EXISTING FRAMEWORK (A NON-BINDING TARGET OF RETURNING EMISSIONS TO
1990 LEVELS BY THE YEAR 2000) HAS BEEN LARGELY UNSUCCESSFUL. MOST
DEVELOPED NATIONS, INCLUDING THE UNITED STATES, WILL NOT ACHIEVE THIS
GOAL. ^ BINDING, YET REALISTIC TARGET, WILL REQUIRE A GREATER COMMITMENT
AY NATIONS TO REDUCE GREENHOUSE GAS EMISSIONS.
-- THE MOST RECENT SCIENTIFIC REPORT, WITH FARTICIPATION FROM 2,500 OF THE
WORLD'S LEADING CLIMATE EXPERTS, REINFORCES THE VALIDITY OF THE CLIMATE
CHANGE THREAT AND DEMONSTRATES THAT A STRONGER COMMITMENT TO REDUCE
EMISSIONS IS NEEDED.
-- A FAILURE TO TAKE MEANINGFUL ACTIONS NOW WOULD SUBJECT FUTURE
GENERATIONS TO UNACCEPTABLE ECONOMIC COSTS. HUMAN HEALTH PROBLEMS, AND
ENVIRONMENTAL HARM.
Q: Aren't there still a lot of questions in the scientific community about
whether climate change is a legitimate threat.?
A: -- NO. THE SCIENTIFIC FINDINGS FROM THE WORLD'S CLIMATE EXPERTS ARE
CLEAR: HUMAN BEINGS ARE ALTERNING THE EARTH'S NATURAL CLIMATE SYSTEM.
-- WHILE A FEW SKEPTICS WOULD ARGUE CLIMATE CHANGE WILL BE TOO SMALL TO
MATTER, THEIR CASE HAS FOUND LITTLE CREDIBILITY AMONG INDEPENDENT
SCIENTISTS.
Q: Why is it that the U.S. proposal would place additional obligations on our
industry while exempting developing countries who will soon be responsible
for over half of global greenhouse gas emissions?
A: -- WE HAVE SAID THROUGHOUT THAT WHILE THE RESPONSIBILITIES OF DEVELOPED
AND DEVELOPING COUNTRIES ARE DIFFERENT, ALL NATIONS MUST TAKE STEPS TO
REDUCE GREENHOUSE GAS EMISSIONS. ADDRESSING CLIMATE CHANGE IS A GLOBAL
CHALLENGE REQUIRING THE PARTICIPATION OF EVERY NATION.
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-2-
-- GIVEN OUR FAR GREATER RESOURCES AND TECHNOLOGICAL KNOW-HOW, DEVELOPED
COUNTRIES MUST TAKE THE LEAD IN REDUCING GREENHOUSE GAS EMISSIONS.
-- AT THE SAME TIME, EVEN THE EXISTING REQUIREMENTS OF THE CLIMATE
CONVENTION DO NOT GIVE DEVELOPING COUNTRIES A FREE RIDE -- THEY TOO MUST
DEVELOP PLANS AND TAKE ACTIONS TO REDUCE THEIR EMISSIONS.
Q: Is it true, as some claim, that U.S. proposals will cause a large increase
in energy costs to consumers and reduce GDP growth by several percent?
A: -- WHILE THE U.S. HAS PROPOSED A FRAMEWORK FOR THE NEGOTIATIONS, WE HAVE
NOT PROPOSED A SPECIFIC TARGET OR TIMETABLE BECAUSE WE HAVE NOT YET
COMPLETED OUR ONGOING ANALYSIS AND ASSESSMENT PROCESS.
-- THUS, ANY ESTIMATES OF COSTS ARE SIMPLY EXAMPLES OF SPECIAL INTERESTS
"CRYING WOLF. WE ARE CURRENTLY CAREFULLY ANALYZING COST IMPACTS AND
BELIEVE THAT COST-EFFECTIVE ACTIONS ARE POSSIBLE THAT WILL RESULT IN
SUBSTANTIAL LONG-TERM BENEFITS WITHOUT HARMING THE ECONOMY.
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final draft 7/15/96 12:00 noon
The Honorable Timothy E. Wirth
on behalf of the United states of America
Second Conference of the Parties
Framework Convention on Climate Change
Geneva, Switzerland
July 17, 1996
Thank you, Mr. Chairman. Let me begin by congratulating
you, Mr. Chimutengwende, on your selection as Chair of the
Conference. My government appreciates your willingness to
assume this important role and the leadership you have brought
to this task. I also want to take this opportunity to
congratulate the distinguished representative from Germany,
Angela Merkle, for the remarkable job that she did in guiding
the work under this Convention over the past several years. The
task of moving forward more than 150 nations is difficult
enough. In this instance, however, the challenge has been
compounded by the fact that we are dealing with what is probably
the most complicated scientific, environmental, economic and
political challenge in history. The international community is
in your debt for hosting us and helping us reach the mandate
agreed upon in Berlin last year.
Since Berlin, our deliberations have benefitted from the
careful, comprchensive and uncompromised work of the
Intergovernmental Panel on Climate Change, whose efforts serve
as the foundation for international concern and whose clear
warnings about current trends are the basis for the sense of
urgency which my government holds in these matters. We are not
swayed by and strongly object to the recent allegations about
the integrity of the IPCC's conclusions. These concerns were
raised not by the scientists involved in the IPCC; not by
participating governments, but rather by naysayers and special
interests bent on belittling, attacking and obfuscating climate
change science. So let's take a false issue off the table,
there can be no question but that the IPCC's findings meet the
highest standards of scientific integrity.
In the ongoing scientific effort, Mr. Chairman, I want to
note that the United States is proud of the more than $1 billion
annual investment it has been making in recent years on global
change research. This is a cost we have taken on in order to
enhance our own and the world's understanding of the Earth's
atmospheric, oceanic and biological systems and represents not
only the seriousness with which we view these matters, but also
the willingness of President Clinton and the American people to
help pioneer progress on behalf of the environment.
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My government took very seriously the IPCC's recently
issued Second Assessment Report, which underscored and amplified
the panel's initial work -- refining estimates and revealing new
understandings that serve to signal even louder alarm bells.
From our perspective, the most salient of these findings are as
follows:
The chemical composition of the atmosphere is being altered
by anthropogenic emissions of greenhouse gases.
The continued buildup of these gases will enhance the natural
greenhouse effect and cause the global climate to change.
Based on these facts and additional underlying science, the
second assessment reported that "the balance of evidence
suggests that there is a discernible human influence on
global climate." This seemingly innocuous comment is in fact
a remarkable statement: for the first time ever, the world's
scientists have reached the unavoidable conclusion that the
world's changing climatic conditions are more than the
natural variability of weather. Human beings are altering
the Earth's natural climate system.
In turn, the best scientific evidence indicates that human-
induced climate change, if allowed to continue unabated, could
have profound consequences for the economy and the quality of
life of future generations:
Human health is at risk from projected increases in the spread
of diseases like malaria, yellow fever and cholera;
Food security is threatened in certain regions of the world;
Water resources are expected to be increasingly stressed, with
substantial economic, social and environmental costs in regions
that are already water-limited, and perhaps even political costs
where there is already conflict over limited resources.
Coastal areas -- where a large percentage of the global
population lives -- are at risk from sea level rise.
In our opinion, the IPCC has clearly demonstrated to
policymakers that action must be taken to address this challenge
and that, as agreed in Berlin, more needs to be done through the
Convention. This problem cannot be wished away. The science
cannot be ignored and is increasingly compelling. The
obligation of policymakers is to respond with the same
thoughtfulness that has characterized the work of the world's
scientific community.
Unhappily, Mr. Chairman, while the established
international scientific process is working well, the
international policy process, as established under the
Convention, has not been as successful. The shortcomings of the
Convention -- its failure to address the post-2000 period, for
example -- were well explored in Berlin and do not bear
repeating today. The most salient fact is now more apparent
than ever: the current Convention structure has not achieved the
results that were anticipated and planned for in good faith; few
2
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nations in either the developed or developing world have been
fully successful in meeting their commitments under articles 4.1
and 4.2 of the Convention. We have to do better.
Over the past year, the United States has been engaged at
home and internationally in serious analysis of the successes
and failures of the current Convention structure, as well as of
the practicallity of the various proposals for next steps that
have been put forward in recent discussions. While we still
have much work to do, our analysis and consideration of this
issue to date have led us to certain conclusions about the form
of an agreement we hope these negotiations will consider and
pursue. In the months ahead, our ongoing analysis and
assessment will allow us to more precisely articulate the
specific contents that the United States could support.
We begin, Mr. Chairman, from the following base set of
principles, which will guide our consideration of proposals and
which we believe should guide our multilateral negotiations:
First, our negotiations must be about proposals that will
result in protection of human health and the environment.
The current structure has been largely unsuccessful in this
regard. we are not interested in grand rhetorical goals that
are impossible to realize. We want the negotiations to focus
on outcomes that are real and achievable. Sound policies
pursued in the near term will allow us to avoid the prospect
of truly draconian and economically disruptive policies in
the future. Measured adjustments now and in the years ahead
will enable all nations to reduce emissions in an
economically sensible manner. Denial and delay will only
make our economies vulnerable in the future.
Second, the United States will continue to seek solutions
that are flexible and cost-effective, as we have
consistently. We will not accept proposals that are offered
for competitive, not environmental reasons. Serious
proposals in the future must not be thinly veiled attempts to
gain economic advantage. This is a global problem with
global impacts and therefore requires solutions that are
fair, and that will ensure prosperity -- now and in the
future -- for all the world's people.
And third, the agreement should lay the foundation for
continuing progress by all nations in the future. The United
States is immovable in its belief that international
cooperation on this challenge remains critical to any
effective response and that all nations -- developed and
developing -- will have to become more ambitious in
contributing to the solution to this challenge as we move
forward. We believe that, while this is a long-term
challenge, short-term signals about the importance of this
challenge must be sent unmistakably to the public and private
3
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$202 647 0753
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sectors everywhere. Climate change is a serious problem and
will require sustained long-term investment and the full
creativity of the marketplace to be addressed successfully.
President Clinton has urged all Americans and all nations to
prepare their economies for the 21st century. Meeting this
challenge requires that the genius of the private sector be
brought to bear on the challenge of developing the
technologies that are necessary to ensure our long-term
environmental and economic prosperity.
Based on these principles -- encompassing environmental
protection, economic prosperity, flexibility, fairness and
comprehensivcness -- the United States recommends that future
negotiations focus on an agreement that sets a realistic,
verifiable and binding medium-term emissions target. WE believe
that the medium-term target must be met through maximum
flexibility in the selection of implementation measures,
including the use of (measures such as] reliable joint
implementation and trading mechanisms. In addition, our view is
that it will be necessary to continue working toward a longer-
term concentration goal (e.g. for the next 50-100 years), as set
out in the Convention's objective, recognizing that scientific
understanding and technology will improve over time. Working
toward such a goal would better establish the long-term, global
nature of the problem.
Having outlined in broad terms the basic components of an
agreement we could support, I want to underscore the expectation
of the United States that the agreement be realistic and
achievable. Our preliminary analysis of the targets that have
been tabled for consideration to date suggests that these
proposals are neither realistic nor achievable -- either because
they would compromise other important principles, such as the
need for flexibility in time and place of implementation, or
because they involve timeframes and objectives that are not
consistent with national and international prosperity. Our job
in the months ahead is to search for agreement on a next step
that will produce results that are consistent with our
environmental and economic aspirations.
Others have suggested that the negotiations move toward
consideration of some ambitious mandatory, internationally
coordinated policies and measures. In particular, suggestions
are emerging for annexes to the agreement outlining specific
actions that relevant Parties would be required to undertake,
such as, for example, agreed fiscal or regulatory policies.
In our view, the significant differences in national
circumstances and individual national approaches to these
matters suggest that few, if any individual measures are likely
to be applicable to all countries. Therefore, the United States
opposes mandatory harmonized policies and measures. We are open
to the possibility of exploring consensus on agreed procedural
measures, for example those that might be necessary to implement
an international trading regime or ensure enhanced reporting.
4
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Finally, Mr. Chairman, I want to discuss what has been and
remains a difficult component of the negotiations but it is
essential if we are to make progress over the long-term in
preventing harmful climate changes. The United States is
committed in these negotiations to ensuring that all countries -
- developed and developing -- take steps to limit emissions,
consistent with the mandate agreed upon last year in Berlin. We
look forward to working together to develop strategies for
advancing implementation of this Convention. While we recognize
that developed countries have the responsibility to lead, we
also believe that this effort must be a partnership with all
nations contributing to the Convention's objective. We stand
ready to continue our efforts to provide technical expertise to
work with developing countries to reduce greenhouse gas
emissions. This will be a major issue in the months ahead and
we expect it to be taken up in earnest, as with the other issues
I have mentioned, in December.
In summary, we have come to the conclusion that the
current structure of the Convention is less than ideal.
Performance under the current regime -- or lack thereof --
suggests that a new model must be considered. Next steps must
be structured in a way that will help produce the desired
results -- not just more rhetoric. We believe that
circumstances warrant the adoption of a realistic but binding
target, leaving it to individual governments to decide the most
appropriate measures needed to meet the agreed target. We are
convinced that the target must be both realistic and binding
because it is only through the surety of a commitment of this
nature that governments will take their obligations seriously
and the only way we can be assured of progress.
We are also convinced that it is the target that should be
binding, not the individual measures, thus allowing maximum
flexibility in implementation. Continued use of non-binding
targets that are not met makes a mockery of the treaty process.
It leaves the impression that rhetoric is what counts rather
than real emission reductions -- an outcome that is both
unacceptable and counterproductive.
Mr. Chairman, the United States is committed to making the
international climate change process work. As I indicated
today, the science is increasingly convincing: it is evident
that concern about global warming is real and that We must
continue to take steps to address this problem consistent with
our long-term economic and environmental aspirations. Working
together, it are imperative that we marshall the creativity and
will that is necessary to address this far-reaching challenge in
an aggressive manner. The United States will be participating
in this effort with a view towards negotiating an agreement that
is comprehensive, flexible, fair and certain. In this way, we
hope to outline an agreement that will help prepare our country
and the world -- environmentally and economically -- for the
next century.
5
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Draft 7/16
CLIMATE CHANGE NEGOTIATIONS
BACKGROUND QUESTIONS AND ANSWERS
BINDING TARGET
Q. Why did the U.S. propose that any emission target be binding?
A. Our proposal called for setting a realistic binding target and
timetable for reductions. We think the current framework, which
relies on a non-binding aim, inevitably leads to more rhetoric than
action and therefore does not effectively advance the goals of
reducing the health and environmental risks from climate change.
Q. Why should a binding target make any difference?
A. Many environmental and other related international agreements
contain binding commitments (e.g., Montreal Protocol, CITES, London
Dumping, etc.). Given the latest scientific evidence, which
supports the need for stronger action, we believe a change in the
Convention's framework to a binding commitment would shift the
discussion from what might be done to what can realistically and
will be done.
Q. Won't a binding commitment hurt US competitiveness?
A. No. The idea behind a binding agreement is to encourage
compliance. Non-binding agreements may be viewed differently by
different countries. We want all developed countries to face a
clear commitment and to play by the same rules. We think this
will ultimately work to the benefit of U.S. competitiveness and the
environment.
Q. How would a binding commitment be enforced? Would it entail
penalties?
A. Environmental agreements employ a number of measures from
political and moral persuasion to the use of penalties. We need
to carefully balance our desire to encourage others to comply, with
our interests in maintaining flexibility at home. We do not at
this time have a specific position on which compliance measures
would be most appropriate.
DEVELOPING COUNTRIES
Q: Why were developing countries "exempt" from any requirements
under the Berlin Mandate?
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A: Developing countries do not get a "free ride" under the terms
of the Berlin Mandate. They must take steps to "advance" their
commitments under Article 4.1 which specifically calls on them to
take actions to limit greenhouse gas emissions.
Q: But the Berlin Mandate makes clear any "new" commitments would
apply only to developed countries. This would include the U.S.
proposal to make any target binding. Won't this just make the
competitiveness problems worse?
A: Developed nations have both greater resources and
technological know-how to deal with concerns about climate change,
and the U.S. is still the largest single emitter of greenhouse gas
emissions. For example, carbon dioxide emissions from the U.S.
auto fleet alone are larger that total emissions of carbon dioxide
from energy from the entire continent of Africa. Per capita
emissions of carbon dioxide from energy from the U.S. are: 8 times
greater than China; 20 times greater than those from India; and 14
times greater than Brazil. We have to lead in addressing this
problem. The failure of most developed countries to meet their
2000 goal of stabilization sends exactly the wrong signal about the
seriousness of this problem. How can we expect the developing
countries to take actions until we demonstrate that we are willing
to act?
We think shifting to a binding aim will demonstrate our
increased concern and political commitment to take realistic
action. We will make certain that U.S. economic interests,
including our competitiveness, are fully protected in the context
of setting a specific target and timetable and insuring that
maximum flexibility is permitted in meeting those limitations.
Q: What do we expect developing countries to do under their
existing commitments?
A: Positive steps are being taken in four areas:
1. Convention Requirements: all nations are required to report
on inventories of greenhouse and to adopt policies and measures
that reduce emissions of greenhouse gases.
2. Bilateral efforts: the U.S. has established its Country
Studies program to provide technical support to developing
countries in preparing their country studies and action plans.
AID, DOE and EPA all have active bi-lateral programs in developing
countries aimed at reducing greenhouse gas emissions.
3. The Global Environmental Facility has been supporting
projects and institutional building in developing countries aimed
at facilitating actions under the Convention. Unfortunately,
Congressional funding for the GEF has been 70% below the
Administration's request.
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4. We have been supporting efforts by U.S. industry in the
area of export promotion of greenhouse friendly technology -- a
win-win for the economy and the environment. As part of this
effort, implementation. we have established an extensive pilot program on joint
Q: Since developing countries will soon be responsible for over
half of total global emissions, how can we solve this problem
without their full cooperation?
A: We cannot. That is why it is so critical that steps be taken
to continue to engage them in the process and overtime to encourage
greater use of greenhouse friendly technologies. But we cannot
expect them to take this issue seriously unless and until we
demonstrate leadership.
MISCELLANEOUS QUESTIONS
Q: Given that over 100 CEOs from industry wrote to the President
urging a "go-slow" policy to avoid actions that could harm the
economy, isn't the Administration concerned about the costs of
moving forward?
A: The Administration believes that inaction at this time, in
light of the growing scientific evidence of climate change, would
be inexcusable. instead, the Administration supports a framework
for progress based on realistic binding actions that can be
achieved consistent with continued economic prosperity.
Q: Seventeen Republican Senators wrote the President urging that
we suspend the negotiations until scientific and economic issues
have been resolved? Doesn't that make sense?
A: Some Senators have taken many extreme views during the past
year against common sense actions to protect the environment. This
letter demonstrates that while they may be trying to change their
tune, the substance of what they want has not changed. They would
want to base climate policy on the views of a handful of skeptics
largely supported by global fossil fuel interests while turning
their back on the view held by the vast majority of the 2,500
climate scientists that forms a strong basis for further action.
Q: What if key assumptions (e.g., energy prices, economic growth)
underlying the setting of a target prove wrong making it much
harder and more costly to meet? Shouldn't we condition meeting any
binding target on the validity of these key assumptions over time?
A: The United States has cautioned that any target should be
realistic, based on a clear view of what can be achieved.
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Furthermore, we have urged in our proposed framework, that
flexible, cost-effective approaches be fully utilized including
such possibilities as joint implementation, verifiable banking and
trading, and targets defined as rolling multi-year averages.
Combining realistic targets with flexible implementation should
provide adequate safeguards against unintended impacts of meeting
a binding target.
Q: It's now a year into analysis and assessment. Why isn't the
U.S. prepared to propose a specific target and timetable? What,
if anything has the U.S. learned during this time?
A: The June analytical workshop included the presentation of over
50 studies related to next steps under the Berlin Mandate. These
analyses are now being reviewed and further refined. Based on our
work to date we have developed some tentative conclusions
including:
-- the current framework based on a non-binding aim has not
proven equal to the task of achieving a serious political
commitment to reducing emissions;
-- flexible approaches over considerable cost-effective
opportunities that should be incorporated into any future
agreement;
-- a target and timetable overs greater prospects for success
that any harmonized sector specific controls.
Q: What do we mean by a target? Does this mean a specific
emission limitation in a specific year?
A: Not necessarily. We believe that a target must set a clear
and binding objective but that it could be defined in a number of
potentially attractive cost effective and flexible ways. For
example, a target could be a multi-year rolling average to minimize
concerns about short-term variations due to weather or economic
conditions. It could be meet through trading of reductions over
time (e.g., through banked reductions) or through verifiable
reductions in another country.
Q: ARE DEVELOPING COUNTRY COMMITMENTS CONTINGENT UNDER THE
CONVENTION ON ANNEX I COUNTRIES PROVIDING MONEY AND TECHNOLOGIES
AS DEVELOPING COUNTRIES SEEM TO CONTEND?
A: No. In Article 4.7 of the convention, it is acknowledged that
the extent to which developing countries can effectively implement
their commitments depends on the effective implementation, by
developed countries, of their commitments mentioned in the
Convention with regard to financial assistance and technological
07/16/96 TUE 14:42 FAX 202 456 0753
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015
transfer.
Obviously, our support for the Global Environment Facility
and our on-going Country Studies Program will serve as incentives
for developing countries which might not otherwise have the
resources or the administrative wherewithal to carry out their
commitments under the convention.
Q: WHAT CONSIDERATION HAVE YOU GIVEN TO THE TYPE OF INSTRUMENT
THAT SHOULD BE REPORTED BY THE AGBM?
A: We have given considerable thought to the various options for
the type of instrument that might emerge from the AGBM process.
At this point, we have not foreclosed options as among possible
legal instruments, with the exception of an annex. As may be
recalled, it was the United States that insisted that the Berlin
Mandate leave open the question whether the process should lead to
a protocol or other type of legal instrument.
-JOURNAL-
DATE JUL-16-1996
TIME
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138
00:01'12
RCV
9
202
6222633
JUL-16
09:47
0150270537000
30
OK
006
139
00:01:59
RCV
JUL-16
13:07
0110270377000
31
OK
001
140
00:00'54
RCV
202
6220294
JUL-16
13:55
0150270A37000
32
OK
015
141
00:07'14
RCV
202
456
0753
JUL-16
14:39
0150270337000
202 395 6947-