Climate Change Policy: The Rise of Market Mechanisms Presented by Kevin Fay CCELP-Global Commons Project February 2007 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

ICCP 2007 Membership List 3M Company Air-Conditioning and Refrigeration Institute Alliance for Responsible Atmospheric Policy Association of Home Appliance Manufacturers Association of International Automobile Manufacturers Arkema Boeing BP Carrier CH2M Hill Dow Chemical DuPont European Chemical Industry Council (CEFIC) - European Fluorocarbon Technical Committee (EFCTC) Sector General Electric General Motors Halliburton Industries Honeywell Intel Corporation Japan Fluorocarbon Manufacturers Association Natsource United Technologies York International 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

ICCP Organized in 1991 View that Science is Credible and Issue is Durable Goal to Establish Credible Business Voice Obtain Seat At Policy Table Make Process go Smarter, Not Necessarily Faster or Slower 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

International Climate Change Partnership The ICCP Mission Statement: - The International Climate Change Partnership (ICCP) is a global coalition of companies and trade associations from diverse industries committed to constructive and responsible participation in the international policy process concerning global climate change. The ICCP recognizes that the continued growth in emissions of greenhouse gases is an important concern for all nations and that efforts are underway internationally and in national governments to develop policies that address this concern. 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

International Climate Change Partnership ICCP Core Beliefs: - Climate change is an important global environmental issue that requires participation of all nations developed and developing. - International efforts must be guided by sound and credible scientific information and supported by a credible technology and economic assessment process. - Climate change issues are most effectively addressed at the global level. - Parties to the Framework Convention on Climate Change must balance environmental concerns associated with greenhouse gas emissions with the need to promote the continued economic growth necessary for the benefit of all nations. - Climate change policies should be comprehensive and market-based and should not single out or disadvantage specific industries. 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Climate Policy Debate Not That Old Considering… Hard tasks take time Modern environmental policy regime only started in late 1960s 13 yrs between Clean Air Act Amendments 17 yrs since last amendment Leaded gasoline phase-out proposed in U.S. – 1972, adopted in EU – 2000 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Progress is Relative UNFCCC – 1992 Kyoto Protocol – 1997 Kyoto EIF and first MOP – 2005 Kyoto first budget period – 2008 Beyond Kyoto - 2012 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Policy Community General consensus on issue’s importance Mixed signals on policy approach Conflicting signals on near term action, particularly mandatory vs. voluntary approach Few signals on long term objective Little public education Economic Policy issues key 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Business Community – Cautious Approach Engaged in Policy Discussion Remain Educated Responsible for Kyoto outline If mandatory target Kyoto contains much of what was requested Devil is in the details Needs: Clarity, Certainty, Transparency, Equity 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Kyoto Framework Binding Commitments Single basket of gases Developed countries reduce 5.2% below 1990 levels Single basket of gases Flexible market mechanisms No harmonized policies and measures CDM for developing countries 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Effective Global Climate Policy Requires Better consensus on long term objective Policy process that includes all major emitters – developed and developing economies; key industrial sectors Better education of public on climate protection role and responsibilities Reliance on suite of initiatives – voluntary and mandatory – to achieve reductions in atmospheric loadings Support for technology evolution in near term and revolution in long term Commitment to market-based, cost effective approaches 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Rise of Market Mechanisms Dramatic shift in focus on market-based approaches Introduction of European trading system Implementation of Kyoto mechanisms Success of mechanisms critical to future steps 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

GHG Emissions Trading Systems EU CO2 Emissions Trading System State Trading Programs Northeast and Mid-Atlantic Program California US Domestic Proposals National Commission on Energy Policy (NCEP) McCain-Lieberman USCAP 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Key Design Elements Who is regulated and at what point? Economy-wide or only certain sectors? All GHGs or only CO2? Upstream vs. downstream? How are emissions allocated? Auction, grandfathered, vs. output-based? Are offsets allowed and how? At 100% or discounted? Int’l or only domestic? All non-covered sources or limited? 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Economy-wide or only certain sectors? All GHGs or only CO2 No single sector accounts for all GHG gases CO2 is dominant gas, but other gases are also relevant US GHG Emissions 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Upstream vs. downstream? Upstream requires smaller number of regulated sources and can cover larger source of emissions Transportation has millions of downstream sources Mismatch b/t the actors that influence emissions and the regulated sources? Downstream system only likely for certain sectors (e.g., large point sources) in order to limit number of regulated sources Transportation difficult to capture downstream Upstream-Downstream Hybrid can cover point sources at point of emissions and other sources at the point of import or production of carbon containing products

How are emissions allocated? Allowances are $$$$ Current US GHG emissions (allowances) would be $177 billion per year at $25 t/CO2 And as a result has implications on: Business relation to their competitors If you get allowances and your competitors have to purchase them Politics Members of Congress care about how their states fair (e.g., Acid Rain Law) The signals that are sent to certain actions: Allowances or revenues from allowances can be used to provide incentives for certain actions such as renewables or advanced technologies To reduce “distortionary” taxes on salaries To minimize impacts on certain sectors by giving certain amount of allowances free to: Hold equity value of impacted industries whole (e.g., debate over amount of allowances needed) Help with worker transition (e.g., coal industry, etc.) 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

EU Emissions Trading Scheme (EU ETS) Around 11,500 installations in 25 European Union member states 45-50% of the EU’s CO2 emissions Direct link to the Kyoto Mechanisms Possibility to link with other schemes Trades include CO2 only Various Phases: First phase: 2005-2007 Second phase: 2008-2012 (the Kyoto phase) Continuation: Directive allows for and the Commission has consistently stressed that the system will continue beyond 2012 Allocation 2005-2007: 2,100 MMTCO2e/year 2008-2012: in progress (6% cut needed for EU-25) 2005: over 460 MMTCO2e traded (brokers, exchanges, bilateral), total value > EUR 7 billion 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

US National Proposals: National Commission on Energy Policy (NCEP) Establish market-based emissions trading program to reduce US GHG intensity per unit of GDP by 2.6% annually from 2012-2021 and 3% annually after 2021 Target calls for annual reduction of 500 to 1,000 MMTCO2e, with a “safety valve” In 2005, Senator Bingaman developed NCEP-based proposal (declining intensity cap at 2.4% starting in 2010 and price cap of $7 per MT) Intensity target developed into allowance-based trading program Covering “upstream” fuel producers and other entities including manufacturers, importer & emitters of non-fuel GHGs 2006 Sens. Bingaman and Domenici “White Paper” discussed key questions & issues for domestic trading program 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

US National Proposals: Climate Stewardship Act Climate Stewardship Act proposed by Sens. McCain and Lieberman Establish emissions trading program covering major sources All large point sources >10ktCO2 “downstream” e.g., electricity and large industrial plants required to hold allowances equivalent to capped emissions levels Transport fuels regulated “upstream” e.g., oil refineries that produce or import products used for transportation that would emit >10,000 MTCO2e required to hold allowances for the carbon content of their fuels Produced or imported HFC, PFC and SF6 that would emit more than 10,000 MTCO2e Doesn’t regulate direct emissions from agriculture and residential sectors GHG emissions capped at 2004 levels by 2012 Gradually lowered to reach one third of 2004 levels by 2050 Commerce Dept. determines how many allowances given for free versus to the Climate Change Credit Corporation 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

State GHG Trading Programs: Regional Greenhouse Gas Initiative The nine-state Regional Greenhouse Gas Initiative (RGGI) includes Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont Maryland has essentially opted-in Caps emissions from electric power sector only. Cap equal to 1990 CO2 levels (~110 MMT) in 2009-15, declining to 10% below 1990 by 2018 Covers 1.7% of total US GHG emissions Emission offsets allowed (up to 3.3% of each generating unit’s emissions) Allowance prices < $7: allows offsets to be used from across the United States, offsets outside RGGI discounted at 50% > $7 (“Offset Trigger”): offsets allowed from across North America at a 1:1 ratio; offsets may cover up to 5% of unit emissions > $10 (“Safety Valve Offsets Trigger”): offsets from international projects allowed; offsets to cover up to 20% of unit emissions 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

State GHG Trading Programs: California Governor Schwarzenegger Executive Order S-3-05 set GHG emission reduction targets for California AB 32 Sets Economy-Wide GHG Emissions cap--reduce to 1990 levels by 2020 Role and extent of emissions trading to be allowed in program not yet decided CARB Initiating Process for Development of Market Mechanisms as Program Component Role of “Cap and Trade” Significant Political Issue 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Conclusions International Trading Success Key to post-2012 period GHG emissions trading likely to be key component of future US domestic response to climate change Some GHG emitting sources fit easily within an emissions trading system e.g., stationary sources Others more complicated e.g., Transportation and residential sectors Non-CO2 gases? Key design issues have important economic and political implications, including: In cap or offset? Upstream vs. downstream? Allowances allocated free vs. auctioned? 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net

Kevin Fay, Executive Director Contact Kevin Fay, Executive Director fay@alcalde-fay.com Additional Reading: --Center for Clean Air Policy, www.ccap.org --Congressional Budget Office, www.cbo.gov --Pew Center on Global Climate Change, www.pewclimate.org 2111 Wilson Blvd, 8th Floor, Arlington, VA 22201 Phone: (703) 841-0626 Fax: (703) 243-2874 www.iccp.net