The U.S. Domestic Response to Climate Change: Key Elements of a Prospective Program

Securing Emissions Reductions

An especially critical element of a domestic climate change program will be the design of a market-based GHG emissions management framework to ensure significant long-term reductions in emissions. Also, an effective program ultimately will entail some form of mandatory requirements. The approaches that follow include voluntary activities that could be implemented in advance of, or alongside, mandatory emissions reductions:

Enter into agreements with companies willing to make significant, enforceable commitments to achieve net GHG emissions reductions in lieu of future GHG control requirements.

Securing regulatory certainty may be a powerful incentive for those willing to undertake substantial GHG reduction commitments. By committing to take action yielding specified reductions over an established period of time, a firm could receive a commitment from the government that (as long as its contractual obligations are met) it would not be bound by subsequently developed GHG controls over the same time period. For example, if a company were to commit to significant reductions over a 20-year period (e.g., a 20 percent reduction achieved either through steady declines of 1 percent per year or through a major capital investment at some point during this timeframe), the company could avoid additional mandatory GHG control obligations during the same 20-year period.⁴ [1] This approach would allow companies to move forward with substantial capital investments that will secure significant emissions reductions.

Under this approach, reductions below company baseline levels (e.g., 1990 GHG emissions) could be achieved through meeting either rate-based or specified net targets. These commitments would provide baseline protection, and shelter firms from additional requirements developed during the term, in exchange for legally binding agreements containing measurement, verification, and reporting requirements. Such an approach would require enabling legislation authorizing the Executive Branch to enter into these agreements. This legislation should include provisions for public notice and comment. Companies also could be allowed to enter into similar agreements with respect to their services or products manufactured and sold in the United States.⁵ [2]

Ultimately, the ability of the United States to achieve significant long-term GHG reductions depends on our success in the design and implementation of a mandatory program to reduce emissions.

Additional features could include allowing program participants to trade emissions credits and allowing credit for reductions achieved through sequestration and offsets. In other words, companies that reduce their emissions beyond the levels specified in the agreement would be able to trade these additional emissions reductions with firms that were unable to meet their reduction targets under a future regulatory program. Similarly, credit for real, quantifiable, and verifiable sequestration activities could be granted towards the obligations and, when in excess of specified targets, could be sold in an emissions trading market.

Set voluntary emissions reduction targets for major industry sectors with a trigger mechanism for imposing mandatory requirements if a sector falls short of its targets.

A second approach would establish initial rate-based or specified reduction targets for major industry sectors, but impose stricter controls for sectors that do not meet their initial targets. The program, for example, could call for a sector to stabilize its emissions at year 2000 levels over the 2005-to-2010 period, while providing federal authority to impose stricter mandatory control requirements by a later date if the sector as a whole fails to achieve its reduction target. Similar performance targets could be set for products, such as automobiles and appliances. Companies would receive shelter from the stricter requirements so long as they achieve their proportionate share of the reduction target.

One advantage of this approach is that it would promote immediate action towards the reduction target, even while the details of the mandatory control program are being developed. Another advantage is that it would enable companies to coordinate their emissions control strategies for conventional air pollutants with their carbon dioxide reductions. This would be especially important for those sectors whose near-term control obligations for conventional air pollutants (involving major capital investments) may conflict with a long-term GHG control strategy for that sector.

New legislation would be required to either establish general criteria that apply economy wide or set out design elements specific to individual sectors. In the latter case, for example, the legislation could specify for the power generation sector: (a) the initial and “backstop” reduction levels, (b) the reduction timeframes, (c) allocation of emissions allowances through a generation performance standard, (d) the ability of participants to trade emissions credits, and (e) the flexibility to “bank” allowances for future use.

In addition, if a sector that makes products fails to meet its target, those companies not doing a proportionate share could have tighter efficiency standards imposed.

Allow an opt-in for coverage of carbon dioxide emissions in conjunction with air regulatory programs.

Many companies – particularly utilities – are interested in addressing their CO₂ emissions in conjunction with new reduction obligations likely to be enacted for other pollutants. Many studies have documented substantial environmental and economic benefits of harmonizing the timing and reduction levels of multiple air pollutants.⁶ [3] An “opt-in” approach would permit these companies to consider reduction obligations and goals comprehensively, thereby minimizing the chance of stranding pollution control investments aimed at conventional pollutants without regard for CO₂. By providing an opt-in strategy, overall emissions (including GHGs) could be considered simultaneously – avoiding the now-common scenario that control strategies devised for reductions in traditional pollutants have little or no beneficial impact on GHG emissions. (Post-combustion controls aimed at reducing conventional pollutants, in fact, often increase GHG emissions. In contrast, all GHG reduction strategies that reduce fuel consumption – the largest GHG emissions source – also reduce conventional air pollutants.) Harmonizing time frames for achieving reductions could avoid piecemeal and uncoordinated implementation of conventional and GHG emissions.

At the same time, streamlining the existing New Source Review (NSR) program for changes in facilities could enable power plants, refineries, and other major stationary sources to improve their production efficiencies more easily. Such efficiency improvements directly translate into lower CO₂ emissions. Companies participating in this “opt-in” could be allowed to implement environmentally beneficial projects without triggering the NSR requirements.

Design and implement an economy-wide domestic emissions program to meet a mandated cap.

Ultimately, the ability of the United States to achieve significant long-term GHG reductions depends on our success in the design and implementation of a mandatory program to reduce emissions. Since such a program will take time to design and administer, the near-term approaches discussed above should be developed in such a way that they are consistent with important design elements of a future mandatory program. The most cost-effective method of obtaining such reductions is likely to come in the form of a domestic emissions trading program that could be integrated with an international trading regime.

Elements of an effective domestic trading program could include:

• allocation of permits to existing and new sources based on historic emissions, output levels, auction, or – preferably – some combination thereof;
• creation of an independent authority to oversee the GHG registry and trading activity;
• providing for a declining cap in permitted GHG levels over time;
• including credit for other GHG emissions on a CO₂-equivalent basis;
• establishing a multi-year compliance period for meeting any GHG emissions reduction obligation; and,
• recycling revenues from auctioned permits to reduce other tax burdens, increase R&D, and provide transition assistance to affected workers and communities.

Ideally, a domestic program should be compatible with trading programs in other countries to allow credit for reductions undertaken abroad. Also, with improved confidence in measuring and monitoring sequestration-related activities (both domestically and abroad), credit for carbon storage should be included.

NEXT: Conclusions [4] [5]

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