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Greenhouse Gas Trading
Vote on McCain/Lieberman Global Warming Bill
The Senate voted 43 to 55 on October 30, 2003 to reject S.139, the Climate Stewardship Act of 2003, sponsored by John McCain and Joseph Lieberman. Although the bill failed, the vote was much closer than expected and sent the message that global warming is a serious issue. Senator John Edwards (D-NC), a cosponsor of the bill is campaigning for president and missed the vote. Thus, 44 senators support reductions in greenhouse gases.
McCain Bypasses Inhofe On Global Warming
Senators John McCain (R-Ariz.) and Joseph I. Lieberman (D-Conn.) introduced legislation (S.139, Climate Stewardship Act of 2003) that will require all U.S. power plants and industries to reduce their emissions of carbon dioxide and other greenhouse gases (GHG). McCain, Chairman of the Commerce, Science and Transportation Committee is holding hearings and intends to push the bill to the Senate floor early in the 108th Congress. McCain believes that the GHG issue affects transportation, scientific research and other related issues and should be considered by his committee. AAEA supports the Climate Stewardship Act of 2003.
This sets the stage for a conflict with Senator James M. Inhofe (R-Okla.), the new Chairman of the Environment and Public Works Committee, which has primary jurisdiction over Environmental Protection Agency (thus GHG) regulations. Any bill dealing with climate change would have to go through the Environment and Public Works Committee. The Bush administration and Inhofe oppose mandatory limits on greenhouse gases, favoring a voluntary approach. President Bush is facing a split in his own party on global warming - - at least in the Senate. The new Senate Majority
Leader Bill Frist (R-Tenn.) will be tested by this attempt to bypass the Environment and Public Works Committee. Most senators agree with Bush that the Kyoto Protocol would be bad for the United States. Many Senators would also like to negotiate an alternative GHG agreement with U.S. allies.
The McCain-Lieberman legislation would establish a mandatory nationwide cap on emissions of carbon dioxide and other GHGs. Utilities, industries and transportation sources of the major greenhouse gases would have to limit their emissions to 2000 levels by 2010 and 1990 levels by 2016. The bill would establish a trading system allowing utilities and plants with excessive emissions to buy credits from more efficient companies that have reduced emissions beyond their targets. A similar system for sulfur dioxide has operated for years under the Clean Air Act to limit acid rain.
The McCain/Lieberman bill is less stringent than the terms of the 1997 Kyoto Protocol, which calls for mandatory reductions GHGs. It is similar to the 1992 Framework Convention on Climate Change, or Rio Treaty. President Bush opposes the Kyoto Protocol because he believes it would harm the U.S. economy. He announced a Clear Skies Initiative that includes economic incentives to encourage voluntary reductions of GHGs.
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PRINCIPLES TO GUIDE DEVELOPMENT OF A TRADING PROCESS
TO REDUCE GREENHOUSE GAS EMISSIONS
Created By and Endorsed By
The Greenhouse Gas Alliance for Credit Trading (GHG ACT)
Massachusetts is the first U.S. state to adopt regulations that reduce greenhouse gas (GHG) emissions from existing power plants (310 CMR 7.29). The lack of effective on-site reduction technology means these plants must meet their requirements through GHG credit trading. Other states are following Massachusetts’ lead.
By creating a sustainable and effective GHG trading system, one that could be compatible with other markets, and therefore scalable, GHG reductions can be realized now without harm to the economy from large increases in energy costs.
The following principles are intended to serve as guide for creating a workable trading system, one that allows emitters to meet GHG emission reduction targets while ensuring reliability and security of electricity supplies, and without jeopardizing economic growth:
1. Credits may be earned by any source that reduces, avoids or sequesters GHG as long as the reductions are real, surplus, enforceable and verifiable.
The most important attribute of a successful GHG credit trading system is participant and public confidence that the system will produce the intended GHG emission reductions. To gain that confidence, participants must be able to demonstrate that reductions are real. This requires a comprehensive certification process, including methods for monitoring, verifying and enforcing performance. Market confidence will encourage investment and innovation while lowering the cost of compliance.
2. Attributes of a credit should be fully disclosed to market participants and the public.
Full disclosure will help set fair market values. It will also contribute to building participant and public confidence. Disclosure allows participants and the public to weigh the economic and environmental value of various technologies and strategies. Buyers can then express preferences through their purchasing decisions. Similar to a labeling program, full disclosure allows the public and participants to weight economic costs against such factors as labor, project location, environmental impacts, and the sustainability of credit sources.
3. Compliance with GHG requirements should be met by the most cost effective means.
Experience with sulfur dioxide credit trading has shown that compliance with emission reduction targets can be met without harming the economy. An effective credit trading system should encourage development of non-emitting sources and GHG sinks. In doing so, it should provide the means for emitters to meet targets without taking drastic actions, such as premature shutdowns, that could reduce a region’s reliability of supply and fuel diversity. Credit trading should be part of strategies aimed at sustaining economic growth while creating environmental improvements.
4. Trading policies and programs should recognize the global nature of greenhouse gases and encourage cooperation among regions and nations.
Greenhouse gases emitted anywhere have an impact everywhere, which makes them unlike SO2 and NOx. An effective credit trading system should recognize that global characteristic, a characteristic which sets GHG apart from other emissions. Since initiatives are underway worldwide to establish credit trading as a means for reducing GHG emissions, the most effective and sustainable credit trading system will be one that is ultimately compatible with those other trading systems. By recognizing international agreements and protocols, a credit trading system will enhance and secure the value of earned and traded credits and facilitate future inter-market trading.
5. Projects filling the requirements of Principle #1 should get credit for GHG emissions reduced, avoided or sequestered regardless of economics.
While credits should meet an environmental additionality test -- that is they are based on reduced, avoided or sequestered emissions beyond a regulatory imposed limit -- requirements based on an economic test are impracticable to measure. Beyond being unworkable from an accounting standpoint, establishing financial additionality – whether a project is viable without the ability to earn credits – as a test would have a dampening affect on investments in low-cost alternatives. This in turn would reduce the size of the market and drive up the cost of compliance.
6. Banking should be allowed without discounting based on age of credit.
Given the global nature of GHG emission impacts, the age of credits should be irrelevant in determining value as long as they meet the test of being real, surplus, enforceable and verifiable. By allowing banking, without discounting for age, the trading system will encourage earlier and more substantial investments in mitigation strategies and technologies. This in turn will expand the credit pool, lower the cost of compliance and result in earlier reductions.
Successful implementation of a GHG credit trading system, based on the above principles, will produce the most cost effective reductions. It will achieve that result through a robust, transparent and sustainable market that has the full confidence of market participants – buyers and sellers – and the public.
December 2, 2002
ISSUE BRIEF – CLIMATE CHANGE AND CREDIT TRADING
Issue
How best to achieve greenhouse gas emission reduction targets by cost effective means that do not adversely affect reliability of power supplies, diversity of the region’s fuel mix and ultimately the economy.
Background
The potential threats associated with climate change are sufficiently severe to justify prudent, meaningful action by the world community. This recognition is reflected in the United Nations Framework Convention on Climate Change (UNFCCC), to which the United States is a ratified signatory, as well as the Climate Change Action Plan of the New England Governors/Eastern Canadian Premiers.
Massachusetts is the first state in the United States to have adopted regulatory requirements to reduce greenhouse gas (GHG) emissions from existing power plants (310 CMR 7.29). The lack of available on-site reduction technology means these plants will meet their requirements through GHG credit trading.
By adopting GHG credit rules that encourage economically efficient emission reductions, Massachusetts can demonstrate that sensible actions can be taken now to achieve meaningful GHG reductions without harm to its economy from large increases in energy costs. In fact, Massachusetts can send a powerful message to other states and the federal government on taking prudent, meaningful action now by creating a sustainable and affective GHG trading system.
Overview of Key Constituencies
Key constituencies include:
- Environmentalists and environmental organizations
- Business organizations concerned about the cost of energy
- Labor groups concerned about the cost of compliance
- Electricity producers that must meet reduction targets
- Electricity producers with non-emitting sources that generate emission credits
- Electricity delivery companies that must buy power for customers
- Energy marketers
- Emission credit traders
- Government leaders outside Massachusetts engaged in GHG issues.
Recommended Position for the Romney-Healey Administration
We recommend the Romney-Healey Administration adopt the following principles to guide development of the credit trading rule now underway at the Department of Environmental Protection.
1. Credits may be earned by any source that reduces, avoids or sequesters GHG as long as the reductions are real, surplus, enforceable and verifiable.
2. Attributes of a credit should be fully disclosed to market participants and the public.
3. Compliance with GHG requirements should be met by the most cost effective means.
4. Trading policies and programs should recognize the global nature of greenhouse gases and encourage cooperation among regions and nations.
5. Projects filling the requirements of Principle #1 should get credit for GHG emissions reduced, avoided or sequestered regardless of economic motive.
6. Banking should be allowed without discounting based on age of credit.
Example/Best Practice
- Clean Air Act SO2 Cap and Trade program, which set a cap on SO2 emissions and allowed industry to meet the emissions standards in the most cost effective manner through technology innovation and installation and allowance trading. The program reduced SO2 emissions more quickly and at less cost than predicted.
Recommended Talking Points
- Through a robust, workable and sustainable credit trading system, we will achieve our climate change goals, and do so cost effectively.
- This groundbreaking, first mandatory program addressing GHG emissions will encourage the innovation of new reduction methods and technologies, which will be absolutely necessary if future programs address more robust goals.
- We will demonstrate that there are workable solutions to climate change, solutions that achieve strict environmental goals without harm to the economy.
- Given the global nature of greenhouse gases, our actions will serve as a model to other governments concerned about this issue.
Important Announcement
