Greenhouse Gas Policy Initiatives in the United States

Dr. John L. JurewitzDirector, Regulatory Policy

Southern California Edison Companyand

Adjunct Instructor in EconomicsPomona College

11th Reform Group MeetingSalzburg, AustriaAugust 28, 2006

2.

Thesis

Many Americans strongly favor the adoption of mandatory greenhouse gas emission policy

Despite the absence of strong federal policy, state, regional, and private-sector initiatives are proceeding

At some point, even currently resistant commercial interests are likely to conclude that a uniform and predictable centralized federal policy toward GHG control is preferred to ad hoc and fragmented State and regional initiatives

3.

A Brief History of Federal U.S. Policy Before Bush-II

U.S. Senate ratified the United Nations Framework Convention on Climate Change in 1992 following the Rio Summit

» U.S. agreed to voluntary target of returning to 1990 emission levels by 2000

In 1993, newly elected President Clinton criticized former Bush-I Administration for refusal to endorse binding commitments to GHG reductions

In 1996, U.S. acknowledged that voluntary measures were not working and expressed support for legally binding commitments

In 1997, U.S. Senate adopted Resolution No. 98 (Byrd-Hagel) by a vote of 98-0 stating that it will not ratify a climate treaty that does not include meaningful participation by developing countries

In Kyoto in 1997, U.S. negotiated a commitment to reduce GHG emissions 7% below 1990 levels by 2008-2012 but this commitment was never ratified by the Senate

4.

Bush-II Administration Policy

In Spring 2001, although Bush had made generally supportive statements regarding the Kyoto Protocol during his campaign, following his election Bush repudiated Kyoto saying it was simply too expensive and did not include meaningful participation by developing countries

Bush’s substitute policy (announced February 2002):» Target reductions in “greenhouse intensity” (tons/GDP)

– 18% reduction between 2002 and 2012» Establish registry for voluntary reductions

– Assure early actions get recognized in any future regulations» Increase funding for GHG-related activities by $700 million (purportedly to a

total of $4.5 billion total)» About 80 specific programs such as tree planting, methane recovery,

hybrid vehicles, wind and biomass power generation, nuclear power and clean coal

5.

Asia-Pacific Partnership on Clean Development and Climate

In the wake of the Montreal meeting, Bush launched this initiative as his climate program response

Founding partners: U.S., Australia, China, India, Japan, South Korea

First ministerial meeting in Sydney, Australia, January 11-13, 2006; Follow-up meeting in Berkeley, California, April 18-21, 2006

Approved eight public-private sector task forces:1. clean use of fossil energy (e.g., coal gasification)2. renewable and distributed generation3. power generation and transmission4. steel manufacturing5. aluminum manufacturing6. cement manufacturing7. coal mining (including capture and use of coal-bed methane)8. buildings and appliance efficiency

Only $52 million allocated in Bush’s 2007 budget to support APP initiatives

http://www.asiapacificpartnership.org

6.

Provisions Considered by Congress but Not Included in the Energy Policy Act of 2005

Tightening of Corporate Average Fuel Economy (CAFE) standards for automobiles and light trucks

Adoption of a federal minimum Renewable Portfolio Standard (RPS)» Senate version contained a 10% federal RPS by 2020

Limitations on Greenhouse Gas emissions» But formed a cabinet-level advisory committee to develop a

national GHG policy

The following provisions were seriously considered but not included in the final law:

7.

GHG Initiatives Outside the U.S. Executive Branch

Lawsuits against the federal government

Proposed Congressional legislation

State and regional initiatives

Private sector initiatives

Lawsuits Against the Federal Government

9.

Massachusetts v. EPA(415 F.2d 50; D.C. Circuit, 2005)

Petition by several states and environmental groups for review of US EPA’s denial of a petition to regulate GHG emissions from motor vehicles under the Clean Air Act

Petition was denied by D.C. Circuit Court of Appeals on a 2-1 vote» Judges expressed diverse opinions on the merits of the case and

two judges denied the petition for various reasons including lack of standing

» Dissenting judge believed that EPA has authority to regulate GHGand did not adequately explain its failure to do so

D.C. Circuit decision has been appealed to the U.S. Supreme Court and the case has been accepted for review

10.

New York v. EPA(Appeal filed April 27, 2006 with D.C. Circuit)

New York State plus nine other states, New York City, and the District of Columbia sued EPA on April 27 for failing to reduce GHG and other pollutants from electric power facilities in a final EPA order on new source pollution control issued in February 2006

EPA’s final rule failed to regulate CO2 emissions

Petitioners claim harm to “public health and welfare” and argue that EPA’s claim that it does not have authority to regulate CO2emissions is contrary to the plain language of the Clean Air Act

11.

Connecticut v. American Electric Power Company

(Appeal filed April 27, 2006 with D.C. Circuit)

Coalition of states sued AEP, three other power companies, and the Tennessee Valley Authority in federal court under the common lawtheory of public nuisance» Sought injunctive relief requiring specific annual reductions in CO2

emissions

District Court dismissed the complaint finding that it raised a “non-justiciable political question” whose resolution requires “identification and balancing of economic, environmental, foreignpolicy and national security interests”

District Court decision has been appealed to the Second Circuit Court of Appeals

12.

Northwest Environmental Defense Center v. Owens

Plaintiff allege that Owens Corning is constructing a manufacturing facility that would emit 250 tons of GHG without first obtaining a permit

Court denied defendant’s petition to dismiss case» Refused to find that climate change was a generalized

grievance with wide public significance better left to representative legislative branch of government;

– “an injury is not beyond the reach of the courts just because it is widespread”

» Enforcement of Congressional mandate set forth in the Clean Air Act is “squarely within the judicial power to adjudicate cases and controversies”

Proposed Congressional Legislation

14.

Proposal By Senators McCain and Lieberman(Climate Stewardship Act)

A mandatory reporting and mandatory cap-and-trade bill first introduced in 2003, and again in 2005

Return to 2000 emission levels by 2010 and to 1990 levels by 2016

Would allow the use of international emission credits to cover up to 15% of required reductions

The later 2005 version provides incentives for new nuclear power plants and clean coal technologies

Proposal failed by a vote of 43-55 in 2003, and by a vote of 38-60 in 2005» Some Democratic votes were lost between 2003 and 2005 due to intervening

election losses as well as the addition of the nuclear incentives

15.

Recommendations of the National Commission on Energy Policy (NCEP)

(December 2004)

Initiate in 2010 a mandatory, economy-wide, tradable-permits system to limit greenhouse gas emissions

» Number of permits based on reducing GHG intensity of the economy (tons of carbon-equivalent emissions per million dollars of real GDP) at 2.4% per year

» Cap initial costs to the U.S. economy at $7 per metric ton of CO2-equivalent ($26/tC) via a “safety valve” mechanism; safety valve to increase at 5%/yr in nominal terms

Link subsequent U.S. action with comparable efforts by other developed and developing nations via a program review in 2015 and every five years thereafter

Provide federal support to development of IGCC clean coal technology and CO2sequestration

Provide federal support for one or two “first movers” in advanced nuclear power plants

Provide support for renewable generation and energy efficiency

16.

Sense of the Senate Resolution(June 22, 2005)

Sponsored by Senator Bingaman (New Mexico-Democrat) as a substitute for his proposed amendment to the Energy Policy Act of 2005

» His amendment was patterned after NCEP proposal

Approved by the Senate by a 53-44 vote (most Senate Democrats plus 12 Republicans)

“There is a growing scientific consensus that human activity is a substantial cause of greenhouse gas accumulation in the atmosphere.”

“Mandatory steps will be required to slow or stop the growth of greenhouse gas emissions into the atmosphere.”

“…Congress should enact a comprehensive and effective national program of mandatory, market-based limits and incentives on emissions of greenhouse gasses that slow, stop, and reverse the growth of such emissions at a rate and in a manner that:

1. will not significantly harm the U.S. economy; and2. will encourage comparable action by other notions that are major trading partners and key

contributors to global emissions.”

Essentially supersedes the famous Byrd-Hagel 1997 Senate Resolution

17.

Joint Activities By Senators Domenici (R) and Bingaman (D)

Announced intention to jointly introduce a bill in 2007

Released whitepaper on policy issues in early 2006

Conducted Congressional hearings on April 4, 2006» Received testimony in support of mandatory controls based on

cap-and-trade from several large U.S. companies

18.

Proposal by Senator Feinstein(Strong Economy and Climate Protection Act)

Mandatory cap-and-trade program

Return to 2006 levels by 2010, with annual reductions thereafter (e.g., 7.25% below 2006 levels by 2020)

Allows use of international emission reduction credits to satisfy up to 25% of required reductions

5-year Congressional oversight review similar to Bingaman proposal

State and Regional Initiatives

20.

Oregon Climate Trust

In 1997, the State of Oregon enacted the first law (the Oregon Standard) in the U.S. aimed at reducing greenhouse gas emissions

The Oregon Standard requires new power plants built in Oregon to avoid, sequester, or offset a portion of their otherwise unregulated CO2 emissions

To comply, owners of new power plants can pay mitigation funds to a qualified non-profit organization

The Oregon Climate Trust was chartered as such a qualified organization in 1997

The stated mission of the Oregon Climate Trust is to promote climate change solutions by providing high quality GHG offset projects and advancing sound offset policy

To date, the Climate Trust has invested more than $4.9 million in projects to offset more than 1.9 million metric tons of CO2

In 2002, the Climate Trust significantly expanded the scope of its activities beyond the Oregon Power Plant Offset Program and opened its services more broadly to assist all entities interested in pursing GHG offsets

21.

The Northeast’s Regional Greenhouse Gas Initiative(RGGI)

The goal of RGGI is to develop a multi-state cap-and-trade program covering GHG emissions from large power plants

» Once implemented, the states may consider extending the reach of the program to other emission sources

Currently seven states have signed a Memorandum of Understanding to participate by developing a Model Rule that would serve as the basis for common, uniform state-by-state legislation

» Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont (the District of Columbia, Massachusetts, Pennsylvania, Rhode Island, the Easter Canadian Provinces, and New Brunswick are “observers”; Maryland will become a participant shortly)

On August 15, 2006, the seven participating states issued a Model Rule

The RGGI program is to become effective on January 1, 2009

In April 2006, Australian officials expressed interest in possibly linking an Australian national cap-and-trade program to RGGI

22.

Broad Provisions of RGGI’s Model Rule

RGGI will cap emissions at current levels through 2014; Annual reductions thereafter will achieve a 10% reduction by 2018

» By 2020, emission reductions are forecast to be 35% below “business as usual” 2020 levels

Program will cover large power plants of 25 MW or larger using at least 50% fossil fuel

Allowances will be distributed in accordance with individual state plans, but at least 25% of the allowances will be sold with revenues used to fund beneficial energy programs

Limited use of offsets is allowed:» A source is allowed to cover up to 3.3% of its emissions with offsets (3.3% is approximately

half of the forecast reductions required)» If the average cost of allowances reaches $7 per ton, sources will be permitted to cover up

to 5% of their emissions with offsets» If the average cost exceeds $10 per ton, then sources will be permitted to cover up to 20%

of their emissions with offsets

23.

California GHG Policy Initiatives

California Climate Action Registry (established 2001)» Helps companies and organizations establish GHG emission baselines in

order to get credit for early actions to reduce GHG emissions in advance of formal regulations

In 2002, Assembly Bill 1493 ordered California Air Resources Board (CARB) to develop vehicle fleet average GHG emissions standards for automobile model year 2009 and beyond» Car manufacturers sued arguing that this rule was effectively a rule to

regulate automobile fuel economy, an area of regulation pre-empted by the federal government

In 2003, California joined the states of Oregon and Washington in forming the West Coast Governors’ Global Warming Initiative

24.

West Coast Governor’sGlobal Warming Initiative

(September 22, 2003)

Due to the absence of federal action, the Governors of the west coast states have concluded that these three states must act individually and regionally to reduce GHG emissions.

Governors directed their staffs to develop joint policy recommendations focusing on activities that require regional cooperation and action, including:

1. Exercise joint purchasing power to obtain fuel-efficient vehicles2. Electrify ship ports and truck stops to reduce diesel emissions3. Encourage renewable electricity generation4. Improve appliance and building efficiency standards5. Develop consistent and coordinated GHG emissions inventories having

standard protocols for reporting and accounting

Invited other western states, Canadian provinces, and Mexican states to join

25.

Western Governors agree to collaborate to develop “a clean, secure, and diversified” energy system for the West

Examine the feasibility of, and actions needed to:» Meet the West’s generation and transmission needs over the next

25 years» Develop 30,000 MW of clean energy in the West by 2015 (energy

efficiency, solar, wind, geothermal, biomass, clean coal, advanced natural gas)

» Increase the efficiency of energy use by 20% by 2020.

A more aggressive effort is needed to develop the long-term wind energy potential in the western plains and mountain states

» Undertake a comprehensive study

Western Governors’ Association’s Resolution 04-14 “Clean and Diversified Energy Initiative for the West”

(June 22, 2004)

26.

Governor Schwarzenegger's Executive Order 5-3-05

(June 1, 2005)

Established GHG emission reduction targets:» 2010: return to 2000 emission levels» 2020: return to 1990 emission levels» 2050: 80% below 1990 emission levels

Directed California Environmental Protection Agency to lead a multi-agency effort (Climate Action Team)

1. Conduct an analysis of the impacts of climate change in California2. Develop strategies to achieve the Governor’s emission targets as well

as damage mitigation and adaptation plans

27.

California Public Utility Commission Policies

In December 2004, the CPUC adopted a value of $8 per ton of CO2 to be used in evaluating long-term power supply alternatives (projects or power contracts of 5 years or longer)

Accelerated 20% Renewable Portfolio Standard goal from 2017 to 2010; set a goal of 33% for 2020

Precluded long-term contracting from baseload resources having CO2emission rates greater than a new combined-cycle gas turbine

Adopted California Solar Initiative to install 3000 MW of rooftop photovoltaic systems over the next decade (with significant subsidies)

Announced its intention to adopt a “load-based” cap on GHG emissions attributable to utility supply portfolios

28.

California Assembly Bill 32

California Air Resources Board (CARB) or a separate Council to implement a GHG cap for electrical power and major industrial and commercial sectors» 1990 Baseline» Mandatory reporting (CARB Registry)» Enforceable reductions

Ongoing struggle between the Democratic Legislature and Governor Schwarzenegger over program design elements and taking credit for the policy» Market-based cap-and-trade versus command-and-control» Use of offsets» Economic safety valve

29.

U.S. Conference of Mayors

Recently adopted several resolutions encouraging its members to adopt GHG-related policies:» Reduce the fossil-fuel energy use in all new City buildings by:

60% in 201070% in 201580% in 202090% in 2025

100% in 2030» Support landfill gas-to-energy policies at state and federal levels» Support renewable energy policies» Support increased energy efficiency and conservation» Encourage use of plug-in-hybrids

Private Sector Activities

31.

Shareholder Advocacy Groups

Investor Network on Climate Risk» Launched at the first Institutional Investor Summit on Climate

Risk at the UN in November 2003» An alliance of more than 50 institutional investors (controlling $3

trillion)» Directed by Ceres, a national coalition of investors,

environmental groups and public interest organizations

Interfaith Center on Corporate Responsibility (ICCR)» A group over 200 religious investment funds

32.

Voluntary GHG Registries

California Climate Action Registry (CCAR)

Eastern Climate Registry (ECR)» 10 northeast states closely coincident with RGGI

Lake Michigan Air Directors Consortium (LADCO)» Illinois, Indiana, Michigan, Ohio, Wisconsin» Contracted technical support effort to World Resources Institute» Studying potential linkage to CCAR and ECR

U.S. Department of Energy 1605(b) Program» Established pursuant to the Energy Policy Act of 1992

U.S. Environmental Protection Agency’s “Climate Leaders” Program» Established in 2002» Includes nearly 100 corporations having total revenues close to 10% of U.S.

GDP

33.

Chicago Climate Exchange (CCX)

Voluntary, but legally binding, self-regulated, rules-based exchange designed and governed by CCX members

Founded at the end of 2003

All members commit to reducing their direct emissions 4% below a 1998-2001 baseline by December 2006 (Phase I)

» 6% below baseline by – (Phase II)

More than 175 members including American Electric Power, Ford, IBM, DuPont, International Paper, the state of New Mexico, and six U.S. cities (Chicago, Oakland, Boulder, Portland)

Approved categories of offsets are allowed» Agricultural sequestration, reforestation, landfill and agricultural methane

combustion, fuel switching to biomass-based fuels

CCX allowances have generally traded around $4-5 per metric ton of CO2

34.

Voluntary Private Pledges with Credible Green Partners

Examples:Entergy—Environmental Defense

» Entergy committed to reduce its GHG emissions 20% below 2000 levels by 2006-2010 period

» 61 internal projects and 13 external projects have been pursued

Ford—External stakeholders (ICCR, Ceres, INCR< NRDC, UCS, MIT)» Commitments to reduce GHG footprint

Pew Center’s Business Environmental Leadership Council (BELC)» Largest U.S.-based association of corporations focused on climate change» 41 members representing $2 trillion in market capitalization» Members pledge to establish and meet GHG reduction objectives

U.S. Environmental Protection Agency’s “Climate Leaders” program» Climate Leaders partners establish baseline inventory measurement and then

set corporate-wide GHG reduction goals» e.g., IBM, GM, GE, Sun Microsystems, Lucent, Baxter

35.

Conclusions

Many Americans are concerned about global warming and favor the adoption of mandatory GHG control policies

In the near term, state, regional and local initiatives will continue to be the center of policy activity

» Focus will be on California and Northeast (RGGI)

Federal initiatives will gain momentum in Congress beginning in 2007

There is a growing constituency for mandatory federal policy if only to avoid a checkerboard of regional policies

A Federal mandatory GHG policy seems likely to eventually be adopted » The timing is uncertain and will depend, in part, on the struggle for control of

Congress by Republicans and Democrats