RL30155: Global Climate Change Policy: Domestic Early Action Credits

Larry B. Parker and John E. Blodgett

Specialists
Resources, Science, and Industry Division

Updated July 23, 1999

CONTENTS

• Summary
• Introduction
• Why Consider an Early Action Credit Program?
• Objectives of an Early Action Credit Program
• Downsides to Early Action Credits
• Assessing the Desirability of an Early Action Credit Program
• Structuring an Early Action Credit Program
• What is an Early Action Credit?
• What Reductions Should Earn an Early Action Credit?
• What Is the Appropriate Reporting Level for Credits?
• How Can Performance Be Measured?
• When Do Early Actions Begin?
• What Is Covered?
• Should the Number of Credits Be Capped?
• How Can Reductions Be Verified?
• Legislative Proposals
• Footnotes

List of Tables

Table 1. Assessment of Three Categories of Credited Reductions in Meeting Possible "Early Action Credit" Program Objectives

Table 2. The Acid Rain Program, S. 547, and H.R. 2520: A Comparison of Selected Design Parameters

Summary

Given the possibility that the Senate might in the future ratify the Kyoto Protocol or a similar agreement requiring reductions in greenhouse gases, the Administration and some in Congress are preparing proposals to allow credit for early actions to reduce emissions before such a commitment would take effect. Such a program would be in the spirit of the Framework Convention on Climate Change (FCCC), which the United States has ratified, that calls on developed countries to take the lead in reducing carbon emissions; and it would be consistent with Title 16 of the 1992 Energy Policy Act (EPACT) that calls for a least-cost energy strategy to achieve "the stabilization and eventual reduction" of greenhouse gases.

An early action credit program could be considered a form of contingency planning, for the possibility that the United States may in the future ratify the Kyoto Protocol or take some other action requiring mandatory reductions in domestic greenhouse gas emissions. Already, section 1605(b) of EPACT authorizes a voluntary reporting system that anticipates the possibility that early reduction actions might receive credit if mandatory reductions were to be imposed in the future. Legislation would be required to establish an early credit program.

If one accepts that contingency planning in the face of uncertainty is prudent, proponents of early action programs suggest several reasons for initiating such a program: (1) to reward companies that reduce greenhouse gases by rewarding their early action if and when mandatory reductions are imposed; (2) to reduce the current increasing emissions of greenhouse gases; (3) to build up experience with and test the necessary institutions of a carbon trading program; (4) to potentially save money by spurring innovations for reducing greenhouse gas emissions now; (5) to begin building a political base for mandatory reductions.

However, opponents note that under the Kyoto Protocol, if the United States gives some companies credits for early reductions, then, with limited exceptions, other companies would have to make up for that credit during the 2008-2012 reduction period. So, the penalty for non-participation would be more than not accumulating carbon credits for future use; it potentially would represent an increased reduction requirement during 2008-2012. Opponents of early action programs see this zero-sum game as coercive, as participating companies would have an incentive to support Kyoto ratification, while non-participants would be penalized by losing a portion of their emissions allocation.

In the 106^th Congress, two bills, S. 547 and H.R. 2520 have been introduced to authorize the President to enter into agreements to credit early actions to reduce greenhouse gases. Overall, they reward a broad array of carbon reduction activities, maximizing the potential number of participants. This would build experience in the processes necessary to reduce emissions, but could reward actions that may occur anyway, which could adversely affect those who might have to make reductions later. While the bills outline several design parameters, they provide alternatives and delegate many decisions to be resolved in "action agreements" between the President (or his designee) and the owner of emitting sources.

Introduction

Given the possibility that the Senate may in the future ratify the Kyoto Protocol or a similar agreement requiring reductions in domestic emissions of greenhouse gases, the Clinton Administration and some in Congress are preparing proposals to allow credit for early actions that are taken to reduce emissions before such a commitment would take effect.⁽¹⁾ Such a policy would also be in keeping with the spirit of the Framework Convention on Climate Change (FCCC), which the U.S. has ratified, that calls on developed countries to take the lead in reducing carbon emissions to their 1990 levels by the year 2000; and it would be consistent with title 16 of the Energy Policy Act of 1992 (EPACT) that calls for a least-cost energy strategy to achieve "the stabilization and eventual reduction" of greenhouse gases.⁽²⁾

An early action credit policy would require congressional action. In the 105^th Congress, Senator Chafee introduced a bill, S. 2617, to authorize the President to enter into agreements to provide credit for early voluntary actions to reduce greenhouse gases. No action on the bill occurred, and a revised version, S. 547, has been introduced in the 106^th Congress, along with a similar bill, H.R. 2520, introduced by Representative Lazio, Meanwhile, in his January 1999 State of the Union Address, the President spoke of his intention to work with Congress on ways to reward companies that take early voluntary actions to reduce greenhouse gases.

Under the Kyoto Protocol, developed countries would be obligated as parties to the treaty to achieve specified carbon reduction targets over the time period 2008-2012.⁽³⁾ Although the United States has signed the Kyoto agreement, the Administration has not yet submitted it to the Senate for approval. Nevertheless, some businesses are already taking early actions to reduce greenhouse gases. Some believe global climate change is occurring and that early actions will reduce their ultimate costs; some see opportunities for pollution prevention and energy efficiency that are justified in their own right but can concomitantly reduce greenhouse gas emissions. An array of institutional initiatives support these efforts. These include the U.N. Framework Convention on Climate Change; EPACT, which establishes a number of voluntary Department of Energy (DOE) programs to reduce greenhouse gas emissions,⁽⁴⁾ as well as a voluntary reporting system anticipating the possibility of early action credits (§1605(b)); various Environmental Protection Agency (EPA) pollution prevention and energy efficiency programs designed to reduce emissions of air pollutants and that also reduce greenhouse gas emissions⁽⁵⁾; other countries' emerging reduction programs; some state and local programs⁽⁶⁾; and private sector initiatives, such as the Global Climate Information Project and the Pew Center on Global Climate Change.⁽⁷⁾

Currently, reductions under these activities are voluntary. At issue is whether firms taking the initiative to reduce greenhouse gases now should obtain some credit if, as some believe likely, such reductions become mandatory in the future. Unless such credit is given, firms that make early investments could possibly be competitively disadvantaged later for having taken the initiative. (To see how early action credits might work, see the text box on page 3.)

Any effort to provide such credits raises several questions, however, including: What would be the implications of enacting an early action program? How might such a program be structured? Such questions are addressed below, including a review of how proposed legislation would resolve them.

Why Consider an Early Action Credit Program?

Basically, an early action credit program may be viewed as a form of contingency planning. In this case, the contingency is that the U.S. may in the future ratify the Kyoto Protocol or take some other action requiring mandatory reductions in domestic carbon emissions. Already, section 1605(b) of EPACT authorizes a voluntary reporting system that anticipates the possibility that early reduction actions might receive credit if mandatory reductions were to be imposed in the future. If the Kyoto Protocol were approved in the future, any consequent requirements for reductions to meet its target would have to enacted by the Congress. At the same time, Congress

could decide to credit earlier reductions; however, a lack of records and problems of verification would make post hoc crediting extremely difficult. Hence the interest in enacting an early credit program to meet the contingency of a future mandatory reduction requirement.

Objectives of an Early Action Credit Program

The primary objective of an early action credit program would be to reward those companies that undertake early emission reduction activities. Senator Chafee stated the objective of S. 547 as follows: "It is vital for Congress to provide companies with some certainty that their voluntary efforts to reduce greenhouse gas emissions do not go unnoticed nor unrewarded by the government."⁽⁸⁾ As the program is voluntary, companies could decide to participate based on their perception of the probability that the contingency may occur. Those who participated in the program could potentially "lose" relative to those who did not, if mandatory reductions, like Kyoto, were not enacted, while those who did not participate could potentially "lose" relative to those who did, if such requirements were enacted. It would be the company's decision as to what to do. Those who wanted to prepare for a carbon reduction program could do so; those who prefer to avoid such preparation would also be free to do so.

If one accepts that contingency planning in the face of uncertainty is prudent, proponents of early action programs suggest several reasons for initiating such a program:

• to give an incentive to companies that begin reducing greenhouse gases before it might become mandatory (or at least not penalize companies that do so) by rewarding their early action if and when mandatory reductions are imposed,
• to reduce or reverse the current increasing emissions of greenhouse gases, as the U.S. committed to do in ratifying the FCCC, and thus easing the transition to the first reduction requirement for 2008-2012 of the Kyoto Protocol,⁽⁹⁾ if it is ratified;
• to build up experience with and test the necessary institutions of a carbon trading program before implementation of the Kyoto Protocol began⁽¹⁰⁾;
• to potentially save money in implementing Kyoto by spurring innovations for reducing greenhouse gas emissions now;
• to begin building a political base for mandatory reductions (such as those contained in the Kyoto Protocol) by rewarding behavior that supports the goal of reducing greenhouse gases, thereby increasing the number of companies with the potential to gain (or having less to lose) from Kyoto approval.⁽¹¹⁾

Downsides to Early Action Credits

The most obvious downside to an early action credit program is that the credits gain value only if a mandatory reduction program like the Kyoto Protocol comes into force. Without mandatory reductions, the investments made to earn credits will have been wasted -- unless there are other offsetting gains, as could result if, for example, a company's gain in energy efficiency saves on energy costs. If mandatory reductions are not approved, then, participants in an early action program could lose, while non-participants would be unaffected or might even gain some competitive advantage.

The way the Kyoto Protocol assesses compliance with the reduction target could create another downside: an early action reduction credit program could result in a zero-sum game in which there can be "winners" (those who gain credits) only if there are "losers" (those who must reduce their emissions more to offset the credits). If the United States approves the Kyoto Protocol, it would be obligated to meet an emissions "budget" during the target years 2008-2012.⁽¹²⁾ Under the agreement, the allowable emissions for the period, calculated as a reduction from the 1990/1995 baseline, could only be increased by specified pre-2008 reductions: certain domestic sequestration reductions⁽¹³⁾ and approved international early reductions achieved by mitigation projects in developing countries through the Clean Development Mechanism.⁽¹⁴⁾ The result would be the allowable number of tons of greenhouse gas emissions allowed for the 2008-2012 period.

Given these parameters for determining allowable emissions, any domestic program to credit pre-2008 reductions (i.e., "early action") would create an essentially zero-sum game. With the exceptions noted, reductions achieved before 2008 would not be counted toward the 2008-2012 emissions budget under the Kyoto Protocol. Actions taken before 2008 that continue to reduce emissions during 2008-2012 would move the U.S. closer to compliance with the Kyoto requirements by the amount achieved during 2008-2012. However, to the extent an early action program credits any pre-2008 reductions not eligible under Kyoto, the outcome is zero-sum: it effectively rewards participating companies (by permitting them to emit more during 2008-2012 by the amount of their early action credits) and requires nonparticipants to compensate for these credits by emitting less than they otherwise could during the target period (see text box, p. 3). If the increased emissions allowed by the credits were not offset by other reductions, the U.S. would fail to meet its emission limitations set by the Kyoto Protocol.

In short, under the Kyoto Protocol, if the United States gave one company credit for an early reduction, some other company would have to make up for that credit during the 2008-2012 reduction period (except for certain sequestration and international reductions). So, the penalty for non-participation in an early action program would be more than simply not accumulating carbon credits for future use. It would be potentially an increased reduction requirement during 2008-2012, if the Kyoto Protocol were ratified. Some opponents of early action programs see this zero-sum game as coercive, as those companies participating in the program could have an incentive to lobby for Kyoto ratification, and those companies choosing not to participate could be penalized by losing a portion of their emissions allocation to those firms that did participate.⁽¹⁵⁾ The Competitive Enterprise Institute argues that an early action program is "a political strategy to implement a non-ratified treaty, fuel pro-Kyoto business lobbying, and penalize companies that don't jump on the global warming bandwagon."⁽¹⁶⁾

Concern about the possible linkage between an early action credit program and the Kyoto Protocol has led to an alternative to an early action credit program being proposed in the Senate. Introduced by Senator Murkowski, S. 882 would provide for annual "public recognition" of voluntary efforts to reduce carbon emission. It also would require DOE to review and, if necessary, promulgate new guidelines to improve the accuracy and reliability of data collected under the Sec. 1605(b) EPACT program by which firms report voluntary reductions. Calling the approach a "valid alternative to S. 547," co-sponsor Senator Craig stated that "voluntary measures should be encouraged through incentives rather than in anticipation of future domestic or international regulatory mandates."⁽¹⁷⁾ In contrast, Representative McIntosh has introduced H.R. 2221 which would simply prohibit any federal funds being used to develop or implement an early action credit program before the Kyoto Protocol is ratified by the Senate.

Assessing the Desirability of an Early Action Credit Program

The extent to which an early action program would achieve one or more of the objectives identified above, or avoid the downsides, would depend on its design parameters. For example, the relevance of the institutional experience gained from an early action program depends on how closely that program mirrors any final reduction program Congress may establish in the future. Questions arising over the applicability of reductions reported under the voluntary reporting system authorized by section 1605(b) of EPACT illustrate this point, as discussed below. Likewise, because the early action program is mostly a zero-sum game, ultimate cost savings would depend on the acceleration of new, cost-effective technologies -- options that would not have been available in 2008 if the program had not existed. A program that credits reductions that will have occurred later anyway, or would be likely to occur as soon as a mandated program is initiated, would simply shift the cost to another company. Of course these concerns may not be that important if the primary focus is on rewarding companies for acting early on greenhouse gases.

Structuring an Early Action Credit Program

What is an Early Action Credit?

The idea of the early credit action plan owes much to the existing acid rain program, enacted as Title IV of the 1990 Clean Air Act Amendments, which employs a credit-style implementation strategy. Under Title IV, the "credits" allocated for sulfur dioxide emissions are called allowances. Each allowance permits the emission of one ton of sulfur dioxide; facilities covered by the program are penalized if they emit sulfur oxides in excess of the number of allowances in their possession. Allowances can be banked, traded, bought, and sold under regulations issued by EPA. Under Title IV, an allowance is a "limited authorization"; it "does not constitute a property right" [§ 403(f)]. In a sense, it is a license to emit a defined amount of pollution -- a license that can be modified or revoked by a future change in policy.⁽¹⁸⁾ As discussed later, the program for nitrogen oxide reductions under Title IV operates in a different fashion.

Greenhouse gas emissions are conventionally measured in millions of metric tons of carbon equivalent (MMTCE). A credit could therefore document a reduction of a greenhouse gas (or possibly a sequestration of carbon) in terms of a metric ton of carbon equivalent. The credit would be earned during a designated "early action" period and could later be used -- presuming greenhouse gas reductions became mandatory -- to offset an amount of emissions equal to the number of credits on hand. Presumably, credits could be marketed in the same fashion as sulfur dioxide allowances under Title IV. However, whether an early action credit would represent a "limited authorization to emit," as it is under Title IV, is a question to be resolved.

Unlike the sulfur dioxide program under Title IV, an early action credit's value would lie in the expectation of future regulatory requirements, such as ratification of the Kyoto Agreement. If Kyoto or other regulatory constraints on greenhouse gas emissions were never adopted, then the credits would presumably become valueless in an economic sense.

What Reductions Should Earn an Early Action Credit?

A central issue in designing a program is the kind of reductions eligible for credit. Robert Friedman of The H. John Heinz III Center for Science, Economics and the Environment suggests the following taxonomy of reductions to evaluate design parameters:

• early reductions that would have happened anyway (case 1 reductions);
• early reductions that were likely to happen as soon as the control period started (case 2 reductions); and
• early reductions that would not have happened anyway -- even after the start of the control period (case 3 reductions).⁽¹⁹⁾

Examples of the first category would include credit for efficiency or other improvements that reduce carbon emissions that are currently being planned for other environmental or economic reasons -- such as compliance with pending nitrogen oxide regulations. Examples of the second category would include "quick fixes," such as curtailing some marginal activities that produce significant carbon emissions or switching energy sources to lower carbon emitting fuels (such as from coal to natural gas). Examples of the third category would include technological innovations that need some lead time to become fully commercialized, such as efforts to improve the fuel efficiency of automobiles or light-duty trucks.

Which of these categories receives credits in an early action program would depend on the objective sought. Table 1 arrays the three reduction cases identified above in a matrix with five objectives for enacting an early action program. As indicated, the reasons to permit case 1 reductions might be to get the broadest possible experience in the credit program and to build the widest possible base for enacting mandatory reductions, including ratifying the Kyoto Protocol; case 1 reductions would not save money, reduce emissions beyond what would occur anyway, or induce companies to undertake unplanned early action activities. Including case 1 reductions would permit the greatest number of companies to participate (potentially increasing experience and political support), but would not have any substantial effect on either carbon emissions (as participants would have done the reductions without the program), or economics (as non-participants would have to do something later to make up for the credits given for the case 1 reductions).

Case 2 reductions are more difficult to assess. It is not clear whether accelerating greenhouse gas reductions likely to occur quickly in the event they become mandatory represents a useful inducement worthy of reward, nor whether such actions would truly ease the transition to a regulatory regime. Accelerated decisions would reduce carbon emissions and cost companies money that they otherwise would have no incentive to spend. Such decisions would also increase participation and experience in a credit program and could possibly widen the base for Kyoto ratification. However, such decisions are unlikely to save programmatic costs in the 2008-2012 years if Kyoto were ratified. Accelerated decisions are likely to involve relatively inexpensive reductions that are easily and quickly implemented. In contrast, it is likely the offsetting reductions other companies would have to make in the 2008-2012 period to cover for these reductions (in addition to their own reductions) would come at higher marginal costs.

Case 3 reductions are likely to have the most positive effects, according to all criteria assessed here. If the technology developed is more efficient than existing technology or represents an entirely new approach to carbon reduction, it could reduce costs compared with not having the option. Likewise, developing the technology early means that it would be more available in 2008-2012 than would otherwise be the case, easing the transition to the requirements of the Kyoto Protocol. Companies would be rewarded for developing and commercializing such technology in advance of those requirements, and the availability of more options could increase support for mandatory reductions, or at least lessen the fear of compliance costs.

The design parameters of any early action credit program can vary depending on which of these three types of reductions one wishes to credit and thereby encourage.

Table 1. Assessment of Three Categories of Credited Reductions in Meeting Possible "Early Action Credit" Program Objectives

--- tends not to promote objective

??? unclear whether it promotes objective

+++ tends to promote objective

What Is the Appropriate Reporting Level for Credits?

An early action program could operate at either a source, project, or company level, and focus either on upstream or downstream users, depending on the goals one wants to promote. In general, the Clean Air Act (CAA) is source-based -- regulatory measures apply because an individual source violates a specific standard. Each source is required to have a permit indicating that it is in compliance with the standards that apply to it. The ownership of the source is irrelevant to its requirements. For example, under the trading program of Title IV for sulfur dioxide, allowances are allocated on a unit-by-unit basis according to a predetermined formula. If the unit is sold, the allowance allocation goes with the unit, all else being equal.

Whether this is the most appropriate approach for an early reduction program is debatable, and depends on the goals one is trying to achieve. Source controls have the advantage of being easily verifiable -- either the source is in compliance with its agreed upon limits, or it isn't. Also, ownership is irrelevant -- an important consideration given the dynamic nature of some industries. For example, the current restructuring of the electric utility industry is resulting in numerous powerplants changing ownership. With source-specific controls, tracking compliance would not be a major problem.

However, the greatest difference between the CAA and any early action program is that participation in an early action program would be voluntary. This may present problems for a source-based program -- companies could decide to put one of their sources under the program and reduce its emissions while allowing increases in emissions at other sources. How to design a program to control such "gaming" may be an issue.

A company-based approach would solve that problem, but create others. Under a company-based approach, the entire company would be the relevant yardstick for determining reductions achieved. This would prevent the potential "gaming" of the system that a source-specific approach might engender. However, companies are fluid entities that buy, sell, acquire, merge, and build new sources on a regular basis. For a source-based program, these dynamics do not represent a major difficulty. However, for a company-based system, determining how to allocate and track emission reductions in such a dynamic climate could be complex, discouraging company involvement in the program.

Whether the reporting point should be upstream users (such as fuel producers), downstream users (such as end-users), or both, also involves tradeoffs. The difficulty with providing credits to both is the potential for double counting. For example, a producer of cleaner fuels might take credit for its innovation while the downstream user could take credit for the reduction as well. The Center for Clean Air Policy (CCAP) argues that the reporting point should be downstream to avoid any double-counting.⁽²⁰⁾ Thus fuel producers would get credit only for reductions in their own operations, but not for the reductions achieved downstream by the fuel's users. The fuel users would receive the benefits of those reductions.

The potential problems with downstream approaches are three-fold. First, not rewarding upstream users for the full emission benefits of their innovation may discourage such innovations. Because upstream innovations, such as fuel improvements, may involve case 2 and case 3 reductions, serious consideration must be given to a decision not to fully reward such innovations. Second, the tracking of the potentially millions of downstream users could be administratively challenging and the resulting burden on companies sufficient to discourage participation. Third, many of the proposals for a permanent carbon trading program involve upstream reporting. If one wants to ease the transition from a voluntary to a regulatory system, having the two systems measure compliance at the same point would be a useful, although not a necessary situation.⁽²¹⁾

How Can Performance Be Measured?

To measure a company or source's early action deserving of credit, it would be necessary to establish a baseline and to devise a formula for determining progress. For example, the performance baseline for sulfur dioxide (SO₂) provisions of the acid rain program (CAA, Title IV) is an emission rate of 1.2 lb. of SO₂ per million Btu of heat input. This emissions rate is then multiplied by the plant's average annual heat input over a three-year historical period (1985-87) to determine its annual emission cap. In contrast, the performance baseline for the nitrogen oxides (NOx) provisions of Title IV is an emissions rate (specified amount of NOx per million Btu of heat input) based on low-NOx burner technology, but includes no annual tonnage cap or historical baseline.

A performance measure can be based on several different approaches, including:

• an emission rate times an historical baseline (like the SO₂ provisions of Title IV);
• an emission rate times a projected baseline;
• an emission rate without a baseline (like a New Source Performance Standard (§111 of the CAA) or the NOx provisions of Title IV);
• actual tonnage produced in a specific baseline year; or
• tonnage projected to be emitted under some "business as usual" (BAU) baseline.

These measures are not mutually exclusive to some degree -- one industry or company could adopt one formula while another industry had another formula more appropriate to it. Which formula is most appropriate depends on several factors -- the most important is what kind of reductions you want to reward (case 1, 2, and/or 3).

There are several tradeoffs. The first tradeoff involves whether emission targets are calculated from an historical or projected (e.g., BAU) baseline. A projected baseline can more easily account for new entrants than an historical baseline where new entrants have essentially a zero baseline (as in the SO₂ provisions of Title IV). However, a projected baseline adds another variable to the reduction program, a variable that, if incorrectly calculated, can result in "paper" reductions. An historical baseline would appear at first to be the easiest to administer; however, a lack of historical data and the potential for changes in project ownership could make those calculations quite complex, particularly if company-wide coverage is desired.

The second tradeoff is sometimes called the "rate versus tons" question. In determining the performance level necessary to receive credits, performance can be measured in terms of the tons of emissions over a specific historical or projected baseline, or in terms of the rate of emissions per unit of output. A tonnage approach has several advantages: (1) the calculations can be fairly simple, (2) it allows great flexibility to a company to achieve reductions by any means it considers appropriate (assuming the tonnage is company-wide based), and (3) it focuses directly on the total aggregate emissions produced (i.e., a tonnage cap), similar to the Kyoto Protocol and other reduction proposals. Disadvantages include potential administrative difficulties if sources are bought and sold, and the potential need to use a projected baseline, if future sources are to be treated on the same basis as existing, "grandfathered" sources.

The advantage of an emission rate-based approach is that it can be directed toward new technology by focusing on production efficiency. Also, the focus on emission rates could allow new sources to compete on the same basis as existing sources for credits, assuming an acceptable baseline could be determined. Such a rate could be designed to improve on existing technology, or to meet the anticipated efficiency necessary to meet the Kyoto requirements. Implementation could be easier, if the acceptable emission rate is predetermined, like the current acid rain program. Basically, the appropriate monitoring agency would only have to determine a source's actual emission rate multiplied by its predetermined baseline to assess compliance. However, if the program is based on a company-wide strategy (as discussed above) to avoid gaming of reductions, determination of appropriate rates and baselines may be more difficult.

A variation on the rate approach would be not to include an historic or projected baseline, but to base the limitation solely on an acceptable emissions rate per unit of output. This could encourage companies interested in making case 3 reductions. The avoidance of a baseline year would eliminate the distinction between existing and future facilities, and potentially turn the focus of reduction efforts toward improving efficiency rather than reducing output. However, an emission-rate based program would not cap emissions, in contrast to the Kyoto Protocol and other proposed reduction programs. Emissions could rise over time as production increased, unless the emissions rate were progressively reduced over time. Also, while some industries produce an identifiable product from identifiable facilities (such as electricity), other companies use multiple suppliers to produce multiple products (such as bulldozers and garden tractors). Thus, in some cases, definition of output may be difficult.

Although each of these measuring approaches has its strengths and weaknesses, the fundamental problem of how to set appropriate parameters remains in all cases. Is the starting point current emissions or some target to be achieved in the future? Once again, one returns to the fundamental reason for why one is enacting such a program and the type of emission reductions one wants to credit. No measurement approach can avoid having to make decisions on these issues.

When Do Early Actions Begin?

A fundamental design issue surrounding any early action program would be the question of "How early is early?" One possible starting point would be the baselines used in the Kyoto Protocol. The Kyoto Protocol uses a combination of 1990 and 1995 dates for determining baselines for its reduction requirements. Reductions made after these dates could represent "early action," which would parallel the Kyoto Protocol's crediting of carbon sequestration "early action" activities from 1990 -- the same year as the baseline for carbon allocations. However, with the possible exception of electricity production, historical data on carbon and other greenhouse gas emissions may be insufficiently detailed to support verification efforts necessary for crediting reductions for the period.

A second possible starting point would be the 1605(b) program set up under the Energy Policy Act of 1992 (EPACT). The 1605(b) reporting program is operated by the Energy Information Administration (EIA) and is designed to document voluntary actions taken to reduce greenhouse gases. The guidelines are flexible and designed to promote broad participation. Reports made by participating companies are not verified by EIA nor does EIA prevent the same reduction activity from being reported by more than one entity, resulting in double counting.⁽²²⁾ In a recent analysis, the General Accounting Office (GAO) suggested that many of the claims submitted under the 1605(b) program would probably be ineligible for credit under a credit program with more rigorous vetting.⁽²³⁾ Also, some companies participated in the various EPA and DOE voluntary programs, such as Green Lights, but did not report their activities to the 1605(b) program. Should those reductions be included in an early action credit program?

A third possible starting point would be December 1997, when the negotiations of the Kyoto Protocol were completed. Emissions inventories since then are likely to be more accurate than for earlier periods. It would also represent the point at which the international community had given a clear signal of its intention to pursue carbon reductions beyond the voluntary commitments of the FCCC. Its primary disadvantage is that reductions achieved before this time period would not count.

A fourth possible starting point would be the year 2000, the date for which international projects developed under the Clean Development Mechanism (CDM) are permitted to obtain reduction credit under the Kyoto Protocol. Besides putting domestic and international early action credits on the same footing, this approach would have the added advantage of permitting some time for companies to get their emission inventories in shape and develop appropriate strategies. The primary disadvantage is that any reductions achieved before the year 2000 would not count.

What Is Covered?

There are several issues revolving around the scope of an early action program. The first is the number of greenhouse gases that would be covered. Kyoto lists six greenhouse gases that are to be controlled: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Including all six gases would maximize flexibility and potential reductions-- converting the gases' suspected warming potential to a common measure (e.g., metric tons of carbon equivalent) would allow interpollutant crediting. However, historical or monitoring data on the emissions of non-CO₂ gases may be limited in many cases. Thus, some gases might be exempted to maintain the program's integrity and to ease its implementation.

Likewise, there is the question as to whether a company should be allowed to choose which gases to include in its reduction strategy. Unfortunately, although permitting such choice would introduce flexibility to the program, it would also raise the "gaming" issue once again. Could a company take credit for reducing its emissions of some greenhouse gases, while increasing emissions of others?

A company's ability to choose which greenhouse gases to include raises a second coverage question: What sources to include? Carbon dioxide is emitted by many dispersed sources -- the most concentrated sources, electric utility plants, account only for about one-third of U.S. carbon emissions. Should a program exclude a company's small sources (such as company cars) from the inventory? Excluding them would make administration easier and encourage participation, but could raise the potential for gaming. In this sense, the issue of what sources to include in the program presents the same problems that the reporting issue raised earlier does.

A third coverage issue involves the potential inclusion of carbon sinks in an early action program. The development of carbon sinks to sequester carbon emissions has been a prominent feature of the 1605(b) program, and could be expected to be a major component of any early action program, particularly since they can be counted toward the Kyoto reduction requirement. However, experience under the 1605(b) program suggests that inconsistent reporting and documentation of such sinks could be a problem that would have to be addressed under an early action program.⁽²⁴⁾ To be eligible for credit under the Kyoto Protocol, such reductions would have to meet verification standards approved by the parties to the Agreement. Under any program, a methodology for calculating baselines, sequestration, and credits received would have to be worked out to provide potential participants with the certainty necessary to encourage participation. In addition, if company-wide coverage is desirable, one would have to decide whether sinks were a part of a company's baseline emissions or whether companies could choose to opt in or out of such projects on a case-by-case basis.

Should the Number of Credits Be Capped?

Because a domestic early action program can be a zero-sum game, except for certain sequestration activities, the question arises as to how many credits might be awarded in an early reduction program. This is important since those credits would, in effect, increase other companies' reduction requirements in 2008-2012, if Kyoto were ratified. It is difficult to project what that burden on companies not obtaining early action credits might be.⁽²⁵⁾ Because a very large number of early action credits could significantly increase the reduction burden in future years, if Kyoto were ratified, some have proposed limiting the total number of early action credits that could be earned. However, a cap on early credits could significantly increase the complexity of an early action program. In particular, an allocation mechanism would be necessary if the cap on early credits were reached. There are several approaches available, including first come/first serve, or a pro rata approach; each would involve more complexity and interject some uncertainty into the process. Such complexity and uncertainty could discourage participation. Decision-makers would have to decide whether the protection is worth the costs.

How Can Reductions Be Verified?

Surrounding much of the above discussion has been concern about verifying any credits awarded under an early action program. Among the concerns identified include gaming of reductions, double counting of reductions, accounting for carbon sinks, and ability to monitor emissions. Many of the parameters discussed above would require significant administrative flexibility and discretion in order to maximize the program's potential benefits. This would place substantial responsibility on the enforcement agency to ensure the proper balance between promoting the program's goals and maintaining its integrity. In short, how much specificity should Congress include in a program's design, and how much of a program's implementation should be left to administrative discretion by the administrating agency (which might be either DOE or EPA)?

Legislative Proposals

Several groups have proposed early action programs combining the various elements discussed above.⁽²⁶⁾ So far, two proposals, S. 547 and H.R. 2520, have been introduced in the 106^th Congress. In order to provide some comparative insight on credit programs, table 2 identifies how S. 547 and H.R. 2520 answer the questions raised above and the answers provided by the acid rain program enacted as part of the 1990 Clean Air Act Amendments.

Overall, S. 547 offers the potential for rewarding a broad array of carbon reduction activities. By being so inclusive, the bill maximizes the number of potential participants. This has the advantages of encouraging experience in the process of reducing emissions and of potentially reducing emissions of greenhouse gases; however, it may also reward actions that would occur anyway, which could adversely affect those having to make reductions later. While S. 547 indicates answers to several design parameters, it typically provides for alternatives to be decided on later, and it delegates many decisions to be resolved in "early action agreements" between the President (or his designee) and the owners of emitting sources. On the choice of gases covered, for example, the bill specifies that carbon reductions would be eligible for credits, but the inclusion of other gases would be through these agreements.

In general, H.R. 2520 is similar in structure with S. 547 with binding "voluntary action agreements" being employed to encourage broad participation in the program. However, the bill does include more specifics and restrictions than S. 547. In particular, H.R. 2520 includes a detailed section on receiving credit from sequestration activities, the expressed purpose of which is to ensure that such activities "are of sufficient quality to allow comparable and tradable with other credits" from emission reduction activities. Among the safeguards included in this section is a requirement for third party verification of credits reported by the participant. Likewise, credits from retrospective activities must be certified by a third party. Another example of added detail is the inclusion of all six greenhouse gases in voluntary action agreements, not just carbon dioxide.

Table 2. The Acid Rain Program, S. 547, and H.R. 2520: A Comparison of Selected Design Parameters

Footnotes

1. ^(back)This report does not address the substance of the underlying issue of global climate change; rather, it focuses on an issue that has arisen in connection with that continuing debate. For background on the issue of global climate change, see Wayne A. Morrissey and John Justus, Global Climate Change, CRS Issue Brief 89005 or the CRS Global Climate Change electronic briefing book at http://www.congress.gov/brbk/html/ebgcc1.html.

2. ^(back)For background on U.S. global warming policy from FCCC to the Kyoto Protocol, see Larry B. Parker and John E. Blodgett, Global Climate Change Policy: From "No Regrets" to S. Res. 98, CRS Report RL30024, January 12, 1999.

3. ^(back)For the specific obligations of the Kyoto Protocol, see Susan R. Fletcher, Global Climate Change Treaty: The Kyoto Protocol, CRS Report 98-2, updated February 4, 1999. For estimates of the domestic reductions that might be required, if the Kyoto Protocol were ratified, see Larry Parker and John Blodgett, Global Climate Change: Reducing Greenhouse Gases -- How Much from What Baseline? CRS Report 98-235, March 11, 1998.

4. ^(back)Larry B. Parker and John E. Blodgett, Global Climate Change Policy: From "No Regrets" to S.Res. 98, CRS Report RL30024, January 12, 1999.

5. ^(back)See, for example, http://www.epa.gov/climatewise/

6. ^(back)See http://www.epa.gov/globalwarming/actions/state/index.html

7. ^(back)See, for example, http://www.climatefact.org and http://www.pewclimate.org

8. ^(back)Quoted in "Chafee, 10 Others Introduce Bill To Credit Voluntary Greenhouse Gas Emissions Cuts," Daily Environment Report, March 5, 1999, p. AA-1.

9. ^(back)At present, the trend for net domestic greenhouse gas emissions is up. However, reversing this trend helps meet the Kyoto Protocol requirements only to the extent the reductions are sustained through the 2008-2012 target period -- e.g., through improved efficiency. As discussed under "Downsides to Early Action Credits," the actual tonnage reductions during early action would not count toward meeting the reduction requirement during the target period.

10. ^(back)Some have seen the acid rain "allowance" system of Title IV of the Clean Air Act (CAA) as a model, as noted briefly below; table 2 compares parameters of the acid rain program with "early action credits" legislation. A discussion of the extent to which the title IV program may provide useful insights on a carbon "credit" program can be found in Larry B. Parker, Global Climate Change: Market-Based Strategies to Reduce Greenhouse Gases CRS Issue Brief 97057, updated regularly.

11. ^(back)Robert M. Friedman, "Credit for Early Action," Briefing sponsored by the Northeast Midwest Institute, February 5, 1999; Center for Clean Air Policy, "An International Market in Early GHG Emissions Reductions," June 1998, p. 2; and Robert R. Nordhaus, et al., Early Action & Global Climate Change: An Analysis of Early Action Crediting Proposals (Washington, D.C.: Pew Center on Global Climate Change, 1998), pp. 6-8.

12. ^(back)Technically, the net carbon-equivalent emissions of 6 specified greenhouse gases for the 5-year period 2008-2012 are not to exceed 5 times 93% of baseline year emissions (Kyoto Protocol, Article 3(1)), plus allowed adjustments. See Larry Parker and John Blodgett, Global Climate Change: Reducing Greenhouse Gases -- How Much from What Baseline, CRS Report 98-235 (March 11, 1998).

13. ^(back)According to the Protocol, "The net changes in greenhouse gas emissions from sources and removals by sinks resulting from direct human-induced land-use change and forestry activities, limited to afforestation, reforestation, and deforestation since 1990, measured as verifiable changes in stocks ... shall be used to meet" the 2008-2012 commitments (Article 3(3)). Also, pending further negotiations, currently underway, revised methods of accounting for "removals in the agricultural soil and land-use change and forestry categories" may be applied in meeting the 2008-2012 commitment, if the activities took place after 1990 (Article 3(4)).

14. ^(back)Beginning in 2000, early reductions achieved by mitigation projects in developing countries through the Clean Development Mechanism may be credited to a developed country's first budget allocation (Article 12).

15. ^(back)The actual cost of participating or not non-participating is unclear because of general uncertainty about the costs of reducing greenhouse gases. For more on this uncertainty and the range of cost estimates it produces, see Larry Parker and John Blodgett, Global Climate Change: Three Policy Perspectives, CRS Report 98-738, August 31, 1998.

16. ^(back)Marlo Lewis, Jr., "Early Action Crediting: Growing the Kyoto Lobby at Small Business' Expense," CEI On Point, February 12, 1999, p. 3

17. ^(back)Statement of Senator Craig. Congressional Record, April 27, 1999, p. S4271.

18. ^(back)See Larry B. Parker, Acid Rain Control: An Analysis of Title IV of S. 1630, CRS Report 90-63, January 31, 1990. pp. 20-21.

19. ^(back)Robert M. Friedman, "Credit for Early Action," presented at a congressional briefing sponsored by the Northeast-Midwest Institute, February 11, 1999.

20. ^(back)Center for Clean Air Policy, "An International Market in Credits for Early Greenhouse Gas Emissions Reductions," June 1998.

21. ^(back)For example, a recent proposal by Resources for the Future (RFF) for a domestic trading program for carbon dioxide argued for it to be administered upstream to obtain the broadest possible coverage. In the proposed upstream program: "we [RFF] focus on domestic energy producers (and importers) in order to obtain this broad coverage at the lowest possible administration and monitoring cost." Raymond Kopp, Richard Morgenstern, William Pizer, and Michael Toman, "A Proposal for Credible Early Action in U.S. Climate Policy," Resources for the Future, March, 1999.

22. ^(back)S. 882, introduced in the 106^th Congress, would require DOE to review and promulgate guidelines to improve the accuracy and reliability of data collected under the Sec. 1605(b) program.

23. ^(back)General Accounting Office, Climate Change: Basic Issues in Considering a Credit for Early Action Program, Report to Ranking Minority Member, Committee on Government Reform and Oversight, House of Representatives (GAO/RCED-99-23, November 1998), p. 11.

24. ^(back)Susan R. Fletcher and Ross W. Gorte, Forestry Projects in the United States to Offset Carbon Emissions, CRS Report Prepared at the Request of Senator Daniel K. Akaka, April 23, 1998. Available from the Resources, Science, and Industry Division.

25. ^(back)According to a report prepared for the Pew Center, a comprehensive program that provided a ton-for-ton credit for all reductions below a "business as usual" basecase and was immediately successful in meeting the Kyoto Protocol (an extreme case) would use about half of the U.S. emission allocation for the 2008-2012 period under Kyoto. This would be a severe burden on the economy. A more moderate case, where 50% of potential participants take part, the baseline is 1996-1998 emissions, and participants reduced emission at a rate that balanced the early reduction credits with their expected obligations under Kyoto during 2008-2012, the early credit program would consume only about 4% of the available emission allocation under Kyoto. This level, which may be more realistic, would obviously be less burdensome.

26. ^(back)For a summary and comparison of those proposals, see Robert R. Nordhaus and Stephen C. Fotis, Early Action & Global Climate Change, (Arlington, VA: Pew Center on Global Climate Change), October 1998.

Return to CONTENTS section of this Long Report.