Redistributed as a Service of the National Library for the Environment*
RL30155: Global Climate Change Policy: Domestic Early Action Credits
Larry B. Parker and John E. Blodgett
[see p. 4]
|Case 1 (early reductions that would occur anyway)||Case 2 (early reductions that would occur as soon as required)||Case 3 (early reductions that would not occur without program)|
|Induce Early Action||---||???||+++|
|Reduce emissions growth, ease transition||---||???||+++|
|Build up experience, institutions||+++||+++||+++|
|Increase number of companies with potential to gain (or to have||+++||+++||+++|
--- tends not to promote objective
??? unclear whether it promotes 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:
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)?
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 106th 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
|Design Parameter||Acid Rain Program (Title IV, CAA)||S. 547||H.R. 2520|
|Definition of a "credit"||Limited authorization to emit 1 ton of SO2; explicitly not a property right||"Contractual entitlement ... to receive 1 ton of greenhouse gas reduction credit for each 1 ton that is creditable under" the Act [Sec. 5(f)(2)]||Similar language to that in S. 547. [Sec. 5(f)(3)]|
|Credit period||Phase 1 began January 1, 1995; Phase 2 begins January 1, 2000; no ending dates||January 1, 1999 to December 31, 2007, or as otherwise determined due to extension of program or use of alternative baseline [Sec. 3(3)]||Same as for S. 547 [Sec. 3(7)]|
|Baseline||For SO2 a source-by-source tonnage cap based on average annual SO2 emissions for 1985-1987 times a specified emission rate (generally 1.2 lb./mmBtu). No allocation for new utility SO2 sources. For NOx, an emission rate limitation based on low-NOx burner technology -- no cap on new sources||A company-wide tonnage cap based on a company's average annual greenhouse gas emissions for 1996-1998, or as otherwise determined due to data being unavailable or unrepresentative. Cap may be increased to account for new sources [Sec. 6(c)]||A company-wide tonnage cap based on a company's average annual greenhouse gas emissions for the 3-year period ending with enactment, or as otherwise determined due to data being unavailable or unrepresentative. Cap may be increased to account for economic growth [Sec. 6(c)]|
|Eligible reductions||For SO2: program mandate for large electric utility sources; opt-in allowed
for other SO2 sources.
For NOx: eligibility determined by cost-effectiveness criteria
|(a) Internationally creditable actions; (b) U.S. Initiative for Joint Implementation; (c) prospective domestic actions, including emissions reductions and sequestration; and (d) domestic section 1605 actions [Sec. 5]||(a) prospective domestic actions, including emission reductions and sequestration; (b) U.S. Initiative for Joint Implementation; (c) retrospective domestic actions, including Sec. 1605 and federal initiatives. Verification of retrospective action must be certified by third-party auditors [Sec. 5]|
|Reporting level||Individual source level||All domestic greenhouse gas sources owned by a person with whom the President (or his designee) enters into a legally binding "early action agreement" under the Act [Sec. 7(a)(1)(A)]||Similar to provision in S. 547 [Sec. 7(a)(1)(A)]|
|Gases covered||SO2; NOx||CO2; other five greenhouse gases to the extent provided in an "early action agreement" [Sec. 3(8)]||CO2 and five other greenhouse gases [Sec. 3(13)]|
|Limits on credits||Statutory cap on emissions based on formulas contained the legislation||None||None. President is to notify Congress when cumulative credits earned has potentially reached 365 million tons [Sec 5(f)(2)]|
|Verification||Continuous emissions monitors with data reported to EPA. Substantial penalties for non-compliance and non-functioning monitors||Established by the "early action agreement" [Sec. 8(a)]||Established by the "voluntary action agreement" [Sec. 8(a)] Third-party verification required to receive credit for retrospective actions [Sec. 5(d)(3)] and sequestration activities [Sec. 10(e)(2)(B)]|
|Sources Included||Focus on larger utility sources. Non-utility sources, small utility sources, and low-emitting utility sources are not included, but can opt into the program||Generally includes all sources owned by participant at the time an early action agreement is entered into. Small or diverse sources, or sources owned by more than 1 person, may be excluded, but can opt into the agreement. Companies may elect to include sinks, but must include all its significant sinks if it makes that election [Sec. 7]||Generally includes all sources owned by participant at the time a voluntary action agreement is entered into. Sources of de minimis emissions may be excluded. Companies may elect to include sinks, but must include all its significant sinks if it makes that election. [Sec. 7]|
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.
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.
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.
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.
|National Council for Science and the Environment
1725 K Street, Suite 212 - Washington, DC 20006
202-530-5810 - info@NCSEonline.org