Chapter

Context and Approaches for Climate Policy

Introduction

In June 2008, the RAND Corporation convened three half-day workshops on policy approaches to climate-change mitigation and how they would affect two key sectors: transportation and energy. The workshops, which were held at RAND's offices in Arlington, Virginia, included speakers, panelists, and other workshop participants representing multiple government agencies, industries, and advocacy and research organizations.

Given the many perspectives of stakeholders in the climate policy debate, RAND organized the three workshops for participants to offer their own perspectives and to help foster broader agreement on policy approaches that would be effective and could gain support from all three groups of stakeholders. Among the main stakeholder groups that participated in the workshops, each offered distinct perspectives: Government officials tended to focus on what can be implemented and show results in a short to medium time frame; businesses were concerned chiefly with costs and economic competitiveness; and advocacy groups often focused on the solutions that will reduce greenhouse gas (GHG) emissions by the greatest amount.1

For a set of national responses to emerge from ongoing climate change policy discussions, these interest groups will have to come to agreement on how to mesh sometimes-conflicting goals. Because any effective action on climate change will have to be broad and far-reaching, the major policy players will need to come to a general agreement on an effective framework that can garner support from a wide range of stakeholders. Otherwise, policy prescriptions will provoke significant dissent and risk failure.

While the climate workshop focused on how to construct a framework for climate policy, the other workshops examined two key sectors: energy and transportation. Electricity generation is the largest emitter of GHG, responsible for about 40 percent of all emissions in the United States, and would be directly affected by attempts to limit energy use or switch to alternative sources. The transportation sector emits roughly 30 percent of all GHG in the United States, which stems from both personal travel in cars and an increasing share derived from goods movement (EPA, 2008).

1 This document uses the term GHG to refer to the range of gases, chief among them carbon dioxide, responsible for climate change. Although workshop participants used the terms GHGs, carbon dioxide, and just carbon interchangeably, we use GHG in these proceedings. The focus in the workshops was predominantly on carbon dioxide, but people working in this field commonly intend for non-carbon dioxide gases to be included in climate policies, since they can also provide cost-effective opportunities for reductions, given the high global-warming potentials of the other gases. However, we use the common term carbon tax rather than GHG tax when referring to this policy instrument.

The remainder of this chapter focuses on the common themes from all three workshops, while the next three chapters delve into more specifics from the workshops on climate policy, energy, and transportation. Since the three topics overlap, we have organized the chapters along thematic lines wherever possible, rather than provide a strict recording of what was said at each workshop.

Each workshop featured two or three speakers (representing government, business, and advocacy organizations), as well as an additional four to five panelists who responded to the speakers' presentations. Questions and comments from all workshop participants were welcome, and each workshop was moderated by a RAND researcher. A list of speakers, panelists, moderators, and other workshop participants is provided in the appendix. To encourage participants to speak freely, we operated under the Chatham House rule, under which all participants agreed not to quote any comments by name. Respecting this agreement, no comments in this document are attributed to specific participants.

Context for Making Climate Policy

Participants at each of the three workshops generally agreed that the context for making policy on climate issues is defined by the following four broad themes:

Climate Change Is a Significant Problem Requiring Action on Many Fronts

The core scientific findings that support the occurrence of human-induced climate change are no longer in doubt. The business and environmental communities, long on opposite sides of this question, now agree that climate change is a real and growing concern. Significant emissions reductions in GHGs will be needed to prevent harmful climatic change. Although workshop participants did not discuss specific reduction targets or timetables in detail, the general consensus was that broad-based policies should be put in place soon.

The scope of the problem is large enough that all major sectors of the economy should be involved because climate effects cannot be mitigated by changes in just a few sectors or industries. Any specific sector viewed as not pulling its weight will face potential political problems, regardless of the relative cost-effectiveness of specific mitigation measures. In addition, participants noted that the United States should take an integrated approach because it makes sense economically to mitigate GHGs nationally, rather than only on a regional or state basis.

Similarly, no single strategy will reduce emissions to the levels needed to sufficiently slow the pace of climate change. Technological and behavioral changes are both required. Increased energy efficiency—often referred to as the fifth fuel2 because it can help meet energy needs as effectively as the development of alternative energy sources—is the most widely agreed-upon strategy, and it will need to be implemented in a wide variety of settings.

Climate-Change Mitigation Is Intrinsically Linked to Other Important Public-Policy Issues

Because taking on climate-change mitigation will have effects in other policy areas, it is important to understand these interconnections and their consequences. In the case of transportation, it is likely that many policies to reduce GHG emissions will also have a positive impact in other areas. For example, climate change can interact with transportation policy challenges,

2 The other four are coal, natural gas, nuclear, and renewable energy.

such as shortages of financing for infrastructure maintenance and urban congestion. Some policies, such as congestion pricing, would help achieve all these goals simultaneously.

However, in other cases, climate policy goals can conflict with other goals. For example, shifting away from coal, which is carbon-intensive but abundant in the United States, may result in more energy insecurity if the country shifts to alternate sources that have to be imported and may be subject to greater instability, such as natural gas. There was some difference of opinion about the potential scope of consequences of U.S. dependence on imported energy—how vulnerable it makes the United States to the decisions of other countries and whether the high price of foreign oil creates excessive wealth transfer away from the United States. Given those factors, the potential exists for conflict between the goals of lower GHG emissions and reduced dependence on imported energy.

Policymakers and the Public Differ in Their Recognition of the Problem

The level of awareness of climate change and the need for urgency varies among actors. In general, the executive and legislative branches of the federal government are aware of the need to make GHG reductions. Awareness among the states varies greatly; some states are more aggressive than the federal government, and others are doing little. Such variance in awareness or commitment to climate-change policy may make it difficult to achieve national-level policy solutions in which a wide variety of governmental bodies need to act in a coordinated or integrated manner.

In terms of public awareness, the general public understands that climate change is a problem, but additional education may be necessary to bring the public on board to support potential solutions. Furthermore, rigid stances by some interest groups and policymakers—for example, total opposition to nuclear power or support for its unlimited use—can impede the compromises needed to reach workable solutions.

Executive Leadership Is Needed to Make Progress on Climate Change

Developing plans for climate-change policies, building public acceptance of the policies, and implementing them will require leadership from top elected officials in the executive branch at all levels of government—from the president to governors and mayors. Such leadership will be necessary to help structure constructive policy debate by congressional committees, state legislatures, and city councils, all of which will play a role in debating and ultimately approving necessary policy changes.

Policies to Confront Climate Change

At the workshops, participants debated advantages and drawbacks of specific policies to mitigate climate change. We organized mitigation policies into four broad categories: market-based approaches, regulations, technology policies, and behavioral change.3 Speakers, panelists, and other workshop participants discussed examples of each, along with advantages, drawbacks, and related issues. In some cases, there was broad agreement; in others, there was significant

3 Although workshop participants did not assign policies to these four categories, we believe that they provide a useful framework for sorting out a wide range of policies that were discussed.

debate. The upcoming sections describe each policy type, provide examples, and present the most salient points from the workshop debates.

Market-Based Approaches

This type of policy attaches a price to a specific quantity of GHG emissions. Currently, emitting GHGs is a negative externality in economic terms, meaning that the emitter does not bear a direct financial cost for emissions. Policies based on market incentives use price signals—that is, prices associated with emissions tell individuals and businesses the cost of not mitigating emissions. Emitters should react to price signals by implementing various means to curb their emissions when the costs of such efforts are lower than the price of emissions, so that mitigation saves them money.

Two types of market-based approaches have been considered in the United States. The first is known as a cap-and-trade policy, in which the government sets a limit on total GHG emissions and issues permits that allow the permit holder to emit a specific amount. The permits can be bought and sold on an open market. Companies that have excess permits because their emissions are below their allowable limit or because they have low costs of emissions mitigation can sell their permits; companies that find it more cost-effective to exceed their allowable emissions limit will need to buy additional permits. As a result, if one business can reduce its emissions at a lower cost than another business, it makes sense all around for the first business to sell some of its permits to the second. Over time, the value of permits will rise or fall depending on technology advances and changes in targets for total permissible GHG emissions.

The second approach is known as a carbon tax, which charges emitters a fixed amount per unit of GHG emitted. Unlike a cap-and-trade system, which sets a quantity of emissions but leaves the price of a permit up to the market, a carbon-tax approach sets a price for GHG but imposes no direct limit on the amount of emissions that companies can release. Both a carbon tax and a cap-and-trade system can be applied to fuel supplies based on their GHG content, not just to measured emissions from fuel combustion.

Workshop participants debated which of these two broad approaches would be superior. While many economists and some industry leaders believe that a carbon tax would be more economically efficient, others view cap and trade as still effective and more politically feasible. One critique of the cap-and-trade approach, however, is that it does not provide investors with compliance cost certainty, because the price of emitting GHGs can fluctuate with the permit market. A detailed discussion of the advantages and disadvantages of a cap-and-trade policy as opposed to a carbon tax can be found in Chapter Two.

Regardless of which approach (or combination of the two approaches) is ultimately selected, there was broad agreement that market-based approaches are a necessary component for a climate policy to succeed in reducing emissions. A number of other implementation issues would also need to be decided. One key issue is who would set the emissions cap levels or carbon tax and how they would be set. Participants agreed that over time, in order to decelerate and subsequently reduce emissions, either the carbon tax would have to be raised or the overall emissions cap in a cap-and-trade system would have to be lowered. However, they disagreed on whether Congress would be more likely to take action to raise a tax or lower the emissions cap. Tax or cap adjustments also could be set to take place automatically, thus distancing them from the political process by putting them into a more bureaucratic realm.

Participants' perspectives varied on whether permits would be auctioned or allocated if a cap-and-trade system were to be adopted. Auctions would require emitters to purchase the emissions permits from the government initially, after which they could be bought and sold by permit holders. This would engender a very large revenue flow from emissions sources to the government. In contrast, allocations would be available at no cost to businesses, perhaps on the basis of current emissions profiles.

If permits were auctioned, a second key question is what would be done with the revenues. They could be used to invest in lower-GHG technology, offset the impact of higher energy costs on low-income groups, and/or reduce other taxes. This is an important issue because the revenues could be substantial—on a par with corporate income tax revenues. There are already strong political pressures for different uses of these funds.

Participants agreed that getting the price right is necessary for an effective climate policy, but not sufficient. They argued that there are too many market failures in this arena to assume that GHG pricing alone would induce the desired behavior relatively cost-effectively. Therefore, while some type of market-based approach should be enacted, it should be used in conjunction with other types of policies.

Two other observations emerged from the discussion of market-based approaches. First, participants noted that climate-change policies should be effective regardless of the price of energy sources. A suite of policies premised on high oil prices (for example, assuming that the private sector will invest heavily in alternative energy research and development) will lose at least some effectiveness if the price of oil falls. Second, depending on the sector, there may be other ways to send effective price signals beyond cap and trade and carbon taxes. For example, drivers might reduce their amount of driving if congestion pricing is implemented (see details in Chapter Four, which examines transportation policies).

Regulations

Regulations require individuals and businesses to reduce certain types of emissions, without direct concern for the cost of doing so. Many regulations currently in place have implications for GHG mitigation, including the following:

• Corporate Average Fuel Economy (CAFE) standards, which require manufacturers to produce vehicles that use fuel more efficiently

• appliance standards that set energy-efficiency levels for goods such as dishwashers and dehumidifiers for both residential and commercial use

• building codes that regulate types and efficiencies of heating and cooling systems, lighting, windows, and so forth

• renewable portfolio standards, which require electricity companies to use a minimum percentage of renewable-energy sources to produce the electricity they provide to customers.

Even with a cap-and-trade or carbon-tax policy, workshop participants largely agreed that regulations are needed to correct other market failures that occur when markets do not respond adequately to a price signal. For example, even with a carbon tax, some builders might not invest in state-of-the-art energy-efficiency technology if they do not expect to recover the additional costs in building sale or lease prices.

However, participants disagreed in several key areas regarding the form and focus of such regulations. First, there was no consensus on what kinds of regulations are best suited for overcoming the market failures that impede the effects of emissions pricing. For example, some argue that auto manufacturers would not have achieved the current levels of fuel economy without CAFE standards. The auto industry has sharply disputed this, saying that it would have responded to consumer demand for more fuel-efficient cars when the price of gasoline

The second area of contention was over which level of government should set standards. Industry representatives tended to favor federal regulation, since responding to a single set of national regulations would be easier and less costly than responding to different state and local regulations. On the other hand, states that want to go beyond federal standards have argued that they would like to be allowed to innovate and that relying exclusively on federal standards would prevent them from raising the bar.4 This may be a more contentious point in some sectors than others. For example, there was support for state, regional, or local solutions in allowing different types of transportation investments depending on the existing land use. However, it is clear that tensions among industry and state governments will persist on this set of issues.

Technology Policies

As discussed in the climate workshops, technology policies refers to a suite of measures that promote research, development, demonstration, and deployment of innovations that can reduce GHG emissions. The potential technologies themselves vary widely. Among those specifically discussed at the workshops were alternative fuels, such as ethanol and other biofuels; alternative vehicles, such as plug-in hybrid gasoline-electric vehicles and exclusively electric vehicles; and carbon capture and storage (CCS),5 in which GHG that would otherwise be released into the atmosphere is instead collected and stored. Potential technology-related policies range from tax credits designed to promote investment in specific technologies (for example, the national Production Tax Credit [PTC] for wind power) to direct government investment in promising avenues of research or pilot technology deployment programs.

Participants strongly disagreed about the appropriate role for government in the development and deployment of new climate-related technology. One particular area of disagreement was the question of how important technological solutions will be in reducing emissions. While all felt that many technologies will be needed to reduce emissions, participants expressed a range of views about how large a role technology should play. Some believed that technology would ultimately be the dominant path to achieving progress, while others thought that the promise of technologies had been overhyped because significant behavioral and infrastructure changes would also be needed. For example, even with plug-in hybrids available to consumers, if the infrastructure to recharge them does not become widely available, demand will be constrained. Despite these disagreements, most participants concurred with the idea that no single technology can reduce emissions to the degree needed for long-term climate protection and that efforts to research, develop, demonstrate, and deploy new technologies should be broad in scope.

4 In some cases, even lower levels of government adopt regulatory standards, such as local building codes.

5 Also known as carbon capture and sequestration; for our purposes, the two terms are interchangeable.

A second area of disagreement was the proper federal role in technology policy. Some proposed a federal Manhattan Project-style effort for climate-change technologies, in which major public funding would be made available to the scientific community for a wide variety of initiatives. Others thought that federal money would be wasted on an effort predicated on selecting unproven or uncertain technologies and that the private sector has sufficient financial incentive to innovate in many areas. For example, rising gasoline prices have led to greater consumer demand for fuel-efficient vehicles and thus provided manufacturers sufficient incentives to develop such vehicles. Although this particular issue was not resolved, participants noted that, in cases in which the government is involved in providing financial incentives to spur innovation, those incentives have to be stable to ensure continued investment. For example, the PTC for wind power has expired and been subsequently renewed a number of times, resulting in wildly fluctuating U.S. investment levels in wind-power projects. One outcome of this uncertainty is that businesses have built manufacturing facilities in other countries that provide more stable incentives.

Finally, participants asked how the government could best evaluate various technologies and proposals for new technology financing. Any government investments or incentives involve some selection of technologies deemed most promising, and it is not clear that the federal government has the expertise to make the best decisions. For example, some previous advocates for ethanol research have backed down from this position because of the unanticipated impact that ethanol production has had on food prices. There will inevitably be controversy whenever the government tries to decide which technologies will be supported through public funding.

Behavioral Change

The final group of policies is defined by changes in individual and corporate behavior that complement those changes induced by fluctuations in energy prices. Desired behavioral changes include driving less, purchasing more energy-efficient appliances and vehicles, using less electricity, and switching to alternative sources of electricity. Small changes in individual and business behavior can add up to large decreases in collective GHG emissions.

Although some behavioral change may occur with increased public awareness of climate-change issues, the government can adopt policies to help encourage such change. For example, ENERGY STAR® is a voluntary labeling program in which businesses whose products meet certain U.S. Environmental Protection Agency standards can use the ENERGY STAR label to inform consumers that their products are energy-efficient. Alternatively, governments could provide tax and other incentives to consumers who purchase energy-saving equipment or make other lifestyle changes leading to less energy consumption. Finally, in many cases in which government regulations are enacted to achieve other purposes, the regulations create conditions that lead to more energy use. Such regulations could be repealed or amended. For example, zoning regulations in many cities make it difficult to combine residential and commercial land uses. Amending such zoning rules could lead to the development of more mixed-use neighborhoods in which residents could drive fewer miles.

It was generally agreed that there are significant obstacles to achieving major emissions reductions from voluntary measures. One main concern is that it is difficult, time-consuming, or expensive for consumers to get needed information on energy efficiency, and, in some cases, it is hard to act on such information effectively. For example, it can be difficult to know how much money one can save by improving home insulation. A second problem is that the costs of energy-saving investments are often high and up-front, while the energy savings are some times small and spread over many years. Third, for many businesses, the cost of energy is not a major factor in the overall cost of doing business. A business searching for ways to cut costs would focus on other areas first, if, by saving energy, it would save only a small percentage of its overall operating costs. Finally, behavioral change is particularly difficult in transportation, where land-use patterns make it difficult for people to drive less.

Participants mentioned several potential ways to overcome these obstacles. First, it is important to reduce investment cost barriers to consumers. For example, one innovative program allows residential solar panels to be installed and financed over time through a special assessment levied by the city, rather than to be paid up-front by the owner. The homeowner pays off the costs gradually over time, and, if the house is sold, the next owner assumes responsibility for the payments. Second, consumer education is essential. This can be done through better labeling, as with the ENERGY STAR system, or through publicity materials, Web sites, courses, or other means to inform people about not only the environmental consequences of their behavior, but also how to take practical action for change. Finally, in transportation, it will be important to change land-use patterns, but this may require significant reform at the local level and may take decades to achieve.

Summary

Workshop participants agreed that an effective climate policy requires action on many fronts. However, they disagreed considerably on the correct balance between market-based approaches, regulation, technology, and behavioral change. Even reaching agreement on the appropriate mix of approaches will require many compromises between the various stakeholder groups, as will decisions on how best to use the revenues collected from market-based approaches.

Renewable Energy 101

Renewable Energy 101

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.

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