Testimony of Joseph Goffman, Senior Attorney Environmental Defense Fund Committee on Science U.S. House of Representatives February 4, 1998 Mr. Chairman and Members of the Committee: Thank you for extending to EDF the opportunity to testify here today on the Kyoto Protocol and climate policy. My name is Joseph Goffman. I am a senior attorney at EDF, which developed a proposal for the use of emissions trading in the design of an international regime for managing greenhouse gas emissions. In EDF's view, both the position of the U.S. government and the text of the protocol negotiated last December incorporated the critical elements needed to establish a successful global greenhouse gas emissions trading regime - one that can bring about important environmental benefits in an economically affordable way. As part of this testimony, EDF is submitting three documents. The first, "Emissions Budgets: Building An Effective International Greenhouse gas Control System", discusses in detail EDF's own proposal for the use of greenhouse gas emissions trading in an international climate regime. The second, "The Kyoto Protocol on Climate Change: Issues and Analysis", presents our preliminary analysis of the text of the Kyoto Protocol. The third, "More Clean Air for the Buck: Lessons from the U.S. Acid Rain Emissions Trading Program", is a report EDF did last November on the U.S. experience to date under the Clean Air Act acid rain program whose emissions trading mechanism offers what is perhaps the most extensive basis for anticipating how an emissions trading system for greenhouse gases might perform. Together, these documents provide a foundation for the case that EDF would like to make here today. The Importance of The Market Mechanism It is EDF's view that through the use of the market mechanism of emissions trading, as incorporated more or less in the current protocol text, the greenhouse gas emissions reduction objectives of the protocol can be met in an affordable fashion. The importance of the emissions trading mechanism was explained just last week by Senator Robert C. Byrd of West Virginia in a floor speech on the Kyoto Protocol: "The purpose of these mechanisms is to allow advanced nations and their industries to satisfy their requirement for emissions limitations by sharing, buying and selling credits internationally, and to fulfill part of their obligations by assisting developing nations in developing cleaner technologies and conservation. These mechanisms are based on the environmental reality that cutting greenhouse gases anywhere on earth reduces the global concentration of greenhouse gases virtually everywhere on our planet. It therefore makes economic sense to reduce those emissions wherever it is most cost effective to do so. Emissions trading will allow the industrialized nations to buy and sell credits that will be created by the most cost effective reductions of greenhouse gases. Through emissions trading, industrialized nations may transfer to, or acquire from, another country party emission reduction credits resulting from projects aimed at reducing greenhouse gases for the purpose of meeting its commitments under the treaty. The importance of the regime Senator Byrd describes is that it will tap the creative energies of many differently situated buyers and sellers, enticing them to engage in an unending search for ever better ways to reduce emissions at lower and lower cost. In short, a greenhouse gas emissions trading market, like every other market, first and foremost will do what markets do best: continually drive costs down. Accordingly, the most striking result of the acid rain emissions trading program are it compliance costs, which are dramatically lower than predicted. One way of seeing this effect is to look at the price of emissions reductions, called allowances under the program, that are being traded today or saved for future use, as permitted under the program's emissions reduction banking provision. Applying conventional discount factors to today's allowance prices while assuming that allowances being banked today will be used some time during the decade between 2000 and 2010 suggests compliance costs of about $400 per ton of emissions reduced when the program is fully implemented beginning in year 2000. Consider that even taking account of the costsavings potential of emissions trading, the U.S. EPA predicted that costs during this same period would be anywhere from $500 to $750 per ton, and you will see an emissions trading market reducing costs by 20% to 45% from predicted levels. The savings margin is even greater when compared to predicted compliance costs of $1,000 per ton in the absence of emissions trading. Right along with these cost-savings is another striking result produced by the acid rain emissions trading market. Figure 1 illustrates the environmental performance of the acid rain market so far. Under the program, utilities have cut their sulfur dioxide emissions by approximately 35% more than required - at least in part because the emissions trading market makes those extra reductions valuable. This degree of overcontrol is a vivid demonstration of how powerful the incentives of an emissions trading market can be. These extra, early reductions obviously represent an environmental benefit beyond that provided by the required emissions reduction levels. The same incentive power also provides the impetus for mobilizing a broad range of low-tech creativity and high-tech innovation of precisely the sort needed to reduce greenhouse gas emissions in an economically affordable way. EDF has not done its own analysis of the likely costs of compliance with the obligations of the Kyoto Protocol. We believe that looking to experience, such as that provided by the acid rain emissions trading program, may provide the most compelling lesson of all: that markets are both inherently unpredictable and inherently powerful in lowering cost and stimulating innovation. Accordingly, rather than simply repeat the results of analyses done by others, EDF would ask the Committee to focus on the potential interaction of a market-based policy and the immediate economic and environmental challenge the U.S. faces if it is to meet its responsibilities under the Protocol. The approach I am about to describe not only represents an important policy initiative, but a perfect illustration of how the use of emissions trading will enable the U.S. to answer "yes" to the question: can we afford to meet the greenhouse gas emissions limits established under the Kyoto Protocol? Emissions Business As Usual Time Figure 2 First nternatORA Meeting the Initial Challenge: Using a Market Mechanism for Early Reductions Figure 2 depicts the challenge the U.S. faces in meeting the Protocol's greenhouse gas emissions requirements. In some ways, this is what the economics boils down to: according to some analyses, U.S. greenhouse gas emissions could be more than 30% above 1990 levels if our economy hews to a business-as-usual course. If the U.S. remains on its current course and follows the upward curve of greenhouse gas emissions shown in figure 2, then the country will be faced with the prospect of making abrupt changes in order to bring its greenhouse gas emissions down to required levels. It is the abruptness of such change that threatens to inflict the greatest economic pain in the near term, increasing political resistance to compliance with the treaty's obligations and limiting the range of innovative choices our society can make in responding to the climate challenge. The upward curve poses a serious environmental risk, too. Greenhouse gases do their damage by staying in the atmosphere for long periods of time, from decades in the case of a carbon dioxide to centuries in the case of other greenhouse gas. That is why preventing their release in the first place is so important. Because the protocol's limits do not begin to kick in until 2008, however, the atmosphere faces ten more years of what could be unchecked greenhouse gas emissions increases of the sort shown by the upward curve. Those continued the atmosphere, a warming that could also occur much faster than either the natural world or human societies can tolerate. Fortunately, however, the market-based emissions trading approach embraced first by the U.S. and then by the drafters of the protocol text offers the critical solution to this dilemma. Again, starting in 2008, the protocol would create a world-wide market for greenhouse gas emissions reductions. In such a market, companies and countries that could make more greenhouse gas reductions than required would be able to earn money by selling them to countries and businesses facing greater difficulty in making their own cuts. Thus, companies will have a positive economic incentive for making extra greenhouse gas emissions reductions. An identical economic incentive system can be put in place – and put in place quickly - to stimulate businesses to begin making such greenhouse gas reductions prior to 2008. Under this approach, companies that made such reductions would be able to earn greenhouse gas emission reduction credits that they could save and use for purposes of meeting their mandatory greenhouse gas emissions reduction requirements. They could also sell them to other companies who might need them for the same purpose. In either case, such a program would make greenhouse gas reductions achieved today or any time before 2008 financially valuable to the companies who made such reductions, in just the same way that extra reductions made after 2008 would be valuable in a greenhouse gas emissions trading market after 2008. The goal of such an early reduction program for greenhouse gases would be to achieve the same results now being produced by the acid rain program: through market forces, give businesses an economic reason to reduce their greenhouse gas emissions before they have to. At the same time, such a program could be strictly voluntary. Paralleling the exact design of the acid rain program, figure 3 shows how such a program can be designed. Participants who chose to join the program would agree to keep their greenhouse gas emissions at a certain level - somewhere between the levels specified in the Kyoto protocol and the business-as-usual curve shown in Figure 2. |