WRI Publications Feed: Next Practice Collaborative: Business in a Zero-Carbon Economy

Aligning Profit and Environmental Sustainability: Stories from Industry

Sarah Parsons — Wed, 27 Feb 2013 10:11:22 -0500

Executive Summary

Many large companies have established sustainability goals and targets, and it is becoming increasingly common for these goals to address significant environmental challenges like climate change. More efficient use of natural resources, like energy, reduces operating costs and therefore makes business sense. In response to consumer preferences, some companies are also taking steps to reduce the environmental impact of their products and services as well as their supply chains. However, despite some progress, strategies that are good for business and good for the environment are not getting to scale.

To begin to understand why this is, WRI interviewed sustainability managers from a cross-sector sample of eight multinational companies. This research showed that using a “sustainability lens” to evaluate business opportunities has helped companies grow revenue and gain competitive advantage. It also identified four main barriers preventing the improved scale-up of environmentally sound business practices. Based on the experiences of the companies WRI interviewed and WRI’s own perspectives, four actions have been identified that could help overcome these barriers and better scale financially-sound corporate investment in environmental sustainability (see Table 1).

sSWOT: A Sustainability SWOT

Sarah Parsons — Fri, 07 Dec 2012 17:36:00 -0500

Summary

In partnership with companies in WRI’s Next Practice Collaborative, and through workshops, road tests, and interviews with dozens of companies and sustainability experts, WRI has put a new twist on the familiar SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. The graphic below conveys our new sustainability SWOT (sSWOT) guide.

Purchasing Power: Best Practices Guide to Collaborative Solar Procurement

Maggie Barron — Mon, 25 Apr 2011 13:30:59 -0400

Executive Summary

Background

Solar photovoltaics (PV) is a commercially proven technology and, in markets with incentives, can compete with traditional fossil fuel-based power. Wider adoption and decreases in manufacturing costs are driving down the cost of solar electricity. As the industry grows and matures, it will optimize and standardize its practices to further reduce costs and make solar energy accessible to a mainstream market. The crucial role of policy in accelerating this industry growth and maturation cannot be understated. Today, however, several barriers remain to bringing solar PV to scale:

Transaction costs can be high. Because the industry is fragmented and installation processes are not standardized around the country, each developer has different procedures and negotiated contracts. Allocating internal staff resources to research solar power and to negotiate fair contracts for each potential site can be expensive.
Learning takes time and effort. Potential buyers have to learn on their own about the solar market, financing, and technology, while building internal consensus for moving forward.
Demand is fragmented with many individual sites being developed opportunistically. The current patchwork approach of designing, permitting, contracting, and installing systems for one facility at a time is inefficient.

These barriers help explain the slow pace of solar PV adoption among commercial and government consumers. However, collaborative purchasing can help overcome these barriers and scale up solar PV deployment. By organizing interested consumers (and their potential installation sites) into groups, collaborative purchasing can reduce transaction costs, educate potential buyers, and aggregate demand so that solar panels can be installed at lower-than-average costs.

Purpose

This Best Practices Guide is intended to assist commercial and government entities in the process of organizing and executing a collaborative solar purchase. A measure of success will be the number of readers who use this guide in purchasing solar power to meet their electricity needs more sustainably and at an affordable price. The guide outlines a list of best practices, which together constitute a 12-step process to capture the economic and practical benefits of a joint purchase. The starting point for participating in such an effort is simply an interest in purchasing solar electricity. The best practices are intended as a resource for project planning and decision making. They provide specific actions in chronological order, with milestones to indicate when to move from one step to the next. The end goal is that regional groups of participants will have solar PV installed on their facilities at competitive prices.

Experts in the solar energy field, including those specializing in regional collaboration, helped to develop the best practices presented here. They are based on extensive research and real-world experiences, and are supported by case studies (one a private sector collaborative and one with public-sector participants). These two cases were unique models of regional collaboration, among the first in the country at this scale. Like all new approaches to a problem, both efforts encountered challenges along the way. Throughout the guide, we illustrate the lessons learned from these challenges, point out pitfalls to avoid, and highlight ways to streamline the process. We also provide resources, such as solicitation and procurement documents, participant questionnaires, and evaluation criteria.

By promoting the use of this guide and sample documents, we hope to encourage the use of these models for regional collaborative efforts. Successful collaboration can lead to lower costs, increased competition and vendor performance, and better projects with higher visibility.

Twelve Steps for Collaborative Solar Purchasing

1 Early regional recruiting

RESULTS: Initial participants indicate interest and agree to proceed with site identification and assessment in next stage.

2 Initial participant questionnaire

RESULTS: List of potential participating organizations with site opportunities and considerations documented.

3 Solar project workshop

RESULTS: All participants share common understanding about the basics of collaborative purchasing, key metrics to evaluate, timeline, and expectations of them. Lead organization has been identified.

4 Consolidated analysis of sites

RESULTS: Compelling technical overview of total purchase size and individual bundles. This initiative overview is consolidated into packet including talking points explaining expected benefits for participants and lead organization.

5 Internal decision maker consultation

RESULTS: Buy-in to proceed in procurement process to drafting RFP is obtained from decision makers in each participant/lead organization.

6 Design of procurement process & documents

RESULTS: All participants agree to procurement process, template contracts, and standard terms with understanding of risks and opportunities.

7 Request for proposals

RESULTS: RFP issued with compelling bids received from potential vendors.

8 Proposal evaluation

RESULTS: Winning bidder is selected for each bundle through competitive process that ensures best-value vendor selection.

9 Negotiations and award

RESULTS: Negotiations are complete with successful award and signed contracts with a qualified vendor for each bundle, within agreed timeline.

10 Installation project management

RESULTS: Solar PV systems are properly built to meet or exceed specifications and safety standards.

11 Commissioning and operations

RESULTS: Successful solar installations demonstrate energy production and savings as planned for 25 years or more.

12 Celebration of success

RESULTS: Participants’ internal and external stakeholders, regional community, and government are aware of the positive impact of this effort and support future projects.

Bottom Line on Emerging Solar Metering Policies

admin — Thu, 27 Jan 2011 13:25:16 -0500

Inflexible metering procedures limit the types of customers who can invest in solar electric power, and the scale of systems. New policies for virtual net metering, community solar, and meter aggregation can make solar more economical and accessible.

Virtual Net Metering

What is virtual net metering (VNM)?

Net metering allows utility customers with on-site renewable electricity generating systems to receive credits for excess electricity that is sent to the grid and to later use those credits to offset their electricity bill, or receive outright payment for them.1 In contrast, virtual net metering (VNM) allows multiple customers (with their own discrete meters) to share the net metered credits from a system without rewiring to physically link their meters to the system. Specific rules vary by state, and even by utility. Virtual net metering policies are currently most often available to owners and/or operators of multi-tenant buildings, or to a group of buildings within a small contiguous geographic boundary. Typically, the system must located “behind” (on customer side of) the meter of at least one of the utility customers credited and/or the customers credited must be located within the same facility where the system is installed.

For example, a low-income housing building owner could install a solar PV system where the power flows through a single meter and feeds directly back into the grid. The utility would allocate the credits for the kilowatt-hours received to each tenant’s individual utility account based on a pre-agreed percentage sharing scheme. While VNM customers sharing an electricity generation source do need to be in the same utility territory, they do not need to be under the same rate schedule in most states.

Which states allow for virtual net metering?

California
Colorado
Delaware
Maine
Massachusetts
Rhode Island
Vermont

How does virtual net metering facilitate new customer participation?

Currently, virtual net metering is most often available for occupants of multi-tenant buildings, low-income housing, municipal buildings, and to groups of buildings in contiguous proximity to the solar installation. Without VNM, separate tenants with a solar investment on their building’s roof would each have to be physically connected to the system to receive net metered credits on their separate utility bills. This is cost-prohibitive and logistically difficult.

What is “community solar”?

Community solar programs and policies facilitate joint ownership or sponsorship of a generating system, and sharing of the benefits even when the power itself cannot be physically shared. It can make solar accessible to owners of property that cannot accommodate a solar PV array and those prohibited from entering into legal ownership structures typically used for solar, among others.

Policies and incentives vary from state to state, thus there is no one standard community solar model. According to a publication of the National Renewable Energy Lab, three project models are currently the most common:

Utility-Sponsored Model: a utility owns or operates a project that is open to voluntary ratepayer participation;
- United Power, an electric co-op in Colorado, offers the option to lease panels at its Sol Partners Cooperative Solar Farm for a fixed upfront fee. In return, payment for the kilowatt-hour (kWh) production is credited to their account at a “community solar” rate higher than the retail rate.
Special Purpose Entity (SPE) Model: individual investors join in a business enterprise to develop a community solar project;
- In Maryland, a group of investors formed the University Park Community Solar LLC to invest jointly in a system located on the roof of a local church. Owners share the revenues from power sales to the church, as well as from incentives.
Non-Profit “Buy a Brick” Model: donors contribute to a community installation owned by a charitable non-profit corporation. [Donations may be tax deductible, but there are no financial benefits shared, and in fact this does not require special policy.]
- The East Portland Community Center project was funded by local businesses through the “Solar 4R Schools” program. The non-profit program installs solar systems and uses them to educate communities about solar power.

Community solar models often aim to reduce the high upfront costs of solar, sometimes allowing participants buy into the program’s installation(s) monthly or per kWh. Their contribution then entitles them to receive payments for the system’s production, and can fix the price for a portion of their bill to protect against future price increases.

Where is community solar allowed?

The following states allow at least one of the community solar models listed above:

Arizona
California
Colorado
Delaware
Florida
Illinois
Maine
Maryland
Massachusetts
Utah
Washington

Meter Aggregation

What is “meter aggregation”

Meter aggregation allows for allocation of the credits from a solar electric system to meters in buildings separate from where the actual power is produced, if they are on the same customer’s utility account. It is usually reserved for buildings located in a tight geographical boundary, either adjacent to one another or located no more than a few miles from one another. It can be done physically, which may require additional equipment, or virtually.

Often, net metering policies limit the amount of power that a customer can sell back to the grid to less than a set percentage of their annual consumption. The benefit of meter aggregation is that several facilities’ metered annual consumption is aggregated; thus the owner can install a larger system and sell more power back. Meter aggregation is often used in agricultural operations or business campuses where there are multiple separate facilities with the same owner.

Summary

In summary, net metering, virtual net metering, community solar, and meter aggregation can be characterized as follows:

Net metering: allocation of benefits to one customer via one meter;
Virtual net metering: allocation of net metered energy credits denoted in kWh to multiple customers with separate meters, often system located on their site or nearby;
Community solar: allocation of benefits across meters of multiple customers who may or may not be near and/or own some part of the generating system, and
Meter aggregation: allocation of system benefits to multiple meters of one customer.

Bottom Line on Offsets

Maggie Barron — Sun, 01 Aug 2010 08:37:17 -0400

What are greenhouse gas offsets?

A greenhouse gas (GHG) or “carbon” offset is a unit of carbon dioxide-equivalent (CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere. These offset credits, measured in tons, are an alternative to direct reductions for meeting GHG targets in a cap-and-trade system. In some systems, regulated facilities can buy offset credits from projects located in sectors or countries not legally required to reduce their emissions. The cost of meeting the GHG reduction targets of a cap-and-trade program can be reduced by buying offsets in cases where reducing GHG emissions at uncapped facilities or sectors is less costly than at capped sources. Many businesses and organizations currently buy GHG offsets to help meet voluntary commitments to reduce their GHG emissions.

What qualifies an activity as an offset project?

There are five commonly agreed-upon criteria that an offset credit must meet to ensure environmental integrity.

1. Real: GHG offsets must represent one ton of CO2e greenhouse gas emissions reduced or sequestered as a result of an activity undertaken for the purpose of reducing emissions. In practice, this ensures that total GHG emissions to the atmosphere are lower due to the implementation of the offset project, relative to a business-as-usual baseline scenario. Determining theoretical baseline emissions in the absence of the offset project (i.e., under the business-as-usual baseline) is not an exact science, so all baselines must be accurately and conservatively defi ned. The quantity of emission reductions should not be infl ated by incomplete accounting, which could occur if emissions were reduced at one location but increased elsewhere as a result (known as emissions “leakage”).

2. Permanent: Emission reductions or removals are permanent if they are not reversible; that is, the emissions can’t be rereleased into the atmosphere. The issue of permanence applies to projects where emissions are sequestered in ways that could be reversed over time, such as in forests (which can release carbon through fi res or decay) and through geological sequestration (where gases could potentially leak unexpectedly). There are mechanisms to account for or reduce the risk of reversal, though they can bring additional costs. These include buying insurance in case of emissions reversals, establishing a reserve “buffer” pool of credits or issuing temporary credits from the project that are valid for a period of time but must be re-certified or replaced in the future.

3. Additional: In order to generate offsets, a project must be a response to the incentives provided by a carbon offset market. Activities that would have happened without such incentives are business-as-usual and do not represent new emission reductions. Since offsets are used to compensate for continued or increased emissions elsewhere, if they are not additional then their use allows a net increase in GHG emissions. Additionality is ultimately a subjective judgment. Regulatory approaches attempt to ensure that additional projects are able to get credits while weeding out those that would occur in the absence of the incentive provided by the carbon market. For example, if regulation requires a landfi ll to capture the methane it produces, it cannot earn offsets for this activity. Since the landfi ll would have captured the emissions anyway, it is business-asusual and not additional.

There are two primary ways additionality can be determined in existing offset programs: on a project-specific basis or through standardized criteria. Project-specific additionality is determined through an evaluation of the proposed project against a range of alternative scenarios. The scenario deemed most financially viable and/or probable in the absence of the incentive provided by the carbon market is considered the business-as- usual scenario from which offset credits are calculated. Standardized additionality criteria evaluate projects against a set of consistent criteria for a particular project type and are intended to exclude non-additional projects, without developing a business-as-usual scenario for each individual project. This can include requirements that the project is not mandated by law, is not common practice (based on technology use or activity data),involves a specific pre-approved technology, and/or has an emissions rate lower than most others in its class.

The Clean Development Mechanism currently uses a project-specific additionality test to certify offsets for use to meet reduction obligations under the Kyoto Protocol. Other systems such as the Climate Action Reserve, EPA Climate Leaders, and the Regional Greenhouse Gas Initiative use standardized additionality approaches.

4. Verifiable: Credible offset programs require that emission reductions be monitored and regularly verified by an independent, qualified third party.

5. Enforceable: One credit can only credibly offset one ton of CO2e emissions; as a result, it must be tracked and it must be possible to enforce its ownership and use in order to avoid double counting. This is usually done via a registry.

Who can implement offset projects and earn emissions reduction credits?

Offset owners must be able to claim the legal right to the emission reductions of the project, usually through legal or contractual means. In addition, most offsets bought and sold today are certified by a third party certifier, who provides a “seal of approval” that the offset is providing the promised emission reduction benefit. Currently, U.S. facilities that are not operating under a regional GHG reduction program could attempt to claim offset credits. Once a federal climate program is in place, U.S. facilities will no longer be able to claim offset credits if they are located in a regulated sector.

How are offsets measured and tracked? What are standards, verifiers, and registries?

There are two primary markets for offsets: the regulatory market and the voluntary market. In regulatory markets, such as the Regional Greenhouse Gas Initiative, government agencies are responsible for establishing the standards for offset crediting and programmatic structure. In the voluntary market, the predominant market to date in the United States, there is no common standard for offset measurement and verification.

Various voluntary standards have been developed to provide independent quality assurance. A standard provides a detailed list of eligibility requirements for projects and methodologies for calculating a project’s emission reductions. Most rely on third party auditors, called verifiers, to perform the due diligence and attest to the veracity of the information provided by the project in its application. It must be verified that the project as a whole meets the standard, and that each individual offset credit issued is based on data that meets the requirements of the registry or policy program.

For a company with a voluntary commitment to reducing its carbon footprint, what value do offsets provide in GHG reduction strategies?

Purchasing and retiring (that is, not re-selling) high-quality offsets can be a useful component of an overall voluntary corporate emissions reduction strategy once internal abatement opportunities have been realized. The cost comparison of internal abatement versus offsets as a strategy is accurate only if evaluated over an appropriate time scale, such as the lifetime of the internal abatement (with appropriate discount rates) and if it includes all of the additional non-CO2 benefits of the internal abatement (such as greater efficiency or lower fuel costs). Also, it should be noted that it is more likely that future climate programs will recognize internal GHG abatement rather than offsets.

Which standard should I buy from or use to certify my project? Which is likely to be accepted in a federal program?

There is currently no bottom line on this question. The leading U.S. standards (ranked by the size of the 2009 market) include the: Climate Action Reserve (CAR), Voluntary Carbon Standard (VCS), Chicago Climate Exchange (CCX), American Carbon Registry (ACR), and The Gold Standard (GS). In general it is more likely that offsets certified under existing mandatory cap-and-trade systems (such as the Northeast’s Regional Greenhouse Gas Initiative (RGGI) or California’s AB 32) would be recognized automatically under a federal climate program, but this is not certain. Project types within sectors regulated by cap-and-trade policy will not be eligible to generate offsets because their emissions are covered by the cap. For instance, grid-connected renewable energy and energy efficiency projects are highly likely to be covered by a federal program and thus would be ineligible to produce offsets.

Additional Resources:

Broekhoff, Derik and Kathryn Zyla, 2008. Outside the Cap: Opportunities and Limitations of Greenhouse Gas Offsets. World Resources Institute Climate and Energy Policy Series. December 2008
Kelly, Alexia and Bianco, Nicholas “Options for Addressing Early Action Greenhouse Gas Reductions and Offsets in U.S. Federal Cap-and-Trade Policy”: WRI Working Paper. August, 2009
Offset Quality Initiative (OQI), 2008. Ensuring Offset Quality: Integrating High Quality Greenhouse Gas Offsets into North American Cap-and-Trade Policy. July 2008.

Bottom Line on Climate Bill Compliance

Jefferson Cox — Fri, 19 Mar 2010 15:57:19 -0400

Will my facility need to comply with climate change policy?

Rather than regulating all GHG emissions, most approaches focus on the largest sources. This typically involves large “smokestack” emissions (e.g., from electric power plants), as well as the upstream bulk sale or import of fuels (e.g., petroleum) that emit GHGs when used. This helps limit the number of facilities under direct regulation while still covering most GHG emissions—approximately 80 percent in some cases. Facilities that are not directly regulated would still have a cost incentive to reduce their indirect GHG emissions (e.g., from electricity consumption) where compliance costs are passed through from regulated fuel and electricity suppliers.

Recent legislative proposals in the U.S. Congress seek to regulate facilities that emit 25,000 metric tons of CO2-equivalent per year which is roughly equivalent to the CO2 emissions of a 4 MW gas turbine running at full load with 98 percent availability. These “covered entities” would include electric power plants and large industrial facilities. Federal legislative proposals would also cover GHG-emitting fuels sold by natural gas utilities (local distribution companies) and petroleum refiners and importers. For more information on the point of regulation, see WRI’s federal climate policy summary.

In addition to federal proposals, there are regional and state programs a business may need to consider. Regional and state climate policies vary in their respective points of regulation. For more information on regional programs, see WRI’s summary on regional cap-and-trade programs.

Will my facility need to report GHG emissions?

Beginning in 2010, a new mandatory GHG reporting rule went into effect that requires large “smokestack” and other selected sources to report emissions to the U.S. Environmental Protection Agency (EPA). For more information on this rule, see the EPA’s FAQ document on GHG emissions reporting.

In addition to the EPA GHG reporting rule, individual states may also have reporting requirements. For example, the Regional Greenhouse Gas Initiative (RGGI) requires energy generation plants larger than 25MW to report GHGs.

What are the compliance costs for regulated facilities?

Compliance costs depend on how efficient a facility is in reducing its GHG emissions and what policy mechanisms or programs are implemented to reduce costs. A regulated facility would need to weigh the various costs of these options to understand full compliance costs. In a cap-and-trade program, for example, covered facilities would need to hold GHG allowances equal to their annual emissions, so costs depend on how much the facility emits and the price of GHG allowances (estimated to be about $32 per ton CO2e in 2020 according to a Department of Energy analysis of a recent federal proposal1). The trading option would allow entities to buy and sell allowances (meant to encourage the most cost-effective emission reduction options and lower overall compliance costs).

Most federal proposals provide these or other flexibility options (including allowances allocated for specific purposes in early years or tax incentives) to reduce costs and encourage investment in GHG emission reduction projects. For more information, see WRI’s Bottom Line on Cost Containment.

What costs can non-regulated facilities expect?

Facilities that are not directly regulated by climate policies may see upstream costs passed down from energy providers and other suppliers. Costs could be high for facilities that source from suppliers that are major GHG emitters. Meanwhile, costs could be minimal for facilities that source from suppliers that produce few or zero GHG emissions.

Will facilities be able to leverage new competitive advantages?

Both regulated and non-regulated facilities could see new market opportunities and competitive advantages. Facilities that produce clean, low-GHG emissions technologies could see increased market demand for those products and services. Price signals and funding programs may provide additional incentives for GHG reduction projects, such as both supplyand demand-side efficiency upgrades, fuel switching from more carbon-intensive to less carbon-intensive fuel sources and clean energy equipment. In general, facilities that reduce their GHG emissions—as well as upstream (supplier) and downstream (customer) emissions—can optimize competitive positioning.

Will climate legislation increase energy bills?

According to analyses of recent federal proposals, climate legislation will increase the price of producing energy from resources that emit GHG pollution (e.g., coal and petroleum). Higher energy prices or electricity rates, however, do not always translate to higher energy bills. Facilities that reduce total energy use by increasing their energy efficiency or that purchase power from low-GHG energy sources can mitigate energy costs or reduce energy bills.

The table (see PDF) presents estimates from the Energy Information Administration (EIA) for how energy prices could change under the American Clean Energy and Energy Security Act (ACESA) that passed the House of Representatives in 2009.

What types of incentives and programs will be available to reduce GHG emissions at my facility?

Climate policies often incorporate additional incentives and financing programs to assist facilities in reducing GHG emissions. These can involve funding for federal, state and local programs. These funds are generally distributed in the form of competitive grants, rebates and tax credits. Below are a few examples of activities typically eligible for such support:

Clean energy technology deployment (including wind turbines, solar panels, electric vehicles and fuel cells)
Industrial electricity and thermal energy efficiency, including combined heat and power (CHP)
Worker training for energy efficiency
Building efficiency retrofits
Motor efficiency upgrades

Additional Resources

Note

This issue builds on topics and policy mechanisms discussed in previous issues:

Bottom Line on Climate Policy Terminology

Bottom Line on Cap-and-Trade

Testimony Before the Senate Committee on Environment and Public Works: Getting to Yes on Climate Change

Maggie Barron — Thu, 29 Oct 2009 11:44:48 -0400

TESTIMONY OF JONATHAN LASH
PRESIDENT, WORLD RESOURCES INSTITUTE

HEARING BEFORE THE UNITED STATES SENATE COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
“LEGISLATIVE HEARING ON S. 1733, CLEAN ENERGY JOBS AND AMERICAN POWER ACT”

Good afternoon and thank you for inviting me to testify today regarding the pending legislation, action of other countries to address climate change, and the implications of their action for the United States.

I am Jonathan Lash, president of the World Resources Institute. WRI is a non-profit, non-partisan environmental think tank that goes beyond research to provide practical solutions to the world’s most urgent environment and development challenges. We work in partnership with scientists, businesses, governments, and non-governmental organizations in more than seventy countries to provide information, tools and analysis to address problems like climate change, and the degradation of ecosystems and their capacity to provide for human well-being.

I have a single message to deliver today: The time is ripe for Congress to enact climate legislation to reduce emissions, establish energy security, and create new jobs in clean energy. Other nations are moving; the outcome depends on us.

We need global action to solve this global problem. Those who have worried that the United States might act alone need worry no more. The worry should be that without us, the rising global effort will falter. The worry should be that if we hesitate, we will miss the opportunity to lead the coming clean energy revolution.

With other nations acting, U.S. action now can make the critical difference.

Other countries across the globe are moving to take action to confront global warming. This has transformed the debate over this issue. The time is ripe for the United States to act and it is in our own interest to act promptly. In a nutshell, there are three reasons for this:

Action by other countries increases opportunities for the United States if we are prepared to seize these opportunities.
Steps by other countries help ensure that the United States will not be disadvantaged by taking action itself.
Action by the United States is essential to cement an agreement under which all countries commit to continue and increase the steps they are taking.

In order to take action, we need a better understanding of what we are facing. We need to understand the opportunities. We need to put aside old myths. We need to focus on the real problems and recognize the solutions to those problems. And we need to get busy so we do not miss this opportunity.

A changed landscape

As illustrated by Figure 1, almost 80 percent of global emissions are produced by fifteen countries (counting the European Union as a single country). A majority of these are developing countries, which, until recently, said they would not take action on emissions without clear action by wealthy countries. At the same time, all countries have recognized that the poorest would need assistance in deploying clean energy and preserving forests and also in adapting to minimize the damage from changes in the climate that are no longer avoidable. What has changed is that in the last couple of years, and even in the last few months, without waiting for rich nations to act, countries such as China, India, Brazil, Mexico, and South Africa are stepping forward with significant proposals and actions.

As explained below, China provides an important example among developing nations, but China is not alone. Mexico has pledged to halve its greenhouse gas emissions by 2050, employing a “cap-and-trade” policy like the one under consideration in the U.S. Congress. South Africa has presented a detailed plan to peak its national emissions by 2020. India has defined eight national missions in efficiency, renewable energy, and sustainable agriculture and ecosystems and is developing strategies in these areas. Recently, the Indian government announced it will offer new legislative proposals to tighten fuel efficiency standards and pursue other clean energy targets, and there have been indications of increased willingness to subject its actions to review. Deforestation accounts for about two thirds of Brazil’s greenhouse gas emissions. Brazil has said it would reduce its deforestation rate 70 percent from recent levels by 2017.

Among developed countries, a new government recently came to power in Japan, transforming that country from a laggard to a leader with an ambitious proposal to reduce emissions 25 percent below 1990 levels by 2020 if other major countries take ambitious action. The European Union position is that it will reduce its emissions by 20 percent regardless and by 30 percent if other developed countries take sufficient action. And Australia, heavily dependent on coal for consumption and exports, has said that it will cut its emissions by 25 percent below year 2000 levels if others take on similar actions.

The ball is now in our court, and it is in our interest to act. In December, the nations of the world will meet in Copenhagen, Denmark to try to reach agreement on plans to confront climate change. In order to reap the benefits of an agreement, we need to bring something credible to the table. That something is what this committee and this Congress write into legislation.

Let me explain what is at stake by focusing on China. China is a country taking action and looking at China helps us understand the problems, solutions, and opportunities before us.

The case of China

Some people have worried that action by the United States on climate change could put us at a competitive disadvantage if countries like China do not also take action and produce at lower cost. In fact, China is taking action, which can help assure that there is a level playing field. As I will explain, they are doing this because it is in their own interest, which should give us confidence they will continue. Instead of more delay, we should get an agreement that helps further to ensure that Chinese action on climate will continue and increase. But there is more. Not only should we lock in a commitment; we should work with China to reap the benefits of the new economic future emerging in the worldwide shift to clean energy.

Here are the facts. In 2005, realizing its growth in energy consumption was unsustainable for energy and climate security reasons, China launched a plan to reduce energy intensity 20 percent from 2005 levels by 2010. This may be the largest greenhouse gas mitigation program of any country. China also plans an increase in renewable energy to 10 percent by 2010. In 2007, China was second in the world in funds invested in renewable energy.

China, like the United States, is a major user of coal. However, China is closing inefficient coal plants, deploying state-of-the-art or better technology, and exploring carbon capture and storage (CCS) technology. These efforts can help improve coal technology and bring down the costs. U.S. – China collaboration on development of CCS and other coal technologies is already underway and opens vast opportunities.

At the Major Economies Forum in July, China and India for the first time agreed at the international level to a declaration to take action to meaningfully reduce emissions below business as usual, peaking as soon as possible. Also, they recognized the scientific view that temperatures should not exceed 2 degrees Celsius above pre-industrial levels.

In the first-ever speech by a Chinese President to the UN General Assembly in September, 2009, President Hu Jintao said China will reduce its carbon intensity by “a notable margin” by 2020.

Why are they doing this? “All politics is local.”

China’s aggressive action to improve energy efficiency and reduce emissions is not an act of global charity. China’s leadership realizes they cannot maintain growth and reduce poverty without conservation of resources. Pollution is choking off growth and producing social unrest. Adverse impacts from climate change are projected to undermine agricultural productivity and cause flooding in south China and along the coasts.

Qi Ye, deputy director of the China Sustainable Energy Program in Beijing says you have to “address the global issue in terms of local need” because people act on what they care about. Similar sentiments can be heard in other developing countries. In describing India’s new initiatives on clean energy, the Indian environmental minister said recently, “I want to be aggressive, because, frankly, we are a country that is climate dependent” because of rising seas and monsoons. “We may not have caused the problem, but we have to be part of the solution.”

How do we know they’re doing what they say? “Trust but verify.”

Self interest in taking action to confront climate change affords us some confidence that countries like China will follow through. Still, challenges remain. Reliable data are not always available and standards of enforcement, governance and transparency are variable. This is one of the reasons it is in our own interest to establish an international climate agreement. A key element in the negotiations is creation of a system for measuring, reporting, and verifying actions to give confidence that promises are being kept and action taken.

Just as President Reagan suggested to Soviet leader Gorbachev in signing the nuclear arms reduction treaty and quoting the Russian proverb “trust but verify,” trust is fine, but real confidence depends on verification.

Verification of China’s action to reduce emissions will be feasible. China participates in peer review and verification already under international agreements like the WTO and the Montreal Protocol to address ozone. The U.S. Environmental Protection Agency has worked with China in successful efforts to improve its control of sulfur dioxide emissions. China has already begun collecting and verifying energy data. Moreover, the United States could invest in satellite tracking as an additional way to help check up on whether China is meeting its commitments.

China and the United States – solving problems, seizing opportunities.

Some people have worried that China would steal American jobs by competing using dirty production processes. The reality is China is pulling ahead of us by being innovative and clean. If doubts remain, a global climate agreement can allay them by ensuring action by all that will help level the playing field. As a fallback, the House-passed climate bill protects energy-intensive U.S. industry by providing free allowances to comply with cap-and-trade, in the form of output-based rebates. When the rebates phase out a decade from now, the president is authorized to impose border duties if action by China and other countries has not done enough to level the playing field.

In September 2009, The Wall Street Journal said that a group of Western firms published a report anticipating a $500 billion to $1 trillion market annually in China for clean technology. In August and September, America’s third largest coal fired electric utility, Duke Energy Corp., announced agreements to explore clean energy and carbon capture projects with Chinese companies. In July, the U.S. and Chinese governments signed an MOU for joint research collaboration.

The opportunities are there in the vast Chinese and global markets and in collaboration with the Chinese and others in the private and public sectors. But to take advantage of the opportunities, the United States will have to get its act together to promote clean energy. We risk falling behind if we don’t move forward. Climate legislation is key because, by putting a price on carbon, it shifts investment into clean energy. The pending legislation also contains important new financial support for clean energy development, clean technology exports, and carbon capture and storage technology. Additionally, it creates economic opportunities in international carbon trading.

Getting it in writing – U.S. legislation and a global agreement.

Now what we need is a global agreement, confirming and strengthening the new trajectory of China, India and others. To realize the benefits of a global agreement, the United States needs to take action – better yet, take action and take the lead – to make the global agreement possible.

Both warming and the emissions that cause it are global. The economy, trade, and competition are global. A global agreement provides a basis on which countries can act with some confidence that others will do so as well. It can address issues of verification, competitiveness, and fairness, and it can create new opportunities for collaboration on clean energy.

In order to get that global agreement, Congress needs to take action on climate legislation so our negotiators can go to the negotiating table with what the United States will do – what emissions reductions we will achieve and what assistance we will provide to help less developed countries shift to clean energy and adapt to climate change.

U.S. negotiators have made clear that they will not commit the United States to greenhouse gas reductions and other critical points without a clear expression of political will by Congress. At the same time, other countries have expressed understandable reluctance to complete an agreement without a commitment from the United States. Thus, until Congress acts on U.S. legislation, the world cannot reach final agreement.

Only if all nations come forward with what they propose to do is agreement possible. The question is no longer whether others will act. They are acting. The question is whether we will act. The point is no longer that global warming cannot be addressed without those other countries. The point is that it cannot be addressed without this country and that we cannot gain the benefits of leadership unless we enact climate legislation.

Then we can not only avert the threat of dangerous global warming; we can reap the benefits of new jobs, economic growth, and energy security in the age of clean energy.

The United States has led the world through great economic and social changes and has thrived by doing so. This is an occasion and an issue on which the world again needs that leadership.

Additional Resources

Comparative Analysis of National Climate Change Strategies in Developing Countries (PDF, 631 Kb). This matrix helps policymakers compare the National Climate Change plans of five developing countries: India, Brazil, China, Mexico and South Africa.

Bottom Line Series of Climate Policy Briefs

Stephanie Hanson — Mon, 19 Oct 2009 12:15:29 -0400

The Bottom Line series is made possible by the following organizations:

Bottom Line on Cost Containment

Maggie Barron — Mon, 19 Oct 2009 11:45:30 -0400

What factors determine the cost of a cap-and-trade program?

Many aspects of cap-and-trade design impact the cost of compliance. For example, decisions regarding the allocation and auction of allowances, implementation of complementary greenhouse gas (GHG) reducing measures such as renewable energy standards and improved vehicle efficiency standards, and government support for technology research and development will have significant impacts on cost.

What is cost containment?

Cap-and-trade programs for GHGs often incorporate additional mechanisms to reduce overall economic costs or provide additional price certainty for affected companies without requiring future legislative intervention. Recent efforts have focused on developing cost containment provisions that do not compromise the environmental goals of the cap-and-trade program. These provisions typically modify rules related to compliance period length, offsets, borrowing, and auctions. However, they could also involve policies to mitigate demand for allowances, such as additional investments in energy efficiency and low carbon technologies.

How do compliance periods affect compliance costs?

A longer compliance period may help reduce costs by mitigating the impacts of fluctuations in business cycles, weather events, and fuel prices. Companies are typically not required to hold allowances (certificates representing the right to emit GHGs) equal to their running total of emissions during the entire compliance period. Instead, regulated companies are required to hold allowances equal to their emissions when a compliance period comes to a close. Compliance is monitored by the regulatory agency through a process commonly referred to as “true-up.” In the United States, a two or three-year compliance period has become the norm for greenhouse gases cap-and-trade design. In the Northeastern Regional Greenhouse Gas Initiative (RGGI), sustained high prices will cause the compliance period to extend from three to four years.

What role do carbon offsets play in managing compliance costs?

Cap-and-trade programs for greenhouse gases (GHGs) typically allow regulated companies to reduce their GHG emissions by purchasing offsets, which are emissions reductions in non-regulated sectors. Reductions through offsets can sometimes be less expensive to achieve than reductions within the firm, thereby reducing the costs of compliance. However, at times it can be challenging to ensure the quality of offsets. Cap-and-trade programs that allow the use of offsets tend have limitations on the number of offsets allowed for compliance to ensure that some GHG reductions occur from within capped sectors.

What role does borrowing play, and how does it differ from banking?

Banking and borrowing provide flexibility for regulated companies, allowing them to make additional reductions early or postpone reductions in response to market factors.

Banking: Virtually all cap-and-trade programs and proposals provide for the banking of allowances. Banking allows firms to hold “spare” allowances and use them in a later compliance period. This can give companies the ability to execute long-term compliance strategies that result in greater emissions reductions early in the emissions reduction schedule. Because firms undertaking aggressive reductions in the short-term would see their long-term compliance obligations relieved, banking may help to relieve overall program costs and temper price fluctuations.

Borrowing: Borrowing allows companies to exceed early emission reduction caps in exchange for greater emission reductions in the future. This can reduce allowance prices in the near term, but increase allowance prices in the future. Borrowing is somewhat more controversial than banking because the provision is subject to the government’s enforcement of future targets. If companies suspect they can lobby for weaker future targets, they may borrow heavily and count on relief from sympathetic legislators later. Borrowing also creates risk of default if the borrowing entity goes out of business. This would compromise the environmental goals of the program. Due to these concerns, borrowing has been viewed cautiously, and has been excluded from United States SO2 and NOx trading programs, as well as the European Union Emissions Trading Scheme (EU ETS) and RGGI. The leading bills in Congress allow borrowing with interest, but impose limits on how many allowances may be borrowed in any compliance period.

What if allowance prices are too low and what is a price floor?

If carbon prices are too low, it can stall investment in essential low-carbon technologies. In past market-based regulatory programs, a variety of factors have caused lower than expected prices. For example, in RGGI, the unexpected switching of relative natural gas and residual oil prices caused emissions to fall below the cap, leading to very low allowance prices. To ensure a sufficient price signal, the quantity of offsets may be reduced, or borrowing mechanisms may be constrained. Alternatively, allowance supply can be constrained either by reducing the cap, or by implementing a “price floor” in allowance auctions. Price floors are typically used in an auction to prevent against collusion. However, the price floor can be raised and unsold allowances removed from the market by retiring them, or they may be set aside for later release if allowance prices rise too high.

What are price triggers and how do they work?

Price triggers are mechanisms to address costs when prices reach unexpectedly high or low levels. These triggers may lead to automatic changes in offset limits, borrowing provisions, changes in compliance periods, or auction price floors. They can also trigger implementation of a price cap or an allowance auction reserve.

A price cap (also commonly referred to as a safety valve) establishes an allowance price ceiling to ensure that the mandatory cost of carbon mitigation does not rise above a given level. While a price cap is a transparent way to provide companies regulatory certainty, the mechanism can compromise the emissions cap established for the program. For this reason, it is highly controversial and has not been included in any of the three regional U.S. trading programs or the EU ETS.

An allowance auction reserve would make additional allowances available through an auction that begins at a specifi ed price. The allowance reserve can maintain the integrity of the emissions cap by using allowances set aside from previous control periods. For example, the Midwestern Accord calls for 2 percent of allowances to be set aside each year in a cost containment pool for auction if allowance prices spike. The reserve can also build up over time if allowances go unsold at auction. A price collar pre-defi nes a desired range of trading prices for allowances, and creates price triggers to modify program parameters if prices move too high or too low. This approach has been incorporated into the Midwestern Accord and has been discussed in the context of a national cap-and-trade program.

How do price triggers impact market volatility and investment certainty?

Allowance prices, like other traded commodities, can vary within a compliance period, month to month, day to day, and hour to hour. While some of this volatility can be smoothed by the mechanisms discussed in this document (e.g., banking, borrowing, and multi-year compliance periods), some volatility should be expected. As price triggers are employed, it is important to ensure that volatility will not be exacerbated by a response to high or low prices that are temporary. Instead, price triggers should seek to correct long-term market trends. RGGI, for example, incorporates price triggers based on a 12-month rolling average price, after allowing for a 14-month market settling period at the start of each new compliance period. It is also important to note that changes in market rules (and subsequent impacts on allowance prices) can present long-term planning and investment challenges.

What other policy tools may be available to manage uncertainty in allowance prices?

As an alternative to including automatic mechanisms within cap-and-trade design, an oversight body or review board could evaluate when prices have exceeded a level acceptable to the market. Under various versions of this proposal, the oversight body could loosen or tighten restrictions on offsets or allowances. Because market oversight may add another variable to investment decisions, it is essential that the board have a clear, transparent and effective governance structure.

Additional Resources

Bottom Line on Regional Cap-and-Trade Programs

Payson Schwin — Tue, 14 Jul 2009 09:21:15 -0400

What is happening on the regional level and why is this significant?

Twenty-three U.S. states and four Canadian provinces are actively participating in the design and implementation of three regional cap-and-trade programs to reduce greenhouse gas emissions. Participating U.S. states account for one-half of the U.S. population and Gross Domestic Product (GDP), and one-third of all U.S. greenhouse gas emissions. The Canadian provinces account for more than three-quarters of the Canadian population and GDP, and nearly one-half of Canadian GHG emissions. These efforts are formally observed by another 14 states and provinces across the United States, Canada, and Mexico.

Regional cap-and-trade programs account for the most significant domestic greenhouse gas regulatory efforts to date. In developing these programs, the regions have demonstrated innovation in policy design and program implementation that will inform national climate policy development in the United States and Canada. For basic information on cap-and-trade programs, please see The Bottom Line on Cap-and-Trade.

What are the regional programs? Which states are participating?

Regional Climate Initiatives in the United States and Canada

The Northeastern Regional Greenhouse Gas Initiative, or RGGI, was the first cap-and-trade program for greenhouse gases in the United States. It covers 10 Northeastern and Mid-Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont). The program limits – or “caps” – carbon dioxide (CO2) emissions from large fossil-fuel-fired electric generating units, with the goal of stabilizing emissions from 2009 through 2014 to a level roughly equivalent to recent historical emissions. The program then reduces the cap by 2.5 percent per year over the next four years so that in 2018 there is a 10 percent reduction from the baseline. RGGI took effect and began regulating CO2 emissions on January 1, 2009. The first auction for allowances was held on September 25, 2008. Subsequent auctions have been and will be held quarterly.

The Western Climate Initiative, or WCI, covers seven U.S. states (Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington) and four Canadian provinces (British Columbia, Manitoba, Ontario, and Quebec). Another six U.S. states, one Canadian province, and six Mexican states are formally observing this process. The WCI released a design document laying out its basic program parameters in September 2008. That agreement calls for a program that will cover nearly 90 percent of the region’s greenhouse gas emissions when it is fully implemented (commonly referred to as an economy-wide program). The program will reduce emissions 15 percent below 2005 levels by 2020. Member jurisdictions are moving forward with program implementation. The cap-and-trade program will begin regulating emissions in January 2012. To ensure the program is founded on sound emissions data, mandatory emissions monitoring will commence in January 2010.

The Midwestern Greenhouse Gas Reduction Accord, or Midwestern Accord,7 covers six U.S. states (Illinois, Iowa, Kansas, Michigan, Minnesota, and Wisconsin) and one Canadian province (Manitoba). Another three U.S. states and one Canadian province are formally observing this process. In early 2008, participating jurisdictions appointed an Advisory Group comprised of representatives from environmental groups, industry, and the participating jurisdictions to develop recommendations on a regional cap-and-trade program. In May 2009, the Advisory Group released their draft final design recommendations. These recommendations call for an economy-wide program that would reduce emissions 20 percent below 2005 levels by 2020, and 80 percent below 2005 levels by 2050, though the 2020 target may decrease to 18 percent if allowance prices increase too much. The Advisory Group will meet to finalize its recommendations after regional economic modeling is completed in early fall 2009. A model rule, which is the proposed set of GHG trading rules upon which participating jurisdictions base their own rules, is being developed. The Midwestern Accord cap-and-trade program is scheduled to launch in January 2012.

Chart: Regional Climate Initiatives in the United States and Canada (Click to view full size)

What will happen to the regional programs once U.S. federal regulations are passed?

While historically states have been drivers of policy innovation, it remains unclear what role they may have in a federal climate program. Under federal legislation, the regional programs may be preempted or encouraged to fold into the federal program. If this happens, it is likely that a federal program will provide some mechanism for regional allowances to transition into the federal program. For more information on the roles of states in a federal climate program, see The Bottom Line on State and Federal Policy Roles.

Additional References

Acknowledgements

WRI would like to thank our many internal and external reviewers for providing feedback on drafts of various issues in The Bottom Line series. WRI also wishes to thank the following foundations that support our climate and business engagement activities and help make this series possible: