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The International Case for Carbon and the Economy

3p Contributor | Tuesday April 13th, 2010 | 0 Comments

By Henry Derwent, President and CEO, IETA

As Congress shifts its attention from health care to energy and climate change, the discussion will undoubtedly return to the role of international offsets in a cap-and-trade system. It will again focus on the ability of international offsets to ensure cost containment and provide a more liquid domestic market. The conversation need not end there, however. International offsets offer a level of utility extending far beyond the domestic sphere. And since climate change is a global problem, the non-domestic influence of this aspect of U.S. legislation merits attention.

Senator Cantwell and Senators Graham, Kerry and Lieberman have begun work on separate proposals for climate change legislation. It is our hope that these proposals learn from the missteps of the American Clean Energy and Security Act (ACES) passed by the House of Representatives last summer. ACES made good use of international offsets, but erred by not considering the limits to quick scale-up of offset generation and the unequal distribution of international offset opportunities around the world. By gaining a better grasp on the ins and outs of international offset generation, U.S. climate legislation can be designed to contain costs and buoy low-carbon development by driving the growth of widespread mitigation activities in areas of the world awash in inexpensive emission reduction opportunities.

Cost Containment

The overwhelming cost containment benefits are the most obvious, and therefore most oft-noted, advantage of incentivizing a significant flow of international offset credits into the U.S. system. Analysis by the Environmental Protection Agency (EPA), found that excluding international offsets would make climate legislation 34 percent more expensive than a bill including international offsets. They also provide critical assistance stabilizing carbon prices by providing a more liquid market and, thereby, the flexibility covered entities need to efficiently reduce emissions at timescales attuned to their particular business situation. This flexibility will help stave off price spikes by providing an alternative to purchasing scarce allowances in the event of unanticipated compliance shortfalls.

Encouraging a Global Market

These cost containment benefits are a powerful argument for granting international offsets a large role in any U.S. cap-and-trade system. Addressing climate change is not only about the U.S. making emissions cuts, however. Apart from U.S. emissions, the growing emissions of the developing world—where international offsets will be generated— matter most to the climate.

Linking the U.S. cap-and-trade system with international offset programs will enable the United States to drive the growth of developing countries’ capacity to reduce emissions and to accurately and transparently measure, monitor, and verify results. This is a key step on the road to greater levels of mitigation activity in developing countries in the future.

As well, the offset demand coming from the U.S. market will accelerate the introduction of a carbon price signal into developing countries. In other words, it will help put a value on carbon in developing countries. Doing so will compel companies to identify emission reduction opportunities, build mitigation capacity and begin laying a market foundation by cluing in key supporting industries such as low-carbon technology providers and financial institutions to the value of carbon. These are not small steps.

With this potential influence, the types of offset programs offered in the U.S. and the rules that determine access to those programs are critical. For that reason it is critical Congress not lose sight of the economic benefits of emissions markets, nor devise market oversight rules that unnecessarily limit those benefits.

What’s Next

Critics of cap-and-trade point to the European Union’s Emissions Trading System (EU ETS) as an example of how such a system failed to reduce greenhouse gas emissions while doing nothing to help Europe’s economy. But the evidence tells a different story. Since 2005 Europe’s cap-and-trade system has reduced emissions by 50-100 million metric tons of CO2 per year while adding more than 1.5 million new jobs in clean technologies, all at an added value of €58 billion ($87 billion) to the European economy. The EU ETS is now the largest emissions market in the world and the European CO2 price is the global benchmark. It has increased overall profitability in all participating sectors while supporting a sizeable boom in clean energy jobs in spite of the global recession. And as one recent study from the EU notes, the EU ETS can be expected to generate about 410,000 additional jobs and 0.24% additional GDP in 2020.

The lesson for the current debate in the U.S. is that the notion that a carbon price will wreck the overall economy is clearly disproved with the European system. But perhaps more important, by encouraging greater levels of emission reduction activity in developing countries and increasing the scale of offsets available to American companies for cost containment, it is possible for the U.S. to integrate into the emerging global emissions framework while providing U.S. companies the necessary flexibility to make short- and long-term investments in technology and infrastructure without the risk of sudden obsolescence.

By taking a more thoughtful approach to designing the cap-and-trade system, the U.S. can go a long way toward recognizing that climate change is a problem that requires a wide range of tools for achieving emission reductions in ways that fit the heterogeneity of participating sectors and countries. By providing clear openings to link other cap-and-trade systems with ours, it is possible to maintain and deepen the current levels of international engagement and contribution. Adding this touch of practicality into U.S. offset provisions will benefit the U.S., developing countries, and the climate.

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Henry Derwent is President and CEO of the Inernational Emissions Trading Association, a nonprofit business organization created in June 1999 to establish a functional international framework for trading in greenhouse gas emission reductions. Derwent is former director of International Climate, Air and Analysis at the UK Department for Environment, Food and Rural Affairs. To find out more, visit IETA.org.


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