On December 4, The German Marshall Fund of the United States in partnership with the Business Council for Sustainable Energy and Carbon Markets and Investors Association hosted a transatlantic discussion on opportunities and challenges facing a U.S. cap-and-trade system. The event was structured into two panels. The first panel provided the viewpoint of climate policy experts and featured Artur Runge-Metzger, Head of the European Commission delegation to COP14, and Jonathan Pershing, Director of the Climate, Energy & Pollution Program at the World Resources Institute. The second panel captured the outlook of the business community and featured: Martin Berg, Merrill Lynch; Lisa Beal, Interstate Natural Gas Association of America; Kate Hampton, Climate Change Capital; and Lisa Jacobsen, Business Council for Sustainable Energy. Jennifer Haverkamp of Environmental Defense moderated the discussion.
Jonathan Pershing of WRI gave an overview of planned and potential future U.S. climate activities at the state and federal levels. The bulk of activities to date have been at the state or regional level, such as the Regional Greenhouse Gas Initiative (RGGI), an emissions trading system among New England states. RGGI explicitly foresees integration with the EU Emissions Trading System (EU ETS) by allowing U.S. entities to purchase EU permits to meet their obligations; it also allows the purchase of CDM credits above a certain price threshold. Also discussed was the Western Climate Initiative, covering California and other states. Some of these initiatives go further than the EU ETS, e.g. the Western Climate Initiative includes transport-sector emissions and after 2015 will cover all emitting sectors of the economy.
Despite the multitude and ambition of state-level reduction programs, a federal approach is essential if America is to reduce its emissions, according to Pershing: even if all proposed state initiatives are implemented, this will only bring about stabilization of U.S. greenhouse gas emissions at current rates. These initiatives will contribute to the creation of a national system, however, and the issues they are raising are found in the various bills presented in Congress to date. In the absence of federal action 40 states have complied with a voluntary initiative to register greenhouse gas emissions; any eventual federal system will be able to build on this and integrate the existing data.
Pershing also discussed the U.S. Climate Action Partnership, an initiative composed of U.S. companies and NGOs. He predicted that the United States will have a domestic program soon, with significant reductions and an emphasis on funding for technology research and development. The U.S. Senate is likely to move toward the adoption of measures in 2009 or 2010, depending on how the political process succeeds in linking these climate measures to the creation of new jobs. U.S. climate measures at the federal level are likely even in the absence of a post-2012 agreement, but many of the details will be contingent on the international negotiations and the relative commitments of large developing economies like China and India.
Artur Runge-Metzger of the European Commission presented on climate change activities in the European Union. He described the European Union's future targets and lessons learned from experiences with the EU ETS, such as the need to address carbon leakage, keep the allocation system simple, and minimize transaction costs. The European Union would like to link up with federal and sub-federal trading system in the United States. This could be done under the following conditions: the existence of a robust cap that could be the basis for an OECD-wide trading system, no government intervention to "correct" the price signal created by the market, and an openness to international offset credits with minimum environmental and social requirements. Runge-Metzger thought that linking the two systems could be negotiated quite easily and that the European Union and United States could simply agree mutually to accept each other's allowances.
The panel of four business representatives provided a business perspective on the opportunities and challenges facing a U.S. cap-and-trade system. On the issue of ways to allocate permits, several participants emphasized that the market price should carry through to consumers. This requires that permits to polluters should be auctioned as much as possible, not given away for free as is currently largely the case in Europe. Correcting a common misperception, Martin Berg of Merrill Lynch stressed that auctioning does not affect the price of permits, only relative profitability. The European Union proposes to address this issue through an evidence-based accommodation of those companies that are particularly exposed to foreign competition.
The panelists also touched on the issue of technology transfer, recognizing the enormous amount of new capital investment that is expected over the coming decades and the need for a carbon cap to prevent a lock-in of carbon-intense technologies. Kate Hampton of Climate Capital highlighted the need for transparent and simple rules and support for the diffusion of carbon capture and storage and electricity from renewable energy sources. Lisa Jacobson from the Business Council for Sustainable Energy pointed out that the deployment of renewable electricity is largely a debate about transmission, a part of national infrastructure that requires appropriate policies and investment.
Finally, the panel discussed project credits. Despite some calls for forest credits to be included in any trading system - forest CDM credits are currently excluded from the EU ETS -panelists noted that forest carbon credits are problematic because of doubts about their permanence and difficulties in measuring them. Nevertheless there is broad expectation that credits from avoided deforestation may be included. Ms. Jacobson also hoped that a reformed CDM should allow carbon finance to co-fund policy development and implementation.