The Need
The design of a cap and trade system is very difficult because of the need to avoid disproportional impacts to important sectors of the economy. As one of the world's largest industrial energy consumers, Dow understands how fossil energy impacts global competitiveness. And yet, because Dow products save much more energy than is used in the manufacturing of those products, we recognize the transformational power of policies that place a price on carbon.
Certain design elements are critical to minimize the costs and maximize the benefits of cap and trade:
Feedstocks: Some manufacturers use fossil energy as a feedstock material. This fossil energy is not combusted and does not result in emissions of greenhouse gases. A cap and trade system that imposes a cap on those who produce (rather than emit) fossil energy has the potential to raise feedstock prices, which will hurt domestic manufacturing without addressing greenhouse gas emissions.
Leakage: U.S. manufacturers who produce energy-intensive, commodity-like products that are globally traded are particularly vulnerable to higher energy prices from a cap and trade scheme or a carbon tax. Such industries (iron and steel, basic chemicals, cement, pulp and paper, glass and ceramics, non-ferrous metals) have lost three million jobs in the past eight years. If not designed carefully, U.S. climate policy will result in the outsourcing of jobs to countries that do not have rigorous GHG controls.
Fuel Switching: Climate policy should be designed to avoid a “dash-to-gas” from coal to natural gas in the power sector. Such a movement will greatly increase demand for natural gas that could, in the absence of increased supply, drive up prices for manufacturers.
Cost Containment: Legislative proposals that would impose a cap and trade program often contain limits (quantitative or procedural) on offsets that can be used to meet a firm's compliance obligation. Such limits on legitimate, high-quality offsets-both domestic and international-increases the cost of cap and trade and reduces the flexibility of firms that have to comply. Care must be taken to ensure that international offsets are not a substitute for action to reduce emissions by countries having significant GHG emissions.
Energy Efficiency: The UN Foundation reports that doubling the rate of energy efficiency improvement by the G-8 countries can, with current technology, come close to achieving the high end of the stabilization range for atmospheric concentrations of greenhouse gases.
Technology: The only way the world economy can slow, stop, and reverse its growth of greenhouse gas emissions in an economically effective way is with new, low carbon technology.
A global approach: Climate Change is a global issue and therefore must be addressed by all regions of the world.
Solutions
- Protect feedstocks. If cap and trade imposes an “upstream cap on fossil fuel, manufacturers that use this “fuel” as feedstock should be reimbursed for their higher costs through the issuance of free allowances equal to the CO2 content of their feedstock material.
- Do not limit high-quality offsets that can be used to meet a firm's compliance obligation.
- Promote energy efficiency. The new administration should seek agreement among the G-8 plus 5 countries to double their rate of energy efficiency improvement.
- Avoid “leakage” of U.S. manufacturing jobs. The best way to accomplish this is by keeping allowance prices as low as possible, and by the awarding of free allowances to energy-intensive, trade exposed manufacturers to compensate them for their increased costs from a cap and trade program. These free allowances can be discontinued once there is an internationally level playing field. A global sectoral agreement would be ideal for energy intensive, trade exposed industries.
- Minimize fuel switching in the power sector. To avoid a “dash-to-gas” in the power sector, provide incentives for the rapid deployment of carbon capture and storage (CCS) technologies, set realistic emission reduction targets based on the development of this technology, and ensure an ample supply of high-quality offsets.
- Accelerate new clean energy technologies. Lawmakers should accelerate federal research, development and deployment of clean energy technologies and provide incentives for private R&D. In addition, any revenue generated from the sale/auctioning of allowances should be dedicated to fund climate friendly projects.
- Ensure a global approach. U.S. policy must create incentives and encourage actions by other countries, including large carbon emitting economies in the developing world, to implement GHG emission reduction strategies. Seeking consensus on global sectoral agreements should be a high priority for the U.S.
