U

Instructor

Dr. Armin Rosencranz

EXECUTIVE SUMMARY

The U.S. Climate Policy Blueprint is the culmination of collaborative efforts by graduate public policy students at the University of Maryland to produce a comprehensive climate change mitigation plan that can be quickly adopted and implemented. Over the course of the past four months, we have reviewed the scientific data indicating that climate change is occurring and that it is indeed caused by human actions. We have also discussed the skeptics’ counter-argument, reviewed substantial literature pertaining to the likely impacts of climate change and the existing technologies available to mitigate those impacts, investigated current efforts being undertaken here and abroad to reduce greenhouse gases, and spoken with climate change experts.

We have concluded that climate change is a real threat not only to our livelihoods here, but also to national security, energy independence, food security, global sustainable development, and a host of invaluable ecosystem resources around the world. We are also concerned that changes are occurring more rapidly than previously thought possible. Based on our discussions and analyses over the past several months, we have developed a proposal outlining the necessary steps that the U.S. needs to take to make significant reductions in greenhouse gases over the next few decades. The U.S. Climate Policy Blueprint is divided into six sections: Domestic Cap and Trade Policy, Regulatory and Legislative Approaches, Alternative Sources of Energy, Domestic Adaptation, Transportation Demand Management and Urban Development, and Linking Domestic Efforts to Global Initiatives.

Part I of the Blueprint calls for an economy wide cap of emissions at 182 billion metric tons (bmt) of CO₂equivalent GHG’s between 2010 and 2050. Tradable permits would initially be allocated by auctioning and grandfathering; the number of grandfathered permits would eventually be reduced to zero. The policy would also provide for a safety valve cap and floor that would adjust to inflation. Revenue from the cap and trade program would be allocated accordingly: 50 percent to reduce income taxes on a progressive basis, 20 percent to facilitate energy production and efficiency, 15 percent to global climate initiatives, and 15 percent to climate change adaptation.

Part II covers the regulatory and legislative approaches, which include federal mandates for governmental agencies, forest management, energy efficiency standards for appliances, corporate average fuel economy standards, and carbon offsets. Under the federal mandates for agencies, Congress would strengthen and codify Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management, to help spur demand for energy efficient products. Additional minimum efficiency standards based on readily available technologies would also be put in place to quickly and dramatically reduce energy consumption. A government-led offset service is also suggested to increase the feasibility of carbon emission reductions over single energy-efficiency approaches alone.

Part III proposes three overarching strategies for promoting the use of alternative energy, which include a national renewable portfolio standard (RPS), tax incentives, and support for research and development. We suggest as a minimum, a national RPS of 20 percent by 2020, which would include energy produced by wind, biomass, geothermal, solar, tidal, and landfill gas. We also propose that the tax credits established under the Energy Policy Act 2005 be increased and/or extended, while credits to carbon based energy should be eliminated immediately. The U.S. government supports carbon intensive energy sources through direct subsidies, tax incentives, accelerated depreciation, and direct federal budgetary outlays. The elimination of these supports could potentially release between $32 and $66 billion a year, which could be used to fund R&D for clean energy sources.

Even with aggressive mitigation through rapidly decreased GHG emissions, historic emissions, observed changes, and current feedback processes suggest that climate change will still create many impacts in the United States and around the world. Part IV addresses adaptation strategies that are designed to help the American people adjust to the impacts of climate change while protecting ecosystems and keeping America’s economy strong. In an effort to systematize an adaptation strategy, we offer six core principles, which include broad dissemination of context-appropriate information to guide personal, community, and corporate decision-making; continued research and risk assessment at all levels to prioritize targets, strategies, and solutions; adjustment of government regulations and programs to reflect potential impacts of climate change and potential adaptation to those impacts; prevention of development in extremely vulnerable or ecologically sensitive areas; and restoration of natural systems where possible.

Part V of the Blueprint supports transportation and land use policies that reduce the need for single-occupancy vehicle trips. We suggest that efficient and carbon-free travel be supported by increasing funding, authority and accountability for Metropolitan Planning Organizations; leveling the playing field between highway and transit funding; and ensuring that new highway projects are cost-effective. Strategies are also recommended to link transportation capacity to user fees, which call for the expansion of toll systems and the exacting of fees based on vehicle miles traveled. Additional recommendations encourage effective land development strategies by providing support to educational efforts and technical assistance to state and local governments to develop pedestrian- and transit-friendly development.

The final section of the Blueprint links domestic efforts to global initiatives since climate change is a global problem and it requires cooperative international action to keep the average global surface temperature from increasing more than 2^◦C. To achieve this, it is imperative that the U.S. strengthen its participation in international negotiations to limit GHG emissions, which can be achieved through various bilateral and multilateral agreements. Additional strategies to internationalize U.S. mitigation efforts should also include engaging major economies, integrating climate change objectives into development policies, linking domestic markets for GHG allowances to international markets, and scaling up the transfer of technologies between countries.

In developing our proposal, we took into account the political feasibility and the costs of implementation, but we realize that some of the necessary measures are not easy decisions. However, we also recognize that climate change mitigation is not a choice, but a necessary action to ensure our future security. To this end, the U.S. Climate Policy Blueprint includes strategies and policies that are readily adaptable and that will lead to substantial reductions of GHG emissions in the foreseeable future.

Introduction

Climate change mitigation will necessarily mean a diversion from the business as usual model towards a more progressive and efficient way of conducting business. Our allies across the Atlantic and in the Pacific have already recognized that human induced climate changes could be catastrophic and they are actively seeking ways to mitigate these changes. If the U.S. wants to be a leader on this front and remain competitive in the global market, we must make the hard choices now that will reduce greenhouse gases. The proposal that follows is a framework for legislation covering cap and trade, regulations, alternative energies, adaptation and transportation, as well as U.S. policies for cooperative international action that would significantly reduce greenhouse gases by 2050.

I. Domestic Cap and Trade Policy

Basic Policy Framework

The two means of "putting a price on carbon" are carbon taxes and a cap and trade system. Though a carbon tax is deemed a more effective and direct means of pricing carbon, and is much more efficient from an administrative standpoint, a cap and trade system is preferred at this juncture because its effects are more certain. Scientists know that carbon emissions need to be stabilized at 450-550 ppm to avoid catastrophic changes, but the tax level required to maintain carbon emissions at this level is uncertain. Additionally, cap and trade has already had some success in America, and it appears likely that it will be accepted sooner than carbon taxes. Because time is of the essence for reducing carbon emissions, a cap and trade system is the means we have selected.

A cap and trade system is a market-based approach to regulating the quantity of emissions allowed by emitting entities. In essence, a cap and trade policy identifies the emitting entities to be regulated, sets a cap on total emissions, distributes emission allowances that in total equal the cap, and allows trading of emission allowances between regulated entities. Every year, regulated entities are required to turn in allowances equal to their emissions for that year. If a regulated entity has an excess of allowances, it may sell the extra allowances to other entities. This creates a market for emissions allowances and establishes a market price on emissions that in turn creates economic incentives for cost-effective abatement. Over time, the cap is lowered by reducing the total amount of allowable emissions. This effectively increases the price of allowances and ensures that the economic incentive is adequate to facilitate abatement.

Outlined below are the major features of a cap and trade policy to mitigate climate change. Our recommendations specify how to craft an environmentally effective policy that is both economically and politically feasible.

GHG’s Covered

In the short-term, the reduction of several non-CO₂ greenhouse gases can be achieved at a low cost relative to CO₂. Therefore, a multi-gas implementation scheme will allow greater market flexibility and reduce policy costs by enabling entities to target the most cost efficient abatement first. Global Warming Potential (GWP) is the desired exchange rate, reported as CO₂ equivalent (CO₂-e), and the regulated gases should include CO₂, CH₄, N₂O, SF₆, HFCs, and PFCs.^{^[1]} To avoid perverse incentives to overexploit gases with the highest GWP, the EPA should devise an exchange rate among these six gases.

Point of Regulation

In order to stabilize carbon emissions at 450-550 ppm, the regulation shall apply to all sectors of the economy. This includes the industrial, transportation, energy, residential and commercial sectors. In order to minimize administrative costs, the smallest actors in each sector, to be determined by the EPA on a sector by sector basis, will be exempt from the regulation; however, the exclusion will not exceed 5 percent of sector capacity. For example, in the electricity generating sector, only entities with a capacity of 25 MW or greater will be regulated. In 2005, electricity generation accounted for 40 percent of US carbon dioxide emissions. Regulating entities with a capacity of 25 MW or greater would cover slightly more than 95 percent of all US electricity generating capacity.

Stringency

The emissions reduction target is not an effective measure of the policy stringency and reveals little concerning the policy cost or the climate benefits. Instead, the total emissions allowed over the time horizon of the policy should be the basis for measuring stringency of emissions.

The program will be effective from 2010 to 2050. This allows for maximum emissions over a specified time frame, as opposed to meeting a target at a point in time (e.g., 80 percent reduction by 2050). Since carbon stays in the atmosphere for 100 years or so, it is total emissions that matter. This will allow for a more efficient emission reduction path as it allows for greater reductions in the future when advancements in technology or conservation allow them more cheaply.

The cap will be based on total emissions of 182 billion metric tons (bmt) of CO₂ equivalent GHG’s over this 41 year period. This total level of emissions allowed is consistent with an annual reduction in emissions of approximately 2 percent from the projected 2010 baseline of 7.4 bmt, to approximately 1.2 bmt in 2050. This level also reflects an approximate 80 percent reduction of annual emissions between 1990 (6 bmt) and 2050.

Allocation of Allowances

Emission allowances are valuable assets that can be auctioned to generate revenues for other emissions abatement strategies and other purposes. Additionally, it is essential that the price of carbon emissions increase to provide incentives for both conservation and technological innovation. However, time should be allowed to plan for and make adjustments to the higher prices. Therefore, 40 percent of allowances will be auctioned in the first year with the remaining 60 percent distributed for free based on average emissions from 2003 through 2006. In subsequent years, an additional 5 percent of allowances will be auctioned each year, so that 100 percent of allowances are auctioned in year 13.

Safety Valve: Cap and Floor

A safety valve, in which the cost of allowances is capped at a particular rate, is also vital for the program’s political viability as many are concerned the US economy would be unduly damaged should the cost of emissions rise to a prohibitively high level. To alleviate the cost uncertainty, the government will sell an unlimited amount of allowances when the price increases to $60/mt CO₂ (approximately 50 percent greater than the model projected price of $40/mt expected in 2010), ensuring the price of allowances does not increase above this “cap” rate. The cap rate will rise by 5 percent plus the rate of inflation per year beginning in 2010 (a rate just above model projected price increases over the first 15 years of the program).

However, to support incentives for potentially expensive long-term efforts toward both energy conservation and investments in alternative energy sources, a minimum price on emissions should also be established. A floor for allowance prices will be set at of $10/mt and rise at 3 percent plus inflation per year beginning in 2010. To achieve this, the same government facility will purchase an unlimited amount of allowances at this “floor” rate, ensuring the price never falls below it.

The government agency responsible for allocating and selling allowances will need to track all allowances, enabling the users of the allowances and the flow of permits to provide continual feedback for system monitoring and adjustment.

Figure 1: Estimated CO₂-e Price

(167 bmt scenario is similar to the proposed Program)

Source: MIT Report, supra n. 1

Figure 2: Average Fossil Fuel Cost Increase for a CO₂-e Price of $27/mt.

Revenue Recycling

Public spending on energy R&D and subsidies for renewables have merit in their own right and such policies should be pursued independent of the cap and trade. Because the cap and trade policy must be implemented soon to begin the process of reducing carbon emissions, the design of the policy should favor political expediency. To this end, 50 percent of revenues from auctioning allowances will be “recycled” on a national basis to reduce income taxes. The remaining 50 percent of the revenues will be distributed to programs to facilitate renewable energy production and energy efficiency (20 percent of revenues), international programs (15 percent) and climate change adaptation (15 percent) as specified below in this proposal. The revenue allocation will be reviewed by Congress every five years and modified as deemed appropriate. Because energy costs for families are generally regressive (lower income families pay a higher proportion of disposable income for energy), the design of this allocation will be to distribute funds on a progressive basis and only to lower and middle income Americans. However, the distribution will be a function of income, not of energy use, so that the higher prices of energy provides an incentive to conserve, and those using a disproportionate amount of energy will see a net revenue loss.

Figure 3: Potential Revenues Generated from CO₂-e Emission Permit Auctions

Source: MIT Report, supra n. 1

Linkage with Non-US Systems

Generally, the broader a market, the greater the potential gains from efficiency. This argues designing the policy to facilitate integration with the European Union Emissions Trading Scheme (EU ETS) and other emerging national GHG markets. As such, the program design will be consistent with that of the EU ETS or other such systems that develop prior to initiation to facilitate integration.

Credit Provisions

Again, for the sake of being able to reduce emissions at least cost, the policy allows for entities to generate credits through the CDM. However, the capacity to generate credits from the CDM will not be granted until certain “gaming the system” issues with that process have been rectified. That may be achieved with the beginning of the second implementation phase of the Kyoto protocol in 2012, though a judgment will be made at that time. However, as a constraint applied to this credit, no more than 20 percent of an entity’s emissions in a given year may be “offset” by CDM credits.

Typically, if covered under a cap and trade policy, land use generates credits for carbon sequestration in soils. However, the difficulties of accurately estimating the amount of carbon sequestered and the concern over the difficulty of deriving appropriate baselines make it prudent to exclude land use. Additionally, the economics of biofuels is projected to dominate the economics of carbon sequestration in soils. This means that there will be no incentive to protect carbon in soils through a credit system.

Banking of Permits

Entities may expect allowance costs to rise over time because the amount of allowances will gradually decline. Banking allows entities that expect allowance costs to rise to over-comply in the short-term and “bank” permits. Allowing the banking of allowance permits should increase the efficiency of the system since attempts to minimize the cost of emission reductions can be affected across both sources and time.

Congressional Review

The many variables of this Program, such as the level of the safety valve and floor, the total emissions cap, and methods of revenue recycling, were crafted to achieve results as projected by complex model simulations. However, these simulation results are highly sensitive to a variety of assumptions. The actual changes in variables such as the cost of emission reductions, the growth in economic activity and corresponding “demand for emissions”, and advancements in technology will help determine the actual results achieved by the program. In light of this significant uncertainty, this Program should be subject to a full Congressional review every five years. If a strong rationale can be constructed for altering some element of the Program, it may be amended with the approval of a 60 percent majority of Congress.

II. Regulatory and Legislative Approaches

Federal Mandates for Agencies

Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management, was a progressive policy to use the purchasing power of the Federal government to jumpstart the market for energy efficiency and greenhouse gas mitigation technology. In order to guarantee that the order’s mandates are continued in future Administrations, we propose codifying EO 13423 into law with several changes:

1. Revise Section 2(a) by eliminating “intensity” so that all agencies are required to reduce total energy usage by 30 percent by 2015

2. Revise Section 2(d) to mandate that agencies purchase recycled paper with at least a post-consumer fiber content of 50 percent

3. Revise Section 2(f) to include all majority federally-funded buildings in mandates

4. Also, the mandate will add an exemption for cases in which no commercially available product or technology exists

US Forest Service Management

The National Forests System is an important carbon sink and given the magnitude of climate change impacts, should be managed as such. We propose to amend the Forest and Rangeland Renewable Resources Planning Act of 1974, Section 3 to require the Secretary’s decadal Renewable Resource Assessment to include an analysis of the carbon storage contained in the National Forest System and the impact on storage of a range of future timber sale plans consistent with carbon offset program standards. This information will guide future timber sale decisions. To facilitate this, we also propose amending the National Forest Management Act of 1976 to include climate change mitigation among the administrative criteria for the Forest System.

Ban on Inefficient Lighting Technology

The use of compact fluorescent bulbs can save consumers money over the life of the product and significantly reduce energy consumption. Manufacturers have resisted the technical change and information dissemination to consumers has been slow. As a result, consumers have yet to take advantage of this technology on a wide scale. In 2002, incandescent bulbs were used in 85 percent of all US lighting sockets, as compared to 2 percent for compact fluorescent bulbs. Several other nations have banned the production and sale of incandescent bulbs. We also propose banning the production and sale of all bulbs with efficiencies less than 50 lumens/Watt, where they are commercially available alternatives, by 2012. The Secretary is also to conduct a review of this efficiency standard every 5 years thereafter to determine whether further stringency is commercially feasible.

Increase Energy Efficiency Standards for Appliances

Over 55 percent of all household electricity usage goes towards appliances. An increase in these products’ efficiency has the potential to dramatically reduce energy consumption. The average California resident uses 40 percent less electricity than a US citizen. This can be attributed, in part, to the progressive standards they have developed over past three decades. We propose phasing in the appliance standards codified in California’s 2006 Appliance Efficiency Regulations for those that currently surpass federal standards by 2012. The Secretary is also to conduct a review of this efficiency standard every 5 years thereafter to determine whether further stringency is commercially feasible.

Corporate Average Fuel Economy Standards

The US transportation sector contributed 27 percent of the nation’s carbon dioxide emissions in 2003, approximately 2 billion metric tons of carbon dioxide per year. Cars and light trucks contribute 62 percent of total transportation sector emissions. One of the most immediate and effective ways to reduce greenhouse gas emissions is to increase the overall fuel economy of the country’s car and light truck fleet. The model year (MY) 2006 standards are 27.5 mpg for passenger cars and 22.5 mpg for light trucks.

A two-pronged supply-side approach that combines mandates and tax incentives is needed. The US Congress should pass legislation that will increase the corporate average fuel economy (CAFE) standard for cars and light trucks by 4 percent per year for ten years. (That would mean a one mile-per-gallon improvement fleet-wide for the first year.) Tax incentives to manufacturers would help finance any needed retooling of auto plants to accommodate new technologies.

A recent rule for light trucks sets a standard based on the vehicle’s “footprint,” a formula involving the vehicles weight and wheelbase. The size-based standards can give the auto industry increased flexibility in complying with the strengthened standards. The National Highway Traffic Safety Administration (NHTSA) could allow manufacturers to delay compliance if the industry can prove to an independent review board that such improvements are technically impossible or would seriously reduce the safety of new vehicles.

As additional incentives to auto manufacturers to accept increased CAFE standards and to pay for technological advances, the US Congress can subsidize health care expenses to retired auto workers. Rep. Jay Inslee (D-WA) and Sen. Barack Obama (along with Sen. Clinton) have proposed “Health Care for Hybrids Legislation.” One half of the amount that auto manufacturers and parts suppliers would receive as reimbursements for health care costs would be dedicated to research and adoption of fuel-efficient vehicle technologies. For companies in a weakened financial position, these resources will make investing in new fuel-efficiency technologies easier. The technology is available for Detroit automakers to improve efficiency.

Pressure is growing and legislation to raise CAFE standards has been introduced in the 110^th Congress.^{^[2]} Voluntary measures are not effective; nor is waiting for higher fuel prices to provide the industry some form of market incentive. Congress should provide the mandate and the assistance to improve fuel economy.

Carbon Offsets

Carbon offsets refer to the process of reducing the net carbon emissions of an organization. Carbon offset services are arranged with a provider to achieve a net reduction of carbon emissions by performing activities to reduce carbon emissions or increase their absorption of carbon dioxide. Examples of offset actions include planting trees, switching to renewable energy sources, adopting new technologies to reduce the levels of non-renewable energy consumption, among others. A key concept is additionality, the principle used to define a carbon offset project, which describes carbon offset emission reductions as those that occur in addition to business-as-usual.

This proposal refers to the implementation of a system to provide carbon offset services at a national level, as an effort led by the US government aimed to address the causes of climate change. It is complementary to a cap and trade emissions reduction scheme.

Carbon offset services represent a more feasible alternative to be embraced by many companies, especially those who find it difficult to reduce their current levels of non-renewable energy consumption. The system would allow these companies to compensate for their carbon emissions, and allow them to make a smoother long-term transition to renewable technologies.

The implementation of a national system to provide carbon offset services would base its activities in a certification process. It would develop formal standards to quantify offsets and keep accurate records of the carbon reductions, based on the best scientific knowledge. The goal is to effectively measure the carbon offsets and facilitate a market for carbon trading. The efforts to standardize certification criteria should be led by a task force comprising the US government in partnership with NGOs, private companies, US cities, and other stakeholders.

Once standard criteria for certification are in place, an organization that wishes to get offset credits would identify a project that will reduce carbon emissions or increase the absorption of carbon dioxide. The organization should then demonstrate that the project would not have happened without its intervention, making sure the additionality principle is included, and estimating the future emissions in absence of the project. The project is then evaluated by the carbon offsets provider agency, or designated party, to confirm that the project would actually contribute to emissions reduction. Based on this appraisal the project is approved or rejected, with suggestions for improvement. Once the project is approved, the carbon offsets provider agency starts issuing certified emissions reduction credits to the organization, based on the amount of metric tons of carbon reductions. The continuity of these market-tradable credits received is contingent upon successful implementation of the project, as measured by regular performance assessments.

Carbon offsets should be included in the current climate change legislation proposals. It would introduce a complementary approach that would make the proposal more comprehensive. It might also increase the feasibility carbon emissions reductions more than single energy-efficiency approaches.

Trading these permits might also help companies to profit in the process, contributing to a healthy economy. The price of carbon offset credits should be defined by the demand of the market.

The implementation of a carbon offset system is expected to increase the level of compliance with climate change regulations, which otherwise might find resistance from some business sectors, especially the ones that are not prepared to assume the transitional costs of greenhouse gas emissions limits. In a context where climate change is increasingly getting the attention of their constituencies, congressional leaders could benefit by passing laws that successfully address the causes of climate change.

A deeper analysis is required to develop this proposal in further detail. It would be very valuable to learn from existing cases. The experiences of several NGOs,^{^[3]} private companies,^{^[4]} cities,^{^[5]} and multilateral organizations^{^[6]} should be considered.

III. Alternative Sources of Energy

Basic Policy Framework

The federal government should promote strategies to shift the United States from a carbon-intensive economy to an economy more reliant on non-carbon intensive sources of energy. These include renewable sources such as wind, solar, biofuels, and biomass, as well as other sources such as nuclear power, coal with carbon capture and storage, and hydrogen. Funding for such initiative should come primarily from the general treasury, although 10-20 percent of auction proceeds from a carbon cap and trade program (if enacted by Congress) should be directed towards research and development for non-carbon energy sources and energy efficiency. The government can free up treasury funds by gradually shifting subsidies, tax credits, and other funding from carbon-intensive fuels. We propose three overarching strategies for promoting the use of alternative energy, including a renewable portfolio standard, tax incentives, and research and development. We also address some technology specific considerations and proposals. While alternative energy is most economically viable in a carbon-constrained world, our proposals could apply even if the United States does not limit carbon emissions.

Renewable Portfolio Standard

Twenty-two states and the District of Columbia currently have some form of renewable portfolio standard (RPS). The goals vary widely, as well as the target dates. A national RPS of 20 percent by 2020 (and maintaining that as a minimum afterward) would provide a clear national standard that would set the mark for business and public investment. H.R. 969, introduced by Rep. Tom Udall (N.M.), provides a framework that could get the nation to this goal. However, “20 by 2020” should be seen as a floor that ambitious states could rise above.

Many states also lack effective implementation and enforcement mechanisms. One way to get effective implementation is to establish a tradable credit market among utilities for renewables, thus allowing utilities in regions with low capacity for renewables to purchase their way to compliance. Such a scheme would also need a strong enforcement mechanism with federally enforced fines and other penalties for noncompliant utilities.

An RPS should include the following technologies: wind, biomass, geothermal, solar, tidal,

and landfill gas. It is not appropriate to include nuclear power in an RPS. It may be appropriate, as included in H.R. 969, to include “incremental hydropower” (defined as “additional generation that is achieved from increased efficiency or additions of capacity” on an existing hydropower facility).

In other respects, the design of the RPS under H.R. 969 seems appropriate. The tradable credit system and the enforcement mechanism are straightforward. H.R. 969 exempts publicly owned utilities and rural electric cooperatives (RECs), but encourages voluntary participation. This may be a concession to political reality, as well as to the orientation of these utilities toward public benefit. However, these utilities are often the most coal-reliant (for example, more than 80 percent of electricity from rural cooperatives is coal-generated). Therefore, we suggest that publicly-owned utilities and RECs be given more time to reach the 20 percent target. 15 percent by 2020 and 20 percent by 2025 may be feasible.

Tax Credits

The adoption of non-fossil fuel technologies has been relatively slow with such technologies representing only a small percentage of energy sources utilized compared to conventional technologies. Non-fossil fuel technologies tend to be more expensive, which discourages their development and production. Tax credits are a mechanism in which this higher cost can be overcome and thereby making them cost-competitive with conventional forms. Support for non-fossil fuel technologies through tax credits will encourage further research and development into the advancement of such technologies and their use.

To promote the adoption of non-fossil fuel technologies, the Energy Policy Act of 2005 created and/or extended tax credits for such technologies. In order to “ramp up” their adoption, we are recommending that these tax credits established under the EPAct 2005 be increased and/or extended. Specific recommendations are discussed below.

1. Renewable Electricity

Wind – Currently, there is a production tax credit (PTC) of 1.5 cents per kWh for the production of electricity from qualified wind energy facilities. The PTC was granted a 2-year extension under the EPAct 2005. These short-term extensions of the PTC, however, create a “boom and bust” cycle that deters manufacturers from investing in and expanding wind manufacturing facilities in the U.S. Due to the uncertainty created by the impending PTC expiration, financial lenders hesitate in providing capital for wind projects and developers rush to complete projects before the deadline leading to smaller projects and additional costs that result in higher electricity prices. A long-term wind PTC, 10-years, is recommended in order to provide the wind industry with more certainty and stability. At this time, Congress shall evaluate whether to extend this tax credit.

Solar – The EPAct 2005 created a 2-year solar investment tax credit (ITC) for U.S. homes and businesses. The duration of this ITC is not long enough though to encourage significant development and expansion within the U.S. solar energy industry. The ITC for solar energy should be extended by 10-years so as to allow the U.S. solar energy industry to realize its full potential. At this time, Congress shall evaluate whether to extend this tax credit.

Biomass – For closed-loop biomass^{^[7]}, the PTC is 1.5 cents per kWh under the EPAct 2005. For open-loop biomass^{^[8]}, a .75 cents per kWh PTC exists. Biomass is increasingly becoming one of our most important energy resources and it is recommended that the tax credits for both open and closed-biomass increases. We are recommending that the PTC for open-loop biomass be increased to 1.5 cents per kWh, and closed-loop biomass be increased to 1.9 cents per kWh.

Other sources – Hydroelectric power, municipal solid waste (which includes trash combustion and landfill gas facilities), and small irrigation power all receive a PTC of .75 cents per kWh under the EPAct 2005. These credits are among the lowest established. It is recommended that the PTC for all these sources be increased to 1.5 cents per kWh in order to place them on equal footing with other renewable energy sources.

2. Nuclear Power

The EPAct 2005 established a PTC of 1.8 cents per kWh for the first 8 years of production from new nuclear power facilities. The PTC should be extended by 2-years in order to increase the incentive for investors to build new nuclear plants. There is a clear need for new nuclear power plants and this extension would help meet that need as well as make nuclear energy a viable option. Further extensions would only be recommended after careful consideration.

Research and Development

Many of these technologies require continued research and development in the private and public sectors in order to become commercially viable. According to the Government Accountability Office, however, DOE’s R&D budget declined by over 85 percent between 1978 and 2005 (from $5.5 billion in real terms to $793 million). To begin restoring these levels, we recommend a 60 percent increase in DOE R&D funding over three years, and a 100 percent increase over five years. This R&D funding should be targeted to renewable energy or non-carbon intensive energy. Much of the funding for this R&D could come from the elimination of fossil fuel subsidies. A few specific R&D initiatives are listed below.

Carbon capture and storage (CCS) has not been demonstrated at a commercial scale. The Congress should allocate funding to research and development for CCS, including multiple sequestration demonstration projects and carbon capture projects. This includes expanding the scope of DOE’s Future Gen program, a program designed to build one CCS coal-fired power plant at a cost of over $1 billion to the government. Additionally, Congress should authorize the Department of Energy to investigate potential sequestration sites. Some of the funding for this research could come from canceling much of the Energy Policy Act’s Clean Power Initiative, which provides $200 million annually, 70 percent of which is used for coal gasification plants that may not be CCS-ready. Because of the high costs of retrofitting plants, it is more cost-effective to build a new plant with CCS. Congress should place low priority on funding the construction of non-CCS power plants.

Congress should also expand R&D funding for hydrogen and expand the Department of Energy’s Freedom Car program. Research should include expanding the life of the fuel cell by improving the proton-exchange membrane, and redesigning vehicles to achieve lower costs for hydrogen cars and trucks. Additionally, research to create hydrogen in a non-carbon intensive manner will improve its viability in a carbon-constrained world. Funding for these initiatives could be found by eliminating other Energy Policy Act funding that supports traditional fossil fuels. This includes $50 million from the Ultra-Deepwater and Unconventional Onshore Natural Gas and Other Petroleum Research and Development Program, as well as other government moneys spent on off-shore oil and gas and on-land oil shale and tar sands.

Additional R&D funding should also be directed at renewable sources of energy such as wind and solar, with a focus on improving efficiency and reliability and decreasing costs. Research for wind could also be directed at completing siting studies.

Credits and Incentives to Carbon Based Energy

Due to the factors that place clean energy at a disadvantage in comparison to traditional energy sources, consideration must be given to removing economic barriers to its development. Such a policy would require the review of current utility incentives and the removal of those subsidies that discourage efficiency. Estimates of federal transfers to energy markets in 2006 ranged between $49 and $100 billion. The exact amount is difficult to calculate due to non-cash interventions (such as provision of access to domestic resources, import restrictions, and purchase requirements) that are not easily quantified. However, it is clear that the bulk of these transfers continue to benefit carbon intensive sources, which is in direct contradiction with environmental goals that would be achieved through policies such as cap and trade. The following chart summarizes preliminary estimates of federal subsidies to energy in 2006:

Figure 4: Distribution of Federal Fiscal Subsidies to Energy, 2006

Preliminary Estimates

	$Billions Per Year (Avg. of High/Low Est.)	% Share
Oil and Gas Coal Fossil, mixed Total Fossil	39 8 2 49	52.4% 10.5% 3.3% 66.2%
Nuclear	9	12.4%
Ethanol	6	7.6%
Other renewables	6	7.5%
Conservation	2	2.1%
Mixed Resources/Other	3	4.2

Total All Resources	75	100%

Source: Earthtrack.net

Congress should create a task force to identify and review current policies that result in government transfers to private energy firms to subsidize production, R&D, infrastructure, and transportation/distribution. This policy review should include, but is not limited to, direct subsidies, tax incentives, accelerated depreciation, and direct federal budgetary outlays. Following this review, Congress should seek to eliminate policies that are benefiting carbon intensive energy sources. The elimination of transfers to fossil fuel energies alone would release between $32 and $66 billion a year.

Technology-specific considerations

1. Solar

Currently, solar energy provides a very small percentage of the world’s electricity, but it is rapidly growing. Solar has the potential to become a much greater source of usable energy than it currently is. The biggest constraint is the cost. Currently, electricity from crystalline PV costs around 20-25 cents/kWh (compared to 4-6 cents for coal-fired plants). Thus, the most helpful strategies are imposing a cost on carbon emissions, investing in R&D to lower costs, providing production or investment tax credits, and establishing an RPS to force utilities to commit to targets.

Tax credits for solar are comparatively recent (established by the 2005 EPACT). The Solar Energy Industries Association suggests that the Investment Tax Credit be expanded to 8 years to get parity with other renewables (http://www.seia.org/getpdf.php?iid=140). The rationale is that plant development takes more lead time, the solar energy market is less mature than other renewables (e.g., wind), and the ITC is fundamentally different than a PTC (the PTC triggers eligibility for electricity produced 10 years after installation, ITC only applies in the year the investment is made). Based on the assumption that Congress is interested in establishing a renewable energy policy for the long-term, we suggest doubling the ITC extension to 16 years, with review in 2021 to determine whether the subsidy is still needed.

2. Wind

Wind power is growing rapidly (36 percent from 2000-2005). There are some outstanding concerns with regard to local opposition to siting, and impacts on wildlife. Impacts on migratory birds are being resolved through better siting studies, but some bat populations remain at risk.

Like solar, wind power needs continued tax credits, a market cost to emissions, and national RPS to be fully brought to scale. This well-established industry may need less publicly funded R&D than other renewables. However, research is still needed to deal with siting, habitat, and grid connectivity issues.

3. Biofuels

Biofuels, in particular corn-based ethanol, have grown considerably in the past few years as a part of U.S. motor fuels. Expanding biofuel production, especially corn ethanol, raises several issues. The surge in corn demand for ethanol has fueled a sharp rise in corn prices, and rapidly expanding corn ethanol production could have significant consequences for agriculture. Higher corn prices encourage corn production, which means corn would crowd out other field crops. The cost of feed for livestock would likely increase since feed consists mainly of corn. A sustained rise in corn prices could lead to higher food prices. Further, an expansion of corn production would likely impact the environment due to increases in fertilizer use and soil erosion. Another issue concerns the energy required to produce corn ethanol. The amount and types of energy required to produce corn ethanol limit its energy and environmental benefits.

Due to these issues, concerns have been raised about whether large federal incentives in support of corn ethanol production should be continued. Concerns largely focus on the potential for widespread unintended and undesirable consequences that might result from excessive federal incentives for corn ethanol. As an alternative, cellulosic biofuels are being pursued since they do not share many of concerns associated with corn ethanol. However, these biofuels are currently prohibitively expensive compared to corn ethanol. Consideration should be given to phasing out some of the corn ethanol incentives and directing them towards alternative biofuels such as cellulosic.

4. Batteries

Vehicles powered by rechargeable battery packs produce no exhaust fumes and are emissions free if charged by renewable electricity sources; however, there are some drawbacks. Battery electric vehicles are not zero emissions if the electricity used to charge the battery pack is from traditional sources such as coal. Certain battery technologies have a limited driving range between recharging and poor availability of public charging stations reduces their practicality. Other issues concern their cost, lifespan, charging time, and performance in cold weather. Advancements in battery technology have begun to address some of these issues, but further research is needed.

5. Carbon Capture and Storage

Carbon Capture and Storage (CCS) is the process of separating the carbon dioxide created when coal is burned and storing it underground. This process would allow for the continued use of one of the United States’ most plentiful resources without exacerbating climate change. Risks include rapid outflow of carbon as well as gradual seepage, both of which could likely be mitigated through appropriate site selection. Other problems include the increased costs of building a power plant with CCS, the burning of more coal to create the same amount of useful energy while capturing carbon, and the environmental degradation that comes with extracting coal (including impacts to waterways and ecosystems).

6. Nuclear Power

The United States currently produces approximately 20 percent of its electricity from nuclear power. It is the most widely used energy source that does not produce climate change causing carbon dioxide. A 2003 study by MIT determined that tripling worldwide nuclear power generation to one million megawatts by 2050 could prevent 0.8 billion to 1.8 billion tons of carbon per year. However, the number of operable nuclear units peaked in 1990 at 112, and have been declining since then. Reasons for this include the high capital costs of nuclear energy as well as concerns regarding waste management and nuclear proliferation.

Energy Policy Act initiatives supporting non-carbon energy should be maintained, in particular, the Next Generation Nuclear Plant Initiative, which provides $1.25 billion for a prototype plant for to produce electricity and hydrogen, other research and development initiatives for nuclear power (including proliferation-resistant fuel, managing used nuclear fuel), and the nuclear tax credit.

7. Hydrogen

Fuel-cell vehicles use hydrogen fuel and oxygen from the air to run electric motors without producing greenhouse gases. Additionally, hydrogen can be extracted from natural resources found in the United States, including coal and natural gas. Obstacles include technological impediments that keep the life of a fuel cell below what is needed for commercial vehicles, and the high cost of fuel cells. Other obstacles include safety concerns such as the flammability of hydrogen, lack of hydrogen infrastructure, and the carbon emitted in creating hydrogen fuel. This could be solved through CCS, gasification of biomass, or water electrolysis using power generated from renewable sources.

Congress should provide grants to states and localities to convert their fleets to fuel-celled power vehicles. Additionally, Congress should commission a panel to study and recommend methods of expanding hydrogen infrastructure to make fuel celled vehicles commercially viable.

IV. Domestic Adaptation

Well-implemented adaptation strategies can enhance the resilience of communities, ecosystems and the economy to impacts of climate change. Even with aggressive mitigation through rapidly decreased greenhouse gas emissions, observed changes, historic emissions, and current feedback processes suggest that climate change will still create many impacts in the United States and across the world. These impacts may include (but are not limited to) crop losses, sea-level rise, and biodiversity losses. Changes in weather patterns may include an increase in droughts in certain regions, stressing agricultural and water-management systems; an increase in heat-related ailments in certain regions, stressing public health and welfare agencies; and an increase in the frequency and severity of severe weather events causing catastrophic damage. These impacts will not be evenly distributed across the nation; some areas may suffer disproportionate losses while others may actually find climate change a net positive. Adaptation strategies are designed to help the American people adjust to these impacts while protecting ecosystems and keeping America’s economy strong.

There is already a plethora of current laws, regulations, and programs that could be considered part of an adaptation strategy (e.g., EPA’s wetlands restoration grants). However, they are relatively ad hoc and inconsistent. Current legislation on climate change, such as McCain-Lieberman or Boxer-Sanders, only obliquely addresses adaptation. Thus, in an effort to systematize an adaptation strategy, we offer six core principles of such strategies as well as some specific policy and program suggestions.

Principles

1. Education: The broad dissemination of context-appropriate information to guide personal, community, and corporate decision-making is vital to the successful implementation of an adaptation strategy.

To make informed decisions, individuals and groups need context-appropriate guidance on the following:

· the science of climate change,

· the probable effects of climate change on their “sphere of influence” (i.e. their home, town, or corporation), and

· suggested short-term and long-term adaptive changes, at both the personal and institutional level.

The Energy Star program is a current example of guidance that is readily available for consumers in a context-appropriate format.

2. Research/Risk Assessment: Continued research and risk assessment at the national, regional, and local level are vital to prioritize targets, strategies and solutions.

Climate change will have many impacts, some predicted, some unforeseen. Given the complex dynamics in climatic systems, these impacts will be constantly evolving. Research and risk assessment are vital to prioritize the targets, strategies and solutions necessary to keep up with this evolution. Research should be conducted at the national, regional, and local levels, with overlap among the three, to foster the creation of more comprehensive strategies. National and regional research can benefit localized planning and vice versa. Political support and funding from the federal government would lend credibility to such projects.

Using the best available science and the best available tools of analysis (e.g., cost-benefit analysis), government agencies should prioritize risks and needs by locality, and target federal aid towards addressing top priorities. For example, fragile water management systems in the desert Southwest may be a top target in that region while public health agencies’ ability to deal with severe heat events may be a priority in the Midwest and Northeast. Thus, agencies should develop a ranking system for projects, based on their ability to increase adaptive capacity.

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