Virtually every American in the climate change policy space is supporting, fighting or still deciphering the EPA’s plan to regulate CO2 emissions from existing power plants – commonly known as the 111d proposal. Over the next two months, hundreds of thousands of stakeholders, particularly within the regulated community, will be focused on finalizing and submitting comments, which are due on Dec. 1. (As of Sept. 22, the Agency had already received 1.1 million comments.)
But Dec. 1 is significant for another reason – it is the launch of the international climate negotiations in Lima, Peru, also known as the 20th Conference of the Parties (COP). Next year’s COP in Paris receives greater attention from most observers due to its promised result – a new international climate agreement, the first since 1997 — but negotiators in Lima aim to define the shape and form of that arrangement. Accordingly, the outcome of this year’s talks potentially holds immense importance to U.S. policymakers and industry, including those entities directly and indirectly impacted by EPA rulemaking.
Although EPA carbon regulation is not linked formally to the international climate process, the Lima meeting and other ongoing discussions related to international climate issues should be watched closely by domestic policy wonks for at least the following four reasons – all of which offer economic and political opportunities:
1. U.S. leverage: From the administration’s perspective, EPA proposals on new and existing power plants should build international confidence in the U.S. commitment to reduce carbon emissions and provide leverage to seek concessions from other major emitters. It remains to be seen, however, if other governments will be satisfied with assurances from the Obama administration that the United States, through EPA and other executive branch action, can alone achieve the “necessary” emissions reductions. Although many Republicans believe the White House will circumvent the Senate with an executive agreement on international climate, other governments may demand a treaty, given their lack of confidence in the commitment level of following U.S. administrations.
It is a widely known assumption in international policy circles, including those in Europe, that a top-down climate treaty like the Kyoto Protocol would almost certainly be rejected by the U.S. Senate. Therefore, climate negotiators may gamble on an alternative approach to Kyoto that may not be as politically controversial in Washington – a treaty embracing a bottom-up approach with domestically-enforceable obligations from all major economies, including China and India. If that happens, the Senate could possibly debate an international treaty in 2016.
2. Availability of international offsets: A number of foreign governments will be eager to preserve a role under a new global agreement for international offsets in the developing world that help developed countries meet their emissions targets. Questions persist whether tradable credits will be rewarded for land use and forest conservation, but such an option should intrigue U.S. regulated entities, because the cost of such credits can be much lower than the costs of retooling domestic energy systems – especially in the near term. The EPA has estimated that developing country forests can mitigate more than a gigaton of emissions at prices below $3 per ton and 3.5 gigatons at prices below $13.3 per ton. If international forest offsets were used at $3 per ton, the total cost of the 111d proposal would fall from EPA’s estimate of $7.3 to $8.8 billion per year to less than $2 billion, assuming U.S. annual reductions of 0.5 gigatons.
Although the EPA’s proposal does not allow for such offsets, there is no reason why a final rule could not be amended in later years to lower compliance costs substantially, assuming that the agency’s interpretation of “best system of emission reduction” survives certain litigation. If the courts give approval to meeting reductions outside the regulated entity (i.e., the power plant), there is no reason why EPA should not then attempt to broaden the compliance opportunities further to include domestic and international offsets. Domestic energy-policy wonks should thus be keenly interested in making sure that an international agreement leaves room for such tradable credits, to keep costs low for future domestic climate regulations – whatever shape they might take.
3. Energy financing: Developed-country funding for fossil-fuel projects in developing countries has come under scrutiny in recent years. A number of major economies, including the United States, Germany, and the United Kingdom, have placed stringent conditions on financing overseas coal plants – even highly efficient coal-fired generation. Although finance ministers take the lead in such policy, developing countries, such as India, Nigeria and Vietnam, could put stronger and more realistic climate action plans on the table if they were linked to a more refined approach on energy financing from the United States and its partners – one that supports cleaner and more efficient coal plants. Such an effort by those developing governments would reinforce the position of congressional Republicans who wish to prevent the Obama administration from placing tough restrictions on financing power plant exports or projects through the U.S. Export-Import Bank (Ex-Im) or the Overseas Private Investment Corp. (OPIC).
4. Free trade in environmental goods: Earlier this year, the Obama administration announced that it would begin liberalized trade negotiations with 13 other WTO members, accounting for 86 percent of the global trade in environmental goods – worth roughly $1 trillion annually. Some developing country members charge tariffs as high as 35 percent; non-tariff barriers also represent substantial hurdles. With developing countries asking for financial assistance to deploy cleaner technologies as part of a global climate deal, it seems practical for the United States and other developed countries to demand liberalized trade as a precondition – a position that U.S. exporters of pollution-control technologies should favor.