Global Warming: Challenges, Opportunities and a Message of 'Be Prepared'

Although the global COP15 talks in Copenhagen last December ended in a weak, non-binding international agreement that dashed immediate hopes for a muscular successor to the Kyoto protocols, the fact that the talks were held at all produced momentum for many countries -- including big players such as India and China -- to make significant commitments on their own.

Despite the delays in enacting a global treaty, efforts to reduce greenhouse gases are already underway and will increasingly affect global markets. What’s more, there is likely to be far-ranging regulation domestically and internationally, even in the absence of a final political breakthrough in Washington. Also, smaller “climate contracts” involving nations, NGOs and large companies are likely to be important drivers in reducing emissions in the long run, according to Eric W. Orts, professor of legal studies and business ethics at Wharton, who also is the director of the Initiative for Global Environmental Leadership (IGEL) at Penn/Wharton.

The Copenhagen talks left few observers pleased with the process or the results. Although the parties affirmed that climate change “is one of the greatest challenges of our time” and reiterated the need to hold global temperature increases below 2 degrees Celsius (3.6 degrees Fahrenheit) from pre-industrial levels, they set no timetables or rules for the major mitigation needed to meet that ambitious target. An analysis by the Sustainability Institute found a large gap between the goals expressed at Copenhagen and actual national climate commitments. The present course would lead to warming of 7 degrees Fahrenheit by 2100, the group said.

“It was badly organized, and until President Obama arrived very little progress was evident,” said COP15 attendee Paul R. Kleindorfer, professor emeritus at Wharton and professor of sustainable development at INSEAD in France. “Obama showed great leadership skills, but only small steps were taken, and not much progress was made on the North-South divide.” The U.S. Senate has still not come close to passing comprehensive climate legislation, despite the passage of an amended Waxman-Markey climate and energy bill in the House June 26. And third world nations, which represent the greatest growing threat to global warming, are justifiably concerned that efforts to reduce greenhouse gases could limit their economic development and ability to eliminate poverty.

But U.S. executive branch efforts are substantial. President Obama’s initiatives are already reshaping the business environment (especially the energy and auto industries), and states are either acting alone or forming regional compacts to combat climate change.

And myriad efforts are underway abroad -- especially in Europe but in the third world, too. In the run-up to Copenhagen, many nations made commitments. According to Andrew Light, a senior fellow at the Center for American Progress, if the 17 largest economies meet the climate commitments already on the table, then the world would be 65% of the way toward the emission reductions required by 2020 to limit the global temperature rise to the 3.6-degree Fahrenheit increase referenced in the Copenhagen Accord.

Climate Change in the Developing World

China recently surpassed the U.S. as the world’s biggest carbon dioxide (CO2) emitter (though the U.S. remains the leader in per-capita emissions, with China far behind). India is also rapidly increasing both economic activity and climate emissions. But there is no easy path to substantial reductions by these large emitters given their view that industrial nations are responsible for most of the CO2 now in the atmosphere.

“There is a clear attempt to shift the burden and the responsibility to the emerging markets,” said R.K. Pachauri, chairman of the Intergovernmental Panel on Climate Change (IPCC), in an interview. “But it’s also a fact that these are countries that still have significant poverty, particularly India: There are 400 million people who do not have access to electricity there. So, to impose anything [that gets] in the way of eliminating poverty and creating development opportunity, in my view, is not even ethically correct.”

Still, on the brink of the Copenhagen talks, the Indian government said it would commit by 2020 to reducing its “carbon intensity” (the amount of CO2 released per unit of economic output) by 20% to 25% compared to 2005 levels. That would reduce overall emissions, but it would substantially reduce the rate of emissions’ growth. The Chinese similarly announced a larger, 40% to 45% carbon intensity reduction.

China’s commitment alone, if realized, would account for 25% of the 3.8-gigaton CO2 reduction the world needs to limit the global warming increase to 3.6 degrees Fahrenheit, said Fatih Birol, chief economist at the International Energy Agency (IEA). But such large reductions are only theoretical, and could cost $400 billion in Chinese energy sector investment, said the IEA. An important sticking point is verification. Developing countries could meet their carbon intensity goals by reporting increased economic growth, without actually taking any specific mitigation actions. Efforts to establish third-party monitoring became a major battleground in Copenhagen.

Now, there is a growing acknowledgement that climate change will affect rich and poor countries alike, and that the industrialized nations need to break a stalemate that has hampered negotiations (and led to climate conference walkouts) by agreeing to contribute to the cost of compliance in the developing world. Jairam Ramesh, the Indian environment minister, said bluntly in announcing the new targets that his country would not agree to legally binding emissions reductions -- but might go further if outside economic aid is forthcoming.

Ramesh must have been encouraged by an emerging consensus among leading Group of Eight (G8) countries to support a $10 billion annual fund by 2012 to offset climate effects and pay for mitigation efforts in the most vulnerable developing countries. British Prime Minister Gordon Brown put a specific amount on the table -- $1.3 billion over three years.

President Obama has also committed the U.S. to making unspecified contributions to the fund, declaring, “Providing this assistance is not only a humanitarian imperative -- it’s an investment in our common security, as no climate change accord can succeed if it does not help all countries reduce their emissions.” During the conference, Energy Secretary Steven Chu put a specific dollar amount, $350 million, on a fund for clean energy technology assistance for the developing world. John Podesta, president and CEO of the Center for American Progress and also co-chair of the Obama transition team, called the administration’s commitment “a game changer.”

Another effective and growing third-world regulatory strategy to counter global warming is preventing deforestation (because trees act as “carbon sinks”). Annie Petsonk, international counsel at the Environmental Defense Fund (EDF), sees the prospects for a global anti-deforestation agreement as promising. Like the plan to compensate developing nations for climate mitigation costs, the agreement would provide payments for local communities that agree not to log their forests.

A recent Science study of 286 Amazonian communities revealed that local short-term economic gains from deforestation are quickly reversed. And the article estimated that the bill for reversing Brazilian deforestation could be relatively small: a $7 billion to $18 billion outlay beyond the country’s current budget, resulting in a 2% to 5% reduction in global carbon emissions.

“Even if everything else stalls out, REDD [the United Nations initiative Reducing Emissions From Deforestation in Developing Countries] could actually move forward,” Petsonk said. “It connects very well with the provisions of the U.S. Waxman-Markey bill, and there is openness in many quarters to both market- and non-market financing to reduce emissions from deforestation.”

Possible Executive Action in the U.S

The U.S. Supreme Court ruled in the 2007 Massachusetts v. EPA (Environmental Protection Agency) case that carbon dioxide (the principal global warming gas) may be designated a pollutant under the Clean Air Act, and that the EPA has the authority to regulate it. That historic ruling was followed by a final endangerment finding from the EPA itself December 7, clearing the way for the Obama Administration to issue emission-reducing executive orders or move forward with administrative rulemaking under the Clean Air Act. In May, shortly after that finding was first proposed, President Obama announced (with leading automakers and environmentalists by his side) historic  federal EPA rules (35.5 miles per gallon by 2016) to regulate fuel economy and climate emissions.

Dan Becker, director of the Safe Climate Campaign, said that the Supreme Court ruling gave President Obama a mandate to curtail global warming, even in the absence of legislation from Congress. “He can act with a stroke of his pen,” Becker said. “He can issue executive orders right now, without waiting for Congress.”

President Obama went into the Copenhagen talks with the 17% greenhouse gas reductions by 2020 that was passed in the House version of the Waxman-Markey legislation. Senate action, expected soon (with final Congressional action by the summer), could arrive at lower percentages.

Michael Oppenheimer, professor of geophysics and international affairs at Princeton’s Woodrow Wilson School, points out that international agreements have lengthy ratification periods, and he agrees that executive orders are a potent tool for quicker action. “The President can only go so far without Congressional action,” Oppenheimer said. “On the other hand, the administration can and has done some things through executive power without waiting for Congress, such as the fuel economy/climate standards. In the next few months, there is likely to be an interesting series of actions on the executive level that, though clearly not internationally binding, are part of a dance toward a domestic and global policy on climate. It’s a multi-layered, complex situation, with progress having to come on many fronts at once.”

One such order could aim at reducing emissions from coal-burning power plants. Becker said that converting just 100 of the largest coal plants to natural gas would reduce U.S. emissions by 15%.

Cap and Trade: Effective Reform or Bureaucratic Nightmare?

There is considerable uncertainty over the dimensions of a U.S. energy and climate bill -- if it does pass. Although a carbon tax would be easiest to administer, it is very unlikely to win political approval. And some are concerned that a more politically palatable (but also much more complex) cap and trade system, as included in the Waxman-Markey legislation, would be susceptible to manipulation.

Carbon taxes have many proponents because they are relatively straightforward, according to Noam Lior, professor of mechanical engineering and applied mechanics at Penn's School of Engineering and Applied Science, and an IGEL faculty member. “A carbon tax would be the simplest approach, but it is socially and politically difficult,” he says.

Lior praises the effectiveness of the Clean Air and Water Acts (passed in the early 1970s under then-President Richard Nixon), and offers a simple analogy in support of environmental regulation and enforcement: “We all know and accept that if you toss even a gum wrapper out of your car window, you’re subject to a $500 fine.” The emissions from smokestacks cause local air pollution and aggravate global warming, and the cheapest forms of generation -- notably coal -- are also the dirtiest. Lior says that regulation needs to change that equation. “We have to go to some kind of mechanism that encourages a transition from a high-carbon energy economy,” he said.

Robert Giegengack, professor emeritus in the department of earth and environmental science at Penn and also IGEL faculty member, agrees. “The only way to be truly successful is with a very significant progressive tax on carbon.” Giegengack believes that the main alternative, cap and trade, will “create an enormous bureaucracy.” 

Under cap and trade, governments set a limit on the total amount of pollution that can be emitted into the atmosphere, then distribute permits to companies that allow a set amount of emissions per company under that cap. If a company exceeds the pollution limits of the emissions credits it holds (thus facing fines), it can buy more credits on the open market from other, environmentally better-performing companies. Thus, the desired level of total emissions can be reached when some companies -- which for various reasons find it easier to reduce emissions -- sell their excess emissions credits to offset the emissions released by companies that find it more difficult to do so. This all takes place through an emissions-market mechanism.

According to Giegengack, “Economists, lawyers and politicians will jockey for position and, inevitably, set the cap too high. With every carbon credit transaction, two lawyers will be engaged. Cap and trade will do for lawyers what corn ethanol did for farmers. And it will have no more effect on CO2 emissions than corn ethanol.”

Lior shares some of those concerns, but is more optimistic about the long-term benefits. “Cap and trade does have some negatives, in that higher costs for business will be passed on to consumers in the form of higher energy prices,” he said. “In the long term, that’s OK, because it will reduce energy use and emissions, and because competition will come in with lower prices.” Some of that competition will come from renewable energy, which gains a business advantage under cap and trade. A problem with any form of government intervention, Lior said, is that “people immediately find loopholes in the legislation and use it negatively for their own benefits -- as was seen in the Enron scandal. And how do you monitor complaints? How many more bureaucrats do you create?”

Despite these qualms, the political momentum is behind carbon trading (which, in avoiding use of the word “tax,” appeals as a free-market solution). “Cap and trade is the way the world is moving,” said Orts. “We can debate the policy merits of cap and trade versus carbon taxes, and I have some concerns about how it will operate, but it is the main mechanism lined up to pass.”

Cap and trade has already been enacted in Europe, with mixed results. According to the World Resources Institute, by 2007 some 65% of the companies participating in the European trading system were making investment decisions based on having a carbon price -- “precisely the response needed.” But, according to The New York Times, “The European Union started with a high-minded ecological goal: encouraging companies to cut their greenhouse gases by making them pay for each ton of carbon dioxide they emitted into the atmosphere. But that plan unleashed a lobbying free-for-all that led politicians to dole out favors to various industries, undermining the environmental goals. [I]t is becoming clear that [the] system has so far produced little noticeable benefit to the climate -- but generated a multibillion-dollar windfall for some of the continent’s biggest polluters.”

Cap and trade is underway in the U.S. without federal action. A 10-state compact, the Regional Greenhouse Gas Initiative (RGGI), is aimed at reducing emissions from power plants in the Northeast and Mid-Atlantic states. It began trading in early 2009, and aims to reduce plant-based CO2 emissions 10% by 2018. California, the second-largest emitter after Texas, is also launching a regional cap and trade effort to begin in 2012. 

But Cary Coglianese, a Penn law professor and director of the law school’s Penn Program on Regulation, is convinced that these localized programs are counter-productive. “Regional and state initiatives are complicating the ability of the federal government and the international community to address climate change,” he said. “One problem is that people will see these efforts and decide that there’s no need for a national program, and that’s a mistake.” Some 20 to 25 states have climate change legislation, Coglianese said.

A 2008 Connecticut Law Review article Coglianese wrote with Jocelyn D’Ambrosio concludes “Whatever the merits of decentralized experimentalism in other contexts, it is not well-suited for reducing global emissions of carbon dioxide and other greenhouse gases. Perhaps not all global problems require a comprehensive, global solution -- but reversing the trajectory and effects of greenhouse gas emissions most assuredly does.”

Coglianese also said the most effective form of cap and trade would focus on the smaller number of “upstream” sources (such as power plants, oil and gas companies, mining operations and refineries) rather than the myriad “downstream” point-of-use emissions at the smokestack level. “All of our cars, our office buildings, our homes, are carbon emitting, so it’s much easier focus on a few thousand production sources.

Another approach to pricing carbon comes from James Hansen, the prominent climate scientist who heads the NASA Goddard Institute for Space Studies. A critic of cap and trade, Hansen proposes an alternative entitled “fee and dividend” -- a gradually rising tax on carbon would be imposed and collected at the “port of entry” for fossil fuels (including oil, gas and coal). The fees, expressed in a uniform cost per ton of CO2, would be returned to the public in the form of dividends (and offsetting inevitable energy price increases passed on to them). “As time goes on,” Hansen said, “fossil fuel use would collapse.”

Hansen’s op-ed produced a strong response from The New York Times columnist Paul Krugman, who charged that Hansen “really hasn’t made any effort to understand the economics of emissions control.” According to Krugman, both carbon taxes and cap and trade ultimately produce the same result. “The only difference is the nature of uncertainty over the aggregate outcome,” he wrote. “If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.” Ultimately, Krugman favors cap and trade because it is “the only form of action against greenhouse gas emissions we have any chance of taking before catastrophe becomes inevitable.”

Orts also emphasizes the benefits of focusing on major sources of greenhouse gases. While he supports an international treaty, he adds that a top-down approach may not ultimately be as effective as a profusion of what he calls “climate contracts” -- independent reduction agreements potentially between NGOs and large companies (Wamart’s “greening the supply chain” work in partnership with the EDF is an example) or between major countries. “If China and the U.S. are put together that’s 40% of total greenhouse gas and 25% of world population,” Orts said. “We need a range of different climate contracts that get us to what Malcolm Gladwell calls a ‘tipping point’ (in his book, The Tipping Point).

Having seen the impasse in Copenhagen, Kleindorfer agrees that side agreements not necessarily involving all of the 192 countries present at the conference can produce highly significant results. “There are 30 nations that produce 90% of the world’s emissions, and they can play a fundamental role,” he said. “Those 30 with the primary responsibility for our current emissions can take on an urgent agenda for 2010, which is laying down common rules and agreeing on carbon pricing.”

Climate change also must be put in perspective among many pressing environmental problems, says Giegengack. Other issues -- specifically clean water scarcity and human population growth ­-- do not get as much attention as climate change, but might have larger effects on long-term sustainability, he notes.

An Uncertain Business Climate: Some Solutions

Regulation of carbon through global, national and local action on the legislative and executive level is a virtually certainty. But business values clarity, consistency and certainty, and the specifics of emissions control are far from clear today.

Kleindorfer points to the “clear and present danger” of Western companies attempting to limit their carbon output getting “blindsided” by competing companies, in China and other parts of the developing world, with no such limits. “I’m concerned about the possible effects on our manufacturing base. This is an elephant in the room for business.” One method of equalizing carbon costs is with a border tax applied by climate-conscious countries to imports from nations without a global warming plan, though a Financial Times editorial in December warned that such tariffs could spark “the biggest trade war since the Great Depression.”

H. Jeffrey Leonard, president of the Global Environment Fund, a private equity investment management firm, was a speaker at the 2009 Wharton Energy Conference. “There’s a huge amount of uncertainty right now,” he said. “And until that uncertainty is reduced it will continue to dramatically affect the long-term capital investment climate.” Investment in renewable energy startup companies, for instance, was strong from 2005 to 2007, he said, but then “fell off a cliff,” not only because of the recession but also because of Congress’ erratic and short-term extension of tax credits.

Wind energy production tax credits, for example, were repeatedly given last-minute one-year extensions until the stimulus bill earlier in 2009 extended them for three years. Senator Charles Grassley (R-Iowa) has proposed an extension through 2016 that would include credits for energy from biomass. “Getting these tax incentives extended is important to help businesses secure the loans they need to make the investments necessary to create jobs,” Grassley said.

According to Leonard, “A price on carbon is inevitable. The proposed cap and trade system has gotten people talking, but there could be unintended consequences. It scares the living daylights out of me to have a process that can be gamed as much as cap and trade.” Leonard, who is on the board of India’s Reva Electric Car Company, points out the rapidly changing price of petroleum is as much a factor in business investment reticence as unknowns about federal legislation. For that reason, he supports a federally mandated floor price for gasoline. Such a program, by raising taxes automatically when gas prices fall, would encourage investment in renewable energy

Daniel Sperling, director of the Institute of Transportation Studies at the University of California, Davis, and co-author of Two Billion Cars: Driving Toward Sustainability, advocates a $3.50 price floor for gasoline. “If the price goes above $3.50, then the tax disappears,” he said. Revenue from this variable tax would subsidize loan guarantees to auto companies, which in return would be required to produce set numbers of fuel-efficient, low-carbon vehicles.

Business Commitments: Not Just Window Dressing

Many companies have gained business and marketing advantages by offering short- and long-term CO2 reduction plans. Their motivations vary, and in some cases may be more complex than public statements allow. All are ahead of regulation, but most admit that regulation is coming and that companies need to be ready for it.

Emissions reduction strategies are also a key component of the environmental progress reports that many companies now issue regularly, and that help shape corporate image. Here’s a sampling of such commitments from companies that are part of the EPA Climate Partners program:

·         Alcoa said it would reduce emissions 4% from 2008 to 2013. “Aluminum production is especially energy intensive, and thus is a significant producer of CO2,” it said in an online statement, noting that estimated worldwide emissions from primary aluminum production at 230 million metric tons per year amounts to 1% of the planet’s annual anthropogenic greenhouse production.

·         Anheuser Busch promised to cut emissions 5% from 2005 to 2010 (a goal reached in 2009), and has pledged 15% cuts from 2008 to 2013. The company, with a 48.4% share of U.S. beer sales, claims over the past five years to have cut energy use in company breweries by 8% per barrel.

·         Dell announced it would reduce global emissions 15% per dollar revenue from 2007 to 2012, and would achieve net-zero global emissions by the end of 2008 (a goal it reached) and maintain that level through 2012.

·         Frito-Lay said it would cut U.S. emissions 14% per pound of production from 2002 to 2010. It is part of the way towards that goal: From 2002 to 2005, it made 7.2% per pound of product reductions. Frito-Lay had earlier reduced greenhouse emissions 14% between 1994 and 2004. According to the company, environmental improvements (including emissions reductions) made in that period saved Frito-Lay $55 million in 2008. 

·         General Electric launched its “ecomagination” initiative in 2005, and committed to reducing operational greenhouse gas emissions by 1% from a 2004 baseline through 2012. Without that action, GE said greenhouse emissions were predicted to rise as much as 30% by 2012. GE also said it would cut greenhouse emission intensity 30% as of 2008 on an emissions per dollar revenue basis. The third commitment (collectively they are known as “1-30-30”) is to improve energy efficiency 30% by 2012. GE said it reduced worldwide greenhouse gas emissions 13% in 2008 compared to 2004. Greenhouse gas intensity dropped 41% in the same period, and energy intensity 37%, putting the company on track to reach its goals.

·         General Motors pledged in 2007 to reduce CO2 emissions from its North American operations 40% by 2010. GM was one of the first automakers to voluntarily release information on its greenhouse gas emissions (dating to 1990).

·         Intel pledged to reduce emissions 30% per production unit from 2004 to 2010. Since 2000, the company says it has reduced use of perfluorinated compounds (PFCs, powerful greenhouse gases with a long life in the atmosphere) by 56% in absolute terms. It has also launched 250 energy conservation projects since 2001, and according to the EPA is the number one purchaser of green power in the U.S.

·         Pfizer said it would cut emissions 20% between 2007 and 2012, and reached an initial goal of a 43% reduction per million dollars of revenue between 2000 and 2007.

The 700 leaders who attended the World Business Summit on Climate Change last May pledged their support for reductions by 2020 and 2050 that would limit temperature rise to two degrees Celsius compared to pre-industrial levels.

It is, of course, easier to issue non-binding declarations in world forums than it is to carry out actual large emission reductions. As Duke Energy CEO James E. Rogers, who attended the summit, noted, “It’s not going to be cheap, it’s not going to be easy and it’s not going to be quick, but we’ve got to work on the transition now.” He pointed out that companies need to “talk honestly about what these targets mean. What does it mean for a company like ours? We’ll have to retire and replace or radically transform every one of our power plants. We’re the third-largest emitter of CO2 in the U.S.; we’re heavily reliant on coal. Can we do that? And if we can’t do that, we will have failed.”

Drawing Conclusions

The COP15 conference showed that, even without internationally binding commitments, countries on both sides of the development divide are willing to make large cuts in carbon intensity and actual emissions compared to earlier baselines. Breakthrough pledges will be the basis for future negotiations. Corporations, with various motives, have also shown willingness to act without national regulation in the countries where they operate.

The climate lesson for business in 2010 is that the world is no longer denying the reality of global warming, and is actively seeking to apply the brakes to runaway emissions. Companies that emit carbon dioxide will have to pay for the privilege, and climate mitigation will be written into the DNA of doing business.

Although the impact of an emerging climate policy on international business is not yet clear, it would be a mistake for companies to delay action on reducing greenhouse gases in the name of holding down costs in a troubled economy.  Proactive companies will not only be ready to profit under a cap and trade system (should one be enacted), but they will be positioned for the business challenges that are inevitable in what some have called “the environmental century.”

Global Commitments: Tentative and Conditional

The ambitious country-specific targets below, many of them non-binding and set at various levels of government, are based on news reports and “An Overview of Greenhouse Gas (GHG) Control Policies in Various Countries,” published by the Congressional Research Service on November 30, 2009. Many of the countries listed made commitments under the Kyoto protocols, but failed to meet the targets. The list is as follows:

·         Australia -- by 2020, 25% emission reductions below 2000 levels (but contingent on a world agreement that stabilizes CO2 levels at 450 parts per million in the atmosphere);

·         Canada -- by 2020, a 20% emission reduction from 2006 levels; by 2050, a 60% to 70% reduction;

·         China -- by 2020, a 40% to 45% carbon intensity reduction (compared to 2005 levels);

·         France -- by 2050, a 75% reduction from 1990 levels;

·         Germany -- by 2040, a 40% reduction from 1990 levels;

·         India -- by 2020, a reduction in “carbon intensity” by 20% to 25% compared to 2005 levels;

·         Korea -- by 2020, a 4% reduction from 2005 levels;

·         Mexico -- by 2050, a 50% reduction below 2000 levels, contingent on international financial assistance and a world agreement on stabilizing CO2 concentrations at 450 parts per million in the atmosphere;

·         Russia -- by 2020, a 40% reduction from 2007 levels;

·         United Kingdom -- by 2020, a 34% reduction from 1990 levels; and,

U.S. By 2020, a 17% reduction below 2005 levels -- the target in the version of the Waxman-Markey bill that passed the House of Representatives last June. The Senate has not acted, but a measure calling for 20% cuts passed a Senate committee.

Published : 2010.03.03


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