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Comment 63 for Design Comments for the GHG Scoping Plan (sp-design-ws) - 1st Workshop.


First Name: Erin
Last Name: Rogers
Email Address: erogers@ucsusa.org
Affiliation: Union of Concerned Scientists

Subject: comments from Prof. David Roland-Holst on offsets
Comment:
Think Globally, Innovate Locally:
Offsets and the Risks of Outsourcing Climate Action
David Roland-Holst†
UC Berkeley
July 2008

† Department of Agricultural and Resource Economics, University of
California, Berkeley. This policy brief was written at the request
of the Union of Concerned Scientists. Opinions expressed here are
those of the author and should not be attributed to affiliated
institutions. Contact: dwrh@berkeley.edu 

As the world awakens to the reality of climate change, policy
makers are scrambling to reconcile the need to reduce global
warming pollution with traditional economic priorities such as
growth, employment, and technological progress. Fortunately, a
growing body of research suggests a way forward, though the
challenges are enormous: transitioning to a low-carbon future
without having to sacrifice living standards will require
path-breaking commitments to innovation. The opportunities this
presents are just as significant as the challenges, and the
rewards may rival those of history’s most robust industrial and
technological booms.

Rising global warming pollution has drawn California, the world’s
eighth largest economy, into an unprecedented policy dialogue that
will influence energy and environmental decisions around the world.
Among many other climate action initiatives, pollution offsets are
being intensively discussed—particularly in the context of
market-based incentive schemes like carbon trading—yet their full
implications for the state are only partially understood. Some
industry stakeholders strenuously advocate offsets because they
can reduce short-term adjustment costs. To achieve a balanced
appraisal of this approach, outsourcing climate action, more
evidence is needed. At this critical moment of policy debate, we
all need to better understand the benefits and costs of offsets.

My research on the economic effects of AB 32 suggests that
California will achieve higher growth and more widespread
employment benefits if climate policies induce innovation,
building on the state’s long history of improvements in energy
efficiency. Thanks to a generation of stringent regulatory
standards, California’s per-capita electricity consumption is 40
percent below the national average. The resulting energy savings
have exceeded the capacity of 24 traditional coal-fired power
plants and represented $56 billion dollars of household income.
The power plants were never built, and the household savings went
on to create about 1.3 million new jobs and $40 billion in new
payrolls. Offsets, by contrast, would outsource both efficiency
gains and their many downstream benefits. California has the
innovation capacity to capture these benefits for its own economy.


Short Term Challenges, Long Term Opportunities
Because the dispersion of global warming pollutants is a worldwide
phenomenon, there is in principle no reason not to “recognize”—that
is, account for—mitigation wherever it occurs. Indeed, many
advocates of offsets argue that mitigation can be achieved at
lower cost outside the geographic boundaries of the trading scheme
(e.g., outside California) and that climate risk can thus be
reduced more efficiently with offsets. For example, a U.S. company
might invest in, sell, or give a more efficient power plant to a
Chinese counterpart in exchange for some contractual arrangement
specifying that the transaction results in lower global warming
pollution than would otherwise have been emitted. These contracted
reductions would then be credited to the U.S. investor. Although
there are extra transactions expenses, such a deal could reduce
global warming pollution at lower cost than that of inventing and
adopting entirely new technology at home.

Countering this simple intuition are many uncertainties—including
the challenges of measurement, verification, and “additionality”
(defined below)—as well as environmental and economic objections.
From an environmental perspective, offsets forsake the opportunity
to reduce local pollution, which often is toxic and represents
substantive local public health risk and environmental damage. The
costs of such effects and, just as important, the benefits of local
mitigation, are not usually considered in the global efficiency
argument. They need to be estimated and included, however, if
local stakeholders are to fairly compare offsets with in-state
global warming pollution reductions.

Offsets also forsake the opportunity for innovation, and for
higher-income technology-intensive economies like California this
may be their most serious drawback. The primary drivers of the
state’s superior growth experience over recent decades have been
education and innovation, which together have made the state a
knowledge-intensive leader in the global economy. First in
information and communication technology (ICT), then in biotech,
California’s R&D supply chain has delivered solutions for the most
dynamic and profitable sectors of modern times. And now the Next
Big Thing has arrived, as is apparent from the venture community’s
rapid initiatives to capture the opportunities it presents.

New Markets Will Belong to Innovators
That Next Big Thing is efficient and clean energy use; today’s
innovators in this field will be tomorrow’s new technology barons.
 Because energy consumption accounts for over 80 percent of CO2
emissions, energy efficiency is a cornerstone of climate action.
By revenue, energy is also the world’s largest industry. Because
this product so pervades the modern economy, efficiency can do for
energy what ICT did for management and logistics—deliver innovation
that revolutionizes traditional practices around the world. Such
innovation will save money in the production of every single
modern good and service; and in an era of escalating energy
prices, demand for efficiency would grow robustly over the coming
decades even without climate action. These considerations,
together with the additional demand induced by local environmental
regulation, will create an enormous global market in new energy-use
technologies that range from compact fluorescent light bulbs to
hybrid vehicles.
These markets will be dominated by innovators, not those who defer
innovation. While it is a laudable goal to reduce pollution in poor
countries, doing so with today’s technology merely substitutes
short-term solutions elsewhere for long-term solutions and
opportunities both at home and in rapidly emerging global
technology markets. For example, even though the U.S. electric
power systems are more efficient than those of many other
countries, they remain far less efficient than they needs to be in
order to meet our long-term needs for decarbonization. 

Meanwhile, the so-called “additionality” problem is a serious
conundrum for offset advocates. Simply put, how do we know that an
investment we make in lower pollution elsewhere would not have been
made anyway—especially in dynamic emerging markets, where
spontaneous rates of innovation and technology adoption are very
high? Such an investment would not only be a false economy but
also would imply significant opportunity costs. China, for
example, is facing some the world’s fastest-growing energy prices,
as domestic fuel subsidies have become unsustainable and the
country has moved, in a single decade, from being a small net
exporter of oil to the world’s second-largest importer. These
price pressures will do much more to stimulate long-term energy
efficiency than a short-term opportunity to export pollution
rights. Consider that China, which was once the ultimate
labor-intensive economy, is today the fastest-growing market for
industrial robotics. Why? Even the most expensive technologies
become profitable in the face of rising wages and the desire for
higher product quality. In much the same way, rising energy prices
and a rapidly increasing public desire for environmental quality
will drive emerging markets toward pollution mitigation.

Other challenges related to offsets arise from unwelcome secondary
effects that are socioeconomic in nature. For example, if we pay
for environmental mitigation in fast-growing economies, what
incentive do they have to establish and maintain their own
standards? What happens when offsets arouse conflict between home
and overseas regulatory regimes or complicate salient social
issues (such as labor standards, biofuel-food tradeoffs, or
biodiversity )? Clearly, offsets can lead to a host of new and
difficult policy challenges.
Offsets can also dispel the momentum of climate action into profit
making by middlemen marketing uncertain projects and financial
instruments. By putting a price on carbon, mechanisms like cap and
trade share the burden of adjustment, using markets to identify
real efficiency and reward innovation. Creating a market for
surrogate pollution reduction invites intermediaries to package
emerging market technology adoption and sell it to more affluent
bidders. Like the current mortgage securitization mess,
contracting for far-away emission cuts creates uncertain agency
relationships that increase transactions costs and risk. These
schemes create real profit for matchmakers, but information and
incentive problems multiply as the principals become farther and
farther removed from each another. Verifiability, enforceability,
and sustainability of such contracts all become more tenuous
across space and time, and the short-term cost advantage and
efficacy of offsets decline accordingly.

Finally, we need to recognize that offsets forsake opportunities
to reduce long-term energy costs by leaving us vulnerable to
ever-rising energy prices. Rapidly emerging economies might be
happy to accept our technology while we defer innovation, but they
will not pay our energy bills. As the costs of electricity,
gasoline, and all the goods that use them continue to escalate, we
pay more for every day we drag our feet on improving energy
efficiency at home.
Outsourcing climate action through offsets ultimately outsources
innovation and its rewards. Energy technology should take its
rightful place among California’s knowledge-intensive industries,
establishing new global standards at home for climate security and
sustained prosperity. California should say no to offsets and
accept the challenge to innovate. 
	


Attachment: www.arb.ca.gov/lists/sp-design-ws/66-drh_offsets_policy_brief.pdf

Original File Name: DRH_offsets_policy_brief.pdf

Date and Time Comment Was Submitted: 2008-08-01 13:08:04



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