by Richard D. Morgenstern
March 15, 2006
(Note: This article is adapted from the September 20, 2005 testimony of Richard D. Morgenstern, Senior Fellow of Resources at the Future, before the Senate Committee on Energy and Natural Resources. Further hearings on the 'Sense of the Senate Climate Resolution' adopted last year, introduced by New Mexico Senators Domenici (R) and Bingaman (D), are scheduled next month.)
Everyone buys insurance to hedge against things they hope will never happen. Proposals advanced by the bi-partisan National Commission on Energy Policy (NCEP) differ from the Kyoto Protocol because the NCEP proposal insures against runaway damages from reducing greenhouse emissions and supports the generation of innovative technologies to reduce emissions—all the while limiting costs to the economy.
Unlike the Kyoto Protocol, the NCEP approach does not seek to avert climate change over the next 20 years. Rather, the Commission focuses on developing and deploying technologies needed to address the problem in the decades beyond. NCEP does this in two ways: 1) by directly subsidizing a wide range of new technologies including coal, nuclear, fuel-efficient vehicles, biofuels and others; and 2) by encouraging private-sector research and development through incentives for the deployment of cost-effective carbon saving technologies of all types. NCEP's cap-and-trade system has the added benefit of generating a revenue stream to fund the technology subsidies. |
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Testimony on Senate Amendment 866
Richard D. Morgenstern
Senate Committee on Energy and
Natural Resources
September 20, 2005
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It is widely recognized that major progress on climate change will not be possible without new technologies and that government has an important role to play in spurring the development and diffusion of these technologies. Without some kind of additional incentives, however, the private sector typically will under-invest in research, development, and demonstration because, even with patent protection, innovators cannot reap the full benefits to society of their advances. The existence of these "spillovers" reduces private incentive to pursue innovation, as others will mimic the innovation without compensating the inventors.
Absent government incentives, corporate concern for the environment may overcome some hurdles. Working against this kind of "corporate altruism," however, is the need to compete in the marketplace. It is exactly this need to align public and private interests that underlies the argument for an emissions trading program, or similar mechanism, alongside technology development and demonstration programs. While the government seeks technologies to cut carbon emissions, the private sector seeks technologies to cut costs. Market-based policies that put a value on emissions reductions encourage firms to conserve energy, reduce emissions from existing technologies, and adopt new low-carbon or no-carbon technologies.
Market-based policies can reduce emissions in the near term and alter the incentives that firms have for developing and adopting new technologies for the future. Few would disagree that it is the private sector, not the government, which has driven innovation and growth in modern economies. According to the National Science Foundation, industry funded almost two-thirds of all research and development in 2003.
Technology programs alone may succeed in bringing down the cost of technologies such as integrated gasification and combined cycle coal plants so that they eventually overtake conventional pulverized coal. That said, how can technology programs ever make it cheap enough so that firms will voluntarily capture and sequester emissions? The real choice is whether capture and sequestration will eventually be required under a command-and-control style regulation, or whether a market-based system will be used to flexibly encourage adoption of the cheapest option.
It is also important to pursue relatively inexpensive emissions reductions available right now. Even though such reductions will not be sufficient to 'solve' the climate problem, by delaying the atmospheric accumulation of greenhouse gases they provide additional time to develop long-term solutions.
Just as the Federal Reserve protects against wide swings in bond and currency prices, the incorporation of a safety valve in a greenhouse gas mitigation policy would prevent sharp increases in energy prices. The ideal climate policy is one that sets an upper limit on mitigation expenditures. Most consumers are interested in reducing their out-of-pocket expenditures for energy as well as other goods and services, and most businesses are interested in maintaining a stable environment for purposes of planning and investment. The risk of unexpectedly high compliance costs under a strict permit system would threaten that stability.
A proposal advanced by Senator Bingaman calls for periodic Congressional review of the new U.S. mandatory program. Under this mechanism Congress would make a determination every five years to accelerate, decelerate, or leave unchanged the key program parameters including the emissions target and the safety valve price. If one believes, as I do, that the key to international cooperation on climate change is linkage on a broad range of issues, including global trade, development aid, and technology transfer, then such a procedure would potentially provide Congress an opportunity to influence the actions of both developing and developed nations as climate policies evolve over the next few years.
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