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Guest Commentary: August 6, 2001
Climate Changes Pose Increased Risks for Business
The Honorable John McCain
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Over the past year, the Commerce, Science, and Transportation Committee has held several hearings on the various scientific reports from the National Academy of Science and the International Panel on Climate Change (IPCC).
These reports conclude that air temperatures are, in fact, rising. The IPCC report states that there is new and stronger evidence that most of the observed warming over the past 50 years is attributable to human activities. We continue to see throughout the world the melting of glaciers, the dying of coral reefs, and rising ocean temerpatures.
The agreement reached last week in Bonn, Germany on the Kyoto Protocol means that the rest of the world is moving forward to address this important problem. Given the fact that the United States produces approximately 25 percent of the total greenhouse gases emissions, the United States has a responsibility to cut its emissions of greenhouse gasses. The United States must realize that when it comes to the climate, there are no boundaries. Therefore, climate change is an global problem and must be resolved globally.
The current situation demands leadership from the United States. In accordance with the agreement reached last week, there is going to be a world marketplace for carbon reductions, a marketplace that rewards improvements in energy efficiency, advances in energy technologies, and improvements in land-use practices – and we are running the risk that America is not going to be part of it.
The risks that climate change poses for businesses have now increased. In addition to the risk of unpredictable impacts of global warming, and of unpredictable regulation of greenhouse gas emissions, American companies now face the risk of being left out of the global marketplace to buy and sell emission reductions.
While U.S. businesses are gaining experience with voluntary programs and are recognized as the world's experts in this area, they are increasingly recognizing that purely voluntary approaches will not be enough to meet the goal of preventing dangerous effects on the climate system. Increasingly, businesses confronting these risks see sensible regulation of carbon dioxide and other greenhouse gases as necessary and inevitable. Clearly, they prefer the cap-and-trade approach.
In a July 23 editorial in the Wall Street Journal, a cap and trade program was discussed as one of the incentive-based market strategies that has been developed as an alternative to traditional fiat-based, "nanny-sez-so" regulation. The editorial further states that "a cap and trade program will result in more abatement from those firms who can do it at relatively lower costs and less abatement from those firms who can only do it at relatively higher costs. The net will be the same amount of overall pollution reduction, but achieved at lower cost than would obtain under traditional regulation."
As usual, industry is ahead of government in this area. Many companies have already started trading programs either within their company or as members of partnerships to meet pre-determined levels. Not only are these companies meeting their environmental goals, they are also realizing it on a profitable basis. We all know that improved efficiencies mean improved profitability.
The 1990 Clean Air Act's acid rain emissions trading program for limiting sulfur dioxide has shown that there can be top-down limits on pollutants and not endanger the economy. The key is unleashing the power of markets to find the most innovative, cost-effective ways of meeting those top-down limits. That's what a cap-and-trade system does best. Deploying the power of a marketplace to pursue the least expensive answers is a unique and powerful American approach to the threat of climate change.
In 1994, the Arizona Public Service (APS), an Arizona public utility, entered into an agreement with the Niagara Mohawk, a New York utility, and the US Department of Energy to swap carbon dioxide and sulfur dioxide credits. APS had reduced its sulfur dioxide emissions below levels mandated under the 1990 Clean Air Act. Niagara Mohawk had reduced its carbon dioxide emissions below the level of its voluntary commitment. APS exchanged its sulfur dioxide allowances issued under the Clean Air Act's acid rain program for Niagara Mohawk carbon dioxide emissions reductions that APS could then use to help meet its commitment to DOE to reduce greenhouse gas emissions. After receiving the sulfur dioxide allowances, Niagara Mohawk donated them to an environmental organization to be retired. The cost savings achieved through this plan were used to fund new domestic and overseas projects designed to create additional carbon dioxide reductions.
However, we should not be deceiving ourselves. Designing a cap and trade system is not an easy task. Critical decisions will have to be made as to the design and implementation of such a system. These decisions will ultimately affect some industries more than others. I would hope that the government can work hand-in-hand with industry to make this happen should a decision be made to pursue a cap and trade program.
A comprehensive cap on America's greenhouse gas emissions, paired with an allowance trading system, can encourage innovation across the full range of opportunities for reducing emissions. That would provide businesses with the regulatory certainty and flexibility they need to confront the climate challenge successfully. Industry has repeatedly said that if government sets the rules, they will take them from there and make it work.
Trading helps to establish a market value per unit of greenhouse gas. This can be especially helpful as corporate decisions are made on major investments in new technologies. The market value will allow them to make a real comparison by which to consider purchasing new credits for the markets or investing in technologies and capital improvements.
We also have to recognize that the international system for addressing climate change is evolving. Only a few years ago, many of America's trading partners were reluctant to accept market-based solutions. But now they have embraced them, and the global marketplace for greenhouse gas cap-and-trade is beginning. A national cap-and-trade system could give American the business valuable experience they will need to remain competitive with other companies in countries where greenhouse emissions trading is moving forward. We can expand trade opportunities through a new marketplace for the environment.
Given this developing international market, it also makes sense to ensure that what we do domestically can be integrated and recognized on the international level. Ultimately, we need to make sure that the emissions reductions our companies, our farmers, and our foresters produce are fully recognized and fully tradable in the emerging global greenhouse gas marketplace.
Note: This column has been adapted from a speech Sen. McCain delivered on the floor of the Senate, August 3, 2001.
 How to contact Senator John McCain (R-AZ)
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