Traditional Regulation Won't Do

The first generation of environmental regulation (so-called "command and control") simply wasn't designed for the greenhouse gas problem. Because of the diversity of greenhouse gas emissions sources and even greater diversity of processes for reducing greenhouse gas emissions, traditional, prescriptive regulation would be impractical, inefficient, and politically unsustainable.⁶ Under the first generation approach, Congress decides which industries should be regulated, and government regulators tell businesses which technologies to use to comply with regulation, based on their estimates of corporate costs of compliance. Then, by setting deadlines for compliance, regulators decide when and how much pain the companies should endure to comply with the rules. ⁷

The greenhouse gas challenge presents an opportunity to advance a "second generation" model of market-based incentives and information disclosure that recognizes the significant environmental impact from consumers, consumer products, service industries, and numerous government agencies. In a second generation approach like emissions trading, government sets the environmental goals and rules, but lets the private sector determine optimal ways of achieving the goals under the rules.⁸ Some economists still prefer a direct, across-the-board tax on greenhouse gas emissions or on the carbon content of fuels, but a broad, new tax is unlikely to gain public acceptance anytime soon.⁹

Build a Market Now

The single most important action Congress could take is to establish a domestic market for greenhouse gas emission credits. A market would provide a positive economic incentive for companies, public agencies, and consumers to reduce their emissions. A market would encourage those with the lowest incremental costs to make reductions first. Building a market would increase the value of voluntary greenhouse gas reductions taken by many companies. Further, an organized market would reduce speculation about economic effects of climate change policies by demonstrating real-world costs of emissions reductions.¹⁰

The U.S. pioneering experience with controlling sulfur dioxide emissions shows that a properly designed emissions trading market works. The trading program, established by the Clean Air Amendments of 1990, sets a graduated series of "caps" on total national emissions of sulfur dioxide. The government allocates credits to electric utilities corresponding to the amount of sulfur dioxide emissions permissible under law; these credits can then be traded among the utilities and others. The "cap and trade" program lowered sulfur dioxide emissions below the required levels at a cost of less than $1 billion compared to an estimated $4.5 billion price tag for conventional "command and control" regulation.¹¹

Here's how Congress should initiate a market for greenhouse gas emissions:

With a national cap on total emissions declining by only 1 percent each year and the ability to purchase emissions credits, the potential economic impact of the emissions market on energy-intensive industries would be minimal. Indeed, last year's economy offers hard evidence of this proposition: preliminary numbers from 1998 suggest that emissions barely increased (0.4 percent) as the economy continued to expand (3.9 percent growth). ¹²

Getting an emissions trading market up and running would reduce the economic risk that government might require businesses to take abrupt action later. Companies could reduce emissions gradually instead of being required to rapidly retire capital equipment. Further, the market would create economic opportunities for companies and individuals who participate in the trading directly.

Figure 2. U.S. greenhouse gas emissions by gas for 1998 in million metric tons of carbon equivalent. (HFCs are hydrofluorocarbons, PFCs are per-fluorocarbons, SF6 is sulfur hexafluoride, and CO2 is carbon dioxide). ¹³

An Emissions Trading Market Offers Multiple Incentives

Reducing greenhouse gas emissions means changing sources and efficiency of energy use. Nearly 85 percent of greenhouse gases produced within U.S. borders arise from fossil fuel combustion for energy use; the rest comes from methane from landfills, coal mines, oil and gas operations, and agriculture.

By 2000, the greatest source of demand growth for electricity in the United States may well be home office equipment, not aluminum smelters.¹⁴ This means that a successful greenhouse gas emissions reduction program will need to extend beyond the largest industrial companies, and engage almost every sector of the economy, including commuters. More than 30 percent of U.S. greenhouse gas emissions come from energy used by commercial and residential activities like lighting, heating, and cooling offices and homes, and operating computers and electrical appliances. Driving cars and trucks and other forms of transportation account for another third of total emissions about the same fraction as industry.

Figure 3: U.S. primary energy consumption and sources of greenhouse gas emissions by economic sector for 1997.¹⁵

The vast majority of U.S. companies do not yet perceive much value in greenhouse gas emissions reductions in the absence of clearer regulatory policy. As an executive at a large electric utility remarked, "We've done the voluntary program and have the green stamps. Before we do more, we need to know how we can redeem these 'green' stamps."¹⁶ In other words, companies need to know that a broad, viable, and stable national marketplace will develop before undertaking more voluntary activities with uncertain payoffs.

Europe, Australia, and in the U.S. informal "over-the-counter" (OTC) capital market, companies and governments have been experimenting with greenhouse gas emissions trading.¹⁷ Without a formal market, however, the price of reductions varies widely from trade to trade, and only the companies with the largest emissions participate. For example, in some projects to reduce greenhouse gas emissions and store carbon, prices range from pennies per ton of carbon dioxide emissions avoided to over $5 per ton avoided. A broader and more transparent market would iron out these inconsistencies in pricing.

Some of the most successful corporations in America (and the world) have already devised long-range greenhouse gas emissions reduction programs ¹⁸ To tap the full power of the marketplace including the unique skills of financial intermediaries Congress needs to formally establish U.S. policy, national emission caps, and rules for measurement and enforcement.

Key Features of a Domestic Emissions Trading Market

Congress should direct the President to establish a "cap and trade" emissions credit program modeled on the successful sulfur dioxide emissions program. Credits would be defined in terms of a ton equivalent of CO₂. The sulfur dioxide program covers only a few thousand power plants that are responsible for 70 percent of the domestic sulfur dioxide emissions. In contrast, reduction of greenhouse gas emissions needs to come from virtually all sectors of the economy that contribute to emissions, including consumers of fossil fuel-generated energy.

Table 1. Proposed recipients of initial greenhouse gas emissions allocations, accounting for between 70-80 percent of total U.S. emissions of carbon dioxide.

RECIPIENTS OF INITIAL ALLOCATION CREDITS	NUMBER OF ENTITIES (All numbers are approximate.)
Electric utilities	1000
Industrial co-generation facilities	1000s
Industrial direct emitters	10,000s
Commercial fleets (trucks, planes, and autos)	10,000s
Public agencies (federal, regional, state, and local)	1000s
Large organizations with commuters (over 10,000 employees)	10,000s

Market players in the industrial sector would be allocated credits to cover their emissions in the year 2000. They would then be free to undertake greenhouse gas reduction activities or purchase credits equal to the amount by which their annual greenhouse gas emissions are expected to exceed their allocations. Large greenhouse gas emitters in the non-industrial commercial and transport sectors also would be allocated credits based on year 2000 emissions.

Table 2. Summary of rules for the proposed domestic greenhouse gas emissions trading market.

FEATURE	RULE	RATIONALE
Authority to allocate credits	A federal interagency group	Greenhouse gas emissions credits are public goods transferred to the private and public sectors.
Base year for allocating credits	Year 2000	Market operations should begin from present levels, using the best available information.
Transferability	Fully transferable to third parties	Small businesses and consumers can gain direct economic benefits from reducing greenhouse gas emissions.
Form of allocation credits	Credits for carbon dioxide (CO2) and other gases (when added to the market) expressed as metric CO2 tons using international conversion standards.	Other greenhouse gases should be added after the first several years of market operations.
"Pass through" requirements	Direct emitters required to pass along credits for energy efficiency improvements to their customers as a requirement for receiving allocation credits.	Businesses that save energy can obtain greenhouse gas (GHG) emission credits if they reduce their demand for GHG-producing electricity. If companies fail to pass through credits to customers, then they lose their entitlement to "free" credits and instead have to buy credits on auction market.
Third-party allocations	Third parties not provided initial allocations may aggregate savings of customers or other small generators and apply for GHG emissions credits. Organizations receiving initial allocations are required to pass through verifiable credits.	Organizations that build or retrofit energy-efficient buildings should be allowed to obtain GHG credits. Manufacturers that lease energy-efficient computing systems could obtain GHG credits as part of deals with customers who get them from direct emitters, like their power supplier.
Annual reduction in cap on emissions	All GHG allocations reduced by 1 percent per year.	To achieve real reductions in greenhouse gas emissions gradually, the cap on allocations needs to decline in an incremental and predictable way. The "grandfathering" of allocation credits will be phased out over time and replaced by auctioning.

In addition, there would be an important role for third parties like environmental brokerage firms. Brokers who help connect willing buyers and sellers would not receive allocations, but would be allowed to buy and sell credits, aggregating emissions from smaller parties who would otherwise not have the time or money to play in the market. By expanding the community of participants in a regulated market, the incremental burden of the regulation (if any) on an individual economic sector would be lower than if that sector were singled out for attention.

Expanding the scope of a regulated greenhouse gas market can change the political dynamic from "whose ox gets gored" to how different industries can cooperate to identify the least costly solutions for reducing greenhouse gas emissions on a national basis. This provision secures an economic incentive for financiers to support greenhouse gas emission reduction activities. For example, several firms have put together deals that would result in the trading of about 10 million tons of carbon dioxide emissions.¹⁹ These "demonstration" trades were limited, not by corporate economics, but by lack of federal action on establishing an organized market framework.

Table 3. Examples of emissions trading that could occur in the proposed domestic market, assuming the "pass through" requirement.

POTENTIAL SELLER	POTENTIAL BUYER
Owner of power plant converts from coal to natural gas	Owner of coal-fired power plant used for peak loads
Building owner who reconfigures lighting, heating, and air conditioning to gain energy efficiency	Industrial emitter seeking to avoid expensive upgrades of a soon-to-be-retired facility
Parcel delivery service upgrades truck fleet to include very low-emissions vehicles	Regional air quality fund purchases and retires credits
Privately-operated "cash for clunker" program	Conservation organization retires credits

Beginning in 2001, the federal government should begin a process of making market allocations for other greenhouse gases such as methane and nitrogen oxides which have proportionally greater effects than carbon dioxide Over time, other key greenhouse gases should be included.²⁰ Other specific features of the market are discussed below.

Disclose Emissions Data

Large emitters throughout the economy including major energy users such as government agencies, the service industry, and transportation companies should publish estimates of greenhouse gas emissions in a standardized format to be placed on the Internet. The federal government would use these estimates to set allocations. This disclosure would enhance the information base on which market participants can act and also allow the public to incorporate information on greenhouse gas emissions and developments into their private buying decisions.

Information disclosure can be a powerful tool. The Toxic Release Inventory (TRI), created by the 1986 Emergency Planning and Community Right to Know Act, has demonstrated that the mere public disclosure of legal toxic emissions stimulates corporate efforts to reduce emissions substantially. Indeed, if companies misrepresent their emissions in TRI, the government imposes stiff penalties. In the chemical industry alone, emissions per unit of revenue have fallen by over 50 percent in the last five years, although overall emissions in some sectors have risen.²¹ Similar requirements to disclose greenhouse gas emissions should lead to high levels of compliance and stronger incentives to improve greenhouse gas emissions estimation methods.²²

Small emitters of greenhouse gases should have a choice about whether to participate in the market or not. If they choose to not participate, they should be exempt from mandatory reporting and administrative allocations. If they choose to enter the market as a buyer or seller, they should submit to appropriate reporting requirements. In some cases, these smaller players may be able to capture the "low-hanging fruit" of cheap emissions reductions compared to industries that are already intensively working to minimize energy costs.

Companies that purchase energy efficient products should be allowed to buy and sell credits in an emissions trading market. The pass-through provision enables them to get credit for greenhouse gas emissions reductions as a consequence of their actions. Congress should direct the U.S. Environmental Protection Agency (EPA) to expand product information standards such as Energy Star to increase the market pull for products that are more greenhouse gas efficient. The EPA allows companies to use their Energy Star "seal of approval" if the products meet EPA's criteria for energy efficiency. The program takes credit for encouraging gains in the efficiency of over 3,200 products in 25 product categories.²³ The advance has been achieved by thousands of companies who purchase energy-efficient office equipment and other goods, however, even though they are not necessarily direct emitters of greenhouse gases.

Allocate Rights to Emit Now, Auction Later

The heart of the political challenge of establishing a greenhouse gas emissions market is how the government distributes emissions credits to initiate the market. Either the government could hand out the credits for free, called "grandfathering," or it could auction the credits and use the revenue generated from the auction to reduce payroll taxes or pay down the national debt.²⁴

In the market proposed here, initial allocations are based on grandfathering existing large sources of greenhouse gas emissions. Grandfathering avoids compelling major greenhouse gas emitters to bid for the "right" to continue their operations. In the early stages of the market, 5 percent of the credits should be set aside for auctioning among new market entrants. Over time, the auction set- aside should be progressively increased.

Company-specific allocations of greenhouse gas emission credits would be granted by the federal government on the basis of a 1 percent per year reduction for the next 10 years, using the year 2000 emissions as a baseline.²⁵ This level of certainty would be more amenable to companies than other, less predictable schemes to adjust emissions caps.

Energy suppliers and others who receive grandfathered allocations would be required to pass through credits to customers who demonstrate real, net reductions in energy use. This "pass through" requirement is essential to broadening participation in the market to include companies, property owners, and others who adopt more energy-efficient products and processes.

The missing players in the proposed market are personal vehicle owners. (Commercial fleets are included.) There are several approaches that could be taken to deal with their inclusion in the market. The simplest is to build on California's experience with major employers who can earn air quality "credits" from actions to reduce emissions taken by their employee commuters. In the spirit of this proposal, third parties like cities or environmental groups could organize vehicle owners on a strictly voluntary basis within regions, aggregate their emissions through a certification process, and gain entry to the allocation or auction process. Alternatively, the vehicle emission problem could be dealt with using modified fuel efficiency standards.²⁶

Circumscribe the Role of Government

The yearly reduction in allowable greenhouse gas emission credits should be the same for each regulated entity: 1 percent of the previous year's cap. This takes the government out of the controversial role of estimating an individual company's economics and opportunity costs. Neither government nor trade associations have a good record of determining the net costs, if any, of environmental regulations on private firms. An across-the-board reduction leaves the government with a smaller, well-defined role of administering a database of emissions estimates, determining greenhouse gas emission goals on the basis of those estimates, providing a legal forum for trading greenhouse gas credits, assuring the public that goals have been obtained, and adjudicating disputes that may arise.

Regulate Government Agencies as Market Players

Federal and state government agencies should not receive a carte blanche "carve out" from emissions limits, but rather should be required to meet greenhouse gas targets based on estimated 2000 emissions just like private sector actors. The federal government is the largest energy consumer in the United States. The economic burden on private entities which may well be more energy-efficient by virtue of their economic incentives will be reduced if government agencies and nonprofits are also required to shoulder their proportional share of the burden. In fact, President Clinton signed an executive order in June 1999 to push federal agencies toward greater energy efficiency and lower greenhouse gas emissions.²⁷

A few states like Oregon and New Jersey are already moving on this front. A pilot program underway in Portland, Oregon, estimates the greenhouse gas emissions of various municipal departments, and provides a model for assessing incremental changes by others in the public sector.²⁸

Uncle Sam Can Buy Green Too

In addition to participating in an emissions trading market, federal procurement could generate a very significant market signal to support greenhouse gas efficiency efforts throughout the economy. The federal government is the largest single customer in the United States. If other government entities for example, states and municipal agencies are included, the public sector may represent over 5 percent of the buying power in the United States. A federal procurement initiative that encourages agencies to add greenhouse gas emissions per unit of production to their lists of buying criteria could have a tremendous impact on companies supplying goods and services. In the past, federal procurement has been responsible for the rapid development of solar photovoltaics, wind turbines, aeroderivitive turbines, superconducting transmission, and several other significant contributions to current efforts to reduce atmospheric greenhouse gases.

If public agencies are clever, they may be able to meet their 1 percent emissions reductions per year through better procurement without incurring any incremental costs. If that is not possible, agencies could contract for greenhouse gas emissions reduction services from energy service companies. Stimulated by the June 1999 Executive Order, some federal agencies are already moving toward green procurement, but much more could be done.²⁹ If agencies still can't meet their annual greenhouse gas reduction targets by either of these means, they could be permitted to purchase credits in the market, subject to limitations on direct conflicts of interest.

Seed a Futures Market

Buyers and sellers in oil, electricity, grain, and other commodity markets limit their exposure to big swings in commodity prices through the use of option and other derivative contracts.³⁰ Market players in greenhouse gas emissions trading also should be allowed to purchase option contracts to limit their risk of losses when the price of greenhouse gas emissions credits rises or falls. For example, a hedge against an increase in price of a greenhouse gas emissions credits may be the purchase of an option contract that offers the right to purchase 10 million tons at $1.00 per ton. With that hedge, an electric utility could proceed with its less than $1.00 per ton activities, but know that if the market price went to $2.00 a ton, the company's additional costs would be limited if it still had to purchase more credits to meet its requirements.

To price these option contracts, the financial community and buyers and sellers of emissions credits and options need to know that there will be some stability in government-set "rules of the game" for reducing greenhouse gas emissions. For example, as additional greenhouse gases are added to the trading market, the government would need to maintain consistent definitions of trades and other emissions reduction actions allowable under the law. However, the market not government or think tanks should set prices for credits and options contracts. Government cannot and should not be in the business of estimating business compliance costs which vary widely among firms and across sectors.

Additional Measures To Strengthen the Domestic Policy

Congress should take other low-cost actions to strengthen the proposed climate change policy such as :

Provide an "early bird" credit for voluntary action on greenhouse gas emissions reductions and storage projects in advance of the domestic market's operation.

Two bills are pending in Congress to do just this.³¹ To maximize future flexibility when a domestic emissions trading market is activated, Congress should place a cap of 2 percent of the U.S. annual greenhouse gas budget that could be allocated to these voluntary actions.

Expand scientific work and field testing of means to measure "carbon sinks," the consumption of carbon by trees, crops, soil, and oceans.

Among the most innovative approaches to reducing greenhouse gas emissions are actions that enhance the uptake of carbon by soils, forests, croplands, and water bodies called "sequestration." Unfortunately, several practical problems preclude the use of carbon sinks as part of the backbone of a U.S. trading regime over the next several years.³² For the time being, greenhouse gas sequestration projects should be treated separately from greenhouse gas emissions reduction efforts. The United States should commit to a five year schedule to develop a scientifically acceptable approach to dealing with carbon sinks.³³

Set the rules to grant credits from investments in developing countries that yield verifiable, net reductions in greenhouse gas emissions.

U.S. negotiators should continue to push for establishing rules to provide credits for investments in developing countries that result in net reductions in greenhouse gas emissions called "joint implementation" in the United States and the "clean development mechanism" in the Kyoto protocol. Even if the Kyoto treaty fails, these investment rules would still offer some consistency in crediting international actions that would have value under a different climate change treaty. U.S. companies could provide developing countries with the technologies to control greenhouse gas emissions as their economies grow. An international agreement could further stipulate that developing countries would be required to submit large joint implementation projects for competitive bid.³⁴

Stimulate research on innovative energy and other technologies.

Research and development of new energy technologies depends on relative prices of energy and on the private sector's perception of consistent federal and state tax and regulatory policies. By developing a market for greenhouse gas reductions and a framework for rewarding companies that figure out ways to achieve reductions, the government would likely spur more development of new technologies than it would by tinkering with the tax code.³⁵

Conclusions

A domestic emissions trading market is a model second generation program. The proposed "cap and trade" program for greenhouse gas emissions harnesses market forces and keeps the government out of the business of choosing technologies to accomplish an environmental goal. Further, a wide variety of market actors could actually profit from making climate-friendly economic choices under the second generation model for greenhouse gas emissions reductions.

This proposal avoids reliance on international organizations and developing countries' actions. At the same time, it would put the United States within striking range of the Kyoto targets within the next decade or so, and serve as a market-oriented model for action by other countries a necessity for diminishing the climate change threat over the long term.

The proposed market reduces economic costs and dislocations by spreading the burden of domestic greenhouse gas emissions reductions throughout the economy, including consumers, rapidly growing service industries, and government. While industry has been the primary target of the first generation of environmental regulation, it is only responsible for about one third of total U.S. greenhouse gas emissions. Hence, spreading the responsibility for emissions reductions increases fairness and decreases costs for the high greenhouse gas emissions industries, a major concern voiced by organized labor.³⁶

The time has come to drop the rancor and mistrust engendered by the Kyoto treaty, and address the threat of climate change without shortchanging the U.S. economy.

Endnotes

1. Tamara S. Ledley, Eric T. Sundquist, Stephen E. Schwartz, Dorothy K. Hall, Jack D. Fellows, and Timothy L. Killeen, "Climate Change and Greenhouse Gases," EOS, Transactions of the American Geophysical Union, Vol. 80, No. 39 (September 28, 1999): 453- 458; John Houghton, Global Warming: The Complete Briefing, 2nd edition (Cambridge, UK: Cambridge University Press, 1997), chapters 2 and 3; Wallace Broecker, "Will Our Ride into the Greenhouse Future Be a Smooth One?" GSA Today, 7, No. 5 (May 1997): 2-7.

2. J.T. Houghton, L.G. Meira Filho, B.A. Callender, N. Harris, A. Kattenberg, and K. Maskell, editors, Intergovernmental Panel on Climate Change, Climate Change 1995: The Science of Climate Change (Cambridge, UK: Cambridge University Press, 1996); American Geophysical Union, "Climate Change and Greenhouse Gases," position statement issued in December 1997. Greenhouse warming describes the atmosphere's trapping of heat from the sun. Without it, the earth would be at least 60xF colder.

3. Even if the industrialized nations of the world abided by the December 1997 treaty they negotiated in Kyoto, Japan, their actions would slow but not stop the continued accumulation of greenhouse gases. Developing nations also must agree at some point in the future to limit their greenhouse gas emissions.

4. U.S. Congress, H.R. 2684, the FY2000 VA, HUD and Independent Agencies Appropriations Act. A key provision of this legislation was language proposed by Rep. Knollenberg that prevents the EPA from issuing rules and regulations to implement the Kyoto Treaty on climate change until it has been ratified by the U.S. Senate. According to a September 10, 1999, press release from Rep. Knollenberg: "Our language in this year's VA/HUD bill is even stronger than last year's.... The Administration's backdoor efforts to foist this fatally flawed treaty upon the American people has not gone unnoticed. If the supporters of this treaty want to begin implementation they must first have debate and approval in the U.S. Senate. Unfortunately, they have been unwilling to offer this treaty to the Senate where I am confident it would be dead on arrival."

5. Barnola, J.M., D. Raynaud, Y.S. Korotkevich, and C. Lorius. "Vostok Ice Core Provides 160,000 Year Record of Atmospheric CO2." Nature, 329: 408-414, 1987; Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, 1997; http://www.whitehouse.gov/initiatives/climate/greenhouse.html.

6. For a discussion on efficiency issues, see Richard G. Newell and Robert N. Stavins, Abatement Cost Heterogenities and Potential Gains from Market-based Instruments, Working Paper, John F. Kennedy School of Government, Harvard University, June 1997.

7. While determining the incremental costs of compliance is an interesting task for government economists, the reality is that government will never have enough information to make these determinations as well as individual companies participating in the broad market. Some in big business make this same observation and conclude that voluntary action is the only recourse. In fact, volunteerism is laudable, but it provides little incentive for smaller companies to act and therefore seems less likely to work for the greenhouse gas problem

8. For an excellent discussion of comparative advantages of different policy instruments, see Robert N. Stavins, "Policy Instruments for Climate Change: How Can National Governments Address a Global Problem?" University of Chicago Legal Forum, Volume, (1997): 293- 329.

9. William Pizer, Choosing Price or Quantity Controls for Greenhouse Gases, Issues Brief, Resources for the Future, Washington, DC, July 1999.

10. Economists at Resources for the Future (RFF), another Washington-based think tank, have also advanced a proposal for a domestic emissions trading market, but with markedly different characteristics from the one proposed here. In the RFF proposal, credits would be auctioned and government revenue from the auction recycled to taxpayers. The proposal also calls for a price cap on emissions reductions of $25 per ton in 2002. Richard Kopp, Richard Morgenstern, William Pizer, and Michael Toman, "A Proposal for Credible Early Action in U.S. Climate Policy," Resources for the Future, Washington, DC, March 3, 1999.

11. Environmental Law Institute, Implementing an Emissions Cap and Allowance Trading System for Greenhouse Gases: Lessons from the Acid Rain Program, (Washington, DC: Environmental Law Institute, 1997); A.D. Ellerman, R. Schmalensee, P. Joskow, J.P. Montero, and E.M. Bailey, Sulfur Dioxide Emission Trading: Evaluation of Compliance Costs (Cambridge, Mass: M.I.T. Press, 1997).

12. U.S. Department of Energy, Energy Information Administration, Emissions of Carbon from Energy Sources in the United States: 1998 Flash Estimate, http://www.eia.doe.gov/oiaf/1605/flash. Estimates are based on preliminary data reported in the Monthly Energy Review, May 1999. The full report is due in October 1999.

13. Energy Information Administration, Emissions of Greenhouse Gases in the United States: Executive Summary, Report# EIA/DOE 0573(98), November 5, 1999.

14. Peter W. Huber and Mark P. Mills, "Dig More Coal--the Pcs Are Coming: Being Digital Was Supposed to Mean Less Demand for Hard Energy. It Isn't Turning Out That Way." Forbes, May 31, 1999, 70.

15. Energy Information Administration, U.S. Department of Energy, State Energy Information, http://www.eia.doe.gov/emeu/sep/us, 1998.

16. Personal communication with Jon Naimon, February 1999.

17. Reuters News Service, "European Power Firms Practice Greenhouse Gas Trading," July 13, 1999; The Times of London, "Top 25 UK Companies Seek Emissions Trading," June 28, 1999, http://www.sunday-times.co.uk/news/pages/tim/99/06/28/.

18. Anheuser-Busch, American Electric Power, BP Amoco, Dupont, Lockheed Martin, TransAlta, among others.

19. Inside Washington Publishers, "Emissions Trading: Brokers Expect to Soon Close 10 Million Ton CO₂ Trading Deal," The Reinvention Report, June 2, 1999, 11.

20. The Kyoto Protocol to the United Nations Framework Convention on Climate Change identified six gases for control: carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, per fluorocarbons, and hydro fluorocarbons.

21. U.S. Environmental Protection Agency, 1997 Toxics Release Inventory, (Washington, DC: U.S. EPA, 1999).

22. Emergency Planning and Community Right-To-Know Act, 42 U.S.C. 11023, Sec. 313 and Sec. 325(c).

23. U.S. Environmental Protection Agency, Energy Star Program, http://www.epa.gov/appdstar/estar/.

24. At $10 per ton, an auction of carbon emissions credits could generate $15 billion in new tax revenue. Leaping immediately to an auction, however, would impose large and uneven costs on greenhouse gas emitters, who would pass those costs to consumers. Unless consumers could immediately receive a tax rebate from their "share" of the auction's revenues, they would likely protest loudly over sudden jumps in energy costs. A full auction should be pursued, but we propose a long-term transition strategy to get there with minimal economic disruption.

25. Under a credit for voluntary action plan, companies that could certify that they achieved real emissions reductions between 1993, when the Administration's Climate Change Action Plan was initiated, and the year 2000, would have their 2000 baseline adjusted accordingly.

26. For a brief description see Debra S. Knopman, "It's Time for SUVs to Meet the Fairness Test," intellectualcapital.com, November 4, 1999, (http://www.intellectualcapital.com/ issues/issue316/item7089.asp).

27. Executive Order 13123, "Greening the Government Through Efficient Energy Management," June 3, 1999.

28. John Pendergass, "States Filling CO₂ Reduction Vacuum," The Environmental Forum, (Washington, DC: Environmental Law Institute), Summer 1999, 6.

29. Council on Environmental Quality, Executive Office of the President, "United States: Taking Action on Climate Change," October 1999.

30. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying instrument or asset, typically a commodity, bond, equity, or currency. Examples are futures, options, and mortgage-backed securities.

31. Senate Bill S. 547, introduced on March 4, 1999, by Senators John Chafee, Joe Lieberman, Connie Mack, and others; House Bill H.R. 2520, introduced on July 14, 1999, by Congressmen Rick Lazio, Cal Dooley, and others.

32. While sinks exist for other pollutants, there is little regulatory precedent in the United States or elsewhere for allowing air pollutant emitters to cite uptake of pollutants by terrestrial sources as an offset. Applied internationally, activities such as tree planting hold the promise of dramatically reducing the incremental cost of reducing greenhouse gases far below the costs of reducing greenhouse gas emissions by fossil fuel burning activities.

33. A research plan would include: developing a national baseline inventory of terrestrial and aquatic sinks, by ownership type, for all greenhouse gases using standardized measurement protocols; developing technical protocols for determining the magnitude and longevity of greenhouse gas sequestration; developing technical capacity in the public or private sector to certify projects that effectively reduce atmospheric greenhouse gas emissions by enhancement of terrestrial and aquatic sinks; and negotiating international agreements that address concerns about double-counting and other loopholes to guarantee that real net increases in carbon storage are being achieved.

34. U.S. companies have tended to fair poorly in developing country markets for environmental technologies, in part because of aggressive aid packages provided by European and Japanese governments in support of their own companies.

35. Congress should modernize and make permanent the research and development tax credit across the board, not just for energy technologies. For more details, see Robert D. Atkinson, Boosting Technological Innovation Through the Research and Experimentation Tax Credit, Policy Briefing, Progressive Policy Institute, Washington, DC, May 1999. More focused tax credits for specific technologies could be distortionary and counterproductive.

36. Judith M. Greenwald, Labor and Climate Change: Getting the Best Deal for the American Worker, Report, Progressive Policy Institute, Washington, DC, October 1998.

Jonathan Naimon is a co-founder of Light Green Advisors (www.lightgreen.com), a Seattle-based investment advisory firm specializing in constructing portfolios of environmental leadership companies. Debra Knopman is director of PPI's Center for Innovation and the Environment.