Dow’s Position on U.S. Climate Change Legislation
Climate change is a global problem that requires a global solution. Dow believes that a global solution will require U.S. leadership, and that America needs a comprehensive energy and climate change policy to help reduce the risk of climate change an promote greater energy security.
That is why Dow is a member of the U.S. Climate Action Partnership (USCAP), a coalition of 25 leading companies and five environmental organizations. As a member of USCAP, Dow supports prompt enactment of environmentally effective, economically sustainable and fair climate change legislation to reduce U.S. greenhouse gas (GHG) emissions sharply by mid-century. The centerpiece of this legislation should be an economy-wide cap-and-trade program. This market-based approach is the best way to encourage technological innovation and ensure that short- and long-term emissions targets are met.
A cap-and-trade system not only sets a limit (or cap) on the overall GHG emissions level, but the system also provides the flexibility for companies to determine how best to comply with the emissions cap. This in turn triggers innovation and the development of low-carbon technologies.
The Need For A Well Designed Climate Policy
As one of the world’s largest industrial energy consumers, Dow understands how fossil energy impacts global competitiveness. And yet, because Dow products save much more energy than is used in the manufacturing of those products, we recognize the transformational power of policies that place a price on carbon.
Certain design elements are critical to minimize the costs and maximize the benefits of a cap-and-trade system in the U.S.:
Prevent Carbon “Leakage”: American manufacturers who produce energy-intensive, trade exposed commodity products are particularly vulnerable to higher energy prices from a cap-and-trade system. Such industries (iron and steel, chemicals and plastics, cement, pulp and paper, glass and ceramics, non-ferrous metals) have lost three million jobs in the past eight years. If not designed carefully, U.S. climate policy can result in the outsourcing of jobs (and GHG emissions) to countries that have lower environmental standards or more relaxed climate change policies. This shifting of emissions and production is known as carbon leakage.
The bill seeks to avoid carbon leakage by keeping allowance prices as low as possible, and by awarding free allowances to energy-intensive manufacturers to compensate them for their increased costs from a cap-and-trade program. These free allowances will be discontinued once there is an internationally level playing field.
Protect Feedstocks: Some U.S. manufacturers, like Dow, use fossil energy as a feedstock material. This fossil energy is not combusted and does not result in emissions of greenhouse gases. A cap-and-trade system that imposes a cap on those companies that produce (rather than emit) fossil energy has the potential to raise feedstock prices, which will hurt domestic manufacturing without addressing greenhouse gas emissions.
Under the bill, American manufacturers that use fossil energy as a feedstock will be reimbursed for their higher costs through the issuance of free allowances equal to the CO2 content of their feedstock material.
Prevent Fuel Switching: One of the easiest and most likely ways to meet aggressive, short-term emission reduction targets is through fuel switching from coal to natural gas in the power generation sector. Too strong a price signal on carbon would exacerbate such a movement, which is already underway even in the absence of a U.S. program to reduce GHG emissions. If fuel switching is excessive, demand for U.S. natural gas will rise, and American manufacturers that depend on natural gas will suffer.
In the bill’s cap and trade program, several different elements affect fuel switching, such as emission targets, timetables and cost containment measures. To minimize fuel switching, free allowances are provided to coal-fired power producers, and bonus allowances are provided to deploy carbon capture and sequestration (CCS) technology.
Offsets: A carbon offset project is an action aimed at a reduction in GHG emissions. Offsets can be used to meet a firm’s compliance obligation under a cap and trade program. Carbon offsets are measured in metric tons of carbon dioxide equivalents (CO2e). One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. The most common examples of offsets include renewable energy projects, such as wind farms, biomass energy, or hydroelectric dams. Other examples include energy efficiency and forestry projects.
A cap and trade program can often contain limits on the amount of offsets that can be used to meet a firm’s compliance obligations. Such a limit on legitimate, high-quality offsets – both domestic and international – increases the cost of cap-and-trade and reduces the flexibility of firms that have to comply.
A well designed climate policy should not restrict or hinder development of high-quality offsets that can be used to meet a firm’s compliance obligation. The bill provides for offsets, but they are too limited and administratively difficult to qualify for. We are continuing to seek improvements to this provision.
Global approach: The challenge of climate change must be solved globally because the contributions of GHG emissions come from several countries and these emissions change over time.
Any U.S. policy must create incentives and encourage reductions in GHG emissions by other countries, including large carbon-emitting economies in the developing world. Seeking consensus on a global agreement to reduce GHG emissions should be a high priority for the U.S. American leadership is necessary to achieve an effective international agreement.
For more information on proposed U.S. cap and trade programs, please visit www.us-cap.org/blueprint/overview and read USCAP’s Blueprint for Legislative Action.
