Now that the Kyoto Protocol has gone into effect, Japan, Canada, and much of Europe are struggling to figure out how to comply with its new requirements. But they are not the only ones who are confused: U.S. firms have to contend with their own murky set of circumstances. While the United States refused to ratify the Protocol, U.S. firms—and not only those with multinational ties—are nonetheless directly affected by the increasingly likely prospect that U.S. greenhouse gas (GHG) emissions will sooner or later be controlled. The absence of a clear U.S. policy for curbing GHGs is making today's business decisions more costly and risky than they need to be.
For example, companies making long-term capital investments, like electric utilities, must consider what might happen to those investments if GHG controls come into effect over the next two or three decades. But different designs of a control strategy make a huge difference in future costs—by a factor of five or more. This uncertainty in the size of control costs greatly complicates strategic planning for long-term investors.
Another problem is that U.S. companies with GHG emissions in Kyoto countries still have to comply with GHG reduction requirements in each country. Because the United States is not a signatory to the treaty, however, reducing such emissions in the United States won't count toward their foreign targets, even if doing so is the least costly response. That could increase the compliance cost to U.S. companies and put them at a competitive disadvantage.
And even within the United States, the situation is unnecessarily confusing. U.S. companies are already subject to a variety of state and local requirements imposed because of climate change concerns. Over 20 states have implemented renewable portfolio standards, which mandate varying levels of renewable energy use, especially for electric utilities. California Gov. Arnold Schwarzenegger has proposed cutting his state's GHG emissions by 2050, a group of states in the Northeast has proposed its own regional GHG cap-and-trade scheme, and 131 mayors recently formed a bipartisan coalition to fight global warming. This diversity of regional and local GHG requirements almost certainly drives up the cost of compliance for companies operating in several states.
A key policy issue is how to balance the cost of doing nothing with the cost of doing something.
The time is therefore ripe to design and implement a GHG control strategy for the United States that is fair and efficient for U.S. companies. It's important to have a thorough discussion about this strategy because the design details make a huge difference to both the total cost and who pays it. All of the design options create winners and losers, so the trade-offs needed to find the fairest approach are properly the stuff of political debate. Once a system is agreed upon, both government and business will need operational experience with it to ensure it works in practice as well as in theory. For this reason, the control system must actually be implemented, not merely modeled by experts.
And the time to start this discussion is now. Doing so will reduce the uncertainty—and therefore the cost and risk—that the prospect of future GHG controls imposes on today's business decisions. Moreover, knowing what control system works best for our economy strengthens the U.S. position in the ongoing international debate about climate control strategies beyond Kyoto. Those deliberations will happen with or without us, but either way it's unlikely that anyone else will worry about our interests.
Some costs would be involved in implementing an initial GHG control system now, of course, but they can be minimized in several ways. For example, the initial system should require only modest GHG reductions at the start, and it could include a safety valve that would ensure that costs would be limited to an acceptable amount. Researchers, including several at RFF, have already begun investigating and designing such systems. As this work goes forward, the initial focus should be on getting the rules right, not on the size of the reductions they impose.
In sum, a key policy issue is how to balance the cost of doing nothing with the cost of doing something. The costs of doing nothing are real, and policymakers should address them sooner rather than later.
A version of this article appeared in print in the Spring 2005 issue of Resources magazine.
