At times certain words become quite fashionable, though nobody is quite sure why. Everyone wants to use them, even as they can have different meanings for different people. In the discussion of climate change in the United States, “sectoral” seems to have achieved this particular honor over the past few months.
Before we start, let’s do a quick test. When policymakers use the term sectoral, what do they mean?
1. A command-and-control measure at a national level, e.g. low-carbon fuel standard or a sector-specific tax?
2. A transnational cap-and-trade sectoral agreement, e.g. aviation or maritime?
3. A commitment by a nation or group of nations to commit to intensity targets for a certain sector, e.g. tCO2/unit of production in cement or aluminum?
4. An improved Clean Development Mechanism (CDM) whereby methodologies include simplified baselines following benchmarking across key sectors?
5. All of the above
The correct answer is No. 5 — all of the above, which demonstrates the problem. As such, we really need to define what we mean by sectoral. The dialogue among U.S. policymakers would have sectoral mean everything from command-and-control measures in an industry inside America’s borders to an enhanced market-mechanism like the CDM.
The problem is that while fashionable here, the term is viewed far less benignly in developing countries, where sectoral is perceived as an interim step towards getting them to agree to future CO2 emissions targets without concessions from rich nations. Get ready for a fight at international climate change negotiations in Copenhagen at the end of the year.
This is especially relevant because the draft climate change and energy bill introduced by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) envisions credits for international offsets created by specific industries (i.e. sectors) in countries that have some sort of bilateral or multilateral emissions agreement with the United States. As far as we have been able to tell, nobody quite knows what this means, but the final interpretation will create or stop billions of dollars of climate-friendly investment.
Therefore, shouldn’t we at least get our terms straight?
I understand that U.S. policymakers are concerned about creating (or keeping) a level-playing field for American industries. There are understandable concerns that cement, steel, auto manufacturing and other industries could lose competitiveness if foreign counterparties do not face similar emissions requirements. In theory, a sectoral approach should be viable for an industry that has relatively few important actors across the globe. From what I understand, this is what motivated the Cement Sustainability Initiative (CSI) of the World Business Council for Sustainable Development to push for a transnational cement sector agreement.
But after seven years of hard work, the parties agreed that a transnational cement agreement was simply too hard to reach. The compromise was to write a benchmarking methodology for CDM projects that will be submitted shortly to the CDM Executive Board for consideration. This will not be the first plan that the CDM board approves with that approach. A few months ago the first benchmarking methodology for energy efficiency refrigerators using an intensity baseline was passed.
What the cement industry learned in the very arduous process should not be underestimated. A main disadvantage of a sectoral approach is that it requires an enormous amount of data, which is either too expensive to gather or simply unavailable in many developing countries. The CSI took seven years to develop a methodology for CDM — not because it takes so long to write a methodology, but because creating a common reporting language and gathering data was challenging and time-consuming.
As I mentioned before, there is tremendous resistance from developing countries to agree to anything that resembles a sectoral approach, due to the implications about setting a path to future targets and costs. China is slightly more open to the idea, but other countries — including India, South Africa and Brazil — seem to jump out of their seats any time someone pronounces the word. I’m not entirely joking.
Understandably, these countries feel that having to agree on a sectoral baseline strongly resembles a direct cap on their emissions in that sector, which they find unfair given their historically small role in generating substantial industry-driven carbon emissions. It’s hard to blame them, as the U.S. would think and advocate the same way if the situation was reversed. A further concern in the developing world is that a sectoral approach would resemble international emissions trading under Kyoto i.e. trading emissions units between governments — and would be likely to provide very poor incentives for the private sector, which these countries know they need to engage.
Sectoral approaches are definitely complex, but there are certain concrete policy areas that can benefit from these tools:
1. Aviation and Maritime: These sectors can benefit from sectoral agreements that tackle the ownership issues and other complexities of cross-border regulation that neither the CDM nor national emissions inventory frameworks are able to.
2. Benchmarking: Use data collected from the thousands of registered CDM projects improve and simplify benchmarking methodologies for measuring emissions from various sectors.
3. Technology Transfer: Export-driven technology dissemination is a goal that virtually all participants in the climate process rally behind. This could be achieved by modifying the CDM to provide credit to businesses that export energy-efficient equipment to other countries. For example, Japan has been pushing for ways to achieve emissions credit for its efficient technology development. A sectoral approach could fit well with this aim.
The sectoral approach is no silver bullet, but if we use it wisely and rationally it can become a great source of learning for the next stage of carbon market development, a crucial step to addressing climate change. Now we just need to define the term.