The draft of the American Power Act is now out (see NRDC’s first read summary of the entire bill). The core global warming pollution limits in the bill, covering all major pollution sources, are a solid foundation for Senate legislation to put a final bill on President Obama’s desk this year. So how does this legislative proposal address the critical international investments that aid our international efforts to address global warming?

The bill includes most of the key tools to aid the world in addressing global warming but doesn’t provide the necessary funding to aid developing countries in deploying clean energy, reducing deforestation, and adapting to the impacts of climate change (as a coalition of 24 environmental, development, and religious groups highlighted). The bill contains broad authorizing language for a program to reduce deforestation, provides for only a small and belated effort to help the most vulnerable developing countries, and doesn’t have any program for clean energy exports. Failure to provide the president with the needed tools to promote international cooperation will prove penny-wise but pound-foolish (this is one of the carbon program problems that must be fixed).

It is critical that the U.S. become a strong component of international efforts to address global warming by passing a climate and energy bill this year. To aid in achieving strong international action and providing the U.S. with the necessary tools to support other countries in addressing this challenge such a bill needs several key components:

  • Firm limits on global warming pollution — This depends on the stringency of the limit (A) and the overall environmental integrity, as my colleague discussed in more detail and I’ll discuss in the context of the international offsets (B).
  • Properly designed incentives to encourage, nudge, and push strong actions from other countries — How the international offsets (B) are designed can play a critical role, but it is also important to design specific programs to reduce deforestation emissions (C) and deploy clean energy in developing countries (D). And there are some other tools which can help nudge other countries to take action (E).
  • Support for the most vulnerable countries to adapt to the impacts that are already occurring and that will occur — global warming is already impacting the most vulnerable developing countries so we need a dedicated program to aid these countries in adaptation (F).

A. Firm limits on global warming pollution

At the core of the U.S. engagement in an international agreement is a firm limit on global warming pollution which steadily declines and drives clean energy investments both in the U.S. and elsewhere. The bill creates greenhouse gas reduction targets for the sectors that are covered by emission limits, commencing in 2013 (Sec. 703):

  • 17 percent below 2005 levels in 2020 (4 percent below 1990 levels);
  • 42 percent below 2005 levels in 2030 (32 percent below 1990 levels); and
  • 83 percent below 2005 levels in 2050 (80 percent below 1990 levels).

Overall reductions will potentially be larger because of the requirement that international offsets provide “extra reductions” to make overall progress every time offsets are used. Starting in 2018, a company using international offsets must obtain 1.25 tons of those offsets to cover a ton of its own emissions — the extra quarter ton increases the total carbon pollution reduction achieved. 

B. International carbon offset access rules (Sec. 751-763)

International offsets will be issued only to developing countries that are part of a multilateral or bilateral agreement with the U.S. An International Offsets Integrity Advisory Board will provide recommendations on the international rules and the EPA, in consultation with other U.S. government agencies, will implement a set of rules to assure that offset credits are earned only for real and permanent actions that would not happen anyway and won’t simply shift to other locations. These rules would also need to establish a process to “accept and respond to” comments from the public, providing an important “citizen” watchdog function to the proper implementation of the rules. At least every five years the program is to be reviewed to ensure the environmental integrity of the rules.

The program creates a framework where offsets generally can be produced only by countries that adopt policies to reduce emissions across an entire sector of the economy and only for countries that take some action on their own. These are important principles to retain as it helps ensure that we evolve from “offsets” to sectoral approaches for developing countries — i.e., that offsets are aiding in reducing global emissions not simply shifting reductions from the U.S. to other countries. There are transitions and some exceptions (which I’ll note), but that general framework applies to the majority of the four offset categories outlined in the bill. 

1. Sector-based program. The bill would have the EPA Administrator identify sectors of specific countries where emissions credits can be generated only when an entire sector of the economy in the country reduces its emissions — a sectoral approach. That means that a country can’t produce an offset (get credit) for building a windmill, while not simultaneously getting a debit for building a coal-fired power plant — the net emissions of the sector have to be reduced before an offset can be generated. There are a number of criteria that will be used to determine if a country and sector will be eligible for crediting only on a sectoral basis, which will lead to an offset program where key sectors in the largest emitting countries will only be able to generate offsets if their entire sector reduces emissions:

  • The country has comparatively high emissions or greater levels of economic development; and
  • That it would be a sector covered by the U.S. cap (e.g., electricity, industrial, transportation, etc.).

Credits for these sectors in the country shall be on the basis of an established performance level based upon certain criteria to ensure that the program produces real reductions. These performance levels shall be established at a level lower than the business-as-usual level, take into account nationally appropriate actions of the country, and be consistent with a declining limit to reduce global emissions.

2. Deforestation. Offset credits can be generated from national deforestation emissions reductions with a transition for “state/province” systems, as I’ll discuss in more detail below.

3. Offsets from an International System that meet the requirements outlined in the bill and as implemented in the U.S. rules. Offsets may be issued from an international body (e.g., the U.N. Framework Convention on Climate Change) if they meet the same requirements as established in the bill and designed by EPA. This will provide an important safeguard against less stringent rules and an incentive for the international community, working with the U.S. negotiators, to design strong provisions for international credits (but the onus is on the international rules to reform along the lines in the bill). Starting in 2016, this international system would have to apply sector-based rules in order to be eligible to access the U.S. market.

4. Supplemental/Other offset types. Sectors not covered by the sectoral regulation or the deforestation program may be available to generate credits, if the Administrator determines the offset category eligible and there are higher than expected program costs (the “price collar” is met for a period of time). These potential offset sources would be subject to strict rules before they can generate credits, and won’t necessarily be designed to require that the entire sector reduce emissions before they generate offsets. This would most likely apply to such sources as agriculture, forest replanting, and waste management.

C. Incentives for reductions in deforestation emissions

Deforestation accounts for around 15 percent of the world’s emissions and is generally considered a relatively lower cost emission reduction option. So including a targeted set of tools to combat the loss of the tropical forests is central in our efforts to address global warming. Unfortunately the draft bill contains only funding for one of the key incentive mechanisms to address deforestation emissions — carbon offsets for credible deforestation reductions — but fails to include a dedicated source of investment to ensure that countries develop robust systems, don’t shift emissions to other countries, and achieve early reductions in deforestation. We need both the set aside of dedicated resources and strong rules governing offsets to ensure that efforts to reduce deforestation are actually leading to global warming pollution cuts across the world and that the offsets generated aren’t “subprime” (a point recognized by major companies, farmers, ranchers, and environmental groups from across the spectrum, as I discussed here and here). 

1. Early investment in market readiness, early emissions reductions, and ensuring an environmentally sound system (Sec. 5004). The draft bill contains program language which could be mobilized towards early investments in designing a credible approach to reducing deforestation emissions, but provides no dedicated resources towards implementing such a program.

The program (if it were funded) is designed to achieve emissions reductions, prevent emissions leakage where deforestation shifts from participating to non participating countries, and prepare developing countries to participate in international offset systems for deforestation by building the necessary tools for a credible system. The program would support a variety of activities, including national and subnational emissions reduction activities, forest governance, illegal logging prevention, and enforcement.

Funds generated through this program may be distributed to an international fund to reduce deforestation emissions or through bilateral assistance. The program is guided by an interagency body (which oversees the adaptation investments as well) made up of the key U.S. government officials, in order to ensure that the program is focused, targeted, and effective (Sec. 5003).

2. Carbon credits for credible deforestation reductions. International offsets may be issued from efforts that reduce deforestation emissions. The discussion draft allows offsets to be generated for national level deforestation reductions and state/province level reductions for a transition period of five years. Importantly, countries that generate credits must have established a baseline that is based on real historical data on deforestation rates, declines to zero net emissions after 20 years, accounts for nationally appropriate mitigation commitments, and covers all significant sources of deforestation emissions (no playing around with definitions of forests to avoid covering emissions sources). 

Eligible countries also are required to have developed a “land use or forest sector strategic plan” that prepares the country for efforts to address deforestation and encourages a holistic government approach to the management of its lands. Countries that receive investments must have protections for indigenous and forest dependent peoples, ensure the preservation of biodiversity, and develop transparent and equitable sharing of benefits to relevant populations on-the-ground. The program can be extended to other sources of forestry emissions (e.g., degradation and peatland carbon loss, as appropriate).