Azam Murtazaev, Boris Chumak and Noah Lichtenstein

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Climate change is a crucial issue facing future generations. The International Energy Agency estimates that current greenhouse gas (GHG) emissions from energy use will reach 35,442 Megatons by 2035; roughly 13,700 Megatons more than the amount suggested to keep atmospheric carbon concentration below 450 parts per million. More than a decade after the signing of the Kyoto Protocol, the United States (U.S.) has still not passed domestic legislation to reduce GHG emissions. This paper examines three policy options listed below that the U.S. may pursue to lower global GHG emissions:
1) Removal of ethanol subsidies and trade barriers (REST);

2) Increased use of free trade agreements (FTA);

3) Carbon finance in China’s power sector (CFC).

Each policy evaluation includes estimated emission reductions, a cost-benefit analysis, the political viability of each option, and the time necessary to implement these options.
Given the options proposed in this paper, REST and CFC have the greatest impact on GHG reduction. With the U.S. planning to use 36 billion gallons of renewable fuels, most of this policy requirement will be met with corn ethanol. Greater use of sugar cane ethanol could reduce transportation GHG emissions 38% more than corn ethanol. By financing a switch to non-fossil energy sources in China’s power sector, the CFC policy reveals potential reductions of 1,253 Megatons of GHGs, or roughly 23% of the U.S.’s energy-related GHG emissions in 2009. Although this amount of GHG reductions could not serve as the primary source of offsets for the U.S., the increased involvement in promoting non-fossil energy in China’s power, and presumably other sectors, could potentially encourage other nations to take stronger action in global emission reductions. The FTA policy will not significantly increase or decrease GHG emissions in the short term. The U.S. already offers substantial market access to Panama, Korea and Colombia whose production will not change significantly and is unlikely to increase GHG emissions. On the other-hand, the environmental provisions in the agreements will raise environmental standards in the 3 countries while lowering trade barriers on renewable energy goods allowing all 3 nations to develop in a less GHG-intense manner.

Both FTA and REST offer significant economic benefits. The passage of the pending free trade agreements in the FTA policy will increase U.S. exports by at least 13 billion dollars resulting in the creation of well over 200,000 U.S. jobs. Crucially, U.S. imports will not significantly increase. The removal of ethanol subsidies and trade barriers would result in a net savings for the U.S. of 6 billion dollars annually. In terms of costs, job losses associated with REST may range from hundreds to hundreds of thousands according varying research centers.

In utilizing the CFC policy, the U.S. could reduce GHG emissions at a reasonable cost. The analysis included in this paper shows that 85% of potential reductions in China’s power sector would cost 30 dollars per ton or less. In order to enter such an agreement with China, however, the U.S. needs to enact climate policy that requires GHG emission reductions. This would create an upward pressure on energy prices, slowing GDP growth. Of course, all three proposed policies would benefit the U.S. economy by mitigating potentially disastrous effects of global climate change.

Currently, there are two proposals by U.S. legislative officials to achieve the REST policy. The first proposal eliminates the ethanol subsidies with no other conditions, while the second proposal removes subsidies allowing them to be re-instituted when oil prices rise. The second option seems to be more politically feasible for the REST policy. In contrast to the REST policy, the CFC policy faces very large political opposition in the U.S. Over the past decade, the U.S. has failed to pass comprehensive climate policy that creates sufficient demand for offset credits. Compared to REST and CFC, FTA has the highest likelihood of being implemented this year. The FTAs have already attracted bipartisan support and should be passed after Congresses’s summer recess.

The pending free trade agreements with Korea, Panama and Colombia in the FTA option require cooperation between the President and the U.S. congress. At this point, there is strong bipartisan support for all 3 agreements which are expected to be passed after Congress’s summer recess. U.S. policy towards ethanol is also likely to be revised this year. Since the creation of ethanol industry in 1970s, the U.S. has protected domestic producers by providing ethanol subsidizes while increasing the cost of ethanol imports. In 2010, the U.S. extended ethanol subsidies until the end of 2011. Due to changing political will, by 2012, the U.S. is likely to amend its policy towards ethanol eliminating subsidies and lowering trade barriers.

Unfortunately, out of the 3 policies examined in this paper, the CFC policy is unlikely to be adopted. Because the right political environment is needed, it is unlikely that the U.S. will enact a climate change policy that allows offsets from China’s power sector in the near future.
The options presented in this paper are not mutually exclusive and the U.S. could enact all three policies. However, the likelihood of all three policies passing is very small. While the CFC policy may present the greatest reduction in GHG emissions, its low political feasibility presents significant challenges to its formal adoption. REST and FTA policies also demonstrate an inverse relationship between GHG emission reduction and political viability. The FTA policy possesses the highest political feasibility yet lacks concrete GHG emission figures. The REST policy is also a politically feasible option, but represents emission reductions equivalent to only a small fraction o U.S.’ annual GHG emissions.