INCENTIVES MATTER: Designing an Effective Credit for Early Action Program

1
INCENTIVES MATTERDesigning an EffectiveCredit
for Early Action Program

• Stephen Harper
• Intel Corporation
• UNFCCC COP5
• Bonn, Germany
• October 1999

2
WSC REDUCTION AGREEMENT

• Intel and US semiconductor industry signed MOUs
  with US EPA to find ways to reduce PFC emissions
• In 1999, Intel and SIA led World Semiconductor
  Council (WSC) toward globally-harmonized
  agreement
• 10 real, total emissions reductions by 2010

3
Objectives of Crediting Early Action

• Public policy objectives include
• Spurring technological innovation
• Reducing the business as usual emissions
  trajectory
• Making good on past promises to reward early
  actors
• Private company objectives include
• Insurance against potential future regulatory
  requirements

4
Voluntary Programs Need Volunteers

• Without removal of disincentives and adequate
  incentives to participate, few companies will
  sign up
• Paltry participation will yield paltry results
• In everyones interest, then, to design
  meaningful incentives

5
What Will Discourage Volunteers?

• Failure to remove disincentives before offering
  incentives
• The devil truly is in the details
• Overly-detailed program begins to look like a
  regulatory approach
• Perfect as the enemy of the good
• Uncertainty is the enemy of capital budgeting
• Major new investments in new technologies require
  some certainty re return

6
Necessary, but not Sufficient,Market Conditions

• Credible threat of some form of future climate
  regulations
• Sufficient s of companies must feel
  high-probability that they will face some type of
  GWG constraint
• Belief that early action credits will be
  transferable by companies that do not end up
  being regulated to others who are regulated
• Baseline protection -- without this you
  potentially have a debit for early action
  program

7
Build It This Way and They Might Come

• A compelling early action crediting program would
  include several key features
• First, do no harm
• Reasonable verification procedures
• Low transactions costs
• Credits at corporate, subsidiary, or project
  level
• Credits for product-driven GWG reductions
• Credits for real, verifiable by-product
  reductions

8
Reasonable Verification Procedures

• Objectives of verifications should include
• Crediting only real reductions
• Avoiding double counting
• Avoiding leakage
• Avoid a belt and suspenders approach that will
  raise transaction costs and disqualify real
  reductions
• Establish general verification procedure and
  creditability criteria
• Publish examples of approved verification
  protocols to provide guidance

9
Low Transactions Costs

• Transactions costs will be driven significantly
  by verification process
• Third-party certification optional
• Combine template approach with option for
  case-by-case review of custom credits
• Template could be a set of prototypical GWG
  reducing actions that would have verification
  process and credit calculation procedure spelled
  out in advance
• Custom option needed to ensure experimentation
  and learning todays custom reductions could
  become templates tomorrow

10
Credits at Multiple Levels of Activity

• Companies should be able to make creditable
  reductions at the corporate, subsidiary, and
  project levels
• Corporate level-only requirement may preclude
  participation by large,diversified firms due to
  expense of accounting
• Concern about leakage of emissions from one
  part of company (e.g., individual project) to
  another can be addressed by a general requirement
  for company to demonstrate no leakage occurring

11
Crediting Product-Driven Reductions

• Product innovations offer great potential for
  future decline of GWG emissions
• For many companies, products offer greatest
  opportunity for achieving reductions
• Crediting product-driven GWG emissions reductions
  is an opportunity to involve consuming public in
  tackling the climate problem
• Can establish simple, transparent protocols to
  ensure no double counting of emissions
  reductions between product producers, consumers,
  and power utilities

12
Credits for By-Product Reductions

• What matters is whether a GWG reduction is real
  and surplus to the baseline, not why it was
  undertaken
• Real, surplus GWG reductions (achieved, e.g., as
  a by-product of SIP-driven actions to reduce
  VOC or Nox emissions) should receive credit
• Encourages pollution prevention and pollution
  control approaches that solve multiple problems