INCENTIVES MATTER: Designing an Effective Credit for Early Action Program

1. INCENTIVES MATTER:Designing 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 everyone’s 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; today’s “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