Glossary of Climate Change Terms

Jun 1, 2009

Provided by the Congressional Research Service

Allocation schemes (upstream and downstream). Regulatory approaches to
allocating allowances (as opposed to auction schemes) can choose different points
and participants along the production process to assign allowances and the resulting
compliance responsibility. Upstream allocation schemes establish emission caps and
assign allowances at a production, importation, or distribution point of products that
will eventually produce greenhouse emissions further down the production process.
For example, in the natural gas sector, emission caps could be established and
allowances assigned at processing facilities where facilities and participants shrink
from about 400,000 wells and 8,000 companies to 500 plants and 200 companies.
In contrast, downstream allocation schemes establish emission caps and assign
allowances at the point in the process where the emissions are emitted. In the case
of the natural gas industry, to achieve the same coverage as the upstream scheme, this
would involve assigning allowances to natural gas-fired electric generators, industry,
and even residential users. Thus, some downstream proposals choose either to
exempt certain sectors (such as residential use) from a cap-and-trade program or to
employ a hybrid allocation scheme where some of the allowances are allocated
upstream and others downstream (such as the electric generators).

Allowance. An allowance is generally defined as a limited authorization by the
government to emit 1 ton of pollutant. In the case of greenhouse gases, an allowance
generally refers to a metric ton of carbon dioxide equivalent. Although used
generically, an allowance is technically different from a credit. A credit represents
a ton of pollutant that an entity has reduced in excess of its legal requirement.
However, the terms tend to be used interchangeably, along with others, such as
permits.

Auctions. Auctions can be used in market-based pollution control schemes in
several different ways. For example, Title IV of the 1990 Clean Air Act
Amendments uses an annual auction to ensure the liquidity of the credit trading
program. For this purpose, a small percentage of the credits permitted under the
program are auctioned annually, with the proceeds returned to the entities that would
have otherwise received them. Private parties are also allowed to participate. A
second possibility is to use an auction to raise revenues for a related (or unrelated)
program. For example, the Regional Greenhouse Gas Initiative (RGGI) is exploring
an auction to implement its public benefit program to assist consumers or pursue
strategic energy purposes. A third possibility is to use auctions as a means of
allocating some, or all, of the credits mandated under a GHG control program.
Obviously, the impact that an auction would have on cost would depend on how
extensively it was used in any GHG control program, and to what purpose the
revenues were expended.

Banking. Although allowances are generally allocated on an annual basis, most
cap-and-trade programs do not require participants to either use the allowance that
year or else lose it. Under many proposals, allowances can be banked by the
receiving participant (or traded to another participant who can use or bank it) to be
used or traded in a future year. Banking reduces the absolute cost of compliance by
making annual emission caps flexible over time. The limited ability to shift the
reduction requirement across time allows affected entities to better accommodate
corporate planning for capital turnover, allow for technological progress, control
equipment construction schedules, and respond to transient events such as weather
and economic shocks.

Bubble. A bubble is a regulatory device that permits two or more sources of
pollutants to be treated as one for the purposes of emission compliance.

Cap-and-trade program. A cap-and-trade program is based on two premises.
First, a set amount of pollutant emitted by human activities can be assimilated by the
ecological system without undue harm. Thus, the goal of the cap-and-trade program
is to impose a ceiling (i.e., an emissions cap) on the total emissions of that pollutant
at a level below the assimilative capacity. Second, a market in pollution licenses
(i.e., allowances) between polluters is the most cost-effective means of reducing
emissions to the level of the cap. This market in allowances is designed so that
owners of allowances can trade those allowances with other emitters who need them
or retain (bank) them for future use or sale. In the case of the sulfur dioxide program
contained in the 1990 Clean Air Act Amendments, most allowances were allocated
free by the federal government to utilities according to statutory formulas related to
a given facility’s historic fuel use and emissions; other allowances have been
reserved by the government for periodic auctions to ensure market liquidity.

Carbon tax. A carbon tax is generally conceived as a levy on natural gas,
petroleum, and coal according to their carbon content, in the approximate ratio of 0.6
to 0.8 to 1, respectively. However, proposals have been made to impose the tax
downstream of the production process when the carbon dioxide is actually released
to the atmosphere. In contrast to a cap-and-trade program, in which the quantity of
emissions is limited and the price is determined by an allowance marketplace, with
a carbon tax, the price is limited and the quantity of emissions is determined by the
participants based on the cost of control versus the cost of the tax.

Coverage. Coverage is the breadth of economic sectors covered by a particular
greenhouse gas reduction program.

Emissions cap. A mandated limit on how much pollutant (or greenhouse gases)
an affected entity can release to the atmosphere. Caps can be either an absolute cap,
where the amount is specified in terms of tons of emissions on an annual basis, or a
rate-based cap, where the amount of emissions produced per unit of output (such as
electricity) is specified but not the absolute amount released. Caps may be imposed
on an entity, sector, or economy-wide basis.

Generation performance standard (GPS). Also called an output-based
allocation, allowances are allocated gratis to entities in proportion to their relative
share of total electricity generation in a recent year.

Grandfathering. Grandfathering generally refers an allocation scheme in
which allowances are distributed to affected entities on the basis of historic
emissions. These allowances are generally distributed free-of-charge by the
government to the affected entities. Grandfathering can also refer to entities that
because of age or because they have met an earlier standard, or other factors, are
exempted from a new regulatory requirement.

Greenhouse gases. The six gases recognized under the United Nations
Framework Convention on Climate Change are carbon dioxide (CO2), methane (CH4)
nitrous oxide (N2O), sulfur hexafluoride (SF6), hydrofluorocarbons (HFC), and
perfluorocarbons (PFC).

Hybrid Program. Generally a greenhouse gas reduction program that allows
emitters to choose between complying with the reduction requirement of a cap-and-
trade program or paying a set price (safety valve price) to the government in lieu of
making reductions.

Leakage. Decreases in greenhouse gas-related reductions or benefits outside
the boundaries set for defining a project’s or program’s net greenhouse gas impact
resulting from mitigation activities. For example, emissions could be reduced in an
area with greenhouse gas controls by moving an emitting industry to an area without
such controls.

“No regrets” policy. A “no regrets” policy is one of establishing programs for
other purposes that would have concomitant greenhouse gas reductions. Therefore,
only those policies that reduce greenhouse gas emissions at no cost are considered.

Offsets. Offsets generally refer to emission credits achieved by activities not
directly related to the emissions of an affected source. Examples of offsets would
include forestry and agricultural activities that absorb carbon dioxide, and reduction
achieved by entities that are not regulated by a greenhouse gas reduction program.

Revenue recycling. Some greenhouse gas reduction programs create revenues
through auctions, compliance penalties, or imposition of a carbon tax. Revenue
recycling refers to how a program disposes of those revenues. How a program
handles revenues received can have a significant effect on the overall cost of the
program to the economy.

Safety valve. Devices designed to prevent or to respond to unacceptably high
compliance costs for greenhouse gas reductions. Generally triggered by prices in the
allowance markets, safety valve approaches can include (1) a set price alternative to
making reductions or buying allowances at the market price, (2) a slowdown in
tightening the emissions cap, and (3) lengthening of the time allowed for compliance.
Depending on the interplay between the emissions cap and safety valve and actual
compliance costs, a safety valve can affect the integrity of the emissions cap.

Sequestration. Sequestration is the process of capturing carbon dioxide from
emission streams or from the atmosphere and then storing it in such a way as to
prevent its release to the atmosphere.