Obama and China: Managing Global Risk

Even for those who see warming as a natural evolution of earth's climate, President Obama's agreement with China has important benefits for US competitiveness by leveling the playing field across Asia and South America, while providing an incentive to monitor and manage resource efficiency.

For those who see the general warming of the planet as a problem that people can affect, the agreement is critical to uniting US interests in solving green house gas emissions. 

History

This agreement has been a long time coming. In 1997, the US Senate rejected the Kyoto Protocol by 95-0. The major block was that the Kyoto Protocol listed 'Annex 1' countries, which included the US, and 'Non-annex 1 countries', which included China, India and Brazil. For the US, unilateral action was a deal breaker because it had the potential to harm the US economy without addressing the concerns about emissions from growing economies elsewhere. Jonathan Wiener, Professor of Law and Environmental Policy at Duke, said that although the United States emitted twice the amount as China in 1997, the situation was expected to reverse in twenty three years at 2020. The actual date was a mere ten years later in 2006, lending credence to the concerns of US Senators.

Paul Noel, SVP at Ivalua, looks at risks for corporate clients.

“Business folks don't want surprises,” he said. “They’re just not good at anticipating those surprises, and now they’re even more sensitive because of the downturn.” While he believes the agreement with China has created more risk now than a month ago, he also sees carbon reporting and managing as inevitable. “A business that is well run is already looking at their supply base and asking the relevant questions. This agreement is just one more reason to understand who you are working with."

Mr. Wiener, who was involved in the first COP 1 (Conference of the Parties on Climate) in 1992 sees the current agreement as historical.

"[This agreement] is the most important initiative by US and China, without which the global effort to deal with emissions won't be successful. Not sufficient, but indispensable." 

However, he also pointed out that the United States is already an active participant in the effort to reduce emissions.  He included lowered demand as well as state, regional and Federal policies.

Lowered Demand:

  • The recession, which lowered demand;
  • The increase in renewables, especially wind; and
  • The increase in natural gas for electricity generation over coal, partly due to the shale gas explosion.

State, Regional and Federal Regulations:

  • AB32 in California and RGGI (Regional Greenhouse Gas Initiative in the Northeast), both of which have implemented trading schemes that support incentives for major emitters such as utilities. (For a discussion of AB32, please see TGEink: Cap 'n Trade: There's a lot to learn from what's happening out West.
  • EPA Regulations, including:
    • The Greenhouse Reporting Rule, enacted in 2008 before President Obama was elected, requires large emitters such as utilities, universities and manufacturers report their emissions.
    • EPA implementation of the Clean Air Act, which includes 2 proposed rules for new and existing power plants. These rules would reduce greenhouse gases by about 30% below 2005 levels by 2030 for utilities. The EPA's duty to manage greenhouse gases was upheld by the Supreme Court in 2014.
    • Toxic Release Inventory, created under the Emergency Planning and Community Right-to-Know Act (EPCRA), monitors substances considered to cause cancer or other adverse health risks to people or the environment.
    • The larger goal, 26-28% below 2005 by 2030, is impacting additional EPA rules on methane, largely from escaping natural gas, land fills and agriculture, as well as large industrial sector emitters such as cement factories, and oil and gas refineries.

All these existing policies are already affecting how business reports and manages their risk.



EPA emissions data for the USThe EPA publishes emissions data through the Greenhouse Reporting Rule.  The data can be searched by emissions, state and county, industry and more.  The chart at the right is US generation by source.



What will China Do?

Another question is what will China actually do? In March of 2009, China announced their first target, as a result of meetings between President Obama and Hu Jingtao, leader of China at the time. China was measuring carbon intensity per economic output, which would mean as the economy grows, the amount of carbon emitted could be higher: ten new plants emitting 10% fewer emissions would not reach an overall 10% reduction in emissions.

The new agreement, in contrast, is a total emission peak at 2030, along with a goal of 20% of energy from renewable sources. Mr. Wiener points out that it is unclear at what date the emissions are capped: 2005 levels or some other date.

One of the reasons that China may be willing to talk about reducing emissions is the amount of pollution in major cities. Mr. Wiener warns that this could mean that China will seek to move industries outside of urban areas, as happened in Los Angeles. What this would mean is no overall reduction in emissions, simply a movement from an area of high concentration to one of lower concentration. He went to say that such a transfer of emissions would not reduce what is termed 'leakage': the amount of emissions escaping from China to surrounding countries that are trying to reduce their emissions.

Another option that China is looking at is carbon markets. Mr. Wiener pointed out that China has 7 pilot trading programs with the potential for a national market in the future. This could bring down the cost of green house gas reduction, potentially providing funding for US technologies that use resources more efficiently. Carbon markets in the EU and US (RGGI for example) have suffered from low prices, impacting how attractive they are for emitters to spend money on reducing emissions in return for credits.

From Mr. Wiener's point of view, "It [lowered prices for carbon credits] means that reducing carbon is easier than we thought or the targets are too low." He added that the EU is already considering raising targets.

There are also impacts If China does not comply.  The country could face border tariffs applied to products from companies that do not meet emissions targets entering the US and other markets. Although the US is currently exporting mostly raw materials to China, any trade liberalization would be good for products manufactured in the States, potentially increasing the ‘on-shoring’ that is bringing more industries back to US soil.

Managing Risk 

While US business and political leaders continue to argue about whether we have control over warming, there is little disagreement about the changes in weather that have increased risk around the globe. Since the US has been unwilling to move without all major emitters engaged in the effort, movement toward a global agreement bodes well for a united effort to reduce climate risk. However, certainty is an important factor in encouraging US businesses to develop, deploy and market cleaner and less wasteful use of all resources. As Mr. Noel said,

“If there's anything you can hang your hat on, it is around risk and the formality of risk. I can imagine a risk manager saying ‘I need a line item for the effect of climate change.’”

Such affects include markets disappearing, riskier suppliers, and food and water shortages according to Mr. Noel. He defines risk as probability multiplied by severity. As the probability of variation is getting wider, so is the severity of the potential problems. He advises corporations to have a line item that includes climate risk on corporate balance sheets, even if the company doesn't believe in climate change. As insurance companies are raising premiums or even abandoning certain sectors, these line items are apt to become more material as time goes on.

He concluded, saying that infrastructure and stability make economies do well. As a result, countries -- and businesses -- balance the argument for taking steps proactively on things that might happen against the status quo. In the end, whether the warming planet is under our control or not, steps that manage the risks of climate changes can only benefit people, businesses and countries.   President Obama's agreement with China is another step toward  a unified, global effort toward a cleaner, more efficient and less wasteful use of resources, which includes the air we breather, the water that we drink and the energy that fuels our prosperity.

About Jonathan Wiener

Jonathan B. Wiener is the William R. and Thomas L. Perkins Professor of Law at Duke Law School, Professor of Environmental Policy at the Nicholas School of the Environment, and Professor of Public Policy at the Sanford School of Public Policy, at Duke University. Mr. Wiener has won numerous awards, including being the first lawyer to serve as President of theSociety for Risk Analysis(SRA). He has been a visiting professor Harvard Law School, Chicago University and several Universities in France. He has written widely extensively on risk and environmental issues, including Reconstructing Climate Policy(AEI Press 2003, with Richard B. Stewart) and Risk vs. Risk(Harvard University Press 1995, with John D. Graham).

Before coming to Duke, he worked on U.S. and international environmental policy at the White House Council of Economic Advisers, at the White House Office of Science and Technology Policy, and at the US Department of Justice, serving in both the first Bush and Clinton administrations. He helped negotiate the Framework Convention on Climate Change, and attended the Rio Earth Summit in 1992. In 1993 he helped draft Executive Order 12866 on Regulatory Review.​

About Paul Noël

Paul Noël is SVP Procurement Solutions at Ivalua, a company that works with businesses to maximize savings and control spend through a cutting-edge full suite SaaS solution that users love. 

Mr. Noël holds a Management Degree from Santa Clara University in California and studied international business at Sofia University in Tokyo. His entire career has been about improving Corporate profitability through efficient operations and Management of Spend. From his work at Ariba, Softface, and Blackhog, Mr. Noël's specialty has been to harness standard software and services to create specific solutions for companies large and small, local and international. Continuing this at Ivalua, Mr. Noël manages all customer-facing operations for the Americas.