Over the last 18 months, we have seen an unprecedented push by governments, investors and companies to ramp up climate commitments and announce net zero carbon targets. These commitments are vital to meet the climate goals outlined in the Paris Agreement, and it’s important that they are backed by clear, strategic actions and relevant milestones. We hope to see the fruit of many of these commitments come to bear when the 2021 United Nations Climate Change Conference (COP26) kicks off at the end of the month in Glasgow.
In the case of global manufacturers, outlining a clear plan, with intermediary targets, along the path to a net-zero carbon economy is critically important. Such actions should include disciplined plans to decarbonize global operations, carbon reduction targets, and increased output of low- and zero-carbon products to meet growing consumer demand.
In this context, it is imperative that U.S. companies become competitive players in the net-zero carbon economy and make smart investments to develop low- to zero-emissions technologies and solutions. But this alone won’t be enough. To remain globally competitive and innovative, companies will require the U.S. to adopt a market-based, carbon price signal to incentivize and accelerate the deployment of next generation emissions abatement technologies. The most effective and cost-efficient framework to accomplish this is an emissions trading system (ETS).
An emissions trading system for hard-to-abate sectors will drive the greatest carbon reduction at the lowest cost and the funds generated through such a system can be re-invested to support research, development and deployment of emissions reduction technologies. In the absence of a federal price on carbon, American companies must work together to defend our global economic advantage and protect high-paying U.S. jobs.
A number of leading U.S. companies are actively exploring the establishment of a market-based, technology agnostic and voluntary ETS to incentivize greenhouse gas reductions and uphold the commitment of many in the private sector to maintain U.S. leadership in meeting the goals of the Paris Agreement. This will ensure U.S. companies have equal footing to compete in markets and countries where carbon pricing exists and barriers to U.S. goods are being erected.
For now, the system will be unique in that it will depend on an initial, voluntary approach, which can enable “learning by doing” and establish the framework and tools needed to monitor, report and verify emissions. While many countries are introducing nationally mandated ETS systems, this would test a new bottom-up, industry-driven approach at the start. The voluntary system would evolve into a mandatory one, utilizing learnings generated during the voluntary period. Not only would this model help to inform the creation of a future mandatory ETS, but it would also provide participants alignment with other markets where carbon pricing already exists, allow access to lower-priced allowances during the early days of ETS trading and deliver auction revenues through industrial subsidies reserved for participants.
Such a system would immediately establish a price on carbon in the U.S., which would then set the basis for the necessary carbon border adjustment mechanism (CBAM). These adjustments are critical to ensuring U.S. parity with those trading partners considering similar mechanisms and ensure we are working together to solve the global climate challenge, not simply shifting the carbon emissions geographically along with the jobs.
For many manufacturers, the ultimate utility of such a system and their success in achieving net-zero goals will still depend heavily on the presence of supportive government policies and investment climates. This can include availability of carbon capture infrastructure and attractive government partnerships that support companies in meeting the needs of their customers, investors and other stakeholders. As much as companies can lean on proprietary innovation and clean tech investments, they also depend heavily on government implementation of smart policies — rooted in economic realities — that make these efforts economically viable both for producers as well as consumers. Simply put, governments can and must support policies that ensure progress and compliance, cross-sector participation and continued global economic competitiveness.
To this end, the Biden administration and Congress have made commendable strides to position the U.S. as a leader in addressing global climate change. For example, the proposed bipartisan infrastructure bill supports the development of clean energy technologies, modernization of the transmission grid and deployment of energy efficient manufacturing processes and low-carbon building materials to achieve the new national goal of halving our net greenhouse gas emissions reduction by 2030.
Without action, American companies face an uneven playing field against our global competitors and the potential of being priced out of key markets. While this may require a voluntary system for now, such a system can protect (and grow) U.S. manufacturing and jobs at a critical period of transition for the global economy.
Jim Fitterling is chairman and CEO of Dow.