Climate Change: Basic Issues in Considering a Credit for Early Action
Program (Letter Report, 11/27/98, GAO/RCED-99-23).

Pursuant to a congressional request, GAO provided information on the
Department of Energy's (DOE) proposal to develop a credit for an early
action program promoting environmental cleanups, focusing on: (1) some
of the basic issues that have to be addressed by any effort to develop a
credit for early action program; and (2) how claims for reductions of
greenhouse gas emissions that are reported to the Voluntary Reporting
Program might fare under a credit for early action program that has less
flexible reporting criteria.

GAO noted that: (1) it identified four basic issues that will have to be
addressed to develop a credit for early action program to reduce
greenhouse gas emissions: (a) how emissions reductions should be
estimated; (b) how emissions reduction ownership should be determined;
(c) whether emissions reduction claims should be reported at the
organization, project, or some other level; and (d) how emissions
reduction claims should be verified; (2) on the surface, these issues
appear straightforward; in fact, they are complicated and will require
difficult choices; (3) furthermore, the resolution of these issues will
likely influence the design of a credit for early action program; (4)
the amount of flexibility such a program would provide on each of these
issues would ultimately help to determine the extent of participation
and the credit awarded; (5) many of the claims for reducing greenhouse
gas emissions that have been submitted to the Voluntary Reporting
Program would probably be ineligible for credit under a new program
having more restrictive reporting criteria; (6) this is because the
voluntary program was designed to encourage wide participation by
allowing companies to submit emissions reduction claims under flexible
reporting criteria and was not designed to automatically provide credit
to participants for emissions reductions; (7) for example, the voluntary
program, among other things, allowed companies discretion in determining
the basis from which their emissions reductions were estimated and
allowed companies to self-certify that their claims were accurate; and
(8) according to DOE's Energy Information Administration and other
organizations, such as the Edison Electric Institute and the
Environmental Defense Fund, a credit for early action program could
require more restrictive reporting criteria than the Voluntary Reporting
Program to help ensure that emissions reduction claims are real,
appropriately reviewed, and verified.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-23
     TITLE:  Climate Change: Basic Issues in Considering a Credit for 
             Early Action Program
      DATE:  11/27/98
   SUBJECT:  Air pollution control
             Environmental monitoring
             Energy efficiency
             Hazardous substances
             Projections
             Voluntary compliance
             International agreements
             Reporting requirements
             Climate statistics
IDENTIFIER:  Kyoto Protocol
             DOE Voluntary Reporting Program for Greenhouse Gas 
             Emissions Reductions
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Government Reform
and Oversight, House of Representatives

November 1998

CLIMATE CHANGE - BASIC ISSUES IN
CONSIDERING A CREDIT FOR EARLY
ACTION PROGRAM

GAO/RCED-99-23

Climate Change

(141238)


Abbreviations
=============================================================== ABBREV

  DOE - Department of Energy

Letter
=============================================================== LETTER


B-281309

November 27, 1998

The Honorable Henry A.  Waxman
Ranking Minority Member
Committee on Government Reform and Oversight
House of Representatives

Dear Mr.  Waxman: 

Over the past several years, the level of attention paid to reducing
greenhouse gas emissions has increased because these heat-trapping
gases are believed to be contributing to global warming.  A number of
related events, including the President's Climate Change Proposal of
October 1997 and the United Nations' Framework Convention on Climate
Change in Kyoto, Japan, in December 1997, also focused more attention
on how greenhouse gas emissions could be reduced.  One part of the
President's proposal was a program to reward organizations, by
providing credits or incentives, for taking early actions to reduce
greenhouse gases before the international agreements from the Kyoto
Protocol would take effect.\1 The proposal is now commonly referred
to as a "credit for early action" program. 

As we previously reported to you in March of this year, efforts to
report reductions of greenhouse gas emissions were initiated with the
establishment of the Voluntary Reporting Program, as directed by the
Energy Policy Act of 1992.\2 Under this program, organizations could
voluntarily submit information on their efforts to reduce greenhouse
gas emissions to the Department of Energy (DOE) and have that
information entered into a public database.  DOE specifically
designed the program to encourage voluntary participation by offering
potential participants flexibility in what they reported and how they
estimated their emissions reductions. 

In view of the wide range of emissions reduction claims reported by
organizations to the program, you expressed interest in efforts to
consider granting credit to these organizations for the early actions
they have taken.  Specifically, you asked the following two
questions:  (1) What are some of the basic issues that will have to
be addressed by any effort to develop a credit for early action
program?  (2) How might claims for reductions of greenhouse gas
emissions that are reported to the Voluntary Reporting Program fare
under a credit for early action program that has less flexible
reporting criteria?  As agreed with your office, we also present
other issues we identified about a credit for early action program
that may need to be addressed before the program can be finalized
(see app.  II). 

To select the basic issues associated with developing a credit for
early action program, we identified organizations that have been
involved with the development of such a program and who have prepared
informational papers on their views.  We reviewed these documents and
interviewed available representatives from these groups. 


--------------------
\1 To reward early action taken to reduce greenhouse gases, various
types of credits or incentives, such as a credit against a company's
emissions or a tax credit, could be used. 

\2 Department of Energy:  Voluntary Reporting Program for Greenhouse
Gas Emissions Reductions (GAO/RCED-98-107R, Mar.  24, 1998). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

We identified four basic issues, stated here as questions, that will
have to be addressed to develop a credit for early action program to
reduce greenhouse gas emissions:  (1) How should emissions reductions
be estimated?  (2) How should emissions reduction ownership be
determined?  (3) Should the emissions reduction claims be reported at
the organization, project, or some other level?  and (4) How should
emissions reduction claims be verified?  On the surface, these issues
appear straightforward; in fact, they are complicated and will
require difficult choices.  Furthermore, the resolution of these
issues will likely influence the design of a credit for early action
program.  The amount of flexibility such a program would provide on
each of these issues would ultimately help to determine the extent of
participation and the credit awarded. 

Many of the claims for reducing greenhouse gas emissions that have
been submitted to the Voluntary Reporting Program would probably be
ineligible for credit under a new program having more restrictive
reporting criteria.  This is because the voluntary program was
designed to encourage wide participation by allowing companies to
submit emissions reduction claims under flexible reporting criteria
and was not designed to automatically provide credit to participants
for emissions reductions.  For example, the voluntary program, among
other things, allowed companies discretion in determining the basis
from which their emissions reductions were estimated and allowed
companies to self-certify that their claims were accurate.  According
to the Department of Energy's Energy Information Administration and
other organizations, such as the Edison Electric Institute and the
Environmental Defense Fund,\3 \4 a credit for early action program
could require more restrictive reporting criteria than the Voluntary
Reporting Program to help ensure that emissions reduction claims are
real, appropriately reviewed, and verified. 


--------------------
\3 The Edison Electric Institute is an association of U.S. 
investor-owned utilities and industry affiliates established to
foster the exchange of ideas and experiences on issues of mutual
interest. 

\4 The Environmental Defense Fund is a nonprofit organization focused
on the development of innovative and economically viable solutions to
today's environmental problems. 


   BACKGROUND
------------------------------------------------------------ Letter :2

In 1992, the Energy Policy Act (P.L.  102-486) directed DOE to
develop a voluntary reporting program to collect information on
activities to reduce greenhouse gas emissions.  The act required DOE
to (1) develop and issue program guidelines, (2) develop forms for
reporting emissions reduction activities, and (3) establish a
publicly available database of this information.  The program, by
design, was to encourage voluntary participation and offer
organizations reporting their emissions flexibility in what they
reported and how they estimated their emissions reductions.  Claims
submitted to the program are reviewed by program managers for
arithmetic accuracy and for the clarity of the information presented;
however, there is no verification of supporting documentation or
determination that the emissions reductions actually occurred.  The
program, however, requires that the persons reporting the information
certify its accuracy. 

For the first two reporting periods (i.e., 1994 and 1995), the
program received a total of 250 reports that provided information on
1,612 greenhouse gas emissions projects.  For these periods, claims
for reducing greenhouse gas emissions reported to the program totaled
approximately 257 million tons of carbon dioxide equivalents.\5

On October 22, 1997, President Clinton announced a three-phased
Climate Change Proposal that challenged key U.S.  industries to plan
how they can best reduce greenhouse gas emissions.  Among other
initiatives was a proposal to reward organizations that would take
early action to reduce their greenhouse gas emissions before any
international agreements would take effect.  This effort's goal was
to make any future required emissions reduction targets easier to
achieve. 

In early December 1997, the United States and other nations met in
Kyoto, Japan, and agreed to reduce their greenhouse gas emissions and
set specific targets to achieve during an initial period for
monitoring emissions reductions between 2008 and 2012.\6 Specific
targets varied among nations, and the United States agreed to reach a
target of 7 percent below its 1990 level of emissions. 

A White House Task Force on Climate Change was established to address
a broad array of issues relating to climate change, such as the task
of working on a credit for emissions reductions through an early
action program.  In May 1998, preliminary information on the credit
for early action indicated that the Task Force was considering
several options for that program.  As of October, the Task Force was
continuing to receive input from industry and environmental groups on
the issue. 


--------------------
\5 Carbon dioxide equivalents is a measurement used to compare the
global warming impact of carbon dioxide with other greenhouse gases. 

\6 This agreement has become known as the "Kyoto Protocol." GAO
testified on the administration's efforts regarding the protocol. 
Global Warming:  Administration's Proposal in Support of the Kyoto
Protocol (GAO/RCED-98-219, June 4, 1998). 


   SOME BASIC ISSUES IN DEVELOPING
   A CREDIT FOR EARLY ACTION
   PROGRAM
------------------------------------------------------------ Letter :3

Efforts to develop a credit for early action program to reduce
greenhouse gas emissions involve consideration of many issues before
such a program could be implemented.  We identified four issues,
stated here as questions, that will have to be addressed in
developing a credit for early action program.  (1) How should
emissions reductions be estimated?  (2) How should emissions
reduction ownership be determined?  (3) Should the emissions
reduction claims be reported at the organization, project, or some
other level?  and (4) How should emissions reduction claims be
verified?  While these issues appear straightforward, in fact, they
are complicated and will require difficult choices.  Various views
and opinions have been offered on these issues by a variety of
groups, including business, industry, public interest, and
environmental groups involved in the issues of climate change and
greenhouse gas reporting. 


      HOW SHOULD EMISSIONS
      REDUCTIONS BE ESTIMATED
---------------------------------------------------------- Letter :3.1

Determining what qualifies as a creditable reduction of greenhouse
gas emissions would likely be one of the first and primary questions
in developing a credit for reductions through an early action
program.  Resolving this question would lay the foundation for the
program and strongly influence how many other issues would be
addressed. 

Estimating a creditable emissions reduction involves establishing a
baseline, or point from which emissions reductions will be measured. 
Several approaches have been proposed, including a "historical
baseline" of emissions for a given period, such as 1990, that is
developed from an organization's historical data on emissions.  As
shown in figure 1, a company's current level of emissions may be
above its 1990 historical baseline. 

   Figure 1:  Use of a Historical
   Baseline to Estimate a
   Company's Carbon Dioxide
   Equivalent Emissions and
   Possible Reductions

   (See figure in printed
   edition.)

Under a historical baseline approach, an organization takes actions
to get its total emissions at or below the baseline, for example, in
1990.  Once a company's emissions fall below its historical baseline
(represented by the shaded area in fig.  1), the company would be
eligible for credit.  DOE's Energy Information Administration and
such groups as the Edison Electric Institute have indicated that
growing companies may have more difficulty reducing their emissions
because their businesses and consequently their emissions are
expanding.  For example, a small manufacturing company that generated
5.5 million metric tons of carbon dioxide equivalents in 1990 and
today generates 8.5 million metric tons might have experienced this
increase because of business expansion.  This company will be faced
with the decision to either take steps to reduce its emissions or
purchase emissions reduction credits from another company that was
able to achieve reductions below its baseline.  In contrast,
companies in economic decline could more easily demonstrate
reductions.  The historical baseline was the approach selected for
the Kyoto Protocol. 

While the Environmental Defense Fund has essentially supported the
historical baseline concept, it has also noted that alternative
methods would also be acceptable, if they produced greater precision
or reliability.  Both DOE's Energy Information Administration and the
Center for Clean Air Policy have noted that, with the historical
baseline approach, only reductions below that baseline would be
recognized as creditworthy. 

Another proposal would use a "projected baseline" that reflects what
an organization believes would be its emissions over a given period
of time.  As shown in figure 2, with a projected baseline, an
organization would take actions to get below its projected emissions
level and would try to continue reducing its emissions to meet
specific targets over time. 

   Figure 2:  Use of a Projected
   Baseline to Estimate a
   Company's Carbon Dioxide
   Equivalent Emissions and
   Possible Reductions

   (See figure in printed
   edition.)

Under this approach, any reduction below the projected baseline would
be considered creditable (represented by the shaded area in fig.  2). 

In the Voluntary Reporting Program, participants have flexibility to
choose which baseline approach they want to use to measure their
reductions.  Because the program tries to encourage participation,
organizations are also given latitude in developing their baselines. 
So far, most of the participants have used a projected baseline.\7

Another approach to measure emissions reductions that has been
proposed is a rate-based or performance-based system that would
determine emissions reductions through changes in emissions levels in
relation to a predetermined unit of output of the organization.  For
example, measurement units could include emissions per unit of
revenue earned or emissions per unit of product produced.  The
concept of developing a standard rate for different industries and
industry sectors has also been proposed.  For example, the Coalition
to Advance Sustainable Technology has supported the rate-based
approach because it believes that approach would accommodate a wide
range of businesses and industries and attract a greater
cross-section of U.S.  companies to participate in early efforts to
reduce their greenhouse gas emissions. 


--------------------
\7 The Voluntary Reporting Program used the description "modified
reference case" to describe a projected baseline approach, noting
that this approach essentially presented a hypothetical situation
that projected what the greenhouse gas emissions would be if no
actions were taken to reduce them. 


      HOW SHOULD EMISSIONS
      REDUCTION OWNERSHIP BE
      DETERMINED? 
---------------------------------------------------------- Letter :3.2

Who owns the emissions reductions is another issue that will need to
be addressed in developing a credit for early action program.  While
ownership would appear to be easily determined, it is not always
clear to the involved parties.  Resolving this issue is important
because, without clear ownership, there may be problems in reporting
and counting emissions reductions. 

Ownership of a reduction can be based on a legal determination,
established under a contractual arrangement, or can be established by
what has been called the chain of causation--who caused the emissions
to occur.  Central to the ownership issue are the links between
parties who may view responsibility for emissions reductions
differently, and each may have a legitimate argument for their
perspective.  An example of the links between manufacturers,
retailers, consumers, and power-generating companies reflects the
significance and potential complexity of the issue.  An appliance
manufacturer building a highly energy-efficient product with
performance exceeding normal energy efficiency standards for similar
products provides an opportunity for several parties to claim
emissions reductions.  The retailer carrying the product promotes it
as a power saver.  The electric utility offers rebates to customers
for purchasing it.  The consumer buys the product, accepts the
rebate, and uses less electricity.  The electric utility generates
less electricity from fossil fuels, thus reducing its greenhouse gas
emissions.  Thus, responsibility for the emissions reductions and
credit is hard to distinguish.  Depending on one's position, any of
the parties--the manufacturer, the retailer, the consumer, or the
electric utility--could be the owner and claim the credit. 

Under the flexibility of the Voluntary Reporting Program, all parties
could have submitted claims from this activity.  To help address the
potential for duplication, the program established the concept of
"direct" and "indirect" ownership, which attempts to categorize the
claims.  Direct ownership refers to emissions from a source owned and
controlled by an organization.\8

Indirect ownership refers to emissions that an organization, in some
sense, "caused" to occur, although it did not own or control the
facility producing the emissions.\9 This approach does not, however,
resolve the issue of who would be credited for the claim, and as a
result, there is the potential for the double reporting of a
reduction. 

How ownership issues are resolved would likely influence the size and
scope of a credit for early action program.  DOE's Energy Information
Administration and the Environmental Defense Fund have pointed out
that determining ownership and reporting responsibility would
influence the size and scope of a credit for early action program. 
Environmental Defense Fund officials have indicated that a decision
might need to be made on whether all U.S.  greenhouse gas emitters
should report emissions reductions or whether only the largest
companies, those emitting the majority of greenhouse gases, should
report.  This decision depends on whether the goal of the program is
to stimulate wide participation, to focus on where the greatest
potential for reductions can be achieved, or some combination of both
goals.  In this regard, the Center for Clean Air Policy has raised
the question of whether participation should include fuel producers
or fuel users or both and thought that a credit program should focus
on fuel users. 


--------------------
\8 For example, the emissions from a car's tailpipe are direct
emissions for the car owner. 

\9 Electricity consumers, such as households and manufacturers, tend
to view themselves as indirect emitters and reducers of greenhouse
gases because of their use of the electricity. 


      WHAT IS THE REPORTING LEVEL
      FOR AN EMISSIONS REDUCTION? 
---------------------------------------------------------- Letter :3.3

Determining how claims for emissions reductions should be reported is
another important issue in designing a credit for early action
program.  This issue focuses on whether emissions are recognized at
the project or organizationwide level.  Reporting at the organization
level would indicate whether an entire organization is actually
reducing its overall greenhouse gas emissions.  Reporting at the
project level would likely reflect the positive results of selected
projects but would not convey information on an organization's
overall achievement. 

For example, suppose a large electric power utility reported carbon
dioxide reductions from replacing a boiler in one of its four
coal-fired plants with a new gas-fired boiler that produced lower
emissions.  The company could claim the difference between the
emissions of the coal- and gas-fired boilers as a reduction in carbon
dioxide.  While this claim could appear to reflect a reduction in
emissions, if the company did not report that it also had to increase
the generating time of its other three coal-fired plants, to produce
the same amount of electricity, it would not have accurately
reflected companywide emissions.  In this case, a net increase would
have occurred, not a reduction in the company's total emissions. 

Some organizations believe that any emissions reductions are valuable
and should be encouraged and receive some type of credit.  The Edison
Electric Institute believes that any effort to deny credit for
reductions at the project level would discourage companies from
taking early actions to reduce their greenhouse gas emissions.  It
believes that a more flexible approach should be taken to increase
participation and reductions at this early stage of our national
efforts to reduce greenhouse gas emissions. 

The reporting level has also been addressed by several other groups
involved in the issue of reporting emissions reductions.  In its
position statement on credit for early action, the Center for Clean
Air Policy said that participants in such a program should report on
a comprehensive companywide level.\10 The Center also stated that
adjustments should be made for changes to or replacements of a
company's assets.  The Environmental Defense Fund has expressed
support for companywide reporting over project-level reporting for
similar reasons, namely that the latter does not provide an accurate
picture of a company's total emissions reductions.  DOE's Energy
Information Administration has stated that, without companywide
reporting, it would not be possible to determine if a company's
overall emissions were reduced.  While the Voluntary Reporting
Program permitted emissions reduction claims at both the organization
and project level, the program was not designed to automatically
grant credit for emissions reductions and thus preserved
opportunities to report alternative approaches. 


--------------------
\10 The Center for Clean Air Policy is a nongovernmental bipartisan
policy organization focused on research and advocacy of market-based
approaches to environmental problems. 


      HOW SHOULD EMISSIONS
      REDUCTION CLAIMS BE
      VERIFIED? 
---------------------------------------------------------- Letter :3.4

Providing some assurance that claims for emissions reductions are
legitimate and accurately developed will also be a key issue in
determining any credits for reductions through an early action
program.  There appears to be a consistent view that these claims
would need to receive some type of review and verification. 

The options for verification range from self-review and
-certification to an independent third-party review.  The Voluntary
Reporting Program uses self-review and -certification, with program
managers reviewing reported information for internal consistency,
accurate calculations, and comparisons with other sources of
information.  However, the program has no procedures to review or
verify the supporting documentation to determine if emissions
reductions actually occurred.  Program officials at the Energy
Information Administration said that accurate reporting is encouraged
because the reports are open to public scrutiny and that it is
illegal to knowingly submit false information on a certified
submission.  In its position paper on an early credit program, the
Coalition to Advance Sustainable Technology, addressed the benefits
of establishing a technical group to develop guidelines, standards
for quantifying estimates, and protocols for making emissions
reduction claims and their review.  In contrast, the U.S.  Initiative
on Joint Implementation, which has been promoting joint initiatives
between U.S.  companies and non-U.S.  partners to reduce emissions of
greenhouse gases, is in the process of developing procedures for an
independent third-party review and verification of projects included
in the initiative.\11


--------------------
\11 This initiative is supported by a Secretariat of several
agencies, including the departments of Agriculture, Commerce, Energy,
State,the Interior, and the Treasury, as well as the Agency for
International Development and the Environmental Protection Agency. 
Climate Change:  Information on the U.S.  Initiative on Joint
Implementation (GAO/RCED-98-154, June 29, 1998). 


   MANY CLAIMS FOR REDUCTIONS
   REPORTED TO THE VOLUNTARY
   REPORTING PROGRAM WOULD
   PROBABLY BE INELIGIBLE FOR
   CREDIT UNDER A PROGRAM WITH
   MORE RESTRICTIVE CRITERIA
------------------------------------------------------------ Letter :4

Many of the claims for reductions of greenhouse gas emissions
submitted to the Voluntary Reporting Program would probably be
ineligible for credit depending on the restrictive nature of the
crediting mechanism.  While the voluntary program was designed to
encourage wide participation by allowing companies to submit
emissions reduction claims under flexible alternative reporting
criteria, it was not designed to automatically provide emissions
credits to participants.  A program to grant credits for early
actions taken to reduce greenhouse gas emissions would probably
require more restrictive reporting criteria to help ensure that the
reductions claimed are real, not being double reported by others, and
accurately determined. 


      COMPARISON OF A FLEXIBLE
      VOLUNTARY REPORTING PROGRAM
      WITH TWO MORE RESTRICTIVE
      SETS OF CRITERIA
---------------------------------------------------------- Letter :4.1

The Voluntary Reporting Program was designed to provide companies
with wide flexibility in reporting their claims for reductions of
greenhouse gas emissions.  Depending on the type of credit program
developed, reductions reported under the voluntary program may or may
not meet the new reporting criteria.  According to DOE's Energy
Information Administration and industry experts whom we identified
that were considering options on how a credit for early action
program might be developed, the program could establish more
restrictive definitions of, among other things, the baseline, or
point from which to measure reductions, than the voluntary program. 

With that in mind, we analyzed two sets of more restrictive reporting
criteria that potentially could be part of a future credit for early
action program and compared them to the voluntary program.  Each set
of criteria varied by the range of restrictions reflecting lower and
upper boundaries placed upon the participants.\12 Table 1 analyzes
each of the four basic issues needing resolution in an early credit
program by using three sets of reporting criteria--the current
flexible Voluntary Reporting Program and two sets of more restrictive
criteria.  The first column lists the four basic issues as questions
to decide.  The second column describes the flexible criteria
currently used in the Voluntary Reporting Program.  The third and
fourth columns describe the more restrictive criteria. 



                                         Table 1
                         
                            Comparison of the Criteria in the
                           Flexible Voluntary Reporting Program
                            With Two More Restrictive Sets of
                                         Criteria

                                               Somewhat
Issues                   Flexible\a            restricted\b          Restricted\c
-----------------------  --------------------  --------------------  --------------------
(1) How should           Organization          Program estimates an  Program estimates an
emissions reductions be  estimates an          emissions reduction   emissions reduction
estimated?               emissions reduction   from a historical,    from a fixed or
                         from any historical   projected, and/or     historical baseline
                         and/or projected      rate-based baseline
                         level

(2) How should           Assigned to the       Assigned to the       Assigned to the
emissions reduction      legal owner of the    legal owner of the    legal owner of the
ownership be             exhaust stack and/    exhaust stack and/    exhaust stack and/
determined?              or assigned by        or assigned by        or assigned by
                         contract (direct),    contract (direct),    contract (only
                         and/or created by     and/or created by     direct)\d
                         causal links          causal links
                         (indirect)\d          (indirect)\\d

(3) Should the           Organization decides  Program requires      Program requires
emissions reduction      level of reporting    reporting the total   organizational
claims be reported at    (i.e.,                emissions reductions  reporting and may
the organization,        organizationwide      of the organization   designate industry
project or some other    and/or by project)                          groups and/or
level?                                                               geographic
                                                                     regions\e\\\

4) How should emissions  Self-certification    Self-certification    Independently
reduction claims be                            with some             reviewed and
verified?                                      independent           verified
                                               verification
-----------------------------------------------------------------------------------------
\a The "Flexible" reporting criteria we designed to resemble the
Voluntary Reporting Program, which has such other goals as to
encourage participation, to take actions to reduce greenhouse gas
emissions, and to provide reporting organizations with discretion in
developing emissions estimates, claiming ownership, and reporting
actions taken. 

\b The "Somewhat restricted" reporting criteria capture a selected
range of potential criteria for a credit program that have been
conveyed by such organizations as the Environmental Defense Fund, the
Coalition to Advance Sustainable Technology, and the Center for Clean
Air Policy.  While these criteria have the overall objective of
accounting for real emissions reductions, they are less stringent
than the "Restricted" for (1) measuring the starting point for
estimating reductions, (2) allowing indirect ownership (i.e.,
reductions that the organization in some sense "caused" to occur,
although the organization did not own the facility producing the
emissions), and (3) verifying claims. 

\c The "Restricted" reporting criteria use a historical base from
which to measures reductions.  An example of a historical base is the
Kyoto Protocol, which generally requires the United States to reduce
its greenhouse gas emissions to 7 percent below what they were in
1990.  The "Restricted" reporting criteria also require independent
verification of all reduction claims and only allow credits for
reductions by legal or direct owners. 

\d Under the "Flexible" criteria, ownership claims can be direct,
indirect, or both.  Double reporting of emissions reductions, whereby
two or more organizations can claim ownership of the same
project-level emissions reductions, are allowed .  For example,
double reporting occurs when one organization claims direct emissions
reduction ownership while one or more other organizations claim
indirect ownership of those same reductions.  Under the "Somewhat
restricted" criteria, ownership claims can be either direct or
indirect, and double reporting is not allowed.  For example, if one
organization claims direct ownership of certain emissions reductions,
no other organization may claim any type of ownership of these same
reductions.  Under both sets of criteria, there has to be a chain of
causation for indirect claims, as between the electricity generator
and the electricity user or the automobile manufacturer and the
automobile purchaser.  Under the "Restricted" criteria, only the
legal owner (i.e., direct or assigned by contract by the direct
owner) is allowed to claim ownership of the emissions reductions. 

\e Under the "Restricted" reporting criteria, the program can require
organization-level reporting and may also designate industry
groupings and/or regional areas to capture emissions sources. 

Comparing the two sets of more restrictive reporting criteria that
could be part of a future credit for early action program (see table
1) to claims reported to the Voluntary Reporting Program indicates
that many would probably be ineligible for credit.  According to
information from DOE's Energy Information Administration, the issues
of (1) how emissions reductions should be estimated and (2) whether
the emissions reduction claims should be reported at the
organization, project, or some other level illustrate why many
reported claims would probably be ineligible for credit.  For
example, according to the Energy Information Administration's reports
summarizing the results of the first and second years of the
Voluntary Reporting Program,\13 only 22 of the 250 companies
reporting, or about 9 percent, reported organizationwide reductions
from some historical baseline and thus would meet the "Restricted"
reporting criteria.  With regard to the issue of reporting level,
only 91, or about 36 percent, of the organizations claimed emissions
reductions for their entire company and thus would meet the
organizationwide reporting criteria of the "Somewhat restricted"
reporting criteria. 

Since we could not easily determine how many of the current
participants to the Voluntary Reporting Program are reporting
ownership of emissions reductions that may also be reported by
others, we did not compare the criteria for it to the two sets of
more restrictive reporting criteria.  Under the Voluntary Reporting
Program, no independent verification was required.  Therefore, if
some form of independent verification were required to receive a
credit for reductions through an early action program, none of the
current claims submitted to the Voluntary Reporting Program would be
automatically eligible without further review or some demonstration
that independent verification had been done. 

We provide further perspective on these four issues by selecting some
examples of actual reduction claims submitted to the Voluntary
Reporting Program to show how they would fare under more restrictive
reporting criteria (see app.  III.)


--------------------
\12 Other more or less restrictive criteria could be developed; the
criteria presented here are for illustrative purposes and should not
be considered all- inclusive.  The two sets of criteria essentially
reflect the views of organizations involved with the development of
an early action program. 

\13 We included information on only the program's first 2 years (1994
and 1995) because at the time of our review, the Energy Information
Administration had not issued more recent annual reports summarizing
data on the program. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :5

We provided a draft of this report to DOE for its review and comment. 
We obtained comments on the results of our work from the Department
of Energy, including the Director, Office of Economic, Electricity,
and Natural Gas Analysis, Office of the Assistant Secretary for
Policy; and the Director, International Greenhouse Gases, and
Macroeconomic Division (the division that is responsible for
administering the Voluntary Reporting Program), Energy Information
Administration. 

DOE agreed with the information in the report and observed that while
the Voluntary Reporting Program was not specifically designed to
automatically provide credit, it does provide a mechanism for
organizations to demonstrate their achieved reductions of greenhouse
gas emissions, should a credit for early action program be
established.  In this regard, we clarified the text throughout the
report to include this observation.  DOE also made other clarifying
comments, which we incorporated as appropriate. 


---------------------------------------------------------- Letter :5.1

We conducted our work from July 1998 through October 1998 in
accordance with generally accepted government auditing standards.  As
arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter.  At that time, we will send copies to
the Secretary of Energy and the Administrator of the Energy
Information Administration.  We will also make copies available to
others on request. 

If you or your staff have any questions concerning this report,
please call me at (202) 512-3841.  Major contributors to this report
are listed in appendix IV. 

Sincerely yours,

Susan D.  Kladiva
Associate Director, Energy,
 Resources, and Science Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

To address the question of issues associated with developing a credit
for early action program, we primarily reviewed documentation and
conducted interviews with the Department of Energy (DOE) and other
groups involved in reporting emissions of greenhouse gases.  We
conducted interviews on issues related to reporting greenhouse gas
emissions and the concept of a credit for early action with officials
and professional staff from DOE's Energy Information Administration's
Voluntary Reporting Program.  We reviewed the Voluntary Reporting
Program's reporting guidance and issues identified by the program
officials through their experience with emissions reduction claims. 
We also reviewed the program's summary reports and a cross section of
reports claiming emissions reductions by participants in the program. 

We obtained the views and the perspectives of other public and
private sector groups involved in issues relating to global climate
change and greenhouse gas emissions.  We obtained and reviewed
available documentation from several organizations involved with the
issues, including the Center for Clean Air Policy, the Coalition to
Advance Sustainable Technology, the Environmental Defense Fund, the
Edison Electric Institute, the Pew Center on Global Climate Research,
the Nature Conservancy, and Resources for the Future.  When possible,
we interviewed some of these groups to obtain additional information
on their positions.  We also obtained and reviewed related reports
and information from the Congressional Research Service and the
Environmental Protection Agency. 

To address the question of how emissions reduction claims that are
submitted to the Voluntary Reporting Program might be considered
under a credit for reductions through an early action program, we
reviewed program data on the basic issues and judgmentally selected
several examples of claims that reflected some of those basic issues. 
We then considered two sets of more restrictive reporting criteria
that could potentially be part of a credit for early action program
and compared them to the Voluntary Reporting Program.  This
comparison highlights some of the decisions that have to be made in
developing a credit for early action program. 

As agreed with your office, we did not present the names of the
organizations whose emissions reduction claims we used to, in part,
illustrate how some claims could fare under different emissions
reporting criteria. 


OTHER ISSUES THAT MAY NEED TO BE
CONSIDERED IN DEVELOPING A CREDIT
FOR EARLY ACTION PROGRAM
========================================================== Appendix II

This appendix provides a brief description of some of the other
issues that may need to be considered in designing a credit program
for early actions to reduce greenhouse gas emissions.  These
descriptions are not intended to be all inclusive but rather a brief
overview of each issue and why it is important. 


      SHOULD AN EMISSIONS CREDIT
      TRADING SYSTEM BE
      ESTABLISHED? 
------------------------------------------------------ Appendix II:0.1

An emissions trading system provides a vehicle for the transfer of
ownership of emissions reduction credits from one party to another. 
Some groups have suggested that a trading system would be an
incentive for organizations to participate in an early credit
program.  This is because some organizations may have difficulty
reducing their greenhouse gas emissions, while others may be capable
of reducing their emissions significantly.  Therefore, an emissions
trading system provides an economic incentive for companies to
achieve maximum levels of emission reductions at the least cost. 
Companies could choose the lower cost option of either buying credits
or making the changes in their operations to reduce its own
emissions. 


      SHOULD CARBON SEQUESTRATION
      PROJECTS BE INCLUDED IN A
      CREDIT PROGRAM FOR EARLY
      ACTION? 
------------------------------------------------------ Appendix II:0.2

Carbon sequestration is the capturing of carbon dioxide from the
atmosphere through the process of photosynthesis.\1 It plays a
significant role in reducing the amount of carbon dioxide in the
atmosphere; each year, about 100 billion metric tons of carbon
dioxide is captured in trees and other vegetation throughout the
world.  At issue, are concerns about how estimates are developed and
what source data are used.  For example, according to a recent
Congressional Research Service report examining sequestration
projects reported to the Voluntary Reporting Program, the
sequestration claims were difficult to compare because of variations
in how the quantities were measured and the source data used for the
estimates.\2 Therefore, how sequestration projects will be handled in
a credit for early action program becomes an important issue. 


--------------------
\1 Photosynthesis is a process through which plants extract carbon
dioxide from the air, separate the carbon from the oxygen atoms,
return the oxygen to the atmosphere, and use the carbon to make
biomass in the form of roots, stems, and foliage. 

\2 Forestry Projects in the United States to Offset Carbon Emissions,
Congressional Research Service, Apr.  23, 1998


      SHOULD CREDIT BE GIVEN FOR
      "BUSINESS AS USUAL"
      ACTIVITIES THAT ALSO REDUCE
      GREENHOUSE GAS EMISSIONS? 
------------------------------------------------------ Appendix II:0.3

There are differing views on the issue of whether to recognize
emissions reductions that would have occurred anyway, without the
incentive of a credit for early action program.  Some organizations
thought that if an organization took an action that would be
considered part of its normal business activities and it also
happened to reduce greenhouse gas emissions, it should not receive
recognition for this reduction because it would have occurred anyway. 
Others organizations, including Edison Electric Institute, believe
that any efforts to reduce greenhouse gases are worthy of some type
of recognition and putting restrictions on these kinds of reductions
could discourage participation in an early action program. 


      WHAT GREENHOUSE GAS
      EMISSIONS SHOULD BE INCLUDED
      IN A CREDIT FOR EARLY ACTION
      PROGRAM? 
------------------------------------------------------ Appendix II:0.4

Numerous gases affect the Earth's atmosphere and act as "greenhouse
gases" which trap heat from sunlight at, or close to, the Earth's
surface.  In addition to the six greenhouse gases that were
recognized in the Kyoto Protocol,\3

other greenhouse gases, as well as other gases that have "indirect
effects" on global warming because they may contribute to the buildup
or decomposition of the greenhouse gases in the atmosphere.  Some of
these gases include carbon monoxide and volatile organic compounds
other than methane.  Because the Voluntary Reporting Program allows
the reporting of these gases, there may be a need to consider to what
extent they should be included in an early action program. 


--------------------
\3 The six gases are carbon dioxide; methane; nitrous oxide;
hydrofluorocarbons; perfluorocarbons; and sulfur hexafluoride. 


      OTHER ADDITIONAL QUESTIONS
      THAT EARLY CREDIT PROGRAM
      DEVELOPERS MAY HAVE TO
      ADDRESS
------------------------------------------------------ Appendix II:0.5

  -- Should an organization reporting to the Voluntary Reporting
     Program be treated differently under a new credit for early
     action program? 

  -- How will growing companies be able to reduce greenhouse gas
     emissions without affecting economic success?  Should growing
     and declining companies be treated the same under a credit for
     early action program? 

  -- Should there be restrictions on who is eligible to receive
     emissions credits? 

  -- Should a credit for early action program be focused on the
     entire U.S.  economy or selected segments that represent the
     majority of greenhouse gas emitters? 

  -- How should a historical base for measuring reductions be
     adjusted for corporate mergers and acquisitions? 

  -- How should companies having no historical data be treated? 


HOW EMISSIONS REDUCTION CLAIMS
THAT ARE REPORTED TO THE VOLUNTARY
REPORTING PROGRAM MAY BE
CONSIDERED UNDER MORE RESTRICTIVE
REPORTING CRITERIA
========================================================= Appendix III

The following examples of actual claims of greenhouse gas emissions
reductions that companies have reported to the Voluntary Reporting
Program serve to (1) further illustrate the four basic issues that
will likely need to be addressed in designing a credit for early
action program and (2) show how such claims may be evaluated if more
restrictive reporting criteria were established.  We used examples
contained in the DOE's Energy Information Administration publications
that summarize the results of the program's first and second years.\4
We supplemented this information with information contained in the
program's public database.\5

The first issue is how should greenhouse gas emissions reductions be
estimated.  A large investor-owned utility located in the Midwest
produces electric power from several fossil-based plants and one
nuclear plant.  It compared its 1991, 1992, and 1993 emissions to
those that had occurred in 1990 to calculate its emissions
reductions.  However, in 1994 its nuclear plant was shut down because
of an equipment failure.  To compensate for the lost electricity that
had been generated from its nuclear power plant, it increased
generation from its fossil plants, reduced sales, and purchased
electricity from another company.\6 As a result, in 1994, its
emissions rose for the first time beyond its 1990 baseline and it
reported an emissions increase.  This example meets the "Restricted"
reporting criterion shown in table 1 on determining reductions from a
historical baseline.  However, the utility would not have received
credit in 1994 because its emissions increased above its 1990 level. 

The second basic issue is how should emissions reductions ownership
be determined.  A large investor-owned utility took several specific
actions to improve the reliability and performance of its two nuclear
power generators (one unit is 100 percent owned by the utility and
the other unit is 41 percent owned).  One action increased the time
between refueling from 18 months to 24 months.  Another action
decreased the number of days for each refueling outage.  A third
action improved maintenance procedures, which reduced forced outages
and automatic shutdowns.  As a result of these actions, the utility
claimed total cumulative reductions in carbon dioxide emissions from
1991 to 1994 compared with its 1990 baseline of more than 11 million
metric tons.  The utility reported only 41 percent (its ownership
share) of the emissions reductions for the second unit.  This example
meets the "Restricted" reporting criterion shown in table 1 on
reporting only those emissions reductions that are directly owned. 

Another example helps to clarify the differences between "direct" and
"indirect" ownership of emissions reductions.  A printing company
based in Wisconsin initiated some projects to reduce its own and its
employees' demand for transportation services.  These projects
included (1) a return load policy requiring its trucks not to return
empty, thus saving 8 million vehicle miles per year; (2) a change
from three 8-hour shifts to two 12-hour shifts, which allows
employees to work fewer days per year, thus reducing their commuting
trips and associated emissions by an estimated 20 million fewer miles
in 1995; (3) the redevelopment of an existing building structure
which was closer to town and workers' homes than a new proposed site,
thus saving them an estimated 3.5 million vehicle miles in 1995; and
(4) an arrangement for the public transportation system to have buses
provide service to its plants, thus reducing the number of employees'
vehicle round trips by 23,185 and saving more than 20,000 gallons of
gasoline.  Under the Voluntary Reporting Program, the company claimed
"direct" emissions reductions associated with the return load policy,
and "indirect" reductions associated with the shift change, the
building redevelopment, and the public transportation projects. 
Under the "Restricted" reporting criterion shown in table 1 on
obtaining credit for only those reductions directly owned, the
company would receive credit only for the return load policy savings
because the company directly owned the trucks and their emissions. 
Under the "Somewhat restricted" criterion on ownership, the company
would receive credit for the indirect reductions in workers' driving
miles if the company could show that the employees and the bus
company did not claim them. 

The third basic issue concerns the level at which emissions
reductions should be reported.  An investor-owned utility located in
the Midwest built a 16 megawatt natural-gas fired cogeneration
facility to meet the electricity and steam needs of a
grain-processing company.\7 The grain company retired its own
coal-fired boilers and less efficient gas-fired boilers that had been
used to make the steam needed for its operations.  On a project-level
basis, the utility reported direct and indirect emissions reductions
resulting from the operation of the cogeneration facility and the
shutdown of the grain processor's steam boilers.  The utility claimed
direct emissions reductions by comparing electricity generation that
would have otherwise occurred at its coal-fired plant.  It also
claimed indirect reductions from, among other things, the grain
company's previous replacement of the coal-fired steam boilers with
gas-fired steam boilers.  None of the company's claims would have
been accepted under the "Restricted" or "Somewhat restricted"
criteria because these claims were reported at a project level, and
it is unknown whether the company as a whole had net reductions. 

The last basic issue concerns how are emission reductions verified. 
All companies' reporting to the Voluntary Reporting Program are
required to self-certify the accuracy of their emissions reduction
estimates.  Independent or third-party verification is not required. 
As a result, we were not able to find any company that went beyond
the self-certification process. 


--------------------
\4 Voluntary Reporting of Greenhouse Gases 1995, July 1996,
Department of Energy, Energy Information Administration,
DOE/EIA-0608(95); Mitigating Greenhouse Gas Emissions:  Voluntary
Reporting, Oct.  1997, Department of Energy, Energy Information
Administration, DOE/EIA-0608(96).  The first report covers annual
emissions from 1987 to 1994 and annual reductions claimed between
1991 and 1994 and the second report presents this information for
1995. 

\5 We reviewed companies claims submitted to the Energy Information
Administration on their emissions reductions for consistency but did
not contact them directly to verify their information.  In addition,
the company information discussed in the examples contains only a
portion of the company's total report.  As such, we did not compare
the entire company's report to the more restrictive criteria. 

\6 Nuclear power plants rely on nuclear fuels to generate electricity
and do not emit greenhouse gases. 

\7 Cogeneration is the sequential production of useful thermal
energy, such as steam and hot water and electricity from the same
energy source.  In this case, the primary source of energy was used
to produce electricity, with the thermal energy recovered from that
process used to produce steam. 


MAJOR CONTRIBUTORS TO THIS REPORT
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 
========================================================== Appendix IV

Daniel M.  Haas
Richard E.  Iager
Michael S.  Sagalow


*** End of document. ***