Testimony of Jay Hakes

Administrator, Energy Information Administration

U.S. Department of Energy

before the

House Government Reform Committee

National Economic Growth, Natural Resources, and Regulatory Affairs Subcommittee

on

The Voluntary Reporting of Greenhouse Gases Program

July 15, 1999


Thank-you for the opportunity to testify on the Voluntary Reporting of Greenhouse Gases Program. The 1605(b) Program, as it is sometimes called, has been a considerable departure from the energy surveys and analysis that the EIA normally undertakes. The program can best be viewed as a limited exercise in measuring and reporting greenhouse gas emissions and in calculating and reporting those emissions. As the program is entirely voluntary, and participants receive nothing more than a thank-you letter and certificate from the U. S. government, the evidence of the 170+ companies and organizations that have reported on more than a thousand projects should be viewed as a mark of success.



The Development of the Voluntary Reporting Program


The Voluntary Reporting Program is conducted pursuant to Section 1605(b) of the Energy Policy Act of 1992. The law requires the Secretary of Energy to "...issue guidelines for the voluntary collection and reporting of information on sources of greenhouse gases." The guidelines are to cover reporting of emissions from "...1987 through 1990; and for subsequent calendar years on an annual basis." In addition to emissions, the guidelines must also cover "...annual reductions of greenhouse gas emissions and carbon fixation achieved through any measures, including....[a long list of specific measures]."

Once the Department of Energy's guidelines are in place, the statute requires that the EIA "shall develop forms for voluntary reporting under the guidelines...and shall make such forms available to entities wishing to report such information. Persons reporting under this subsection shall certify the accuracy of the information reported."

Finally, the EIA "...shall establish a data base comprised of information voluntarily reported under this subsection. Such information may be used by the reporting entity to demonstrate achieved reductions of greenhouse gases."

The Department of Energy's Policy Office held a series of public hearing during 1993-1994, in order to develop the guidelines. As published (in October 1994) the guidelines took an inclusive view of what might be reported and how emissions and reductions should be reported. The guidelines counseled reporters to consider the full fuel cycle emissions of their activities and to report whatever portions of the fuel cycle emissions the reporter deemed necessary to produce an accurate portrayal of the full effects of their activity. The EIA developed reporting forms concurrently with the guidelines. After a public comment process, the forms were approved by OMB in May 1995.

At about the same time, many Climate Change Action Plan voluntary program managers and participants felt the need for a registry to record and document their actions. Many participants in the electric utility "Climate Challenge" program were also part of the 1605(b) public review process. In early 1995, Climate Challenge participants and program managers elected to forgo developing their own reporting system, and to rely instead on the 1605(b) program as their reporting mechanism. The Climate Wise program for manufacturers subsequently did the same. Climate Challenge and Climate Wise participants are instructed to report their reductions to the Voluntary Reporting Program.. Other U.S. government voluntary programs encourage, but do not require, participants to file reports with the EIA.

Features of the Voluntary Reporting Program

The most important features (and some of the key ambiguities) of the Voluntary Reporting Program are established by the language of the statute. "Who can report?" is answered in the statute with the word "entities," which has been interpreted to mean any U.S. legal person who wishes to report emissions or has taken action to reduce emissions. "Reporters shall certify the accuracy of their reports" has been taken to mean that the reporter is ultimately responsible for the accuracy of the information submitted. The numerous categories of reportable emissions and reductions listed in the statute require that the forms permit multiple approaches to accounting for emissions and reductions.

The Voluntary Reporting Program is intended to be a general purpose registry and reporting program for greenhouse gas emissions, reductions, and reduction actions. Its features include:

- Entity Reporting: the emissions (and reductions) of an entire company or facility;

- Project Reporting: the emissions consequences of specific actions; and,

- Commitments to reduce emissions in the future.

The EIA has developed an integrated software system, comprising an electronic form used by reporters to fill out, edit check, and file their reports electronically, and a public use database of the reports received. The electronic form and database are distributed via the Internet and CD-ROM. The EIA also prepares an annual report, Voluntary Reporting of Greenhouse Gases. The Voluntary Reporting Program's portion of the EIA web site (www.eia.gov/oiaf/1605/frntvrgg.html) contains the reporting software, public use database, annual report, and other useful documents and calculation aids.


Results of the Program

Since the program's inception in 1995, participation in the Voluntary Reporting Program has steadily increased (see Table 1).

Table 1. Indicators of Participation in the Voluntary Reporting Program, Data Years 1994-1998

Indicator 1994 1995 1996 1997 1998P
Number of Entities Reporting 108 142 149 156

172

Number of Projects Reported 645 967 1,038 1,229

1,420

Number of Entity-Level (Organization-Wide) Reports Received 40 51 57 56 64
Entity-Level Reductions Reported (106 Tons CO2 Equivalent) 78 120 132 128 NA
Project-Level Reductions Reported (106 Tons CO2 Equivalent) 74 146 154 166 263

Source: Energy Information Administration, Forms EIA-1605 and EIA-1605EZ

P=Preliminary. 1998 data is based on reports received to date.

Data from the 1998 reporting cycle is being received and reviewed now. While not all the reports promised for 1998 have yet been received and only a fifth of the reports received have been reviewed, it is already clear that the number of participants will be at least ten percent greater than last year, with increases in the number of projects reported and the size of reported reductions growing more than proportionately.

Many reporters (about 72 percent) are electric utilities, and almost all electric utilities are participants in Climate Challenge (Figure 1). The Voluntary Reporting Program covers about two-thirds of the emissions of the electric utility industry, but a much smaller fraction of the emissions of the rest of the economy, with the exception of a very specialized group: landfill methane operators, who, as an industry, have chosen to embrace the Voluntary Reporting Program. The balance includes an array of firms: large manufacturers who participate in the Climate Wise voluntary program such as General Motors, Johnson & Johnson, BP America, IBM, Dupont, and Dow; aluminum smelters, semiconductor manufacturers, cement plants, coal mining companies such as Peabody and Consol, two trade associations (the Minnesota Resource Recovery Association and the Integrated Waste Services Association), several private voluntary organizations such as American Forests, two universities (Rochester Institute of Technology and Oregon State University) and one household. Some reporters are single facilities, such as Alcan's Sebree (Tennessee) aluminum smelter or Motorola's Austin (Texas) semiconductor fab. Most reporters participate in U.S. government voluntary programs.



 

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Most reporters used the Voluntary Reporting Program to report on emissions reductions projects. Last year, some 1,229 projects were reported to the EIA, with emissions reductions and sequestration totaling some 166 million tons of carbon dioxide equivalent claimed for 1997. Some 56 companies reported on entity-wide emissions and reductions totaling 127 million metric tons of carbon dioxide equivalent. Since about 45 companies reported on both project-related and entity reductions, the two figures are not additive. Rather, they correspond to alternative approaches to estimating and reporting emissions and reductions.

Some 39 reporters used the two page short or "EZ" form. The short form is intended to provide a simple reporting format for individuals, small businesses, and voluntary organizations. In practice, the short form is also occasionally used by large organizations who wish to limit their reporting burden.

The Voluntary Reporting Program is unique among the many voluntary programs initiated during the early 1990's in its diversity of project types, participation, and approaches. The Voluntary Reporting Program's database provides a wealth of examples of the types of concrete actions that organizations can undertake to reduce greenhouse gas emissions. Some of the most important benefits of the Voluntary Reporting Program:


Accounting Issues Raised by The Program

The Voluntary Reporting Program has been the subject of increasing interest since the White House announced, in October 1997, that the President favored some form of "credit for early action." The interest in "credit for early action" has generated evaluations of the features of the Voluntary Reporting Program as a possible vehicle for providing regulatory credit. For example, the Chafee-Lieberman bill (S. 547) would empower the President to offer credit for voluntary reporting participants, providing the President finds that the reductions reported to the EIA "represent actual reductions, are "accurately reported," and "not double counted."

It should be noted that the EIA's Voluntary Reporting Program was never designed as an emissions trading program, or as a "credit for early reductions" program. It was primarily designed as a registry for claims of reductions. Neither the Department of Energy nor the EIA have attempted to resolve the many contentious that would arise in attempting to construct a set of reporting rules that would create a set of comparable, verifiable, auditable emission and reduction reports that represent "actual reductions" and are "not double counted."

Rather than attempt to resolve these issues, the Voluntary Reporting Program permits multiple alternative answers to a few simple questions.

Who Can Report?

The original legislation mentioned only "entities." In the public hearings, several overlapping concepts of "who can report" surfaced. These included:

All of these approaches are permitted in the Voluntary Reporting Program, and all are actually used by reporters. Some reporters use more than one approach. Each approach has advantages and disadvantages for particular types of programs. However, if multiple approaches are permitted to coexist, then it is possible to legitimately account for emissions in more than one way (permitting multiple acceptable interpretations of the same set of facts).


What is a Reduction?

Reporters use multiple and not necessarily consistent concepts of the nature of a reduction, and each concept has differing consequences.

The most intuitive definition of a reduction is a reduction against an historical baseline, or using a "basic reference case." In this case, the emissions of a corporation (legal person) or facility in a current year are less than in a prior, baseline year, usually 1990. The reduction is defined as the difference between current year and baseline year emissions. This approach is best suited to reporters defined as corporations or facilities whose activities have not appreciably changed since the baseline year. It presents particular problems for firms that have participated in mergers, acquisitions, or divestitures, or have made significant changes in the composition of their business. Start-up companies or new facilities that have no history cannot use historical baselines. The historical baseline approach is also not well suited to measuring the reductions achieved by projects, since projects are often entirely new activities with no history.

Alternatively, many reporters define their reductions by comparison with what would have happened in the absence of a specified set of actions. Thus, corporate emissions may have risen, but they are less than they would have been in the absence of corporate action. This approach is called, in the Voluntary Reporting Program, a "modified reference case" or a "hypothetical baseline."

The "unit of production" approach is a variant of the fixed historical baseline. In a unit-of-production approach, the reporter measures emissions per unit of output, if his emissions per unit of output have declined, either by comparison with levels in a prior year or by comparison with what they would have been in the absence of some actions, then the reporter has a reduction. This approach works reasonably well for organizations that have a well-defined product that is homogenous across companies and over time: for example, kilowatt-hours generated or sold, or tons of steel, or barrels of crude oil. As products increase in complexity, this approach gradually breaks down. Tons of semiconductors, for example, is a meaningless measure of output.

As in the case of defining the reporting entity, these alternative measures of reductions have their advantages and disadvantages. Basic reference cases are objective and relatively easily verifiable. On the other hand, absolute reductions are often the product of circumstance rather than action, while modified reference cases (which are more difficult to verify) explicitly measure the results of actions. Unit-of-production reference cases are only useful in a limited number of cases, and can combine some of the disadvantages of both basic and modified reference cases.

Most of the reductions reported to the EIA use a modified reference case. Among the 56 firms that reported on entity-level emissions (the emissions of the entire organization) only 11 claimed reductions against a basic reference case. Almost all of the project reductions reported necessarily used a modified reference case.


Who Owns the Reduction?

Another issue addressed in the development of the Voluntary Reporting Program was the question of ownership of emissions and reductions. Two theories of emissions ownership coexist in the Voluntary Reporting Program. The most intuitive, and commonplace, is called "direct emissions" and "direct reductions." More simply, if a reporter owns or uses (e.g., leases) the emission source, the reporter owns the emission as well as any reductions from this source.

However, there is an alternative theory of ownership based on causation. This theory holds that if a firm causes an emission or reduction, it is responsible for that emission, even if it does not own the emission source. When one reporter causes an emission or reduction from a source it does not own, it is called an indirect emission or reduction. The most important example of indirect emissions are emissions arising from the consumption of electricity. If firms and households reduce their consumption of electricity, they cause their electric utility to reduce its emissions.

This approach has both advantages and problems. It places responsibility for emissions with firms and households that can affect emissions, and permits reporting of actions that have a significant influence on national emissions. On the other hand, the concept of "causing an emission" is inherently more ambiguous than "owning the smoke stack," and, consequently, more than one firm may have helped to cause an emission or reduction.

Some electric utilities define "their" emissions as the emissions from facilities that they own. Other utilities define their emissions as emissions from plants that they own, plus indirect emissions from electricity that they purchase. Still other utilities define their emissions as emissions from plants that they own, plus net emissions from electricity purchases minus electricity sales. Each of these definitions would provide a different figure for the emissions of the company, and different estimate of emissions and reductions. No single definition is obviously more correct or accurate than the others.

The advantage of limiting ownership to direct emissions is that it generally prevents multiple ownership of the same emission or reduction, and reporters can usually know the actual level of their emissions. On the other hand, public utilities with an obligation to serve have less than complete control over their direct emissions.

Further, limiting the ownership of emissions and reductions to direct emissions excludes many important emission reduction methods: including all activities that tend to reduce electricity consumption, the activities of energy service companies, and the provision of energy-efficient or emission reducing capital goods.

Definitions that incorporate indirect emissions and reductions are potentially or actually subject to multiple or overlapping ownership, since one person's indirect emissions is generally another person's direct emission, and there may be multiple sources of causation. Thus, "double counting" of emissions and reductions is possible. However, since the EIA requires that reporters explicitly identify all emissions and reductions as either direct or indirect, potentially double-counted reductions can be identified. Indirect emissions and reductions account for only a small portion of the total reported to the EIA.


Would the Reduction Have Happened Anyway?

This issue has subsequently been often discussed in the context of Joint Implementation and the Clean Development Mechanism under the term "additionality." It is sometimes argued that many of the projects reported to the EIA don't represent " real" reductions because the companies would have done them "anyway" in the normal course of business.

However, creating an operational definition of additionality is difficult, because the "normal course of business" is a hypothetical concept. The activities that reporters are currently undertaking are the kinds of activities that would be required to limit national greenhouse gas emissions. The current level of activity limits the growth of emissions, and an even higher level of the same activities would be required to stabilize or reduce emissions. For the purposes of the Voluntary Reporting Program, this distinction is unnecessary. The learning and incentive benefits of voluntary reporting do not depend on being able to identify individual projects as "business as usual" or "additional." For the purposes of an early credit program, it might be necessary to revisit this issue.


How Does One Verify Reports?

Another topic that generated considerable discussion then and now is generally described under the heading of "third party verification." It is sometimes argued that reports cannot be considered reliable unless they are verified by an independent third party.

This issue was considered in the guidelines development process, and the Department of Energy decided not to require third party verification. Reports submitted to EIA are generally factually accurate, and, filing a false statement on a U.S. government form is illegal. The key issue, however, is not verification, but verifiability.

If the accounting treatment for indirect emissions from electricity purchases is undefined, then a particular set of facts about a reporter would support two different estimates of emissions: one including electricity purchases, and one excluding electricity purchases. A third party verifier can verify the facts about the reporter, but cannot say whether or not indirect emissions from electricity purchases ought to be included, and consequently cannot say whether the bottom-line total is correct or not.

If a reporter uses a hypothetical "modified reference case," then the reduction is calculated against a counter factual reference case, which (since it never happened) cannot be objectively shown to be true or false. The third party verifier can characterize the reference case as "more likely" or "less likely," but cannot verify its accuracy.

Therefore, verifying the accuracy of 1605(b) reporting would not really be a matter of whether the verifier is independent or objective, but of putting in place common baselines and accounting standards that would limit the scope for the application of judgment in preparing and reviewing claims of emission reductions.


The Voluntary Reporting Program and Credit for Early Reductions


The Voluntary Reporting program has achieved considerable success in the purposes for which it was intended. It is a working example of a completely voluntary emissions and reductions registry: it has generated a considerable body of useful information, and it helped to educate reporters, policy makers, and the public about a set of difficult and poorly understand issues.

Because the issues described above have not been resolved, it is possible for the same company to report its emissions and reductions in several different ways, and for more than one reporter claim the same reduction. Some commentators on the Voluntary Reporting Program have characterized this aspect of the program as a defect: a problem needing a solution. On the other hand, it can be viewed as one of the most useful attributes of the program, and one of the keys to its success, because,


The features make the voluntary reporting program particularly useful in evaluating the design and consequences of any proposed "credit for early action" program. By creating a data base of real world emissions reduction actions and actors, the voluntary reporting data can be used to gain insight into the incentive effects and beneficiaries of a proposed program. The Voluntary Reporting database also provides a mechanism, as we have seen, for identifying some of the issues that it would be helpful to resolve, both for retrospective and future credit programs.

If the Voluntary Reporting Program were to be used as the accounting system for an effective credit for early action program, the baseline, accounting, and additionality issues described above would need to be resolved. In addition, an effective program would have to match the incentives offered to the entities and actions that could actually reduce emissions, and ameliorate the leakage problem. (Not all firms will participate in a voluntary program. If participants reduce their emissions, while non-participants increase emissions, emissions may "leak" to non-participants).

As a general purpose registry, the EIA's voluntary reporting system could be modified to account for the results of a credit program. The extent of the modifications required would depend on the definition of the program, but might be quite extensive and costly. Because the EIA lacks the legal authority to resolve the numerous issues that would be raised by moving towards a crediting program, its role would be to implement decisions about these matters made by policy-makers.

A related topic of great interest to those who have reported reductions to the program is whether an early reduction credit program would provide credit for actions already reported to the EIA. This is clearly an issue for policy-makers, rather than for the EIA, to determine. However, the voluntary reporting database has been designed to preserve information about the underlying operating data, baselines, accounting principles and emission estimation methods actually used by reporters in filing their reports. If policymakers could set objective criteria by which to judge emission reporting, then it may be possible to identify reports that meet the criteria. The eligibility of past reported reductions need not be settled on an "all or nothing" basis.