Market Forces

How the pandemic is affecting oil markets, shale and the future of climate action

By / Bio / Published: July 30, 2020

Earlier this month, EDF’s Office of Chief Economist hosted a virtual fireside chat with Jason Bordoff, Professor of Professional Practice and Founding Director of Columbia University’s Center on Global Energy Policy and Marianne Kah, an Adjunct Senior Research Scholar and Advisory Board member at the Center.

Prior to joining Columbia, Bordoff had served in the Obama Administration as the Special Assistant to the President and Senior Director for Energy and Climate Change on the Staff of the National Security Council. Kah had been the Chief Economist of ConocoPhillips for 25 years, where she developed the company’s market outlooks for oil and natural gas and led the company’s scenario planning exercises. The two discussed the impact of the coronavirus pandemic on oil markets, the outlook for shale and what the 25% decline in demand says about the challenge to move beyond fossil fuels, carbon reduction and climate action.

Maureen Lackner and Aurora Barone of EDF moderated the discussion.

Maureen: Let’s talk about the impact of COVID-19 on oil markets.

Jason: We told 4.2 Billion people around the world to stay home, and oil demand only dropped 25%. On the one hand, that was the largest drop you could possibly imagine. On the other hand we were still using 75% even though we had put half the world’s population under lockdown.  I found that a sobering reminder of how staggering a challenge it is to think about moving to a world beyond oil.

Maureen: You’ve said this idea of energy dominance or energy independence has emerged as a fallacy in the last few months. Can you explain what that means and how we should be thinking about the US role in global oil markets?

Jason: Independence is a fallacy, and this clearly revealed it. Because it’s still a global oil market. What often matters politically and from the standpoint of producers is the price you’re paying at the pump. What is different now is the macroeconomic impact of oil price shocks. This has revealed that we are still vulnerable to global oil supply shocks when oil prices go up and when they fall. There are few politicians who have been more critical of OPEC than President Trump, and the fact that he had no options available to him but to pick up phone and call Moscow and to call Riyadh and say, “Can you help us out, because the pain in the oil patch is too much to bear?” lays bare the idea that we’re not able to insulate ourselves against oil price shocks. And the best way to insulate yourself from oil price shocks is to reduce the oil intensity of your economy in the first place. Which, if at the same time that you’re calling Moscow and Riyadh, you’re rolling back fuel economy standards, doesn’t make a lot of sense to me.

Maureen: What happens to US shale in all of this?

Marianne: The outlook for shale really changed before COVID-19 and before the price collapse, and it really had to do with investors being dissatisfied with the returns that were coming from these projects, because the industry was reinvesting 130% of operating cash flow. Investors got tired of it. That reduced investment already slowed production growth. There’s also increasing concern about environmental performance of some of these operations, particularly in the Permian Basin, which is growing at such a rapid rate. There’s a lot of flaring and methane emissions, which further encouraged investors to say, “I don’t want to fund this industry.” All of that happened before COVID. COVID just exaggerated these pre-existing forces by causing a large volume of oil demand to be lost, particularly since some of it may be permanent.

Jason: In the days of prices at $40 or $50, the U.S. was growing at a million to 1.5-million barrels per day per year, which is pretty extraordinary. And we did that year after year. I think those days are gone. Shale is still a major force. Shale is still there, but I think we’re going to see it growing at a much a slower rate, and I think that’s consequential for lots of issues—the environment, the U.S. economy and geopolitics.

Maureen: It seems pretty clear that we will see a pretty big consolidation in terms of the number of players, but when might see production come back, or most of it come back?

Marianne: The industry desperately needs consolidation, because there are really too many producers that are producing small volumes in wells that aren’t that economic. You’ve seen some high-profile bankruptcies—Chesapeake and Whiting petroleum. But the question is, who is going to consolidate it now? Few companies have sufficient cash. The industry is generally in cash preservation mode. And a lot of these companies are very small companies that wouldn’t be material for the oil majors. I’m not sure that consolidation (beyond the Chevron-Noble acquisition) will generally happen now, even though it’s desperately needed.

Maureen: What does the long-term picture look like for major producers, and what does this mean for emissions and a potential energy transition?

Jason: I think for those of us who care about transitioning to a much cleaner decarbonized world, it’s not terribly encouraging. You see traffic patterns and congestion patterns in countries that have reopened like China at pretty close to pre-COVID-19 levels, in some cases even a little higher. Mass transit ridership is still down 30-50% in Chinese cities, not surprisingly, because people are worried about crowded spaces. They’re taking private vehicles more. Intercity travel is still down; diesel demand has held up. Jet fuel obviously is going to be down for a while. And maybe it’s middle to the end of next year when we get back to the level of oil demand where oil was before COVID-19. And then I think it will continue growing. I don’t think we’ve seen peak oil demand. I think aviation might look different for an extended period, given how concerned people will be about traveling coming out of this pandemic.

The kind of transformational change we need for deep decarbonization is not going to happen unless we make it happen, and that’s going to need significant policies, regulations, standards and investments. We may have a window to think about very large-scale investment in the economy, and that’s going to be a historic opportunity to use in a smart way from a climate standpoint.

Maureen: What do you think about this idea that we may be seeing peak oil happen sooner than anticipated, and how can we hold companies to account here and make sure this isn’t just some type of greenwashing, empty promise?

Marianne: There are some people who think we’ve lost two years—whenever the peak was going to be, it’s now going to be two years sooner, all the way to this transition is going to get rid of commuting and reduce travel by air. It may also geographically shrink  supply chains given concern about dependence on China and other foreign sources. There is a desire to nationalize supply chains—and not, for example, buy ventilators from China. That’s going to lower the amount of marine fuel used. One thing that I think is a sleeper is, there’s a renewed emphasis on clean air. On the other side, is the movement to personal vehicles. People are leaving mass transit and moving to personal vehicles. In a low price environment, it’s harder for electric vehicles to compete. People may decide to move out of cities, because they don’t want to be in an urban area anymore, which is going to mean more driving. There’s more deliveries, so that’s again, more driving. Single-use plastics were being banned, but now there may be a reversal of that trend, because people are worried about sanitary packaging. All of these deliveries are using plastic in their boxes. So I think the jury is still out on whether and the direction of long-term impacts on oil demand. There are a lot of moving parts, which is why it’s not obvious.

Maureen: Do you think that there are certain climate policies that are more palatable that we have more leverage for now? A price on carbon might actually be an attractive source of revenue under this new situation?

Marianne: Being an economist, I do favor a carbon price, because that is the most efficient way to get people to change their behavior. The devil is in the details in terms of whether it’s fair. How you get it done in the U.S. is the obvious question. And yes, the U.S. government does need the revenues given growing deficits, but if we don’t recirculate the revenues from the carbon tax into the economy, it will have a negative impact on the economy.

 Aurora: How might US E&P [Exploration & Production] financing be affected by recent events?

 Marianne: The low oil prices certainly have affected it. The current pandemic is considered a temporary situation, so there’s a belief that demand will come back to some degree and that prices will come back to $50-60, some forecasters even think $70 a barrel. In fact, we could even see a period of very high prices because there’s insufficient investment going on in the entire E&P sector now. It’s a cyclical industry. When people don’t have cash, they don’t invest.  I think the very low price we’re getting now from the coronavirus certainly hurts, but it’s really the change of perception—whether this industry is attractive to invest in, and does it have a long-term future that impacts investment. There are increasing questions from investors—how is this industry going to be impacted by carbon actions from governments? As more and more investors ask these questions, I think there’s going to be less and less investment.

 

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More confirmation that the Trump administration has been disregarding the true costs of climate pollution

By / Bio / Published: July 22, 2020

This post originally appeared on Climate 411

A new report highlights the Trump administration’s dangerous efforts to obscure the real costs of climate change, while a major court decision firmly rejects the administration’s approach.

Costly flooding in Houston after Hurricane Harvey

A new report from the Government Accountability Office (GAO), an independent agency tasked with providing objective nonpartisan information to policymakers, confirms what we’ve known for years: that the Trump administration has been ignoring the enormous costs of climate change. By ignoring these damages, the administration is turning its back on communities across the nation who are footing the bill for those impacts today.

In addition, a federal court recently issued a clear-cut rejection of the administration’s deceptive math on the cost of methane pollution, another greenhouse gas that is 84 times more potent than carbon dioxide over a 20 year time period. This ruling reinforces the fact that the administration has been blatantly disregarding widely accepted science and economics when it comes to the costs of climate change.

All of this comes amid a raging and widespread pandemic that underscores the absolute necessity of relying on experts and scientific data when crafting policy. With unchecked climate change fueling more devastating storms, droughts, and other public health impacts — all of which hit vulnerable communities the hardest — incorporating accurate costs of climate change in policy decision-making matters now more than ever.

Here is what this new report and court decision reveal about the administration’s backwards and harmful approach to decisions on climate change — and how experts and the courts are wholly rejecting it.

Why undervaluing the cost of climate change is dangerous

To justify its own political agenda, the Trump administration has manipulated the calculations behind the estimated impact of emissions to allow for more climate pollution from major sources like power plants and cars. The new GAO report outlines the steps the administration has taken to drastically underestimate the “Social Cost of Carbon” — a measure of the economic harm from climate impacts that is used to inform policy and government decision-making. These impacts include extreme weather events like flooding and deadly storms, the spread of disease, and sea level rise, increased food insecurity, and more.

After a 2008 court decision requiring the federal government to account for the economic effects of climate change in regulatory benefit-cost analysis, an Interagency Working Group (IWG) comprised of experts across a dozen federal agencies began in 2009 to develop robust estimates of the social costs of carbon that could be used consistently by agencies across the government. These estimates were developed through a transparent and rigorous process based on peer-reviewed science and economics that included input from the National Academy of Sciences and the public — and were periodically updated over time to account for the latest science. More recently, the NAS conducted a thorough assessment to provide guidance on updating the social cost of carbon estimates and suggestions for continuing to build on and strengthen it.

The GAO report underscores the importance of implementing those recommendations, while pointing to the fact that the federal government has done absolutely nothing to follow through. In fact, in 2017 the Trump administration recklessly disbanded the IWG — the very federal entity that already had the mandate to take on this task.

Since then, federal agencies like the EPA have been relying on an “interim cost” to inform important regulatory decisions that is seven times lower than the IWG’s estimate — a move that dramatically underestimates the profound impacts climate change has on families, businesses, taxpayers and local governments. To make matters worse, the administration is dramatically reducing the IWG figure even though it is widely recognized to be an underestimate of the true costs. There is wide consensus that the true costs are much likely significantly higher.

The Trump administration substantially reduces estimates through two key flaws in its calculations, both of which fly in the face of established science and economic principles. First, the reduced estimates ignore that carbon emissions are a global pollutant, omitting important categories of climate change impacts on the United States. Second, they undervalue the harm to our children and future generations by significantly over-discounting future climate impacts.

By vastly undervaluing the costs of climate change — and thus, the benefits of acting on climate — the administration has been able to justify rolling back critical protections such as the landmark federal Clean Car Standards. These important rules offer critical public health benefits and fuel savings for consumers.

A court ruling refutes the administration’s deceptive math on pollution costs

In encouraging news, a recent court decision outright rejected the administration’s deceptive math on a similar metric, the ‘Social Cost of Methane,’ used to estimate the impacts of methane pollution. The Bureau of Land Management, under former Department of Interior Secretary Ryan Zinke, has been using an interim social cost of methane that is more than 25 times less than the estimate from the IWG. The U.S. District Court for the Northern District of California recently overturned the BLM’s attempt to ease protections from dangerous methane leaking, venting and discharging from oil and gas activities on public and tribal lands, where it used a distorted social cost of methane as justification. EDF joined the states of California and New Mexico and a broad coalition of health, environmental, tribal citizen and Western groups to challenge in court the rescission of these vital safeguards.

In the opinion, the judge ruled that the BLM’s decision to rely on a lower interim estimate for the social cost of methane was “arbitrary” and “capricious,” and therefore, “failed to quantify accurately the forgone methane emissions and the resulting environmental impacts.” In addition, the court underscored that “the President did not alter by fiat what constitutes the best available science” on the social cost of greenhouse gas emissions. This is a major win for not only the broad coalition involved in the case, but for the basic principle of science-based decision-making on climate change. The court’s meticulous critique of the flaws in the interim social cost of methane — and the process used to develop it — could be influential in future cases involving the social cost of greenhouse gas emissions. Such a critical ruling like this opens the possibility that the Trump administration and future administrations could be required to properly account for the costs of climate change.

The Trump administration’s unwavering, politically motivated attempts at twisting facts and discrediting experts is putting Americans’ lives, health and financial well-being at risk. Unfortunately, its effort to skew the costs of climate change is far more than a political game. It is already causing real harm to communities across the country suffering from climate impacts — and it will only add to the mounting costs our children and grandchildren will pay. That is why ongoing efforts to uncover and overturn unjust climate decisions are all the more essential.

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How an open-source tool helps state climate policy

By / Bio / Published: February 20, 2020

Empowered by the Paris Agreement and a lack of national leadership on climate policy in the United States, state and local governments are leading on their own climate initiatives. California, New York and Colorado have set ambitious greenhouse gas emission and renewable energy targets for 2030. Just last week, Massachusetts introduced sweeping climate legislation targeting net zero emissions by 2050.

As these environmental and energy policies move ahead, experts need to invest in economic data and tools that allow them to conduct robust economic analysis, to better inform policymakers, stakeholders and the public on how to design robust alternative climate and energy policies.

To target this capacity need, Environmental Defense Fund collaborated with Thomas F. Rutherford (University of Wisconsin-Madison), Andrew Schreiber (United States Environmental Protection Agency) and Christoph Böhringer (University of Oldenburg) to launch a project  to build a subnational economic model framework for climate and energy policies in North America.

An Open-Source tool emerges

An important byproduct of the first phase of this project is the Wisconsin National Data Consortium (WiNDC), an open-source data and modeling framework for the U.S. WiNDC is comprised of regional (state-level) social accounting matrices and a calibrated static multi-regional, multi-sectoral computable general equilibrium model that runs on the constructed dataset. This tool, the technical details of which can be found in a peer-review article about its development, makes it possible to conduct analysis of environmental and energy regulations as well as trade policies taken both at the subnational level and at the national level.

A forthcoming paper investigating the potential economic and environmental impacts from the imposition of a carbon adder on New York Independent System Operator’s energy market is the first to utilize the WiNDC accounts in a state-level analysis of climate and energy policies. The study finds that the carbon adder—a carbon tax equal to marginal environmental damages from carbon emissions not already covered under existing policies—gives the “right” price signal for New York’s power generation to turn into a greener one.

In another paper by Balistreri, et al. (2018) “The Impact of the 2018 Trade Disruptions on the Iowa Economy,” WiNDC is used to analyze the state-level impacts of the 2018 tariffs on a wide range of Chinese imports ranging from agriculture and manufactured goods on the state of Iowa. The authors examined the overall gross state product impacts, as well as lost labor income and tax revenue due to additional tariffs.

WiNDC’s aim is to meet the demand for more robust evidence-based regional analysis of environmental and energy regulations. It provides an easy-access, open-source platform for all stakeholders to conduct analyses of environmental and energy regulations taking place at both state and federal levels. The open-source nature aims to encourage further collaboration within the research community and development of this valuable resource.

WiNDC is a powerful and unique tool that could give states the opportunity to design their own climate policies in the light of their economic and environmental objectives and help them align with policies implemented by other states that are increasing economic and environmental efficiency.

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Nature-based solutions can help New York and New Jersey adapt to rising seas and intensifying storms

By / Bio / Published: August 19, 2019

Are we prepared?

With peak hurricane season upon us and what seems like daily coverage of record storms, floods, and ice melt, climate adaptation solutions should be top of mind for individuals and governments alike. After all, recent data show billion-dollar disaster events continue to take place with increasing frequency. Here in New York, many are wondering whether we’ll be ready when the next big storm hits. An emerging consensus —even among local elected leaders —seems to be: “Nope.”

The ongoing upward trend in global GHG emissions suggests we are far from experiencing the worst impacts of a changed climate. And while swift decarbonization is a first-best solution, we also need to bolster community resilience to prepare for the climate impacts around the corner.

What to expect?

New York and New Jersey are acutely vulnerable to sea level rise and storm intensification. Roughly 400,000 New York City residents currently live in an area with a 1% annual chance of flooding. The region’s coast has a booming property market, with an estimated $101.5 billion of property value in an area with a 0.5% annual chance of flooding. Like so many coastal communities, a significant number of lives, assets, and locations of priceless social value are at stake.

An intermediate scenario from NOAA anticipates global mean sea level will rise by more than three feet by 2100. The New York City Panel on Climate Change recently introduced a new low-probability, high-impact “Antarctic Rapid Ice Melt” scenario, which considers the triggering of a critical tipping point that would result in 9.5 feet of sea level rise by 2100.

The science is clear: our coastline is going to look very different by the end of the century.

What can we do?

Superstorm Sandy was a wakeup call. It exposed myriad deficiencies with regard to disaster response, electricity systems, and post-disaster recovery. The storm incurred more than $19 billion in damages in New York City alone, and led to the deaths of 24 people from my home borough of Staten Island.

In the wake of the storm, a number of promising policy responses created momentum toward greater resilience in the region. One major effort is the Army Corps of Engineers’ “New York-New Jersey Harbors and Tributaries Study,” a comprehensive regional assessment spanning 900 miles of shoreline and 25 congressional districts  that will prompt the development of large-scale storm risk mitigation infrastructure projects across both states.

This work has massive implications. One of the alternatives includes a five-mile storm surge barrier, stretching from Breezy Point, Queens, to Sandy Hook, New Jersey. The preliminary price tag of the projects in this alternative: $118.8 billion. While this is just one of five alternatives under consideration, it is clear the Corps’ work will be expensive, transformative and serve as the backbone of the region’s storm risk mitigation infrastructure for generations.

Natural infrastructure can play a part

While the vast majority of the infrastructure solutions considered in the NYNJHATS study are grey — i.e., human-engineered structures which often include steel or concrete— nature-based solutions deserve full consideration as well, because they can be economically viable components of our adaptation strategies. For example, earlier this year the Corps released a final report for a smaller civil works project—still expected to cost more than $600 million—in the Rockaways and Jamaica Bay. EDF successfully advocated to include more than nine acres of new and restored wetlands and maritime forests, and they were ultimately included, as they were deemed the most viable and economically justified solutions in those cases.

While by no means a silver bullet, nature-based solutions are sometimes the most cost-effective flood mitigation options at our disposal. Unfortunately, current Corps guidance does not factor certain incidental benefits, including those from ecosystem services, into cost-benefit analyses. This means things like improved water quality, oxygenation, carbon sequestration, and habitat restoration are excluded from the calculation, on the grounds they are difficult to quantify. Even so, the recent release of “Engineering with Nature: An Atlas” suggests the Corps is moving in a direction that will feature natural infrastructure solutions more prominently in future coastal adaptation efforts.

In the face of historic sea level rise and flood risk, natural and nature-based solutions can play a key role to restore ecosystems and serve as additional lines of defense against flooding in New York and New Jersey. Adaptation authorities need to consider the full range of benefits natural and nature-based flood risk mitigation projects can provide, otherwise we run the risk of leaving economic value on the table. Adapting to climate change is going to be a costly endeavor- let’s not make it more expensive than it has to be.

 

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Not all fossil fuel subsidies are created equal, all are bad for the planet

By / Bio / Published: June 13, 2019

This is part two of a five-part series exploring “Policy Design for the Anthropocene,” based on a recent Nature Sustainability Perspective. The first post explored the intersection of policy and politics in the development of instruments to help humans and systems adapt to the changing planet.

A recent International Monetary Fund (IMF) working paper made headlines by revealing that the world is subsidizing fossil fuels to the tune of $5 trillion a year. Every one of these dollars is a step backward for the climate. That much is clear.

Instead of subsidizing fossil emissions, each ton of carbon dioxide (CO2) emitted should be appropriately priced. That’s also where it’s important to dig into the numbers.

It’s tempting to go with the $5 trillion figure, as it suggests a simple remedy: remove the subsidies. At one level, that is precisely the right message. But the details matter, and they go well beyond the semantics of what it means to subsidize something.

Direct subsidies are large

The actual, direct subsidies—money flowing directly from governments to fossil fuel companies and users—are “only” around $300 billion per year. That is still a huge number, and it may well be an underestimate at that. The International Energy Agency’s World Energy Outlook 2014, which took a closer look at fossil subsidies than reports since, put the number closer to around $500 billion; a 2015 World Bank paper provided more detailed methodologies and a range of between $500 billion and $2 trillion.

What all these estimates have in common is that they stick to a tight definition of a subsidy:

Subsidy (noun, \ ˈsəb-sə-dē \)

“a grant by a government to a private person or company to assist an enterprise deemed advantageous to the public,” per  Merriam-Webster.

These taxpayer-funded giveaways are not only not “advantageous to the public,” they also ignore the enormous now-socialized costs each ton of CO2 emitted causes over its lifetime in the atmosphere. (Each ton emitted today stays in the atmosphere for dozens to hundreds of years.)

The direct subsidies also come in various shapes and forms—from some countries keeping the cost of gasoline artificially low, to a $1 billion tax credit for “refined coal” in the United States.

Indirect subsidies are significantly larger

The vast majority of the IMF’s total $5 trillion figure is the unpriced socialized cost of each ton of CO2 emitted into the atmosphere. Each ton, the IMF estimates conservatively, causes about $40 in damages over its lifetime in today’s dollars.

Depending on one’s definition of a subsidy, this may well qualify. It’s a grant from the public to fossil fuel producers and users—something the public pays for in lives, livelihoods and other unpriced consequences of unmitigated climate change.

The remedy here is very different than removing direct government subsidies. It’s to price each ton of CO2 emitted for less to be emitted. The principle couldn’t be simpler: “When something costs more, people buy less of it,” as Bill Nye imbued memorably on John Oliver’s Last Week Tonight recently.

 

https://twitter.com/GernotWagner/status/1128444583229186048

All that goes well beyond semantics of what it means to subsidize. One policy is to remove a tax loophole or another kind of subsidy, the other is to introduce a carbon price. The politics here are very different.

Unpriced climate risks might be much larger still

The $5 trillion figure also hides something else. By using a $40-per-ton figure, the IMF focuses on a point estimate for each ton of CO2 emitted, and a conservative one at that. The number comes from an estimate produced by President Obama’s Interagency Working Group on the Social Cost of Carbon. That’s a good starting point, certainly a better one than the current Administration’s estimate.

But even the $40 figure is conservative. It captures what was quantifiable and quantified at the time. It does not account for many known yet still-to-be-quantified damages. It does not account for risks and uncertainties, the vast majority of which would push the number significantly higher still.

In short, the $5 trillion figure may well convey a false sense of certainty.

In some sense, little of that matters. The point is: there is a vast thumb on the scale pushing the world economy toward fossil fuels, the exact opposite of what should be done to ensure a stable climate.

In another very real sense, the different matters a lot: Politics may trump all else, but policy design matters, too.

By now the task is so steep that it’s simply not enough to say we need to price emissions and leave things at that. Yes, we need to price carbon, but we also need to subsidize cleaner alternatives—in the true sense of what it means to subsidize: to do so for the benefit of the public. Whether that comes under the heading of a “Green New Deal” or not, it is a much more comprehensive approach than one single policy instrument.

This is party 2 of a 5-part series exploring policy solutions outlined in broad terms in “Policy Design for the Anthropocene.” Part 3 will focus on “Coasian” rights-based instruments, taking a closer look at tools that limit overall pollution to create markets where there were none before.

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A growing call for environmental integrity

By / Bio / Published: December 18, 2018

The recent introduction of bipartisan carbon fee legislation is demonstrating an important pattern taking hold as policymakers focus on climate change solutions. The Energy Innovation and Carbon Dividend Act, like the MARKET CHOICE Act introduced earlier this year by Republican Rep. Curbelo, recognizes that any carbon fee aimed at meeting the challenge of climate change must be designed with environmental performance in mind.

The new legislation is the first time in a decade that lawmakers from both sides of the aisle have come together to put forth serious climate policy. And like the MARKET CHOICE Act, it uses a fee to reduce pollution across the economy and includes “environmental integrity mechanisms” (EIMs) — provisions that tie a carbon fee to clear, measurable pollution reduction goals and keep us on track to meet those goals. EIMs are still a relatively new concept on the climate policy scene, but leading thinkers have begun to pay them significantly more attention, and it is clear they are emerging as a critical component of any serious carbon fee proposal: and with good reason.

A carbon fee – which sets a price per unit of pollution – prompts the economy to respond by providing powerful incentives to reduce that pollution, but it cannot guarantee the environmental result. While energy and economic modeling tools can provide critical insight into possible or likely outcomes, they cannot provide certainty over the magnitude of the impact. That’s why it is critical to include EIMs designed to provide greater assurances that a fee will deliver on its pollution reduction potential.

Momentum is building for urgent action on climate change. Last week, hundreds of protestors flooded into the Capitol calling for lawmakers to act. The recent Intergovernmental Panel on Climate Change report on the climate impacts of 1.5 degrees of warming and the U.S. National Climate Assessment paint a stark picture: the effects of warming are already here and there is no room for more delay if we are to avert disastrous impacts on human health and our economy. As this demand for action has gotten louder, so has the call for solutions that guarantee the results we need.

There is growing recognition that we need serious solutions to these pressing problems – and that means performance-based policy designed to ensure pollution reductions occur at the pace and scale the science demands. EIMs play the role of an insurance mechanism – they may never be triggered if a fee performs as expected, but provide critical safeguards in case it does not. As Rep. Ted Deutch, the author of the new bill, recognized, a price on pollution can harness the power of the market and provide a flexible cost-effective means of achieving results. But Rep. Deutch and the bill’s co-sponsors also realized that it is no longer acceptable to simply set a price and walk away, hoping the fee does the job. We also need limits on pollution, and effective mechanisms to ensure we meet our critical emissions reduction goals.

Indeed, the most straightforward way to cut pollution is to place enforceable declining limits on pollution, guaranteeing the environmental outcome, while giving businesses flexibility to determine the best way to meet it. We already have proof that those kinds of policies can help meet environmental goals faster and more cheaply than expected while growing the economy.

Regardless of the approach we take, the cornerstones of good policy design are the same: clear and measurable emission reduction goals, effective provisions to ensure they are met, and flexibility in how to meet them coupled with strong incentives to do it cheaply and efficiently. In the context of a carbon fee, that means including an EIM.

Ultimately, in order to achieve the dramatic transformational change needed to reach a 100% clean energy economy and the pollution reductions that science demands: net-zero emissions as soon as possible, a portfolio of policy approaches is needed (as others have pointed out). This means not only a limit and a price on pollution, but also investing in innovation and development of promising emerging clean energy technologies. It also means putting in place other programs that accelerate deployment of clean transportation infrastructure and promote electrification of cars and buildings. And it means encouraging states and cities to continue to lead and take action to cut pollution, pushing beyond federal requirements.

The seeds of future progress in Congress are being planted and demand is growing for durable and effective solutions that ensure environmental goals will be met. The key metric for any climate policy is environmental performance – lawmakers on both sides of the aisle are demonstrating they recognize this fundamental principle.

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