Energy and Climate Change Policy Critical Issues for Indiana and Our Nation

1
Energy and Climate Change Policy Critical
Issues for Indiana and Our Nation

• Wally Tyner
• Purdue University
• September 18, 2009

2
World Marketed Energy Use OECD and Non-OECD
History
Projections
409
Non-OECD
286
241
OECD
221
Source EIA, IEO2008
3
(No Transcript)
4
(No Transcript)
5
(No Transcript)
6
(No Transcript)
7
(No Transcript)
8
Key Energy Drivers

• Oil price
• Climate change legislation and regulation
• Economic growth
• Technology development
• PHEV
• Cellulosic biofuels
• CCS for coal based electricity
• Nuclear
• Gains in energy efficiency

9
Our Energy Future Must ContainMany Different
Components

• We will need many demand and supply side options
  there is no silver bullet
• Energy conservation will be very important the
  energy we dont consume is the cheapest resource
• Biofuels have been and will continue to be driven
  by government policy

10
(No Transcript)
11
Renewable Fuel Standard
12
(No Transcript)
13
(No Transcript)
14
Increased Fuel Economy

• The 2007 EISA energy bill requires an increase in
  fuel economy each year starting in 2010 and
  reaching 35 mpg by 2020.
• By 2020, we would be saving 1.2 million barrels
  of oil per day or 18 billion gallons of gasoline
  per year.
• This measure also would result is considerable
  GHG emissions reductions.

15
(No Transcript)
16
CFL Lighting for Your Home

• CFL bulbs Use only 25 of the
• energy of incandescent bulbs
• If every American home replaced just one light
  bulb with an ENERGY STAR qualified bulb, we would
  save enough energy to light more than 3 million
  homes for a year, more than 600 million in
  annual energy costs, and prevent greenhouse gases
  equivalent to the emissions of more than 800,000
  cars.

17
Global Warming or Climate Change

• Three largely undisputed facts
• Global temperature is rising
• Carbon dioxide in the atmosphere is increasing
• The carbon dioxide increase is largely due to
  human activity
• There is strong scientific evidence that this
  human induced increase in carbon dioxide
  equivalent is the major cause of the temperature
  increase, and if CO2 equivalent continues to
  increase, temperature will as well

18
Climate Change Policy

• The basic objective of climate change policy is
  to provide economic incentives for everyone to
  reduce fossil fuel consumption and GHG emissions.
• This means that any effective climate change
  policy short of draconian regulations will mean
  fossil energy becomes more expensive.
• Climate change policy will have a large impact on
  coal based electric power and on the Midwest.
• The net impacts depend on how it is done.

19
(No Transcript)
20
(No Transcript)
21
(No Transcript)
22
Total and Per Capita CO2 Emissions
23
EPA Ruling April 17

• . . .greenhouse gases in the atmosphere
  threaten the public health and welfare of current
  and future generations.
• The action, if finalized, would not itself
  impose any requirements on industry or other
  entities.
• My reading is that EPA would prefer that Congress
  take action, but holds out the possibility of
  future regulations if Congress fails to act.

24
Cap and Trade vs. Carbon Tax

• With cap and trade, the government establishes
  the emissions level (the cap) annually, which
  normally falls over time.
• The trade part of cap and trade means that firms
  can either meet their cap, or they can buy and
  sell permits if they are under or over the cap.
• The price for emissions is determined by this
  emissions permit trading market.

25
Cap and Trade vs. Carbon Tax

• With a carbon tax, the government sets the price
  of emissions (the carbon tax), and the level of
  emissions is determined by market adjustments to
  this carbon price.
• The carbon tax leaves the level of emissions
  uncertain, while cap and trade leaves the price
  uncertain.
• Carbon tax and cap and trade can achieve similar
  results. However, the welfare implications
  differ if the permits under cap and trade are
  given away instead of being auctioned.

26
Cap and Trade vs. Carbon Tax

• Scope most argue that high fraction of
  emissions should be covered
• Design issues
• Should the tax (or cap) be leveled upstream (fuel
  producers) or downstream (fuel users)?
• For ease of administration, an upstream tax (or
  cap) would probably be more efficient easier to
  identify collection points and to collect the tax
• For cap and trade, there is significant political
  pressure to give away at least part of the
  permits. Occurs in both House and Senate bills.
• Use of revenue from permit auction or tax

27
Cap and Trade and Carbon Tax Issues

• Both likely would need to have a refundable tax
  credit for sequestered GHGs
• What if the rest of the world does not go along?
• Both would need a refundable credit for the
  carbon embedded in exported goods in proportion
  to the export fraction of a companies sales.
• Both would need an import tax on the carbon
  embedded in import goods.
• Authorization for these trade changes included in
  Waxman-Markey

28
Waxman-Markey Clean Energy Bill

• Broad clean energy bill covering much more than
  GHG regulations
• GHG reduction targets 97 of 2005 levels by
  2012, 80 by 2020, 58 by 2030, and 17 by 2050.
• Cap and trade applied mainly upstream except for
  electricity
• Significant provisions for agricultural offsets
• Contains a form of a carbon rebate to low income
  consumers

29
(No Transcript)
30
(No Transcript)
31
Emission Offsets

• Credits for emission reductions for sources not
  covered under standard regulations
• Examples include methane reduction from waste
  management and feedlot operations and forest and
  soil carbon sequestration
• Must be verifiable, additional, permanent, and
  enforceable
• Most bills limit use of international offsets.

32
Cap and Trade and Carbon Tax Issues

• Two important criticisms of either approach are
• The increase in energy cost would stymie economic
  growth most studies indicate this effect is
  likely to be very small, especially if other
  taxes are reduced.
• The increase in energy cost under either approach
  would be equivalent to a regressive tax since
  poor people spend a greater fraction of their
  income on energy that the rich do.
• With either carbon tax or cap and trade, the
  energy tax could be offset by a reduction in
  income taxes targeted towards lower income
  families.

33
Consumer Price Impacts of a 15/ton Tax on CO2
These price increases include both direct and
indirect effects.
Source Metcalf, A Proposal for a U.S. Carbon
Tax Swap, Brookings Institution, 2007.
34
Carbon Tax with Tax Rebate
This option includes a 420 credit for workers
and social security recipients.
35
Focus on Indiana and the Mid-West

• Economies tend to be more reliant on
  manufacturing
• Declining population as a share of the national
  population
• States tend to use more coal in generating
  electricity
• High potential for agricultural offsets

36
Midwest economy is goods intensive
37
Fuel Sources for Electric Power in 2005

• Indiana numbers do not include out-of-state
  generators that serve Indiana customers
• Cook (nuclear) in Michigan
• Madison (natural gas) in Ohio
• Trimble County (coal) in Kentucky

38
(No Transcript)
39
Likely Electricity Price Increase for Indiana

• Indiana is an electricity rate regulated state.
  As long as the GHG permits are given away free to
  utilities, rates would not go up at all.
• Once a larger fraction of the permits were
  auctioned, rates would increase.
• The extent of rate increase would depend on the
  price of the permits. Estimates range from 15 to
  40 increase by 2030.
• In the meantime, most electric appliances would
  become more efficient and use less energy.

40
Regional Disparity

• Some have argued that Indiana would be devastated
  by climate change legislation.
• It is true our electricity costs would go up more
  than most, but they are currently lower than
  most.
• Regional disparity is not as great as one might
  think because the price effects consist of direct
  and indirect effects.
• The indirect are essentially the same for all
  regions regardless of coal intensity of electric
  generation.
• They are the price increases in everything we buy
  due to the increased energy cost of producing
  those goods.

41
Midwest is major emitter of GHG emissions

• 8 Midwest States emitted 1.5 billion metric tons
  of CO2 equivalent emissions in 2003
• About 25 of U.S. emissions
• About 5 of world emissions
• If the Midwest were its own country, then it
  would be fifth largest emitter in the world.

42
Three sectors make up 75 of Midwest GHG
emissions electric generation, transportation,
industry
43
U.S.1.00
44
(No Transcript)
45

• Thanks very much!
• Questions and Comments
• For more information
• http//www.agecon.purdue.edu/directory/details.
  asp?usernamewtyner