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Making Climate Change Policy Work in Difficult Economic Times:

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Making Climate Change Policy Work in Difficult Economic Times: ... (RGGI, 'Reggie') EU. Emissions. Trading. System (EU ETS) Cap-and-Trade Systems Under Development ... – PowerPoint PPT presentation

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Title: Making Climate Change Policy Work in Difficult Economic Times:


1
An Overview of Price-based Climate Policies
  • Making Climate Change Policy Work in Difficult
    Economic Times
  • A Conference Focusing on the Job and Equity
    Impacts of
  • Carbon Pricing Policies
  • May 5, 2009
  • Holmes Hummel, PhD
  • www.holmeshummel.net/ClimatePolicyDesign

2
Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
3
Climate Change as an Externality
  • Why are people using fossil fuels?
  • The benefit of work produced with those products
    exceeds the burden individual users bear for that
    consumption.
  • But consumers (including companies) dont pay for
    climate change damages, instead using the sky as
    a free sewer for pollution.
  • As a result, private costs are far less than
    social costs.
  • When climate change damages are externalized from
    fossil fuel prices, society is subsidizing fossil
    fuel users by setting the price of pollution at
    zero.
  • Adding a carbon price to private trades for
    fossil fuels prompts consumers (including
    companies) internalize the full cost of climate
    change and climate risks they impose on
    society.
  • Climate change is the greatest market failure
    ever seen. - Sir Nicholas Stern

4
Achieving Reduction Targets
  • The purpose of a price-based climate policy is to
  • change peoples choices so we move toward a clean
    energy economy
  • as a least cost option that is in societys best
    interest.

Carbon Price (/MtCO2)
Annual U.S. Emissions (MtCO2)
5
Achieving Reduction Targets
  • 1. How far do we want to reduce demand for
    pollution?
  • 2. How high should the price be to reduce that
    quantity of pollution?

Carbon Price (/MtCO2)
Annual U.S. Emissions (MtCO2)
6
Achieving Reduction Targets
  • The choice of quantity (targets) affects the
    optimal choice of price.
  • Who should decide, and how?
  • This is where proponents of Tax vs. Cap-and-Trade
    differ.

Carbon Price (/MtCO2)
Annual U.S. Emissions (MtCO2)
7
Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
8
Covering GHG Pollution
End-Use
Sectors
Transportation
Carbon Dioxide
Electricity
U.S. Sources
U.S. GHG Emissions
Industry
Methane
World Resources Institute 2003 data
9
Covering GHG Pollution
End-Use
Sectors
Transportation
Regional Greenhouse Gas Initiative (RGGI)
Carbon Dioxide
U.S. Sources
U.S. GHG Emissions
Industry
World Resources Institute 2003 data
10
Covering GHG Pollution
End-Use
Sectors
Price-based policies can only cover sectors in
which GHGs can be reliably measured, reported,
and verified
Carbon Dioxide
U.S. Sources
U.S. GHG Emissions
OFFSETS INSIDE U.S.
World Resources Institute 2003 data
11
Point of Regulation
Oil Gas
Power Plants Industry
The purpose of a price-based policy is to have it
affect as many purchases as possible all the way
to consumers. Shielding consumers means they
dont get the message.
National Commission on Energy Policy 2007
12
Point of Regulation
Oil Gas
Power Plants Industry
The purpose of a price-based policy is to have it
affect as many purchases as possible all the way
to consumers. Shielding consumers means they
dont get the message.
National Commission on Energy Policy 2007
13
Who pays?
All of these policy design decisions are
necessary for both a tax and cap-and-trade.
  • 1. Which greenhouse gases are subject to the
    policy?
  • 2. What part of the economy is within the scope
    of the policy?
  • 3. What is the point of regulation for each
    sector in the scope?
  • 4. Who are the covered entities under the policy?

14
Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
15
Price On Carbon
Demand
50
20
Quantity of Allowed Emissions
50 MtCO2
100 MtCO2
16
Price On Carbon
Supply
50
20
Quantity of Allowed Emissions
50 MtCO2
100 MtCO2
17
Carbon Cap vs. Carbon Tax
Price On Carbon
Supply
Demand
P
Quantity of Allowed Emissions
Q
18
Carbon Cap vs. Carbon Tax
Price On Carbon
Demand
P
Tax
Quantity of Allowed Emissions
Q
19
Carbon Cap vs. Carbon Tax
Price On Carbon
Cap
Demand
P
Quantity of Allowed Emissions
Q
20
Carbon Cap vs. Carbon Tax
Carbon Cap
Price On Carbon
Demand
Demand
Carbon Tax
P
P
Q
Quantity of Emissions
Q
Should we set the quantity and let markets
determine the price for a scarce resource?
Should we set the price and let markets
determine the quantity of pollution?
21
Cap-and-Trade vs. Carbon Tax
  • Both are dependent upon a critical policy
    negotiation subject to a great deal of political
    pressure.
  • Either of these policy instruments can be
    effective, depending on their design.
  • Climate policy design is about risk management.
  • Risk Probability X Consequence
  • Lets consider the risk exposure

22
Cap-and-Trade vs. Carbon Tax
Carbon Cap
Price On Carbon
Demand
Demand
Carbon Tax
P
P
Q
Quantity of Emissions
Q
What risks do we face in setting the quantity of
emissions?
What risks do we face in setting the price of
emissions?
23
Carbon Cap vs. Carbon Tax
A.
  • What is the likelihood that such a political
    process will yield a tax that is too low?
  • What are the consequences of having a low carbon
    tax?
  • What is the likelihood that a political process
    will yield a cap quantity that is too tight?
  • What are the consequences of having a tight cap?
  • Which of these two carbon price policy options
    present a greater risk exposure?
  • This is a subjective judgment that depends on who
    you are and what interests you represent.

B.
C.
24
How does Cap-and-Trade figures out The
Price on greenhouse gas pollution?
25
Musical Chairs A Helpful Analogy for Managed
Scarcity
  • Each chair represents the permission to
    pollute
  • one metric ton of carbon dioxide (1 mtCO2)
  • or an equivalent amount of any other
    greenhouse gas

If you have an allowance, you can have a chair.
26
Players Polluters at Points of Regulation
Chemical companies
Power Plants
Oil Refineries
Natural Gas companies
Aluminum smelters
27
Cap-and-Trade
28
Polluters Compete for Scarce Permits
29
Carbon Price Established by Market Activity
So, is it more profitable to buy a permit,
OR reduce my own emissions?
Profit opportunities are a main driver for
innovation and investment, and the climate
challenge needs both.
30
Carbon Price Established by Market Activity
40
Would anyone accept 40 for your permit?
31
Carbon Costs Passed to Consumers
Sending a price signal is the point of the policy!
40
40
40
40
40
35 per gallon
2.5 per kWh
0.6 per therm
People Respond?
32
Moving to Clean Energy
2050
2040
2030
2020
2010
  • Players seek better options as costs rise.
  • Cap-and-trade lets players choose at what price
    they leave the game
  • and how they want to make that change.

Rail Transport
Hybrid vehicle
Nuclear power
Wind power
Solar power
Green buildings
33
Overview of Carbon Price Policies
  • Purpose
  • Who pays?
  • How much and who decides?
  • What is the spending plan?

34
To whom?
Government is considered a proxy for society.
  • What agent of jurisdiction should collect?
  • What is the method of collection?
  • Who has enforcement authority?
  • What is the method for enforcement?
  • What is the penalty for non-payment by covered
    entities at the points of regulation?
  • How should the money be spent?

35
Extreme Inequity in AmericaMakes a Any Carbon
Price a Regressive TaxUnless there is a
Progressive Spending Plan
36
Extreme Inequity in AmericaMakes a Any Carbon
Price a Regressive TaxUnless there is a
Progressive Spending Plan
Extreme Inequity in AmericaMakes a Any Carbon
Price a Regressive TaxUnless there is a
Progressive Spending Plan
37
Obamas budget chief is counting on 75 Billion
in annual carbon revenue. It does not come out
of thin air and its not free, new money.
The effect of a carbon price induced by a cap or
a tax does depend on how the money is spent.
38
CAP
39
Carbon Allowances
Cap Trade Free Allocation
EPA photo of NSR power plant in Kentucky
40
Carbon Allowances
Cap Trade AUCTION
EPA photo of NSR power plant in Kentucky
41
Carbon Allowances
Cap Trade AUCTION
EPA photo of NSR power plant in Kentucky
42
Carbon Allowances
Cap Trade, Auction, DIVIDEND
EPA photo of NSR power plant in Kentucky
43
Carbon Allowances
Cap Trade, Auction, INVEST
EPA photo of NSR power plant in Kentucky
44
Carbon Allowances
Cap Trade, Auction, Dividend
Invest Intl Commitments
EPA photo of NSR power plant in Kentucky
45
Carbon Taxes
Cap Tax, Control, Dividend
Invest Intl Commitments
EPA photo of NSR power plant in Kentucky
46
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47
Price-Based Policy Design Issues
  • TRADE
  • Allocation of Allowances
  • Offsets
  • Banking Borrowing
  • Price Control Keeping the Cap Tight
  • TAX
  • Updating the Tax Value
  • Regulations to Achieve the Pollution Cap
  • BOTH
  • Target
  • Who Has to Play
  • How to Catch Violations
  • Competitiveness
  • Spending

Free Permission to Pollute Is Not Free
48
Cap-and-Trade Systems Under Development
EU Emissions Trading System (EU ETS)
Western Climate Initiative (WCI)
Regional Greenhouse Gas Initiative (RGGI,
Reggie)
49
u
Californias Strategy to Reduce Emissions to
1990 by 2020 174 MMTCO2E below baseline 10
below 2002-2004
Low Carbon Fuel Standard
Transportation Other Vehicle Measures
Vehicle GHG Standards
Efficiency Standards Incentive Programs
Renewable Portfolio Standard 33 by 2020
Other
Million Solar Roofs
F-Gases Refrigerants
Sustainable Forests
50
u
Californias Strategy to Reduce Emissions to
1990 by 2020 174 MMTCO2E below baseline 10
below 2002-2004
Low Carbon Fuel Standard
Transportation Other Vehicle Measures
Vehicle GHG Standards
Efficiency Standards Incentive Programs
Renewable Portfolio Standard 33 by 2020
Cap-And-Trade Market Response
Million Solar Roofs
F-Gases Refrigerants
Sustainable Forests
51
An Overview of Price-based Climate Policies
  • Making Climate Change Policy Work in Difficult
    Economic Times
  • A Conference Focusing on the Job and Equity
    Impacts of
  • Carbon Pricing Policies
  • May 5, 2009
  • Holmes Hummel, PhD
  • www.holmeshummel.net/ClimatePolicyDesign
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