Title: Making Climate Change Policy Work in Difficult Economic Times:
1An 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
2Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
3Climate 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
4Achieving 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)
5Achieving 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)
6Achieving 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)
7Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
8Covering GHG Pollution
End-Use
Sectors
Transportation
Carbon Dioxide
Electricity
U.S. Sources
U.S. GHG Emissions
Industry
Methane
World Resources Institute 2003 data
9Covering 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
10Covering 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
11Point 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
12Point 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
13Who 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?
14Overview of Carbon Price Policies
Purpose Who pays? How much and who
decides? What is the spending plan?
15Price On Carbon
Demand
50
20
Quantity of Allowed Emissions
50 MtCO2
100 MtCO2
16Price On Carbon
Supply
50
20
Quantity of Allowed Emissions
50 MtCO2
100 MtCO2
17Carbon Cap vs. Carbon Tax
Price On Carbon
Supply
Demand
P
Quantity of Allowed Emissions
Q
18Carbon Cap vs. Carbon Tax
Price On Carbon
Demand
P
Tax
Quantity of Allowed Emissions
Q
19Carbon Cap vs. Carbon Tax
Price On Carbon
Cap
Demand
P
Quantity of Allowed Emissions
Q
20Carbon 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?
21Cap-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
22Cap-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?
23Carbon 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.
24How does Cap-and-Trade figures out The
Price on greenhouse gas pollution?
25Musical 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.
26Players Polluters at Points of Regulation
Chemical companies
Power Plants
Oil Refineries
Natural Gas companies
Aluminum smelters
27Cap-and-Trade
28Polluters Compete for Scarce Permits
29Carbon 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.
30Carbon Price Established by Market Activity
40
Would anyone accept 40 for your permit?
31Carbon 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?
32Moving 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
33Overview of Carbon Price Policies
- Purpose
- Who pays?
- How much and who decides?
- What is the spending plan?
34To 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?
35Extreme Inequity in AmericaMakes a Any Carbon
Price a Regressive TaxUnless there is a
Progressive Spending Plan
36Extreme 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
37Obamas 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.
38CAP
39Carbon Allowances
Cap Trade Free Allocation
EPA photo of NSR power plant in Kentucky
40Carbon Allowances
Cap Trade AUCTION
EPA photo of NSR power plant in Kentucky
41Carbon Allowances
Cap Trade AUCTION
EPA photo of NSR power plant in Kentucky
42Carbon Allowances
Cap Trade, Auction, DIVIDEND
EPA photo of NSR power plant in Kentucky
43Carbon Allowances
Cap Trade, Auction, INVEST
EPA photo of NSR power plant in Kentucky
44Carbon Allowances
Cap Trade, Auction, Dividend
Invest Intl Commitments
EPA photo of NSR power plant in Kentucky
45Carbon Taxes
Cap Tax, Control, Dividend
Invest Intl Commitments
EPA photo of NSR power plant in Kentucky
46(No Transcript)
47Price-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
48Cap-and-Trade Systems Under Development
EU Emissions Trading System (EU ETS)
Western Climate Initiative (WCI)
Regional Greenhouse Gas Initiative (RGGI,
Reggie)
49u
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
50u
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
51An 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