October 8, 2008 - PowerPoint PPT Presentation

Loading...

PPT – October 8, 2008 PowerPoint presentation | free to view - id: 37870-NzFlM



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

October 8, 2008

Description:

Is a carbon price a silver bullet? ... Is a carbon price a silver bullet? 14. Scale of Opportunities to Reduce. U.S. GHGs in 2030 ... – PowerPoint PPT presentation

Number of Views:71
Avg rating:3.0/5.0
Slides: 128
Provided by: holmesh
Category:
Tags: october | prices | silver

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: October 8, 2008


1
Carbon Price Policy Design Rules Make the
Market Session 3
  • October 8, 2008
  • Holmes Hummel, PhD
  • hummel_at_stanfordalumni.org

2
Climate Policy Design Pro-Series
  • Targets, Timetables, and Technology
  • Politics of a Durable Deal Justice as Realism
  • Carbon Price Policy Designs Rules Make the
    Market
  • Managing Price-Based Policies Devils in the
    Details
  • Committing a Carbon Trust The Trillion Dollar
    Bargain
  • Essential Complementary Policies Californias
    Advantage

3
Carbon Price Policy Design
  • Rules Make the Market
  • Navigational Instruments on a Path to
    Stabilization
  • Who Pays? How Much? To Whom?
  • Cap-and-Trade 101 and 201!
  • Windfalls to Nuclear and Renewable Power

4
Problem Frame for Climate Policy Design
  • Some humans are generating a massive
    overproduction of greenhouse gases
  • And the rate is accelerating!

5
Approaches to Addressing the Problem
You should not jeopardize life on Earth just to
improve the quality of your own life experience.
Moral persuasion
You must stop polluting the atmosphere because we
say so.
Strong authority
Addressing market failures
You may continue to make decisions about your own
best interests, but we will change the options
and prices that frame your choices.
6
Line of Logic
Policy
Technology
Economy
Population
Emissions
Policy a deliberate plan of action to guide
decisions that achieve a goal
Climate Change
7
Line of Logic
  • Policy Instruments
  • Funding and Technical Assistance
  • Voluntary Agreements
  • Information and Education Programs

Policy
Investment
Technology
Economy
Population
Emissions
Policy a deliberate plan of action to guide
decisions that achieve a goal
Climate Change
8
Line of Logic
Policy
  • Policy Instruments
  • Price-Based Mechanism
  • Reporting and Disclosure
  • Information and Education Programs

Markets
Investment
Technology
Economy
Population
Emissions
Policy a deliberate plan of action to guide
decisions that achieve a goal
Climate Change
9
Market Conditions
Perfect Competition
Energy Sector
  • Many small buyers and sellers
  • Perfect freedom of entry and exit from the
    industry.
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market
  • Big monopolies, or oligopolies
  • High barriers to entry (e.g. capital intensity
    and regulatory barriers)
  • Mostly true though all sources have different
    lifecycle attributes that are commodified
    separately
  • Low price transparency
  • Depends
  • Very, very large externalities including
    climate change

10
Brief Explanation of Externalities
  • Buyers and sellers both tacitly agree to make
    others absorb some of the costs of production or
    consumption generating an externality, an
    additional cost that is external to their price.
  • If the market price is less than the full cost,
    society will overconsume that product compared
    to what would be optimal.
  • The externality can be managed through a policy
    that either limits consumption by quantity, or
    requires those involved in the trade to take
    responsibility for the full cost.
  • The full cost may be considered to be
  • The cost of damages caused by the production or
    consumption, or
  • The cost of keeping the production / consumption
    below a limit.

11
Climate Change as an Externality
  • Lets look at GHG pollution from fossil fuels
    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 in the transactions for
    fossil fuel use.
  • As a result, private costs are far less than
    social costs.
  • Climate change damages are externalized from
    fossil fuel prices.
  • Climate change is the greatest market failure
    ever seen. - Sir Nicholas Stern

Voluntary carbon offsets are one way some
consumers explicitly recognize the externality
and express a willingness to pay for it.
12
Is a carbon price a silver bullet?
  • Climate change is not the only externality of
    fossil fuel use.
  • Chain of destruction follows chain of production
  • Production Mining, drilling, and killing
  • Processing Refining and release of toxic
    substances
  • Consumption Power plants and paved planet
  • A price externality is not the only reason people
    overconsume fossil fuels.
  • Therefore, putting a price on carbon will not be
    sufficient to address either environmental
    injustice or climate change.

In fact, we waste resource on fossil fuels even
with a zero carbon price.
13
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Mid-range case, McKinsey 2007
14
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
100
90
A price on carbon will not address all the
non-price barriers to reducing GHGs or the
price insensitive reasons people consume fossil
fuels.
80
70
60
50
40
30
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
-10
Potential Gigatons/year
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
15
Is a carbon price a silver bullet?
  • Climate change is not the only externality of
    fossil fuel use.
  • Chain of destruction follows chain of production
  • Production Mining, drilling, and killing
  • Processing Refining and release of toxic
    substances
  • Consumption Power plants and paved planet
  • A price externality is not the only reason people
    overconsume fossil fuels.
  • Therefore, putting a price on carbon will not be
    sufficient to address either environmental
    injustice or climate change.

16
Essential Elements of Climate Policy Design
  • Guiding Navigation
  • Mitigation
  • Addressing Monopoly Power
  • Addressing Price Transparency
  • Addressing Split Incentives and Transaction Costs
  • Addressing Knowledge Information Gaps
  • Addressing Barriers to Market Entry
  • Addressing Negative Externality of GHG Pollution
  • Addressing Positive Externality of Technological
    Innovation
  • Adaptation
  • International engagement

17
Essential Elements of Climate Policy Design
  • Navigation
  • Reporting
  • Targets
  • Scientific Review
  • Science / Research Program
  • Mitigation
  • Addressing Monopolies
  • Addressing Price Transparency
  • Addressing Split Incentives and Transaction Costs
  • Addressing Information Gaps
  • Addressing Barriers to Market Entry
  • Addressing Negative Externality of GHG Pollution
  • Addressing Positive Externality of Research in
    Technological Innovation
  • Adaptation
  • Public (human) health
  • Ecosystem health
  • International engagement
  • Technology transfer
  • Adaptation

18
Establishing a Price for GHG Pollution
  • Adding a carbon price to private trades for
    fossil fuels could help those consumers
    internalize the full cost of climate change and
    climate risks they impose on society.
  • The sky should not be a free sewer, so the price
    is not zero.
  • As price rises, demand falls. How high should a
    carbon price be to reduce fossil fuel
    consumption?
  • By what quantity do we want to reduce demand?
  • The choice of quantity affects the optimal
    choice of price. Who should decide, and how?

This is the where proponents of a carbon tax and
market-based mechanism diverge.
19
Carbon Price Policy Design
  • Rules Make the Market
  • Navigational Instruments on a Path to
    Stabilization
  • Who Pays? How Much? To Whom?
  • Cap-and-Trade 101 and 201!
  • Windfalls to Nuclear and Renewable Power

20
Problem Frame for Climate Policy Design
  • In order to slow, stop, and reverse GHG
    emissions, we must measure what we
    want to manage.
  • How much emissions are coming from what?
  • The first climate policy element is mandatory
    reporting.

21
1. Reporting
  • UNFCCC (1990) Article 12
  • COMMUNICATION OF INFORMATION RELATED TO
    IMPLEMENTATION
  • 1. In accordance with Article 4, paragraph 1,
    each Party shall communicate to the Conference of
    the Parties, through the secretariat, the
    following elements of information
  • (a) A national inventory of anthropogenic
    emissions by sources and removals by sinks of all
    greenhouse gases not controlled by the Montreal
    Protocol, to the extent its capacities permit,
    using comparable methodologies to be promoted and
    agreed upon by the Conference of the Parties

22
1. Reporting
  • U.S. EPA reports data as already collected
    through existing authority, such as the Clean Air
    Act.
  • The Climate Registry is a protocol developed to
    encourage and standardize the terms of voluntary
    reporting by emitters.
  • 42 states now recognize the Registry, and the
    prospect of credit for early action is the
    main motivation for facilities to report.

23
2007 Federal Appropriations Bill
To authorize the EPA to require GHG reporting
across all economic sectors, Senator Feinstein
added this single sentence to the 2007
appropriations bill
Draft rule expected September 2008, followed by
public comment, with final rule expected June
2009 light speed compared to standard EPA
proceedings, but still subject to litigation.
24
1. Reporting
Key Terms for Negotiation
Sample Terms
  • Implementing authority
  • Year mandatory reporting begins
  • Frequency of data submission
  • Points of reporting
  • Upstream
  • Midstream
  • Downstream
  • Thresholds for mandatory reporting
  • Protocol for measurement
  • Third-party verification
  • Penalties for non-compliance
  • Public disclosure
  • US EPA
  • 2007
  • Quarterly (or varies by entity)
  • Points of reporting
  • Refineries, F-gas manufacturers
  • Gas processors, and LSEs
  • Power plants, industrial facilities
  • 8,000 ton/CO2-eq per year
  • Climate Registry protocol
  • Third-party auditors spot check
  • 25,000 per violation per day
  • Facilities tied together by entity (company)

25
Problem Frame for Climate Policy Design
  • A robust climate science program informs our
    thinking about societys exposure to risk from
    climate change
  • the impacts (consequences) and likelihood
    (probability) of those impacts as the
    overproduction of greenhouse gases changes the
    climate.
  • What is societys tolerance for these risks?
  • Wayne Leonard, CEO of Entergy
  • I am basically risk averse.
  • I dont believe in taking risks you cant
    manage.
  • And I dont believe in taking catastrophic
    risks at all.
  • What is a policy-makers tolerance for risk of
    losing authority?...
  • What is the limit a policy-maker would support
    putting on GHG emissions?

26
2. Targets
Key Terms for Negotiation
Sample Terms
  • Stabilization target range
  • Emissions boundary
  • Authority
  • Base year
  • Metric
  • Short-term
  • Long-term
  • Dependency / Contingency
  • 550ppm CO2-eq?
  • California
  • California EPA
  • 2000 and 1990
  • Economy-wide emissions
  • 2000 by 2010, 1990 by 2020
  • 80 below 1990 by 2050
  • None

27
2. Targets
  • Implications of the green band
  • Global GHG emissions peaking by 2020.
  • Cut global emissions at least in half by 2050.
  • Near-zero GHG emissions for entire global
    economy by 2100.
  • Presumption that we have negative emission
    technology.
  • The target? Maximum possible effort.

IPCC AR4 SYN SPM
28
Targets and Time Tables
450
IPCC AR4 SYN SPM Table 6
29
Negotiating U.S. Federal Targets
What is the maximum possible (politically
durable) effort for the U.S.?
25 below 1990 by 2020
World Resources Institute, June 2008
30
2. Targets
Key Terms for Negotiation
Sample Terms
  • Stabilization target range
  • Emissions boundary
  • Authority
  • Base year
  • Metric
  • Short-term
  • Long-term
  • Dependency / Contingency
  • 450ppm CO2-eq?
  • U.S.
  • U.S. EPA
  • 1990
  • Economy-wide emissions
  • -2 per year?
  • 80 below 1990 by 2050?
  • Commitments by other major emitters

31
Problem Frame for Climate Policy Design
  • How do we incorporate new information regarding
    climate risks or social tolerance for that risk?
  • Climate change risks turn out to be higher, or
  • Social tolerance for climate risks turn out to be
    lower
  • Political mobilization of those members of
    society with a lower tolerance for climate risk
    turns out to be stronger than policy-makers
    previously perceived
  • How should the targets be revised or updated?
  • Scientific Review process
  • Democratic process

32
3. Scientific Review
Key Terms for Negotiation
Sample Terms
  • Period of review
  • Commissioning authority
  • Executing agency
  • Scope of work
  • Obligation to act
  • Legal process for updating target policy
  • 5 years
  • U.S. EPA
  • National Academy of Science
  • Specified by legislation
  • U.S. EPA
  • Congressional Review

33
Problem Frame for Climate Policy Design
  • Where will we get the information we need to
    adaptively manage the policy expression of our
    social tolerance for climate change risk?

34
4. Climate Science Research
Key Terms for Negotiation
Sample Terms
  • Government science agenda
  • University science agenda
  • International science
  • Appropriations for all above
  • Global Change Research Program National Labs
  • National Science Foundation
  • IPCC and international consortia
  • XXX million / year

35
(No Transcript)
36
Carbon Price Policy Design
  • Rules Make the Market
  • Navigational Instruments on a Path to
    Stabilization
  • Who Pays? How Much? To Whom?
  • Cap-and-Trade 101 and 201!
  • Windfalls to Nuclear and Renewable Power

37
Designing a Carbon Price
  • Who pays?
  • How much?
  • To whom?

38
Who pays?
  • 1. Which greenhouse gases are subject to the
    policy?
  • Carbon dioxide, CO2
  • Methane, CH4
  • Nitrous Oxide, N2O
  • Halocarbons, F-gases (HFC, PFC, SF6)

39
Who pays?
  • 1. Which greenhouse gases are subject to the
    policy?
  • 2. What activity in the economy is within the
    policy scope?
  • Considerations
  • Measurability
  • Jurisdiction

40
(No Transcript)
41
Scope Economy-Wide vs. Sectoral
42
Who pays?
  • 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?
  • Considerations
  • Number of economic decisions affected
  • Administrative burden

43
Point of Regulation
NCEP 2007 Allocation rpt
44
Who pays?
  • 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?
  • Considerations
  • Number of economic decisions affected
  • Administrative burden
  • Considerations
  • Quantity of emissions
  • Administrative burden

45
Points of Regulation by Sector
In 2002, all CO2 emissions from fossil fuel
combustion in the electric power sector was
emitted from 2,200 facilities that each emitted
more than 1,000 tons. Among them, 99.9 came
from 1,600 facilities that emitted more than
10,000 tons. What should be the threshold for
defining covered entities?
Downstream
46
Points of Regulation by Sector
Upstream
47
If coal is address downstream, and oil is
addressed upstream, what about natural gas?
48
Points of Regulation by Sector
What should be the threshold for defining covered
entities?
Downstream
49
(No Transcript)
50
House Energy Commerce Committee White Paper on
Scope of
51
Points of Regulation by Sector
What should be the threshold for defining covered
entities?
Downstream
52
Points of Regulation by Sector
Not Covered
53
Midstream
54
Who pays?
  • 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?

All of these policy design decisions are
necessary for both a tax and a market-based
mechanism.
55
Designing a Carbon Price
  • Who pays?
  • How much?
  • To whom?

56
How much?
  • Should the additional cost be equal to
  • the damages imposed on society?
  • Ex cost of lost property, saving species, or
    adaptation
  • 2. the value of the social benefit of avoided
    damage?
  • Ex what its worth to society to avoid climate
    impacts
  • the value of the private cost of avoiding damage?
  • Ex the cost of replacing a coal power plant

Price discovery through political process
Price discovery through political process
Price discovery through market and failed
markets yield distorted prices
57
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
100
90
80
70
60
50
40
30
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
-10
Potential Gigatons/year
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
58
Scale of Opportunities to Reduce U.S. GHGs in
2030
Cost Real 2005 dollars per ton CO2e
100
90
80
70
60
50
40
30
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
59
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
Reduction Target
100
90
80
70
60
50
40
30
Average cost
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
Potential Gigatons/year
Industry CCS new builds on carbon-intensive
processes
-30
Biomass power Cofiring
-40
Industry Combined heat and power
-50
Manufac-turing HFCs mgmt
-60
Car hybridi-zation
-70
-80
Coal power plants CCS new builds with EOR
Cellulosic biofuels
-90
-100
Natural gas and petroleum systems mgmt
Coal-to-gas shift dispatch of existing plants
-110
Conservation tillage
Commercial buildings New shell improvements
Winter cover crops
-120
Reforestation
-230
Fuel economy packages Cars
Afforestation of pastureland
Mid-range case, McKinsey 2007
60
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
Reduction Target
100
90
80
70
Marginal cost
60
50
40
30
Average cost
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
Potential Gigatons/year
Industry CCS new builds on carbon-intensive
processes
-30
Biomass power Cofiring
-40
-50
-60
Car hybridi-zation
-70
-80
Coal power plants CCS new builds with EOR
-90
-100
Natural gas and petroleum systems mgmt
Coal-to-gas shift dispatch of existing plants
-110
Winter cover crops
-120
Reforestation
-230
Afforestation of pastureland
Mid-range case, McKinsey 2007
61
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
Reduction Target
100
90
80
70
Marginal cost
60
50
SAVINGS
40
30
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
Potential Gigatons/year
Industry CCS new builds on carbon-intensive
processes
-30
Biomass power Cofiring
-40
-50
-60
Car hybridi-zation
-70
-80
Coal power plants CCS new builds with EOR
-90
-100
Natural gas and petroleum systems mgmt
Coal-to-gas shift dispatch of existing plants
-110
Winter cover crops
-120
Reforestation
-230
Afforestation of pastureland
Mid-range case, McKinsey 2007
62
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
Reduction Target
100
90
80
70
Marginal cost
60
50
SAVINGS POTENTIAL FROM
ABATEMENT
40
30
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
Potential Gigatons/year
Industry CCS new builds on carbon-intensive
processes
-30
Biomass power Cofiring
-40
Industry Combined heat and power
-50
Manufac-turing HFCs mgmt
-60
Car hybridi-zation
-70
-80
Coal power plants CCS new builds with EOR
Cellulosic biofuels
-90
-100
Natural gas and petroleum systems mgmt
Coal-to-gas shift dispatch of existing plants
-110
Conservation tillage
Commercial buildings New shell improvements
Winter cover crops
-120
Reforestation
-230
Fuel economy packages Cars
Afforestation of pastureland
Mid-range case, McKinsey 2007
63
Scale of Opportunities to Reduce U.S. GHGs in
2030
Abatement costs lt50/ton
Cost Real 2005 dollars per ton CO2e
Reduction Target
100
90
80
70
Marginal cost
60
50
40
30
Average cost
20
10
0
1.0
1.2
0.2
0.4
0.8
0.6
1.4
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
-10
-20
Potential Gigatons/year
Industry CCS new builds on carbon-intensive
processes
-30
Biomass power Cofiring
-40
Industry Combined heat and power
-50
Manufac-turing HFCs mgmt
-60
Car hybridi-zation
-70
-80
Coal power plants CCS new builds with EOR
Cellulosic biofuels
-90
-100
Natural gas and petroleum systems mgmt
Coal-to-gas shift dispatch of existing plants
-110
Conservation tillage
Commercial buildings New shell improvements
Winter cover crops
-120
Reforestation
-230
Fuel economy packages Cars
Afforestation of pastureland
Mid-range case, McKinsey 2007
64
How much?
  • The additional cost should be equal to the
    marginal cost of avoiding damage, or mitigating
    the last quantity of emissions to reach the
    social limit.
  • If the limit is high, the price will be low
  • If the limit is low, the price will be high
  • Thus, the price will be a function of the
    target.
  • Who should decide that value, and how?

This is the big difference between a carbon tax
and a carbon cap.
65
Price On Carbon
Demand
50
20
Quantity of Permitted Emissions
50 MtCO2
100 MtCO2
66
Price On Carbon
Supply
50
20
Quantity of Permitted Emissions
50 MtCO2
100 MtCO2
67
Carbon Cap vs. Carbon Tax
Price On Carbon
Supply
Demand
P
Quantity of Permitted Emissions
Q
68
Carbon Cap vs. Carbon Tax
Price On Carbon
Demand
P
Tax
Quantity of Permitted Emissions
Q
69
Carbon Cap vs. Carbon Tax
Price On Carbon
Cap
Demand
P
Quantity of Permitted Emissions
Q
70
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?
71
Cap-and-Trade vs. Carbon Tax
  • Both policy instruments are dependent upon a
    critical policy negotiation under a great deal of
    uncertainty and 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

72
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?
73
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.
74
(No Transcript)
75
Designing a Carbon Price
  • Who pays?
  • How much?
  • To whom?

76
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?

The effect of a carbon price induced by a cap or
a tax does depend on how the money is spent
but!, neither obligates payment to those harmed
by the externality.
77
Design Considerations
EPA (Energy Comm.)
  • Jurisdiction
  • Collection
  • Enforcement
  • Authority
  • Enforcement
  • Method
  • Penalty

IRS (Ways Means)
Auction or no collection!
Tax filing
EPA
EPA IRS
Third party verification, with executive
liability?
Random inspection?
Fixed value indexed to inflation? Or a multiple
of the price?
78
Design Considerations
  • Scope
  • Point of Regulation
  • Covered Entities
  • Price discovery
  • Price management
  • Jurisdiction
  • Collection
  • Enforcement method
  • Penalty
  • Competitiveness
  • Regressivity
  • Use of Revenue
  • Considerations
  • Political acceptance
  • Durability
  • Volatility
  • Jurisdiction
  • Alignment of interests
  • Effectiveness

79
Carbon Price Policy Design
  • Rules Make the Market
  • Navigational Instruments on a Path to
    Stabilization
  • Who Pays? How Much? To Whom?
  • Cap-and-Trade 101 and 201!
  • Windfalls to Nuclear and Renewable Power

80
Cap-and-Trade Climate Policy
  • Cap-and-trade means a government authority
    establishes a cap that
  • limits the total amount of pollution allowed,
  • and then distributes permits for a right to
    pollute the global atmosphere,
  • which can be traded as private property.
  • The amount of greenhouse gas emissions permitted
    declines each year, creating demand for a new
    commodity carbon permits.
  • When offered enough money (or faced with high
    enough costs), polluters who own
    permits (or need permits) will reduce their
    emissions.
  • These trades establish a market price for
    greenhouse gas pollution.

Got it?
A familiar game can help illustrate the concepts
81
Musical Chairs A Helpful Analogy for Managed
Scarcity
  • Each chair represents the right to pollute
  • one metric ton of carbon dioxide (1 mtCO2)
  • or an equivalent amount of any other
    greenhouse gas

If you have a permit, you can have a chair.
82
Musical chairs
2008
  • At the start of the game, everyone has a seat
  • because there are no limits on carbon emissions.

All stick figures by Tormod Lund, GraffleTopia.com
83
Musical chairs
2009
  • After the first year, a cap is imposed by
    limiting the amount of permits and making players
    compete for the permits available.
  • In our analogy, one player doesnt have a chair

84
Would anyone be willing to trade their chair for
30?
85
Sure! For that price, I can finance an
efficiency upgrade, eliminating my need for a
pollution permit.
86
  • So, the market price for the right to pollute
    in the first year
  • is 30 for one ton of carbon dioxide

87
Using Market Incentives
2009
  • At that price, some players may realize it would
    be more profitable to reduce their emissions and
    sell their permits.
  • Profit opportunities are a main driver for
    innovation and investment in the global economy
    today, and the climate challenge needs both.

88
Using Market Incentives
2009
If I build wind farms to replace my coal power
plants, then I wouldnt have to pay for this
chair
89
Using Market Incentives
2010
Hey, I made a profit by reducing my fossil fuel
use and avoiding carbon emission costs!
90
Achieving Reduction Targets
2010
  • The purpose of the game is to reduce greenhouse
    gas emissions.
  • The game authority reduces the number of permits
    available
  • each year until the ultimate target has been
    achieved.

91
Achieving Reduction Targets
2050
2040
2030
2020
2010
  • In a market, players leave when they find 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
92
Achieving Reduction Targets
2050
Who will be the last greenhouse gas polluters
left in the game?
Unlike the familiar game of Musical Chairs, the
last players still vying for pollution permits
are not exactly winners
93
Achieving Reduction Targets
2050
  • The last ones remaining in the game are those
    who
  • can afford to pay the most, or
  • have the least flexibility to change games.
  • The underlying assumption is that the most
    valuable uses of fossil fuels must be the ones
    for which people are willing to pay the most.
  • To stabilize global warming, most uses of coal,
    oil, and gas will have to move to a different
    game the clean energy economy.

94
Achieving Reduction Targets
2050
  • To avoid the worst climate impacts, the U.S. must
    eliminate at least 80 of its emissions by 2050.

95
Achieving Reduction Targets
2020
  • There are no time out options between rounds.
  • As the cap tightens in each new round, fewer
    permits are available.
  • So, players have to pay higher prices to get
    pollution permits.

SELL PRICE
90
90
90
96
Achieving Reduction Targets
2020
As high as it takes to motivate one of us to
stand up.
How high can the price go?
SELL PRICE
90
90
90
97
The Carbon Market at Work
  • So, is it cheaper for me to
  • buy a permit, OR
  • reduce my own emissions?

SELL PRICE
90
90
90
98
(No Transcript)
99
Musical Chairs A Helpful Analogy
This familiar game of managed scarcity can
help illustrate the following important concepts
and issues
  • Banking
  • Borrowing
  • Trading
  • Targets
  • Leakage
  • Offsets
  • Equity
  • Ethics
  • Allocation
  • Auction
  • Safety Valve
  • Spending

100
Musical Chairs A Helpful Analogy
This familiar game of managed scarcity can
help illustrate the following important concepts
and issues
  • Coverage
  • Compliance
  • Allocation
  • Auction
  • Targets
  • Trading
  • Banking
  • Borrowing
  • Offsets
  • Leakage
  • Safety Valve
  • Spending

101
Coverage and Distribution
  • Two critical aspects of cap-and-trade are
    determined by how each round begins
  • 1. Which polluters should be required to play?
  • 2. Should polluters have to buy permits in an
    auction
  • or should they receive a free allocation
    of permits?

102
Coverage
  • For practical reasons, most proposals only
    require fossil fuel suppliers and large polluters
    to play directly.
  • As they pass their additional costs on to
    customers, the
    rest of the economy is affected by the resulting
    price signal.

Examples of covered pollution sources
103
Auctioning Permits vs Allocating for Free
  • Though sales of fossil fuels should decline as
    carbon prices rise, some of these firms want to
    be compensated for profits they might have had
    otherwise.
  • Economists say less than 20 of the permits
    should be given to them for free.

Free permits allocated to fossil fuel companies
Permits auctioned to covered companies
20
20
20
20
20
20
0
BUY
Reference Lawrence Goulder, Congressional
Budget Office Conference on Climate Change, 2007.
104
Auctioning Permits vs Allocating for Free
  • By contrast, the Lieberman-Warner bill for U.S.
    climate policy proposes giving away
    more than half the permits.
  • Those companies start out each round sitting
    down at no cost.

Auctioned permits bought by corporations
Free permits allocated to corporations
2012
0
0
0
0
20
20
0
BUY
Though portion would change over time, 1/4 are
still free in 2050.
105
Auctioning Permits vs Allocating for Free
  • Why is this a cause for concern?
  • 1. Unfair competition New players entering
    the market with innovative ideas have difficulty
    competing against pre-existing polluters who get
    free permits as a subsidy to diminish their
    political opposition.

Free permits
Auctioned permits
0
0
0
0
20
20
0
BUY
106
Auctioning Permits vs Allocating for Free
Why is this a cause for concern? 2. Unearned
windfall profits In a carbon market, firms that
buy permits in an auction will try to pass costs
to customers, and others receiving a permit for
free can sell their permits at that same price.
Free permits
Auctioned permits
0
0
0
0
20
20
0
BUY
107
Auctioning Permits vs Allocating for Free
Why is this a cause for concern? 2. Unearned
windfall profits In a carbon market, firms that
buy permits in an auction will try to pass costs
to customers, and others receiving a permit for
free can sell their permits at that same price.
0
0
0
0
20
20
0
BUY
SELL
20
20
20
20
20
20
20
Unearned windfall profits
Cost passed to consumers
108
Auctioning Permits vs Allocating for Free
When the European Union started its Emissions
Trading System, all permits were distributed for
free but charged customers their actual
value. Now the EU is committed to
auctioning nearly all of the permits to the
electric power sector as is the Regional
Greenhouse Gas Initiative (RGGI).
NCEP Allocation report, 2007
109
Concerns about Equity
  • Most unearned windfall profits in the U.S. would
    go to shareholders who are members of the top 10
    most wealthy households.
  • The top 10 of U.S. households already own 2/3 of
    the wealth,
  • and the top 1 own half of that!

References State of Working America, 2006 data
from U.S. government agencies (Census, IRS, BLS)
110
Auctioning Permits vs Allocating for Free
  • A cap-and-trade policy with 100 auction avoids
    giving away
  • unearned windfall profits and returns all
    proceeds to a
  • public policy process for spending decisions.

BUY
All seats sold at auction to the highest bidders
How auction revenue is spent affects the speed
and cost of a clean energy revolution to avoid
climate change catastrophes.
111
(No Transcript)
112
Offsets Where Flexibility
A player may find a business sector (or entire
country) that isnt covered by the policy but
has a lower cost opportunity to reduce emissions.
Reducing methane from hog farms
SELL PRICE
20
20
20
15
113
Offsets Where Flexibility
Because all tons of carbon emissions affect the
atmosphere the same, this offset could be
accepted as equivalent to a permit.
No one would have used this chair unless I went
out and bought it and its just as good as any
other!
SELL PRICE
20
20
20
20
114
(No Transcript)
115
Offsets Where Flexibility
However, it can be difficult to verify that the
players investment was responsible for those
reductions and that they actually happened.
Therefore, standards for offsets must be high to
ensure the carbon reductions are real and not
hot air.
  • Sample Criteria
  • Real
  • Additional
  • Verifiable
  • Permanent
  • Enforceable

SELL PRICE
20
20
20
20
116
Offsets Where Flexibility
However, it can be difficult to verify that the
players investment was responsible for those
reductions and that they actually happened.
Therefore, standards for offsets must be high to
ensure the carbon reductions are real and not
hot air.
  • Sample Projects
  • Bio-sequestration
  • Industrial GHGs
  • Methane Capture
  • Renewable Energy
  • Energy Efficiency

SELL PRICE
20
20
20
20
117
Offsets Where Flexibility
However, it can be difficult to verify that the
players investment was responsible for those
reductions and that they actually happened.
Therefore, standards for offsets must be high to
ensure the carbon reductions are real and not
hot air.
  • Sample Standards
  • Clean Devt Mech.
  • Gold Standard
  • Vol. Carbon Std 07
  • VER
  • Chicago Climate Exch.

SELL PRICE
20
20
20
20
118
Offsets Where Flexibility
However, it can be difficult to verify that the
players investment was responsible for those
reductions and that they actually happened.
Therefore, standards for offsets must be high to
ensure the carbon reductions are real and not
hot air.
SELL PRICE
20
20
20
20
Voluntary Offsets are a social product. They do
not present a large risk to a cap-and-trade
system.
119
Offsets Where Flexibility
China, India, and other countries have some very
low cost opportunities to reduce
emissions. However, the U.S. Congress did not
ratify the Kyoto Protocol that makes use of the
Clean Development Mechanism for offsets.
SELL PRICE
20
20
20
20
120
Banking When Flexibility
2020
Players who receive more permits than they need
would like to bank them. By saving a spare
permit, the player can to pollute that amount in
a future year or to sell that permission to
someone else in the future.
SELL PRICE
90
90
90
90
121
Banking When Flexibility
2020
Im glad I reduced emissions and saved permits in
earlier years because now they are worth much
more!
SELL PRICE
90
90
90
20
122
Early Action When Flexibility
2020
Im glad I bought emissions permits in earlier
years because now they are worth much more!
SELL PRICE
90
90
90
20
123
Borrowing When Flexibility
2020
Similarly, some people who lack sufficient
permits to cover their pollution would like to
borrow them from the permits they expect to
receive in the future.
I cant afford this market. Id rather borrow
from the future and hope that technology and
business opportunities get better
SELL PRICE
90
90
90
90
124
Borrowing When Flexibility
2020
Didnt Social Security and the national debt
get into trouble that way??
SELL PRICE
90
90
90
90
125
Borrowing When Flexibility
2020
Extending the compliance period by a few months
(or at most a few years) adds similar flexibility
to borrowing and helps avoid price spikes without
the administrative burden of securing
credit. Minimum compliance can be 90 (i.e.
maximum 10 float.)
SELL PRICE
on credit, due within 1 year
90
90
90
90
126
(No Transcript)
127
Competitiveness Concern
2020
  • Either reducing emissions or passing an
    additional cost of carbon permits to customers
    may be difficult for some manufacturers that make
    energy-intensive global commodities (e.g. steel,
    aluminum, cement, glass).

SELL PRICE
90
90
90
90
128
Competitiveness Concern
2050
At higher carbon prices, Ill need to close my
cement plant or move it to another country...
SELL PRICE
90
90
90
90
129
Competitiveness Concern Leaking Emissions
Leakage occurs when polluters move outside a
carbon cap territory to avoid regulation which
may drive jobs away and still not reduce global
emissions.
SELL PRICE
90
90
90
90
130
Competitiveness Concern Leaking Emissions
A tight international agreement or global carbon
price would diminish any reward for industrial
migration due to climate policy. but it could
be a long time before either of those feats of
diplomacy are accomplished.
SELL PRICE
90
90
90
90
90
131
Competitiveness Concern
In the meantime, Output-Based Rebates can relax
any competitive disadvantage for energy-intensive
manufacturers of global commodities (e.g. iron,
cement, steel, paper, glass) by returning carbon
costs based on the best performance standard in
each industry, motivating all to improve not
move.
SELL PRICE
90
90
90
90
132
Competitiveness ConcernOutput-Based Rebate
For example, if a steel manufacturer made 4 mtCO2
tons of pollution for each ton of steel
(really!), it would buy 4 chairs. If the industry
best practice were 3 mtCO2, it would get a rebate
of 3 chairs (not 4) for every ton of steel it
produced.
SELL PRICE
90
90
90
90 x Best Practice Pollution Actual
Pollution per Output
133
Climate Policy Design Pro-Series
  • Targets, Timetables, and Technology
  • Politics of a Durable Deal Justice as Realism
  • Carbon Price Policy Designs Rules Make the
    Market
  • Managing Price-Based Policies Devils in the
    Details
  • Committing a Carbon Trust The Trillion Dollar
    Bargain
  • Essential Complementary Policies Californias
    Advantage
About PowerShow.com