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January 23, 2009

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Many small buyers and sellers. Perfect freedom of entry and exit from the industry. ... Many small buyers and sellers ... Few sellers, many buyers ... – PowerPoint PPT presentation

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Title: January 23, 2009


1
Complementary Policies for Climate Change
Basis, Design, Strategy
  • January 23, 2009
  • Holmes Hummel, PhD
  • hummel_at_stanfordalumni.org
  • www.holmeshummel.net/ClimatePolicyDesign

2
Complementary Policies
  • Seeking a Price Response in Failed Markets
  • Making the Case for Complementary Policies
  • Considering a Federal Climate Action Plan
  • Annex Smart Grid (EISA Title XIII)

3
U.S. Approach Cap-and-Trade
4
Polluters Compete for Scarce Permits
5
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.
6
Carbon Price Established by Market Activity
40
Would anyone accept 40 for your permit?
7
Carbon Costs Passed to Consumers
40
40
40
40
40
35 per gallon
2.5 per kWh
0.6 per therm
People Respond?
8
Achieving Reduction Targets
  • To stabilize global warming, most uses of coal,
    oil, and gas will have to move to a different
    game the clean energy economy.

What price trajectory would be sufficient to
drive people away from fossil fuels? Modeling
results are highly uncertain
Carbon Price (/MtCO2)
Annual U.S. Emissions (MtCO2)
9
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
10
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
11
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.

12
(No Transcript)
13
Market Conditions
Perfect Competition
  • 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

SELLERS
BUYERS
14
Market Conditions
Perfect Competition
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

15
Market Conditions
Perfect Competition
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

16
Market Conditions
Perfect Competition
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

3.99
3.99
3.20
17
Market Conditions
Perfect Competition
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

3.99
3.99
3.20
18
Market Conditions
Perfect Competition
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

3.99
3.99
3.20
19
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

3.99
3.99
3.20
20
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

3.99
3.99
3.20
21
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

/Btu?
??
22
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Persistent transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market

??
/Btu?
23
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Persistent transaction costs
  • Many, Very Large Externalities climate change
    is just one

??
/Btu?
24
Complementary Policies
  • Seeking a Price Response in Failed Markets
  • Making the Case for Complementary Policies
  • Considering a Federal Climate Action Plan
  • Annex Smart Grid (EISA Title XIII)

25
1 Complementary Policies Reduce the Cost of
Price-Based Policies
26
1 Complementary Policies Reduce the Cost of
Price-Based Policies
Abatement costs lt50/ton
COST (/tonCO2)
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
Potential Gigatons/year IN 2030
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
27
1 Complementary Policies Reduce the Cost of
Price-Based Policies
Abatement costs lt50/ton
COST (/tonCO2)
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
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
1.6
1.2
1.4
-10
Potential Gigatons/year IN 2030
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
28
1 Complementary Policies Reduce the Cost of
Price-Based Policies
Abatement costs lt50/ton
COST (/tonCO2)
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
Potential Gigatons/year IN 2030
-20
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
29
1 Complementary Policies Reduce the Cost of
Price-Based Policies
Abatement costs lt50/ton
COST (/tonCO2)
Reduction Target 1 GtCO2e
100
90
80
70
60
40 / tonCO2
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
Potential Gigatons/year IN 2030
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
30
1 Complementary Policies Reduce the Cost of
Price-Based Policies
Abatement costs lt50/ton
COST (/tonCO2)
Reduction Target 1 GtCO2e
100
90
80
70
60
40 / tonCO2
50
40
10 Billion
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 IN 2030
-30
-40
-50
-60
-70
-80
-90
-100
-110
-120
-230
Mid-range case, McKinsey 2007
31
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
Abatement costs lt50/ton
COST (/tonCO2)
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
Potential Gigatons/year IN 2030
-30
-40
-50
-60
-70
-80
-90
-100
Shift dispatch of existing plants from coal to
natural gas
-110
-120
-230
Mid-range case, McKinsey 2007
32
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
33
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
20/tCO2
Carbon Price 0/tCO2
Sets Price
Sets Price
Market Price
Market Price
Profit
Profit
Profit
Profit
Profit
Profit
Dispatch Price per MWh
Dispatch Price per MWh
34
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
20/tCO2
Carbon Price 0/tCO2
Sets Price
Sets Price
Market Price
Market Price
Profit
Profit
Profit
Profit
Profit
Profit
Dispatch Price per MWh
Dispatch Price per MWh
35
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
150/tCO2
36
2 People May Reject a Carbon Price Signal Before
They Reject Fossil Fuels
150/tCO2
37
3 Stabilization Requires Reducing Emissions
Outside a Managed Cap of Measurable Sources
CAP
OFFSETS
World Resources Institute 2003 data
38
Complementary Policies
  • Seeking a Price Response in Failed Markets
  • Making the Case for Complementary Policies
  • Considering a Federal Climate Action Plan
  • Annex Smart Grid (EISA Annex XIII)

39
Market Conditions
Perfect Competition
Energy Sector
  • Many small buyers and sellers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • Perfect freedom of entry and exit from the
    industry.
  • Perfect knowledge
  • Low transaction costs
  • No externalities arising from production and/or
    consumption which lie outside the market
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Persistent transaction costs
  • Many, Very Large Externalities climate change
    is just one

40
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Persistent transaction costs
  • Many, Very Large Externalities climate change
    is just one

Complementary Policies
Price-Based Policies
41
Market Conditions
Energy Sector
  • Few sellers, many buyers
  • Homogeneous products are supplied to the markets
    that are perfect substitutes.
  • High capital requirements and regulatory barriers
    to entry
  • Lack of transparency
  • Persistent transaction costs
  • Many, Very Large Externalities climate change
    is just one
  • Curing market failures
  • Coping with market failures
  • Covering emissions by sector

Price-Based Policies
42
Designing Complementary Policies
An economy-wide cap-and-trade policy does not
distinguish between sectors
End-Use
CAP
U.S. GHG Emissions
U.S. Sources
OFFSETS INSIDE U.S.
World Resources Institute 2003 data
43
Designing Complementary Policies
End-Use
Transportation
Distance Mode Fuel Source Fuel Economy
U.S. GHG Emissions
U.S. Sources
World Resources Institute 2003 data
44
Californias Strategy to Reduce Emissions to
1990 by 2020 174 MMTCO2E below baseline 10
below 2002-2004
Vehicle GHG Standards
45
Californias Strategy to Reduce Emissions to
1990 by 2020 174 MMTCO2E below baseline 10
below 2002-2004
Low Carbon Fuel Standard
Vehicle GHG Standards
46
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
47
Designing Complementary Policies
End-Use
Transportation
Electric Power Sector
U.S. GHG Emissions
U.S. Sources
World Resources Institute 2003 data
48
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
49
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
50
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
Million Solar Roofs
51
Designing Complementary Policies
End-Use
U.S. GHG Emissions
U.S. Sources
Industrial Gases
World Resources Institute 2003 data
52
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
Million Solar Roofs
F-Gases Refrigerants
53
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
Million Solar Roofs
F-Gases Refrigerants
Sustainable Forests
54
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
55
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
56
Designing Complementary Policies
End-Use
U.S. GHG Emissions
U.S. Sources
CAP
OFFSETS INSIDE U.S.
World Resources Institute 2003 data
57
Most of the Industrial GHG Emissions Covered by a
Cap-and-Trade Policy are in 5 Sub-Sectors
Energy Intensive Industries
Capped
58
Most of the Industrial GHG Emissions Covered by a
Cap-and-Trade Policy are in 5 Sub-Sectors
ISO 50001 Intl Energy Management Std.
Capped
59
Complementary Policies for EE RE
  • National Action Plan for Energy Efficiency
    recommendations
  • Renewable Portfolio Standard Renewable Fuel
    Standard
  • Generation performance standards Low Carbon Fuel
    Standard
  • Requiring efficiency to be an alternative in
    power plant EIS studies
  • Remove barriers to grid access (Free the Grid
    report)
  • Green power purchases and marketing
  • Combined heat and power (CHP) standards,
    incentives, and/or barrier removal
  • Public Benefits Charge and all that it could
    fund

60
Policy Horizon
  • On the Books
  • EPAct 2005
  • EISA 2007
  • Existing executive authorities across all
    departments
  • Looking ahead
  • New Energy for America
  • SAFETEA-LU (Transportation Reauthorization)
  • Cap-and-Trade legislation
  • Mass vs. EPA regulations

61
Complementary Policies
  • Seeking a Price Response in Failed Markets
  • Making the Case for Complementary Policies
  • Considering a Federal Climate Action Plan
  • Annex Smart Grid (EISA Title XIII)

62
Supplemental questions on Smart Grid
  • What does Smart Grid do?
  • What characterizes a Smart Grid?
  • What does Smart Grid deliver?
  • as specified in the Energy Independence and
    Security Act of 2007

63
What does a Smart Grid do?(EISA Title XIII)
  • Dynamic optimization of grid operations and
    resources, with full
    cyber-security.
  • Development and incorporation of demand response,
    demand-side resources, and
    energy-efficiency resources.
  • Provision to consumers of timely information and
    control options.

64
What characterizes a Smart Grid?(EISA TitleXIII)
  • Increased use of digital information and controls
    technology to improve reliability, security, and
    efficiency of the electric grid.
  • Deployment and integration of distributed
    generation (e.g. renewable resources)
  • Deployment and integration of advanced
    electricity storage and peak-shaving
    technologies, including plug-in electric and
    hybrid electric vehicles, and thermal-storage air
    conditioning.
  • Deployment of smart' technologies (real-time,
    automated, interactive technologies that optimize
    the physical operation of appliances and consumer
    devices) for metering, communications concerning
    grid operations and status, and distribution
    automation.
  • Integration of smart' appliances and consumer
    devices.
  • Development of standards for communication and
    interoperability of appliances and equipment
    connected to the grid, including grid
    infrastructure.
  • Identification and lowering of unreasonable or
    unnecessary barriers to adoption of smart grid
    technologies, practices, and services.

65
What does a Smart Grid deliver?(EISA Title XIII)
  • The ability to measure or monitor electricity use
    as a function of time of day, power quality
    characteristics such as voltage level, current,
    cycles per second, or source or type of
    generation and to store, synthesize or report
    that information by digital means.
  • The ability to sense and localize disruptions or
    changes in power flows on the grid and
    communicate such information instantaneously and
    automatically for purposes of enabling automatic
    protective responses to sustain reliability and
    security of grid operations.
  • The ability to detect, prevent, communicate with
    regard to, respond to, or recover from system
    security threats, including cyber-security
    threats and terrorism, using digital information,
    media, and devices.
  • The ability of any appliance or machine to
    respond to such signals, measurements, or
    communications automatically or in a manner
    programmed by its owner or operator without
    independent human intervention.
  • The ability to use digital information to operate
    functionalities on the electric utility grid that
    were previously electro-mechanical or manual.
  • The ability to use digital controls to manage and
    modify electricity demand, enable congestion
    management, assist in voltage control, provide
    operating reserves, and provide frequency
    regulation.

66
Complementary Policies for Climate Change
Basis, Design, Strategy
  • January 23, 2009
  • Holmes Hummel, PhD
  • hummel_at_stanfordalumni.org
  • www.holmeshummel.net/ClimatePolicyDesign
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