Tools for Climate and Energy Policy. Week 5: Energy and Climate Policy PB AF 595 April 26, 2012 Michael Lazarus and Matt Steuerwalt

Transcription

1 Tools for Climate and Energy Policy Week 5: Energy and Climate Policy PB AF 595 April 26, 2012 Michael Lazarus and Matt Steuerwalt 1

2 Preferences 1. Carbon/GHG Tax 2. GHG Cap and Trade 3. Direct regulation of emission sources 4. No action A. Which would you prefer to see implemented? B. Which do you think is most likely? 2

3 Overview Climate and energy policy instruments: compare and contrast Federalism: energy and climate (briefly) Cap-and-trade (emissions trading) 101 Key design considerations Different perspectives Small group discussion: Tax vs. Trade vs. Regulate 3

4 Why not just put a price on carbon and go home? Policies to reduce emissions should be based on three essential elements: carbon pricing, technology policy, and removal of barriers to behavioral change Stern, xviii 4

5 Climate and energy policy instruments Economy-wide policies (e.g. cap-and-trade or carbon tax) and/or Sectoral policies (e.g. renewable portfolio standards, targeted tax incentives)? Regulatory tools and/or non-regulatory tools Market mechanisms (cap and trade, taxes) and/or Direct regulation ( command-and-control )? Federal policy and/or state policy? To what extent do they complement or compete with one another? 5

6 Another View (Leggett) Regulatory $$ distribution Non-regulatory tools (energy star) technology forcing Easing transition Encouraging international Adaptation 6

7 IPCC on national policy instruments (Ch.13 WGIII) 7

8 Some sectoral policy instruments Sector Policies, measures, instruments Issues Energy supply Buildings and Industry (RCI) Transport ation Reduced fossil fuel subsidies Renewable (or low-carbon?) portfolio standards Feed-in tariffs Production tax credit Research and development Carbon capture and storage projects Appliance standards, building codes, labeling Energy savings targets or funds, DSM programs Tax incentives, subsidies, purchasing requirements for low-co2 products Decoupling elec and gas sales and revenues Voluntary agreements Vehicle fuel economy or GHG standards Pricing fuels, road use, parking Growth management, land use regulation, public transit investment Resistance by vested interests ~20 states, Congressional hurdles European way On/off status weakens signal Decline since 1980s Witness FutureGen Requires updating Mainstay of state EE policies Creates new markets Resistance by large customers Success debatable Doesn t address use Price response? Politics hard Most effective in fast growing regions 8

9 Tools and criteria for evaluating these policies with respect to: Adequacy (effectiveness): Achievement of overall climate objectives Equity: Burdens and benefits shared appropriately Efficiency: Cost-effective in achieving these goals (Political) Feasibility 9

10 Examples of Market Mechanisms Emissions Cap-and-Trade Carbon Tax or Per Ton Emissions Charge Renewable Portfolio Standard (RPS) with Certificates Trading Low Carbon Fuel Standard (LCFS) with Certificates Trading Individual Transferable Quotas in Fisheries Courtesy of Franz Litz, WRI 1 WORLD RESOURCES INSTITUTE 10

11 Why Market Mechanisms? Enable linkage with the rest of the world Take advantage of gains from trade Drive innovation Create a price for greenhouse gas emissions, and allow market forces to: minimize the cost of making substantial reductions Help find most efficient path to compliance Stimulate technological innovation and lead to further cuts in the future Identify solutions regulators cannot anticipate Courtesy of Franz Litz, WRI 1 WORLD RESOURCES INSTITUTE 11

12 Examples of Direct Regulation Clean Air Act Massachusetts v. EPA Clean Water Act Endangered Species Act Typically enforced by some prohibition or measured against some standard 12

13 Carbon Tax Government assesses per unit charge for pollution Pollution charge results in reduced pollution, because pollution costs the firms money Firms would reduce pollution as long as it is cheaper to reduce rather than pay the charge Emission reductions uncertain--reductions proceed until the marginal cost of reduction = tax or charge Emphasis is therefore on cost, or revenue, not reductions Courtesy of Franz Litz, WRI 13 WORLD RESOURCES INSTITUTE 13

14 Carbon Tax vs. Cap-and-Trade Extent of Emissions reductions uncertain Price of carbon set at level of tax Both establish market signal to reduce emissions Emissions reductions fixed by Cap Price of carbon is function of supply and demand in emissions market Both establish market signal to reduce emissions Source of revenue that can be used for complementary purposes Courtesy of Franz Litz, WRI 14 Source of revenue can come from auction of allowances 14

15 A Little Test CAFÉ? Emissions Performance Standard? Production Tax Credit? Gas Tax? Does it matter who bears the compliance obligation? Does it matter who pays? 15

16 Can regulatory or technology standards be more effective, efficient, or equitable than market-based mechanisms? If so, under what conditions? What market barriers stand in the way of R&D investment? 16

17 Federalism: Energy and Climate 17

18 States often shape federal policy What is the role for states once federal policy is enacted? State Action When Corresponding Federal Action When State Acid Rain Laws 1985 Federal Acid Rain Program 1990 State Air Toxics Laws 1987 Federal Air Toxics Program 1990 State NOx Trading (OTC) 1995 Federal NOx SIP Call 2004 State Mercury Laws Federal CAMR Rule 2005 State RPS Laws Federal RPS Law Introduced State 4-P Laws for Power Plants Federal 4-P Law Introduced Statewide GHG Reduction Laws Federal GHG Law (Waxman; Cantwell; KGL) Introduced State GHG Reductions from Vehicles 2002 Federal Vehicle GHG Standards? 18

19 The pre-emption issue: Climate Many states are concerned that federal legislation may limit their ability to lead, to exceed what the federal government can agree to, to generate co-benefits, to maintain programs already established, etc. Pre-emption can be direct or indirect Pre-emption can affect Sectoral policies (e.g. CA tailpipe standards) Economy-wide emission trading policies Can existing regional/state emission trading programs be recognized and/or co-exist with a federal cap-and-trade, and if so, how? Why might states advocate for this objective? What are the concerns? 19

20 The pre-emption issue: Energy Eight decades of federalism in place for energy. FERC is federal regulator, but each state has state regulatory authority Feds do interstate commerce States do operations, obligation to serve, cost of service In Washington, much of state function is done at local level for public utilities. Jurisdiction is mostly settled, but. 20

21 Organic Authority Federal Power Act of 1935 Established the Federal Power Commission (now the Federal Energy Regulatory Commission) Authority of interstate sales for resale and transmission Uses just and reasonable clause as basis for economic (read price ) regulation on generation 21

22 Why did the Feds occupy energy policy? Public Utilities Holding Company Act

23 Federal Policy balancing regulatory v. market signals Public Utilities Regulatory Purposes Act 1978 Energy Policy Act of 1992 Energy Policy Act of 2005 Energy Policy Independence and Security Act of 2007 Others have characterized federal energy policy as Leave no lobbyist behind. 23

24 Cap and Trade 101 Key design considerations Different perspectives So is emissions trading a good idea? 24

25 Cap-and-trade basics Hard to beat Holmes Hummel s thorough and entertaining slide show 25

26 Emissions Trading Works (D. Ellerman, MIT, WCI webinar series*) Markets emerge and firms trade, the cost savings are substantial ( 50%) The environmental performance is better than commandand-control (CAC) Once decided, relatively quick implementation A simple requirement and an unavoidable price Facilitates strict accountability and avoids selective relaxation Available experience provides no reason not to rely on cap-and-trade mechanisms Design issues can be mastered Are regulators ready to focus on emission reduction alone and let markets work? * 26

27 Or a different perspective (Lohmann, class readings) 1) [Carbon emissions trading creates] a special system of property rights in the earth s carbon-cycling capacity [that] sets up deep political conflicts and makes effective climate action exceedingly difficult. 2) Second, pollution trading is a poor mechanism for stimulating the social and technical changes needed to address global warming. 3) The attempt to build new carbon-cycling capacity is interfering with genuine climate action. 4) Global trading systems for greenhouse gases can t work without much better global enforcement regimes than are likely in the near future. 5) Building a trading system reduces the political space available for education, movement-building and planning around the needed fair transition away from fossil fuels. 27

28 Cap-and-trade: key design questions Scope and point of regulation, cap stringency Who and how much to cap? Schedule of reductions (how far into future? ability to modify?) Allowance allocation Who gets allowances? Auctions, set asides, and free allocations. Flexibility mechanisms Offsets (where flex) Banking and borrowing, compliance periods (when flex) Other cost containment mechanisms Safety valves, price floors, pricing boards Enforcement and non-compliance penalties 28

29 What is Scope and Point of Regulation? (Greenwald, Pew, 2007) Scope of Coverage: What GHG emissions are included in the cap and trade program? What greenhouse gases? What sectors? What facilities? What types and thresholds? What fuels? Combustion emissions included? Process-related emissions? Embodied emissions? Point of Regulation: Who has the obligation to surrender allowances to match emissions? Upstream (where GHGs enter the economy, or close) Downstream (where GHGs are emitted into the atmosphere) Other (vehicle manufacturers, local distribution companies) Hybrid (cover large sources downstream, address the rest of the economy at a different point of regulation or through other policy tools) 29

30 Point of Regulation 30

31 We ll discuss these and other issues in more depth in Week 7 Allowance distribution Offsets Cost compliance Trade implications Etc In the context of national legislation, the WCI, and international implications 31

32 What happens with sector-specific energy policies (e.g. DSM, RPS) and state/local policies under cap-andtrade? Lowers cost of compliance? Creates innovation? Helps achieve target? Leads to no additional reductions, i.e. just frees up allowances for others to use? Or helps to tighten future targets? Creates market inefficiencies? (see Montgomery, Stavins, others) Does carbon tax pose same challenges? 32

33 Dallas Burtaw, Congressional Testimony, 2007 : as one of the strongest advocates for cap and trade There comes a point where political compromise is the undoing of successful market design. We can do a lot in this country with good, old prescriptive regulation. If we get to the point where a CO2 cap-and-trade policy begins to resemble the Chicago phone book, it is probably better to move away from this kind of approach. However, done right, with an emphasis on simplicity and transparency, the lessons from previous programs indicate that a cap-and-trade program can help us achieve our environmental goals at dramatically less cost than other types of regulatory approaches. 33

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35 Small-group discussion today 1. Split into three groups Carbon/GHG Tax GHG Cap and Trade Direct regulation 2. Develop a set of talking points that address the strengths of your approach, and the weaknesses of the others (cover key dimensions: efficiency, effectiveness, equity, feasibility 3. Present your position and contest the others 4. Vote again 35