Upstream versus Downstream Cap-and-Trade

Transcription

1 Upstream versus Downstream Cap-and-Trade Kenneth Gillingham 32 nd IAEE International Conference, San Francisco June 23, 2009

2 Outline Background Usual logic and why it may not be so simple Summary of results Conclusions Kenneth Gillingham, June 4, 2009, p. 2

3 Major cap-and-trade policy actions California Global Warming Solutions Act of 2006 (AB 32) Target of 1990 levels of greenhouse gases by 2020 The American Clean Energy and Security Act of 2009 (Waxman-Markey) in Congress now 15% below 2005 levels by % below 2005 levels by 2050 Kenneth Gillingham, June 23, 2009, p. 3

4 Designing a cap-and-trade system Sectors covered? Dealing with imported electricity? Freely allocate or auction? Recognize offsets? Banking and borrowing? Upstream versus downstream? Kenneth Gillingham, June 23, 2009, p. 4

5 Designing a cap-and-trade system Sectors covered? Dealing with imported electricity? Freely allocate or auction? Recognize offsets? Banking and borrowing? Upstream versus downstream? Kenneth Gillingham, June 23, 2009, p. 5

6 Upstream versus downstream Alternative points of regulation for a U.S. cap-and-trade system Upstream Downstream Coal Mining & imports (500) Transportation operations Electric generation Plants (500) Electricity Consumers (millions) Oil Wells & imports (750) Refining (200) Mobile sources, Industry (millions) Natural Gas Wells & imports (750) Pipelines & processing (200 or 1,750) Industrial, residential Boilers, Electric generation plants (millions) Electricity Consumers (millions) Parentheses indicate number of sources regulated in a U.S. cap Adapted from Goulder (2009) Kenneth Gillingham, June 4, 2009, p. 6

7 Upstream versus downstream Alternative points of regulation for a U.S. cap-and-trade system Waxman-Markey Bill Upstream Downstream Coal Mining & imports (500) Transportation operations Electric generation Plants (500) Electricity Consumers (millions) Oil Wells & imports (750) Refining (200) Mobile sources, Industry (millions) Natural Gas Wells & imports (750) Pipelines & processing (200 or 1,750) Industrial, residential Boilers, Electric generation plants (millions) Electricity Consumers (millions) Parentheses indicate number of sources regulated in a U.S. cap Adapted from Goulder (2009) Kenneth Gillingham, June 4, 2009, p. 7

8 Usual logic: upstream and downstream provide equivalent incentives If we assume: Perfect competition No issues with salience Then: upstream and downstream give the same incentives We can choose based on administrative costs Usually much higher for downstream Kenneth Gillingham, June , p. 8

9 But the story may not be so simple What if people respond differently when permit prices increase than when fuel prices increase? Perhaps actually dealing with the permits makes them more salient Then we might see more low-cost emissions reductions downstream Kenneth Gillingham, June 23, 2009, p. 9

10 Other possible complications What if some of these markets are not perfectly competitive? Market power and thin markets Kenneth Gillingham, June 23, 2009, p. 10

11 Summary of results Perfect competition & full salience same incentives Prefer one with lower administrative cost (usually upstream) Imperfect salience Downstream on firms ambiguous result Downstream on consumers issue of salience must be weighed against administrative costs Imperfect competition Upstream market power downstream preferred Thin markets in upstream downstream preferred Kenneth Gillingham, June 23, 2009, p. 11

12 Conclusions U.S. cap-and-trade downstream preferred on electricity sector, upstream otherwise We already regulate downstream for Clean Air Act May be cheapest just to stay downstream on firms Issue of thin markets would only be worse upstream CA cap-and-trade upstream preferred but with a careful eye to thin markets No current regulation Upstream: ~150 firms regulated Downstream on firms: ~ firms regulated Downstream on consumers: millions regulated Upstream would have much lower administrative costs Kenneth Gillingham, June 23, 2009, p. 12

13 Acknowledgments For great conversations and ideas, I thank, but certainly do not implicate, the following: Jim Sweeney Larry Goulder Frank Wolak Caroline Hoxby Kenneth Gillingham, June 23, 2009, p. 13

14 Thanks! Kenneth Gillingham, June 23, 2009, p. 14