Environmental Economics in the News

Transcription

1

2 Environmental Economics in the News China to be largest emitter of carbon dioxide by 2008 With Chinese growth steaming ahead at an annual 11.1 percent so far this year, and with energy-intensive industries such as aluminum expanding by 43 percent, the [International Energy Agency ] has brought its estimate forward by two years. From China's first Climate Change Assessment Report: "If we prematurely assume responsibilities for mandatory greenhouse-gas emissions reductions, the direct consequence will be to constrain China's current energy and manufacturing industries and weaken the competitiveness of Chinese products For a considerable time to come, developing the economy and improving people's lives remains the country's primary task."

3 Environmental Economics in the News Ecuador Seeks Compensation to Leave Amazon Oil Undisturbed The government of Ecuador will wait up to one year to see if the international community offers to compensate the country for not developing a major oil field in the heart of the Ecuadorian Amazon, Energy Minister Alberto Acosta says. The area of lush, primary rainforest shelters a unique diversity of animals and plants. Ecuadorian President Rafael Correa and his government say that if the international community can compensate the country with half of the forecasted lost revenues, Ecuador will leave the oil in Yasuni National Park undisturbed to protect the park's biodiversity and indigenous peoples living in voluntary isolation. "The first option is to leave that oil in the ground, but the international community would have to compensate us for immense sacrifice that a poor country like Ecuador would have to make," said Correa in a recent radio address. President Correa estimates the compensation figure at around US$350 million per year.

4 Announcements Research Paper Guidelines online Deadlines pushed back Prospectus due Monday May 14 Paper due Friday June 1

5 Questions from Last Time?

6 Is Climate Changing (Dangerously)? If So, Is It Anthropogenic? If So, How Much Should We Do About It?

7 Climate-Change Economics and Policy Questions: -- How much emissions reduction (if any) is called for? -- How achieve the reductions at lowest cost? -- Does it make sense to take action now, given the uncertainties? -- What are the benefits from an international approach? -- How can international agreements be made attractive to all parties? 3 Approaches: -- US (national) policy options; California policy options -- decision making under uncertainty -- international approaches, cooperation

8 Variations of the Earth s Surface Temperature for:

9 Trends in Annual Temperature

10 Projected Impacts Temperature Change (3-8 degrees F. by 2100) (reversal of thermohalene current?) Changes in Precipitation Giving Rise To: Sea level rise (6-35 inches by 2100) Increase in tropical diseases (expansion of tropics) Greater intensity of storms Greater variability of weather Impacts on agriculture and forestry (shifts if pests, changes in productivity) Impacts on energy needs Impacts on ecosystems -- species loss -- compromised ecosystem function (lost services)

11 Land at risk in Bangladesh due to a 1m rise in sea level (after Huq et al. 1995).

12 OSTP, 1998

13

14 What s Causing the Climate Change?

15

16

17 Fingerprints

18 Increasing Confidence in the Science IPCC 1990: The observed increase [in temperatures] could be largely due to natural variability; alternatively this variability and other man-made factors could have offset a still larger man-made greenhouse warming. IPCC 1995: The balance of evidence suggests a discernible human influence on global climate. IPCC 2001: There is new and stronger evidence that most of the warming observed over the last 50 years is due to human activities. IPCC 2007: Most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations Views of scientific community and general public do not match

19 Views of scientific community and U.S. public do not match Pew Research Center Poll, July 2006

20 Who s Responsible?

21 CO2 Emissions by Country: Total emissions since 1950 Graphic from: Michael Glantz, What Makes Good Climates Go Bad? and Why Care? USAEE/IAEE Meeting, * Billons of tons of carbon dioxide emissions 10

22

23 OSTP, 1998

24 IPCC Burning Embers

25 Chronology of Scientific Concern 19th C CO2 established as a greenhouse gas early 20 th C Theorized connection between burning of fossil fuels and climate change 1930s Evidence that this effect was already discernible. 1950s Mauna Loa observatory establshed 1960s Mauna Loa observation indicate CO2 steadily rising 1965 Environmental Pollution Board of the President's Science Advisory Committee: we "will modify the heat balance of the atmosphere to such an extent that marked changes in climate... could occur" 1978 Robert M. White, first administrator of NOAA: "We now understand that industrial wastes, such as carbon dioxide released during the burning of fossil fuels, can have consequences for climate that pose a considerable threat to future society."

26 Milestones in Chronology of Economic Concern Nordhaus, W How Fast Should We Graze the Global Commons?, American Economic Review, Volume 72, 2, May 1982 Nordhaus, W Managing the Global Commons, MIT Press, 1994 Stern et al., Review of the Economics of Climate Change, 2006

27 Chronology of Policy Action 1988 Intergovernmental Panel on Climate Change (IPCC) created 1992 United Nations Framework Convention on Climate Change Dec April 2001 July 2001 Kyoto Protocol formulated George W. Bush rejects Kyoto Protocol 178 countries pledge to adopt Kyoto Protocol Oct McCain Lieberman Bill defeated in Senate, Feb Sept Dec Feb Kyoto Protocol enters into force holdouts U.S. and Australia Gov. Schwarzenegger announces GHG targets for CA 11 Northeastern States commit to GHG cap and trade system Western Regional Climate Action Initiatve

28 Kyoto Protocol 1. Industrialized nations commit to significant (5% globally) cuts in basket of greenhouse gases by years US, in particular, would have had to reduce its basket by 7% relative to 1990 emissions. -- this amounts to 25-30% cut relative to business as usual 3. No mandated emissions reductions for developing countries. Added July 2001: flexibility mechanisms -- international emissions trading -- credit for carbon sinks -- credit for technology transfers to developing countries

29 Thawing of Climate-Policy Resistance in U.S.? Amendment to the Energy Bill Included SA 866 (Bingaman- Specter), which: Called for mandatory reductions in U.S. Greenhouse gases (no target or timetable specified) Encouraged (but did not require) developing countries to participate SA 866 passed with 53 votes, including 12 Republicans 6 of which had never previously voted favorably on climate change

30 Current Developments National Efforts McCain-Lieberman, Carper, and Bingaman-Domenici actions State Efforts East Coast Regional Greenhouse Gas Initiative (RGGI) Western Regional Climate Action Initiatve California Actions Schwarzenegger s Announced Targets Climate Action Team Policy Analyses Are state-level initiatives a bad idea?

31 Schwarzenegger s Targets Reduce California s Greenhouse Gas Emissions To: 2000 levels by levels by % of 1990 levels by 2050 How to get there?

32 What To Do? Mitigate Reduce emissions Sequester CO2 Adapt Geo-engineer

33 Do Nothing Now What To Do? -- Domestic Policy Options -- Research only too early for emissions reductions Reduce emissions voluntary programs mandated low-carbon technologies carbon tax carbon caps (perhaps tradable) subsidies to adoption of existing low-carbon technologies subsidies to R&D toward new low-carbon technologies Expand carbon sinks (aforestation)

34 Which Channels to Achieve Concentration Reductions?

35

36 How Big Are the Damages? Market Impacts effects on production and costs in agriculture, forestry, energy, and other sectors Non-Market Impacts impacts on ecosystem function, species viability general comfort non-market health impacts

37

38

39

40

41

42

43 What Instrument(s) for Emissions Reductions? Considerations: Efficiency Price and Output Impacts Distributional Impacts Start with Carbon Tax and Carbon Cap and Trade

44 Incorporating Risk in Efficiency Analysis Easiest to do this if we translate net-benefit-max problem into an overalldamage-minimization problem Note: B-C is same as D -D BAU POL -C but D BAU is exogenous to policy decision The maximization problem is thus equivalent to the problem: minimize f [ (C + D POL )] where the function f incorporates risk aversion In absence of uncertainty, this is just min [C+D POL ] In special case of risk-neutrality, the objective is to minimize E [ (C + D POL )] where E is the expected value operator

45 Uncertainty, Risk Aversion, and Policy Preference frequency distribution under more stringent policy distribution under moderate ( best guess ) policy μ M μ S C + D POL worst possible outcomes under each policy (Climate Damage Plus Policy Cost)

46 Carbon Tax, Carbon Cap-and-Trade 1. Basic Rationales, Complications MC SOC MC Q Q D Coal

47 Carbon Tax, Carbon Cap-and-Trade 1. Basic Rationales, Complications MC SOC MC Q Q D Coal

48 Carbon Tax, Carbon Cap-and-Trade R B A MC SOC MC D Under efficiency-maximizing tax: Q Q Coal Lost surplus to coal consumers = R + B Gain to taxpaying public = R Environmental gain = A + B Net social gain = A

49 Carbon Tax, Carbon Cap-and-Trade R B A MC SOC MC D Under efficiency-maximizing tax: Q Q Coal Lost surplus to coal consumers = R + B Gain to taxpaying public = R Environmental gain = A + B Net social gain = A

50 Carbon Tax and Cap-and-Trade: both have similar efficiency rationales: they effectively put a price on carbon, thereby promoting efficient responses: -- producer and consumer substitutions -- additional efforts toward technological advances

51 Complication 1: Only a portion of external cost falls on home country MC SOC (incorporates external costs to all countries) MC + external cost to US MC Q Q D Coal

52 Complication 1: Only a portion of external cost falls on home country MC SOC (incorporates external costs to all countries) MC + external cost to US MC Q Q Q D Coal

53 Complication 2: Uncertainty about magnitude of external costs MC SOC D MC Q* Q Coal

54 Complication 2: Uncertainty about magnitude of external costs Net Benefits Tax Rate MC SOC MC 0 D Q* Q Coal

55 Carbon Tax, Carbon Cap-and-Trade 2. Price, Quantity, and Distributional Impacts

56 $50/ton Carbon Tax or Equivalent Carbon Cap: (Approx. Kyoto Stringency) Price and Output Impacts (medium run) price domestic output increase reduction Fossil fuels coal: 120% 30-45% oil 40% 6-10% natural gas 42% 7-12% Downstream energy fuels or products gasoline 10% 4-8% residential nat. gas 13% 6-10% electricity 12% 6-10%

57 Percentage Change in GDP 25/ton Carbon Tax or Equivalent Carbon Cap: GDP Impacts

58 Impacts on future Consumption and GDP depend on how policy revenues are recycled Percent Change in Consumption 0 revenues -> income tax cuts revenues -> investment tax credits

59 25/ton Carbon Tax or Equivalent Carbon Cap: Income-Distributional Impacts

60 Options for a Stronger US Policy

61 Current U.S. Climate Policy Is Largely Contained in the 2005 Energy Policy Act

62 The Energy Policy Act: Tax code provisions $14.6 billion Oil & Gas Production/Refining/Delivery Gas distribution lines: shorter depreciation Geo expenses: shortened amortization Refinery investments: expensing, and other credits, ded $1.02 $0.97 $0.65 $ 2.64 Changes depreciation or amortization, Electricity Reliability $ 1.32 Transmission property: shorter depreciation Electric Transmission: other tax provisions Electric Supply Nuclear decommissioning: modifications to funds $1.24 $0.08 $1.29 $ 7.96 Allowed expensing, Nuclear power: production tax credit $0.28 Renewable: extends production tax credit to Clean coal technology: 3 new investment tax credits Coal pollution control equipment: longer recovery Other tax credits Energy Efficiency $2.75 $1.61 $1.15 $0.88 $ 1.35 Tax credits for investments and output, tax credits (homes - weatherization, PV, solar) $0.62 tax credits (business micro-turbines, fuel cells, HVAC tax credits (appliance manufacturers) + other Transportation alternative fuel vehicles: tax credits for purchases bio-diesel, ethanol, other alt fuels: tax credit $0.47 $0.27 $0.87 $0.45 $ 1.32 Tax credits for purchase (consumer, producer)

63 Carbon Tax, Carbon Cap-and-Trade 3. Design Issues

64 Political Considerations in Policy Design Carbon tax has dimmer prospects than cap-and-trade Cap-and-trade is focus of recent efforts toward a national climate policy: How design a politically realistic cap-and-trade policy? political mobilization bias suggests that energy industries may wield effective veto power Is there a way to reduce carbon emissions at low cost while preserving energy-industry profits?

65 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits? 3. Upstream or Downstream? -- if downstream, which sectors included? 4. Safety Valve? 5. Absolute Target (E) or Intensity Target (E/GDP)?

66 Designing a US Cap-and-Trade System 1. How Tight a Cap? MB AGGREGATE E 1 E 2 E 3 E 0 Aggregate Emissions

67 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits?

68 CO 2 Abatement and Profits S 1 p D1 a e p 0 b R f h S 0 c g p S1 d Q 1 Q 0 D Coal

69 Are the Rents Large in Relation to Profits? Some Back-of-the-Envelope Calculations Consider U.S. coal industry in year Tax Revenues (or Potential Rents) Gross output under status quo 1 ( in billions of 1997 dollars) Est. gross output after $25/ton carbon tax (assumes 33% reduction 2 ) Est. carbon tax revenues ($25 per ton carbon x.0228 tons carbon per dollar of fuel x $19.62 billion) After-Tax Profits After-tax dividends plus retained earnings under status quo 3 (in billions of 1997 dollars).33 Loss in dividends and retained earnings under $25/ton carbon tax (assumes 30% reduction 4 ) Loss in Profits as Percentage of Potential Carbon Revenues 0.9% (i.e.,.012 x =.13)

70 Results from Numerical Model of U.S. (emissions caps introduced in 2000) 100% auctioning Partial auctioning 100% grandfathering Coal industry % change in output -20.1, , , % change in profit (7.8%) Oil&Gas industries % change in output (2002, 2025) -5.5, , , -5.2 % change in profit (14.0%) Economy-wide emissions reduction (%) Economy-wide cost per ton CO 2 reduced $85.9 $92.3 $160.5

71 Free Allocation of Permits Can Prevent Profit-Losses to Key Stakeholders 1. Permit system leads to reduction in industry output and increase in output (fuel) prices. This yields potential revenues (rectangle R). 2. If permits are auctioned, government (public) gets these revenues. If they are freely allocated, firms enjoy these potential revenues as rents. 3. Studies indicate that freely allocating just 10-15% of the permits generates sufficient rents to prevent loss of profit in the fossil-fuel supplying industries. 4. Since nearly all (85-90%) permits can be auctioned, the revenuesacrifice (relative to 100% auctioning is small). Hence the efficiency sacrifice is small. Price tag on enhancing political feasibility may be fairly low.

72 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits? 3. Upstream or Downstream? -- if downstream, which sectors included?

73 Natural Gas Coal (Pipelines) Electricity Chemicals Production Metals Manufacturing Crude Petroleum Petroleum Refining Other Manufacturing Services Industries gasoline and diesel fuel Transportation Services (auto and truck use)

74 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits? 3. Upstream or Downstream? -- if downstream, which sectors included? 4. Safety Valve?

75 Safety Valve MB Q Aggregate emissions

76 Safety Valve MB MB Q Aggregate emissions

77 Safety Valve MB MB p Q Aggregate emissions

78 Safety Valve MB MB p additional permits Q Aggregate emissions

79 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits? 3. Upstream or Downstream? -- if downstream, which sectors included? 4. Safety Valve? 5. Absolute Target (E) or Intensity Target (E/GDP)? Intensity target: Enhances political feasibility by reducing cost-uncertainty But it introduces emissions uncertainty Examples: 2002 Bush climate plan, NCEP proposal

80 Designing a US Cap-and-Trade System 1. How Tight a Cap? 2. Freely Allocate or Auction Emissions Permits? 3. Upstream or Downstream? -- if downstream, which sectors included? 4. Safety Valve? 5. Absolute Target (E) or Intensity Target (E/GDP)?