Economic Modeling of Federal Capand-Trade Legislation: Variations on the Lieberman-Warner Bill

Transcription

1 Economic Modeling of Federal Capand-Trade Legislation: Variations on the Lieberman-Warner Bill Brian C. Murray Director for Economic Analysis Nicholas Institute for Environmental Policy Solutions Duke University Presented at: Federal Policy to Reduce U.S. Greenhouse Gas Emissions Workshop Resources for the Future Washington, DC June 18, 2008

2 Overview Key policy features of interest Offsets Target and Timetable Targeted energy efficiency investments Modeling work on Lieberman-Warner (S.2191/S.33036) Top-down: ADAGE Bottom-up: NEMS-XXXX Cost containment approach Fixed allowance reserve 2

3 Offsets Cap = 5 billion tons/yr CO 2 Capped Sources Uncapped Sources Plant A Trading within Cap Plant B Emissions = 5.1 billion tons 100 MM Offset credits Reduce emissions or increase sequestration relative to Baseline By 100 Mt Plant X Farmer Y Cap is Met

4 MM tons CO2 e Alternative Target and Timetable: Start Slow, then Aggressive Emissions: Alternative Caps and Baseline Baseline projection Start- slowthenaggressive S.2191

5 Targeted Energy Efficiency Programs Revenue-generating devices can be targeted for energy efficiency investments Auction Allowance allocation setasides Lieberman-Warner had numerous targeted EE programs, e.g., CCS credits State and LSE programs Weatherization programs Low Income household assistance These programs should reduce energy demand and emissions platform on which cap-and-trade performs Reduce impacts Problem hard to model We tried

6 Lieberman-Warner Modeling Exercise A Collaborative Effort

7 Model Developed by Coverage Key outputs ADAGE RTI International Geographic Macroeconomic variables - Global - GDP Applied Dynamic - US - Consumption - Regional Analysis of the Global Sectors Int l Trade and Emissions - Energy Economy - Energy-intensive Sectoral output manufacturing - Non-energy intensive manufacturing Energy use and prices - Other GHG emissions and All GHGs allowance prices NEMS-adapted* National Energy Modeling System Energy Information Administration/ OnLocation, Inc Models and Features Geographic - US - Regions Energy Sectors - Fuels - Transportation - Electric Power Other sectors - Industrial - Commercial - Residential All GHGs Energy sector (Regional NG, Coal, Electricity, etc) - Outputs - Prices - Technologies deployed Emissions Allowance prices Macroeconomic impacts 7 * NEMS is an integrated energy model with representation of U.S. energy supply, demand, and conversion all within an economic framework. OnLocation, Inc refers to the application of the NEMS model as NEMS-XXXX, and in doing so, takes responsibility for all inputs and any changes made to the model logic required to assess the policies addressed in this report.

8 Other Key Assumptions Rest of World GHG Mitigation Actions (ADAGE, following EPA S.2191 analysis) Group 1 (Kyoto Annex I, less Russia) 50% below 1990 by 2050 Group 2 (all other) : Emissions at 2015 levels : Emissions at 2000 levels Offsets cost and availability to the U.S. is affected by the Rest of World mitigation actions 8

9 Modeling Scenarios Technology Variations 1. AEO Base Case a. No targeted Energy Efficiency programs b. Targeted Energy Efficiency programs 2. More Pessimistic than AEO (a and b) 3. Mid-case between 1 and 2 Policy Variations 4. Offsets Limit = 1 billion tons/yr 5. Transportation deferred 6. Alternative Target and Timetable Start Slower, Cut deeper a. AEO case b. Pessimistic case c. No offsets allowed

10 $/t CO2e $350.0 $300.0 Allowance Prices by Scenario out to 2050: ADAGE $250.0 $200.0 $150.0 $100.0 $50.0 $13-29 $0.0 $59 Scenario w/no offsets a 1b 2a 2b 4 6a 6b 6c Scenario a LW $17 $21 $27 $34 $44 $55 $70 $89 1b $15-29 $15 $20 $25 $32 $40 $51 $65 $82 2a $29 $37 $47 $59 $75 $95 $120 $152 2b $25 $32 $40 $51 $65 $82 $103 $130 4 $18 $23 $29 $37 $46 $59 $74 $94 6a $13 $17 $21 $27 $34 $43 $54 $69 6b $22 $28 $35 $44 $56 $71 $90 $114 6c $59 $75 $95 $121 $153 $193 $243 $307 10

11 Results Themes 1. Macroeconomic effects: policies at most a slight pull on steadily growing economy 2. Technology deployment and cost assumptions are key 3. Offsets matter... a lot 4. Reshaping the cap loosens cumulative emissions target and reduces costs 5. Climate Policy transforms energy markets 6. Electric power sector is the focal point of reductions 7. Transportation reductions largely come through baseline reductions via EISA and CAFE 8. Variation of regional impacts is moderate 9. Global trade effects depend on other country s actions 10. There is still a lot we don t know which brings us to cost containment 11

12 $/t CO2e $/t CO2 e Offsets Matter a lot price effects Effect of Changing Offset Restrictions from % to Tons (Scenario 4) Switching restriction from 15% to 1 billion tons/yr (domestic and international each) significantly relaxes constraint and lowers allowance price by 38% Dropping offsets altogether doubles the allowance price relative to the next highest price alternative ($59 vs $29 in 2015) $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 $350.0 $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $ Allowance Prices by Scenario out to 2050: ADAGE 2a (15% domestic/15% int'l) 4 (1 billion ton domestic/1 billion int'l) ADAGE a 1b 2a 2b 4 6a 6b

13 MMT CO2 Equivalent Offsets matter a lot Enable banking of early emission reductions 7,000 Total GHG Emissions (Cases 1b and 2a) Goal vs. Actual Emissions vs. Banked Allowances 6,000 5,000 4,000 3,000 2,000 1,000 L-W Goal Case 1b Actual Case 2a Actual Case 1b Bank Case 2a Bank NEMS-XXXX Early action (including offsets) reduces net emissions below cap Allowances are banked for later use to help smooth out the costs of compliance over time At some point the bank starts to get drawn down to zero (by end of program) 13

14 2005$/tCO2e 2005$/tCO2e Offset Supply Functions Note difference in scale between two graphs $70 EPA Domestic Offsets (non-covered sources + biological sequestration) $70 EPA International Offsets Available to the U.S. $60 $60 $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 $ ,000 1,200 1,400 $0 0 5,000 10,000 15,000 20,000 25,000 mmtco2e mmtco2e billion ton limit billion ton limit Domestic International Source: EPA 14

15 Changing Offset Constraint from 15% to 1 Billion tons (each) 2a = 15%; 4 = 1 billion tons 1,200 1, Domestic and International Offsets: 2a vs 4 3% 2% 18% of cap 15% 15% 10% 4% 20% 23% 26% 15% 12% 15% 15% 22% ~48% of cap Met by offsets 15% Domestic Offsets - 2a Domestic Offsets - 4 International Allowances - 2a International Allowances - 4 Domestic offsets are lower at first but eventually grows to large share 15

16 MM tons CO2 e Reshaping the cap loosens cumulative emissions target and reduces costs Reshaping S.2191 to Start slow then Aggressive (Scenario 6a and 6b) effectively reduces aggregate emissions reductions by 10% This reduces the allowance price relative to the corresponding S.2191 scenarios by 23-25% Emissions: Alternative Caps and Baseline $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 -$5.0 Effect of Reshaping the Cap on 2015 Allowance Price 1a 6a (revised cap) 2a 6b (revised cap) Baseline projectio n Startslowthenaggressiv e S

17 7. Transportation reductions largely come through baseline reductions via EISA and CAFE. 3,000 2,500 2,000 1,500 1, Transportation Emissions: Alternative Baselines and with GHG Policy (1b, 2a) Baseline - EIA December AEO 2008 w/o EISA Baseline - EIA December AEO 2008 w/ EISA, Increasing CAFE 1b Baseline used in analysis Captures EISA and CAFE Almost all of the transportation sector emission reductions come from incorporating EISA and higher CAFÉ standards in the baseline Incremental effect of the GHG policy is very small, even with more stringent case (2a) ADAGE has a little more response in transportation than still small Ongoing need to assess complementary transportation policies NEMS-XXXX,17

18 Targeted energy efficiency programs could bring down costs Deploying targeted S.2191 allowance/auction revenues for energy efficiency programs can lower allowance prices 1b vs 1a: - 9% 2b vs 2a: -12% Allowance price in 2030*: Tech Scenarios 1-3 $34.61 $31.50 $55.76 $49.31 $ a 1b 2a 2b 3 18 * Ave of ADAGE and NEMS-XXXX for 2030

19 Cost containment: Balancing price and emissions certainty Question: Can we develop an effective and transparent mechanism for containing unexpectedly high costs while maintaining the long-term emissions goals? Collaborative work with Billy Pizer, RFF and NCEP and Richard Newell, Duke and RFF

20 Allowance Market: Demand shift effects, with and without new allowance relief S D H D E P U P Ltd P SV P 0 Demand shift Ltd offering Unlimited offering

21 Possible Solution: Carbon Reserve Limited quantity of allowances set aside Introduced to market in response to price run-up Introduction could be done a number of different ways (auction, allocate, options), automatically or at discretion of a Board Reserve built from allowances within the long-term cap Set aside allowances at initiation of program unsold at auction Reserve drawn down by allowances introduced to market as high price response Payback required Future cap restored with allowances from the reserve, or Future cap is lowered commensurately Modeling TBD