Climate Change Policy

Climate Change Policy

Jonas MonastNicholas Institute for Environmental Policy Solutions

Duke University

Background (or “Stating the Obvious”)

• Using markets to solve an environmental problem

• Concept – internalizing costs

• Cap-and-trade Alternative to a tax or command-and-control regulations

Background (or “Stating the Obvious”) part 2

• Quantity-based approach to emissions controlQuantity-based approach to emissions control• Cap: An absolute limit on GHG emissions allowed Cap: An absolute limit on GHG emissions allowed

during a periodduring a period• Trade: Parties are allowed to bid among themselves for Trade: Parties are allowed to bid among themselves for

the fixed emission “allowances”the fixed emission “allowances”• Distribution of allowancesDistribution of allowances

– Auctioned by the governmentAuctioned by the government– Allocated for free (“grandfathered”) and traded in a Allocated for free (“grandfathered”) and traded in a

marketmarket

Basic Elements of Cap and TradeBasic Elements of Cap and TradeRegulation placing a cap on GHG emissionsRegulation placing a cap on GHG emissionsPoint of regulationPoint of regulation

Upstream: carbon content of fossil fuelsUpstream: carbon content of fossil fuelsDownstream: point of emissionDownstream: point of emission

Allowances for emissionsAllowances for emissionsAllocation – will return to thisAllocation – will return to this

Market:Market: Brokered deals Brokered deals ExchangesExchangesAuctionsAuctions

Rules governing tradesRules governing tradesWho can trade Who can trade Over what period of time Over what period of time

EnforcementEnforcementEmissions measurement and monitoringEmissions measurement and monitoringCompliance enforcementCompliance enforcement

Main Issues

How much will it cost?

Who pays?

Current carbon markets

•EU ETS•RGGI•Western Climate Initiative (under development)

Lessons from the EU ETS

Importance of accurate emissions data

Windfall profits

Banking

EUA Spot Market – 2007-2009

Congressional Action on Cap-and-Trade

• Byrd-Hagel – Sense of the Senate that the U.S. should not sign Kyoto (95-0)

• U.S. abandons Kyoto Protocol in 2001• McCain-Lieberman 2005• Lieberman-Warner 2008• Dingell-Boucher discussion draft 2008• Waxman-Markey 2009• Kerry-Boxer 2009

Congress in early 2009: Somewhat Chaotic

U.S. Senate:

• What Committee is in Charge?• One Bill or Three?

U.S House:

• Chairman Waxman?

• One Bill or Three?

Early 2009: Two Possible Futures

Scenario A: Presidential leadership

– President makes it a top agenda item, engages with Congressional leadership

– Leadership of both Houses forces engagement and equitable tradeoffs

– Legislation passes in this Congress

Scenario B: Chaos

– No effective Presidential leadership– Leadership vacuum in Senate draws in all ideas,

good, bad and ugly– Chairmanship fight in House undercuts progress– 2009 spent posturing, without clear leadership.– 2010 likely dominated by 2010 election

positioning– Climate policy may be left undone– International negotiations are difficult or

impossible

Many issues to resolve

• Cost containment• Allocation of allowances• Trade/Competitiveness• Complementary technology programs, esp. nukes• Building the offsets market • Building a state/federal partnership• Market oversight and transparency

Cost Containment: Root of the Issue

Action Initiation Price Certainty: upper limit

Emissions Certainty

Safety Valve Offer new allowances at fixed ceiling price

Automatic at pre-set (escalating) price

Absolute Not if SV triggered

CMEB Expand borrowing and offsets when “high” price exceeded

Initially: automatic at pre-set (escalating) price

Eventually: Board discretion using legislative guidance

Targeted, not guaranteed

Absolute *

* CMEB actions could shift emissions to expanded offsets

New Option: Fixed Allowance Reserve

• Limited quantity of allowances set aside– Introduced to market in response to price run-up

• Reserve built from allowances within the long-term cap – forwarded from future caps at initiation of program– unsold at auction

• Drawn down by allowances introduced to market as high price response

• Payback required

Key Issues to ResolveParameters Preliminary IdeasReserve

- Size ~ 1 years worth (6 billion tons)

- Forwarding period 2030-2050

- Annual withdrawal rate max 10% of initial reserve

Activation Price

- Level TBD/above “expected” prices from econ studies of the underlying Bill…

- Escalation rate 5-7%

Allowance Allocation

•Allowances can be Allowances can be •Allocated for free (“grandfathered”)Allocated for free (“grandfathered”)

•Auctioned Auctioned When allocated for free…When allocated for free…

Who receives the allowances and how they receive them makes an enormous Who receives the allowances and how they receive them makes an enormous difference (wealth transfer)difference (wealth transfer)

Points of allocation Points of allocation ≠≠ points of regulation points of regulationE.g., you can regulate power plants and allocate the allowances to E.g., you can regulate power plants and allocate the allowances to households households In reality, though, the regulated tend to get the allowancesIn reality, though, the regulated tend to get the allowances

Allowance Value: Central Issue in Debate

Last year’s lesson: K.I.S.S.

Allowance Recipients and Auctioning Under Lieberman-Warner, Post-EPW Markup

0

10

20

30

40

50

60

70

80

90

100

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

Per

cen

t o

f A

llo

wan

ces

Rural Energy Assistance

WAP

LIHEAP

Climate Change and Nat'l Security Fund

Adaptation Fund

Worker Training Fund

Energy Independence Accel. Fund

Energy Technology Deployment

Early Action

Natural Gas Distributors

Electricity Distribution Companies

Methane Capture-- Landfills & Coal Mines

Carbon Capture & Sequestration

Domestic Ag & Forestry

International Forests

Tribal Communities

States--Multipurpose

States--Mass Transit

States--Aggressive Emissions Targets

States--Utility and Building Energy Savings

HFC Facilities

Petroleum Facilities

Manufacturing Sector

Electric Power Sector

Rural Electric Cooperatives

*Shaded allocations represent auction

December 2007

Senator Corker:

“What this bill does is it takes in trillions of dollars and then pre-prescribes how that money is spent, going out into areas to people who have nothing whatsoever to do with emitting Carbon. Twenty-seven percent of the allocations go out to entities in this country that have nothing whatsoever to do with emitting carbon. That is a huge unnecessary transference of wealth.”

Problem: A lot of stakeholders have an established interest in allowance value

Boxer’s February Principles as an example:

• Keep consumers whole as our nation transitions to clean energy; • Invest in clean energy technologies and energy efficiency measures;• Assist states, localities and tribes in addressing and adapting to global warming impacts; • Assist workers, businesses and communities, including manufacturing states, in the transition to a clean energy economy; • Support efforts to conserve wildlife and natural systems threatened by global warming; and • Work with the international community, including faith leaders, to provide support to developing nations in responding and adapting to global warming. In addition to other benefits, these actions will help avoid the threats to international stability and national security posed by global warming.

State/Federal Partnership

With State and Regional leadership, there is a reluctance to yield to federal preemption

Architecture of a Compromise:

• Provisions that create market value – allowance creation, offsets – should be uniquely federal• Provisions that are traditionally in state control – codes, land use – should remain so.• Provisions that are not cleanly in either camp need be negotiated – i.e., tailpipe standards, ability of state to retire allowances unused.

• Could a state only retire allowances equal to “additional” reductions made through state policies?

Why Offsets?

Time

•More mitigation•Same Cost•Political Buy-in•Some Uncertainty

BAU

Cap no offsets

Cap w/ offsets

Offsets Questions

Impossible to do in one slide

Critical Politically, for cost control and for stakeholders

Key issues:

• Standards and protocols for additionality, leakage• Control for reversal risk• Project-based or standard-based accounting• Percentage limitations on usage?• Inclusion of international allowances, esp. averted deforestation

Market Oversight and Manipulation

• Who is the Regulator? FERC, CFTC, SEC, EPA, other?• How is the market structured?

• Cash market?• Deriviatives market?

• Are Over-the-Counter Trades allowed?• Margin Limits?• Limits in Market Participation?• Accounting Treatment?

Where are we now?•Copenhagen•U.S. Senate