Wiener j 20150709_1730_upmc_jussieu_-_room_207

Jonathan B. Wiener Perkins Professor of Law, Duke University

(Law School, Nicholas School of the Environment, and Sanford School of Public Policy)

University Fellow, Resources for the Future (RFF)

Conference on “Our Common Future Under Climate Change”

Paris, 9 July 2015

Carbon Markets and Pricing in the USA:

Toward new national and international regimes

All slides © 2015 Jonathan B. Wiener; not for copying or redistribution without permission.

Is there no carbon pricing in the USA ?

• Congress is not enacting new climate legislation

(Waxman-Markey, 2009 – not enacted)

• EPA “Clean Power Plan” faces opposition

• “U.S. Leaves the Markets Out in the Fight Against

Carbon Emissions” – Eduardo Porter, New York Times,

July 1, 2015, p.B1

• “A Carbon Tax is Not Feasible or Practical” –

Steven Cohen, Huffington Post, June 8, 2015

• Yes and No – the game is still afoot …

Pew Research Center, “Public and Scientists’ Views on

Science and Society,” January 29, 2015, p.49

US public opinion on upswing re: climate ?

US emissions have been declining

– as China, India rise

Carbon pricing initiatives in the USA – Toward new national and international regimes

1. Carbon markets

A. Subnational –

i. RGGI (9 states)

ii. California (with links to Quebec, Ontario)

B. National –

1. New climate law? Waxman-Markey bill (2009): passed by House,

but not by Senate (no vote)

2. Environmental Protection Agency (EPA) regulations, under older

Clean Air Act (CAA) – the “Clean Power Plan” (under CAA section

111) and more

C. International – prospects for linking ?

2. Carbon tax? – Proposals in Congress (e.g. McDermott, Whitehouse, Schatz)

3. Social Cost of Carbon (SCC) for policy analysis

CDC Climat & ADEME, ClimasCOPe, no. 1, April 2015, p.3

Carbon markets and taxes are appearing around the world –

CDC Climat & ADEME,

ClimasCOPe, no. 1, April 2015, p.3

Focus on

North

America: (prices in Euros)

RGGI – 9 states California

Started MOU 2005; trading 2009 Enacted 2006; trading 2013

Target 45% below 2005 level by 2020 (cap

tightened in 2012)

1990 level by 2020; 80% below

1990 by 2050

Emissions covered Electric power; ~ 20 % of ~ 80 mt

from ~168 entities in 2012)

~ 85% of ~459 mt from ~ 450

entities in 2012

Gases covered CO2 CO2, CH4, N2O, HFCs, PFCs,

SF6, NF3

Allocation 90% by auctions Transition from free to auctions

Offsets Up to 3.3% of compliance; only in

some sectors in the 9 states.

Up to 8% of compliance; only in

some sectors in US. Considering

adding int’l REDD, and Mexico.

Linking 9 states’ markets linked via MOU Quebec; Ontario …; WCI ...

Cost containment Banking. Allowance reserve (10 mt);

trigger price $6, increasing at

$2/year. Auction floor price ($2.05).

Banking. Allowance reserve (4%,

then 7%); trigger price $50,

increasing. Auction floor price

($12.10).

Monitoring &

enforcement

Mandatory; via US EPA; 3:1 penalty Mandatory; 3rd party verification;

4:1 penalty

Recent carbon price ~ US $ 5 ~ US $ 12

From IETA / EDF / CDC Climat, RGGI Case Study, April 2015, p.13

RGGI market price, 2008-15

From IETA / EDF / CDC Climat, California Case Study, April 2015, p.18.

California auction price, 2012-15

A national climate policy in the USA?

• Obama Administration target in US INDC:

– Reduce overall US emissions 26-28% below 2005

level by 2025

– US-China joint announcement (2014); for an early

advocacy of this path, see Stewart & Wiener,

Reconstructing Climate Policy (2003)

• How to achieve this target?

– New law? In the meantime: under older Clean Air

Act (CAA), US Environmental Protection Agency

(EPA) regulations – section 111 “Clean Power

Plan” and more – following the US Supreme Court

decision in Massachusetts v. EPA (2007)

Massachusetts v. EPA (U.S. Supreme Court, 2007)

• Mass. et al. asked EPA to list GHGs under CAA 202 (mobile sources).

• EPA (in G.W. Bush administration) denied this petition, arguing:

– GHGs are not “air pollutants” under CAA. Too big an issue to be covered

under CAA without clear language (FDA v. Brown & Williamson doctrine).

– CAA is poorly suited to regulating GHGs.

– GHGs are a subject of international negotiations, foreign policy concerns.

• US Sup.Ct. held (5-4): GHGs are “air pollutants” under CAA 202.

– Dissent by Justice Scalia: “air” vs. “atmosphere” ?

– GHGs are presumably also covered under other sections of the CAA.

– EPA must confront “endangerment” finding for GHGs.

• It is unclear when EPA can decline to undertake an endangerment evaluation.

Can EPA set priorities among pollutants under CAA?

– EPA issued Endangerment Finding in December 2009 (Obama admin.).

Upheld in Coalition for Responsible Regulation v. EPA (DC Cir., June 2012).

• EPA’s authority reaffirmed in AEP v. Connecticut (US Sup.Ct. 2011).

– Held: tort/nuisance claims are displaced by EPA’s authority under CAA

U.S. Clean Air Act (CAA) Enacted 1970, amended 1977, 1990

Some key sections:

• 101 – Purpose

• 108 – Listing “criteria air pollutants”

• 109 – National Ambient Air Quality Standards (NAAQS)

• 110 – State Implementation Plans (SIPs)

• 111 – New Source Performance Standards (NSPS) – plus existing sources under 111(d)

• 112 – Hazardous Air Pollutants (HAPs) (air toxics)

• 202 – Mobile sources (automobiles, trucks) (also airplanes)

• 115 – International reciprocity

• 615 – Stratospheric Ozone

Major EPA rules on GHGs, so far

• GHG Reporting Rule (2009) (new legislation!)

• Mobile sources: fuel economy standard (2010)

– Under CAA. Hence application of “PSD”; Tailoring Rule

– Airplane emissions: EPA endangerment finding, June 2015

• Electric power – “electric generating units” (EGUs)

– President’s climate action plan, June 2013

– New sources: CAA 111(b) rule, proposed January 2014

– Existing sources: CAA 111(d) rule, “Clean Power

Plan,” proposed June 2014 (… final rule July 2015 ?)

• State plans due in 2016 (later if multi-state)

• EPA review of state plans …

Source: Kyle Aarons, “Carbon Pollution Standards for Existing Power Plants: Issues and Options,”

C2ES, March 19, 2014, p.2.

(by sector)

Source: Kyle Aarons, “Carbon Pollution Standards for Existing Power Plants: Issues and Options,”

C2ES, March 19, 2014, p.3.

(in the USA)

2005 level

Karl Hausker et al., “Delivering on the US Climate Commitment,” WRI, May 2015, p.3.

EPA “Clean Power Plan” seeks to help achieve the US INDC target of 26-28% below its 2005 level by 2025 – by reducing the US electric power sector 30% below its 2005 level by 2030 (one of the policies included in the blue line labeled “Core Ambition”).

28%

2005 level

EPA “Clean Power Plan” is based on CAA §111 –

“New Source Performance Standards” (NSPS)

• §111(b) authorizes EPA to set emissions standards for new and modified pollution sources

– NSPS are set for each source category; within each category, standards may vary according to class, type, size of source

– NSPS are “performance standards” (not “design standards”); EPA does not mandate specific technology. An NSPS “reflects the degree of emission limitation achievable through the application of the best system of emissions reduction [BSER] which (taking into account the cost of achieving such reduction and the non-air quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated.”

• §111(d) authorizes EPA to regulate existing sources –

– if they would be covered by a 111(b) NSPS if they were new

– if they are not also being regulated under §109 or §112

EPA has proposed 2 rules for GHGs per§111

• New sources: In January 2014, EPA proposed a standard for GHGs

from new electric generating units (EGUs) under 111(b). BSER:

• For natural gas EGUs: emissions rate 1000 lbs/MWh, i.e.

about the same rate as recent new gas EGUs.

• For coal EGUs: 1100 lbs/MWh, lower than recent coal

EGUs, hence requiring carbon capture & sequestration (CCS).

– EPA forecast of impact on cost, and on GHG emissions: zero.

• Existing sources: In June 2014, EPA proposed a standard for GHGs

from existing EGUs under 111(d) (about 1000 plants, 3000 units).

– “BSER”: 4 “building blocks”: coal plant efficiency; shift to gas;

shift to nuclear and renewables; end user efficiency

– State-by-state: targets, implementation plans

– Rate-based targets (emissions per electricity output, tons/kwh)

Questions facing EPA in using

CAA§111 for GHGs

• Legal challenges (after Final rule is issued)

– 111(b) for new sources: coal – is CCS “adequately demonstrated”?

(Energy Policy Act says EPA cannot cite DOE-funded CCS projects.)

– 111(d) for existing sources: Depends on the 111(b) rule? Barred by

112 coverage of EGUs (even if not for GHGs) ? (Two versions of 111 !)

Do the 4 ‘building blocks’ = BSER? Meaning of “source”? State targets?

Constitutional challenges – federalism, takings, etc.

• Policy issues for electric power sector

– National target: 30% below 2005 by 2030 (part of US INDC).

– State targets: vary, ~10% to 70%. Rate-based; mass-based?

– Flexibility within each state to choose abatement options.

– Multi-state plans invited... = Trading markets?

Gina McCarthy EPA Administrator, Sept. 25, 2014 (remarks at RFF, transcript pp.16-17)

“Well, one of the challenges that we have … is to explain the difference between

regulating under this section of the Clean Air Act and what Congress might do to

adopt a cap-and-trade program or a market-based solution. This is not that. This is

111(d), which looks at what can we do to get some best practices out there to reduce in

this particular sector, which is just the fossil fuel fired plants. …

“Building blocks, and it’s basically shifting to cleaner supplies and getting the waste

out of the system, whether it’s at the facility or more generally, and it’s pretty simple.

We looked at what other states have been able to do, what their progress is, how

they’ve been able to take advantage of it, what kind of pace that it takes to do these

things. And we took a moderate approach to each one [state], so that they’d have

flexibility to take whatever approach they wanted, relying more heavily on building

block two than one than three. And then we gave each state a goal, and that’s how we

articulated the overall reduction we would achieve.

“Now, there are many states that have wanted us to recognize actions that have

happened earlier. And we’re looking at that, and we’ll take those comments very

seriously, but the one caution I would sort of lay down at this point is it’s not going to

look like a cap-and-trade program. This is not about carbon offsets. This is not about

achieving a particular national target. It never was. It is about applying the Clean Air

Act in a way that’s going to be legally defensible, but still be aggressive in terms of

achieving the reductions.” (emphases added)

Carbon prices under the EPA 111(d) “Clean

Power Plan”

• EPA forecast of carbon prices in the year 2030

(under Proposed version of rule) ($/ton CO2e):

• State-by-state mode: range from $0 (in California) to

$101 (in West Virginia).

• Multi-state mode: range from $24.64 to $32.77.

• Narrower range of prices in multi-state mode implies

that promoting emissions trading markets across states

would be more cost-effective.

(EPA RIA, June 2014, simulations spreadsheet; Billy Pizer, Duke Univ.)

• Note: the Final Rule may differ (July 2015 ?).

Toward a US national carbon market via 111(d)?

1. EPA’s proposed rule invites multi-state plans – Trading could occur within several multi-state markets – like RGGI, and

California/Quebec/Ontario. And, they could link among each other.

– Like “clubs” at international level – exclusive benefits? Federal power.

2. Each state plan could allow national trading – without

expressly enacting it – by adopting key “common

elements” (Monast, Profeta, Tarr & Murray, NI PB, March 2015):

– the same unit of compliance as other states (e.g. mass-based)

– a common (or linked) tracking system

– recognizing reduction credits from other regulated sources

– other features not too different among states (e.g. price collar)

3. EPA could adopt a national “FIP” …

4. EPA could issue a Final rule that creates a market …

§ 111(d) and State Implementation Plans (SIPs)

• Under §111(d)(1), EPA must use a “procedure similar” to §110. (how “similar”?)

• Under §110, each state of the USA must:

– Submit a State Implementation Plan (SIP) to EPA that provides for “implementation, maintenance, and enforcement” of the National Ambient Air Quality Standard

(NAAQS) within that state. (But under §111, there are no NAAQS; instead, the SIPs must achieve the “standard of performance” per the BSER.)

– Adopt its SIP within 3 years after EPA promulgates NAAQS (or any revision)

– Adopt emission limitations and other control measures (to meet NAAQS or other standards)

– Adopt air quality monitoring and reporting systems

– Adopt enforcement mechanisms

– Adopt adequate provisions to prohibit interstate spillovers

Toward a US national market: from SIPs to

Federal Implementation Plans (FIPs)

• EPA could create a national market through a “FIP.”

– Voluntary opt-in (as in NOx trading 1998-2008; CAIR 2005)

– Mandatory (as in SO2 trading market 1990) ?

• §111(d)(2) authorizes EPA to adopt FIPs, if EPA

finds that a state plan is not “satisfactory.”

• Similarly,§110(c)(1) also provides that EPA shall promulgate

a FIP, within two years of:

– (a) EPA finding that the State has failed to submit a SIP, or did not

satisfy the minimum criteria in its SIP, or

– (b) EPA disapproving of a SIP submission, in whole or in part (unless

the State corrects the deficiency and EPA approves the revision).

• “FIP” is defined in§302(y) to include economic

incentives, allowance trading, and auctions.

(Could EPA use other CAA sections ?)

• Why use §111 vs. other sections of CAA ? – Can EPA use both 111 and 109 (or 112) ? No: 111(d)(1) precludes.

– What about using only 109 ? (NAAQS; cost.) Or 112 ? (MACT; cost.)

– EPA is already using 202 (mobile sources), GHG reporting rule, etc.

• CAA § 115 – Authorizes EPA to address transnational pollution, if:

• Transboundary impacts

• Reciprocity in policies by the affected countries

– Never (?) used. Seems designed for US-Canada reciprocity, but its

language is broader. Parameters remain unclear.

• CAA § 615 – Authorizes EPA to address pollution that “may reasonably be anticipated to

affect the stratosphere, especially ozone in the stratosphere, and such effect

may reasonably be anticipated to endanger public health or welfare.”

– Could include climate, though written for ozone. Parameters unclear.

Social Cost of Carbon (SCC)

• SCC = estimated damage from emitting 1 ton of GHG – Used in government decision making: BCA of policies, projects

– Used in Canada, France, Germany, Mexico, Norway, UK, USA, …

• USA government development of SCC so far – US Court of Appeals, 2008: wrong to set at zero

– 2010 SCC: ~ $ 26 (central est. of impact in 2020, at 3% discount rate)

– 2013 SCC: ~ $ 43

• Future development of the SCC – Need to review methods/models, discounting, foreign impacts, etc., and

update SCC regularly. Pizer et al., Science (5 December 2014).

– Long-term economic growth effects raise SCC further. Revesz et al.,

Nature (2014); Moore & Diaz, Nature Climate Change (2015).

– Extreme tail risks. Cedronsky et al. (2011): raise SCC by 3x.

– Ancillary impacts. Shindell, Climatic Change (2015): adding health, air

pollution, etc. raises SCC from $10-$67 to $27-$150.

SCC used in Benefit-Cost Analysis (BCA) of

EPA 111(d) rule “Clean Power Plan”

Climate Change Impacts (only) Health Impacts (Co-Benefits) of

correlated Pollutants, plus …

Domestic Global Domestic Climate

Impacts

Global Climate

Impacts

Benefits

Climate Change $ 3 $ 31 $ 3 $31

Health Co-Benefits $45 $45

Total Benefits $ 3 $ 31 $48 $76

Total Compliance Costs $ 9 $ 9 $ 9 $ 9

Net Benefits (Benefits – Costs) - $ 6 $ 22 $ 39 $ 67

Benefits and Costs in 2030 (billions of US dollars; using SCC of $43, at 3%

discount rate; domestic climate impacts estimated as 8.5% of global SCC;

midpoint of range of health impacts) (from US EPA, RIA, June 2014, tables

ES-7 and ES-10; and Rob Stavins blog, June 19, 2014).

Source: Carbon Disclosure Project, Global Corporate Use of Carbon Pricing (Sept. 2014).

SCC / carbon price now used by 150+ private enterprises, from $6 - $90:

The Future of Carbon Pricing/Markets?

• Evolving carbon markets

– EU ETS

– USA/Canada subnational and national

– China pilot programs and national

– Others e.g. NZ, Japan, Korea, Kazakhstan, etc.

• Linking across these markets?

– Stewart & Wiener (2003): US-China & EU linking

– Will COP 21 facilitate or impede – help or hurt ?

• SCC: Diffusion around the world ?

– Complement, or alternative, to treaties/COPs