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Ch. 6. Externality Examples
• Cap and Trade
– Acid rain and SO2
– CO2 and greenhouse gases
Term Project: Addressing the Deficit
Possible groups
•identify and assess spending cut policies for
addressing deficit
•identify and assess revenue generation
strategies for addressing the deficit
•Tax reform strategies
•addressing entitlement programs (Social
Security, Medicare, and especially Medicaid,
SO2 Reductions
6.2
•Cap and Trade Application: Global Warming
6.2
•Global Warming
The Kyoto Treaty
International conferences to address the problem of
global warming began in 1988. The peak of activity was
a 1997 meeting in Kyoto, Japan.
After intense negotiation, the 38 industrialized nations
agreed to begin to combat global warming by reducing
their emissions of greenhouse gases to 5% below 1990
levels by the year 2010.
These goals were written into a treaty that has since
been ratified by 35 of the 38 signatory countries, and
that went into effect in early 2005.
6.2
•Global Warming
Can Trading Make Kyoto More CostEffective?
international emissions trading
Under the Kyoto treaty, the
industrialized signatories are
allowed to trade emissions rights
among themselves, as long as the
total emissions goals are met.
•Copenhagen Conference 2010
Agreement to begin GHG reduction by 2020
The United Nations Climate Change Conference, Durban 2011
The outcomes included a decision by Parties to adopt a universal legal
agreement on climate change as soon as possible, and no later than 2015.
6.2
•Global Warming
Can Trading Make Kyoto More Cost-Effective?
6.2
•Global Warming
Can Trading Make Kyoto More Cost-Effective?
6.2
•Global Warming
Can Trading Make GHG reduction More Cost-Effective?
Participation of Developing Countries
By the year 2030, developing nations will produce more than half of the world’s
emissions, with China and India leading the way.
It is much cheaper to use fuel efficiently as you develop an industrial base than it is
to “retrofit” an existing industrial base to use fuel efficiently. By some estimates, an
international trading system that included developing nations would lower the cost to
the developed world of complying with the Kyoto treaty by another factor of four.
The developing nations wanted no part of that argument, however. They pointed out,
rightly, that the problem that the world faces today is the result of environmentally
insensitive growth by the set of developed nations.
Why should they be forced to be environmentally conscious and clean up the mess
that the United States and other nations have left behind?
Waxman-Markey (ACESA)
• • Require electric utilities to meet 20% of their electricity demand
through renewable energy sources and energy efficiency by 2020
•
• Invest in new clean energy technologies and energy efficiency,
billion), and basic scientific research and development ($20 billion).
• • Mandate new energy-saving standards for buildings and
appliances, and promote energy efficiency in industry.
•
• Reduce carbon emissions from major U.S. sources by 17% by
2020 and over 80% by 2050 compared to 2005 levels.
•
• Protect consumers from energy price increases
Carbon Tax vs Cap and Trade?
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C&T tends to give permits away free
Wasteful lobbying
Administering taxes more tested
SR need for lower abatement costs
C&T trading may be volatile
Objective and Issues
• What are economic implications of greenhouse
gas reduction efforts?
• What are fuel sources for electricity generation in
Iowa?
• Why do we rely on this mix?
• What are implications of changing the mix?
–
–
–
–
Costs
Environment
Agriculture
Health
• How do we decide?
Capping Greenhouse Gases
• Electric Sector deals with CO2 reductions
• Emissions lowered by:
– Domestic caps
– Sequestration
– International offsets and credits
• Higher prices lead to
– reduced fossil fuel use
– Shift to lower emission fuels
• Economic impacts
– Lower jobs and GDP
http://www.eia.doe.gov/oiaf/servicerpt/hr2454/pdf/sroiaf(2009)05.pdf
http://www.usclimatenetwork.org/resource-database/EPA%20analysis%20of%20W-M%20draft_Full.pdf
Electricity Consumers in Iowa
kWh (Energy) Consumed by Customer Type
in Iowa, 2005
INDUSTRIAL
43%
RESIDENTIAL
33%
COMM/ LIGHT
IND.
24%
Sources:
(1) FERC Financial Report, FERC Form 1 (Annual Report), (IOU and Municipals)
(2) Iow a Association of Electric Cooperatives (IAEC), (RECs)
Iowa Electricity - Generation
kWh (Energy) by Each Producer in Iowa, 2005
ELEC COOP
13%
GOVT/MUNI
12%
INVESTOR
OWNED
75%
Sources:
(1) FERC Financial Report, FERC Form 1 (Annual Report), (IOU and Municipals)
(2) Iowa Association of Electric Cooperatives (IAEC), (RECs)
Generation Portfolio in Iowa
Electricity Production by Source in Iowa, 2005
Conventional
Hydro
2.2%
Nuclear
Gas
10.3%
5.6%
Wind & Other
Renewables
4.0%
Petroleum
0.3%
Coal
77.6%
Source: 1990 - 2005 Net Generation by State by Type of Producer by Energy Source (EIA-906)
Role of Coal--International
• 70% of world use is for power generation
• 2004-2006: 7% growth in use
– China 15%
– Russia 7%
– Japan 5%
– U.S. 2.6%
U.S. Coal Statistics
•
•
•
•
1 billion tons used annually
1.44 billion tons by 2025
275 years of reserves
Lowest cost delivered fuel source
http://www.chicagoclimatex.com/index.jsf
Chicago Climate Exchange (CCX), launched in 2003, is the world’s first
and North America’s only active voluntary, legally binding integrated
trading system to reduce emissions of all six major greenhouse gases
(GHGs), with offset projects worldwide.
CCX emitting Members make a voluntary but legally binding commitment to meet
annual GHG emission reduction targets. Those who reduce below the targets
have surplus allowances to sell or bank; those who emit above the targets comply
by purchasing CCX Carbon Financial Instrument® (CFI®) contracts
CFI Contracts, the CCX Tradable Commodity
The commodity traded at CCX is the CFI contract, each of which represents 100 metric
tons of CO2 equivalent. CFI contracts are comprised of Exchange Allowances and
Exchange Offsets. Exchange Allowances are issued to emitting Members in accordance
with their emission baseline and the CCX Emission Reduction Schedule.
Exchange Offsets are generated by qualifying offset projects
http://www.chicagoclimatex.com/index.jsf
Goals of CCX:
•To facilitate the transaction of GHG allowance trading with price
transparency, design excellence and environmental integrity
•To build the skills and institutions needed to cost-effectively manage GHGs
•To facilitate capacity-building in both public and private sectors to facilitate
GHG mitigation
•To strengthen the intellectual framework required for cost effective and valid
GHG reduction
•To help inform the public debate on managing the risk of global climate
change
2008
Quoted in mt CO2
CCX CFI Vintage 2009
2009
(Quoted in mt CO2)
Cap and Trade Issues
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•
•
•
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Setting the right cap
Who should be taxed
Allocating permits
Emission leakages (regulation)
Adverse selection of projects in developing
countries
Inter-generational Considerations
• Uncertainties of Climate Change
– How much change from human activity
– How much harm from climate change
• Future Generation issues
– How much do we care for future
– How rich will they be
– How risk averse are we
Inter-generational
Considerations
• How willing are we to forego current
consumption to benefit future generations
• Choice of discount rate
– Higher discounting
http://www.carbontax.org/issues/carbontaxes-vs-cap-and-trade/