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Climate Change Policy
Jonas Monast
Nicholas 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 control
• Cap: An absolute limit on GHG emissions allowed
during a period
• Trade: Parties are allowed to bid among themselves for
the fixed emission “allowances”
• Distribution of allowances
– Auctioned by the government
– Allocated for free (“grandfathered”) and traded in a
market
Basic Elements of Cap and Trade
Regulation placing a cap on GHG emissions
Point of regulation
Upstream: carbon content of fossil fuels
Downstream: point of emission
Allowances for emissions
Allocation – will return to this
Market:
Brokered deals
Exchanges
Auctions
Rules governing trades
Who can trade
Over what period of time
Enforcement
Emissions measurement and monitoring
Compliance 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
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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
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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 preset (escalating)
price
Absolute
Not if SV triggered
CMEB
Expand borrowing
and offsets when
“high” price
exceeded
Initially: automatic
at pre-set
(escalating) price
Targeted, not
guaranteed
Absolute *
Eventually: Board
discretion using
legislative guidance
* CMEB actions could shift emissions to expanded offsets
New Option: Fixed Allowance Reserve
•
Limited quantity of allowances set aside
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Reserve built from allowances within the long-term cap
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Introduced to market in response to price run-up
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 Resolve
Parameters
Preliminary Ideas
Reserve
- 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
•Allocated for free (“grandfathered”)
•Auctioned
When allocated for free…
Who receives the allowances and how they receive them makes an
enormous difference (wealth transfer)
Points of allocation ≠ points of regulation
E.g., you can regulate power plants and allocate the allowances to
households
In 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
December 2007
100
Rural Energy Assistance
WAP
90
LIHEAP
Climate Change and Nat'l Security Fund
80
Adaptation Fund
Energy Independence Accel. Fund
70
Energy Technology Deployment
Early Action
60
Natural Gas Distributors
Electricity Distribution Companies
Methane Capture-- Landfills & Coal Mines
50
Carbon Capture & Sequestration
Domestic Ag & Forestry
International Forests
40
Tribal Communities
States--Multipurpose
30
States--Mass Transit
States--Aggressive Emissions Targets
States--Utility and Building Energy Savings
20
HFC Facilities
Petroleum Facilities
10
Manufacturing Sector
Electric Power Sector
Rural Electric Cooperatives
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
0
2012
Percent of Allowances
Worker Training Fund
*Shaded allocations represent auction
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:
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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:
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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.
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Could a state only retire allowances equal to “additional”
reductions made through state policies?
Why Offsets?
GHG in atmosphere
BAU
Cap no offsets
Cap w/ offsets
Time
•More mitigation
•Same Cost
•Political Buy-in
•Some Uncertainty
Offsets Questions
Impossible to do in one slide
Critical Politically, for cost control and for stakeholders
Key issues:
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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
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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