Transcript Instrument Choice

Instrument Choice
Bob Wyman
April 9, 2010
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Regulation One Way or
Another
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International diplomacy has stalled
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Increased interest in sectoral programs
This coincides with California’s focus
Congress has stalled
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But EPA will play a resurgent role
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State programs will likely not be preempted
State and regional efforts continue to develop on schedule
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Endangerment Finding December 2009
Light Duty Vehicle Rule to be Final as of March 31, 2010
New and Modified Stationary Source GHG Controls as of April 2010
California’s AB32 and Other Programs (AB1493, SB1368, SB375, low carbon fuel
standard, 33% RPS by 2020): economy-wide program
Western Climate Initiative (WCI)
Midwest Greenhouse Gas Accord
Regional Greenhouse Gas Initiative (RGGI) already governs electricity sector
Courts are plugging the gap
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2nd and 5th Circuits – recognize federal common law of nuisance
NEPA, CEQA, ESA claims challenging individual projects based on climate
impacts
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How Tough Will This Be?
Year
US Population
Per Capita
Emissions
GDP
Total
Emissions
2050
420 Million
(projected)
2.4 Tons (to
meet target)
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1 Billion Tons
(BT)
2005 (Base)
303 Million
20.3 Tons
$ 14 Trillion
6 BT
1910
92 Million
10.9 Tons
$ 572 Billion
1 BT
1887
45 Million
2.4 Tons
$ 147 Billion
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Caveat
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A carbon price signal is not enough
Infrastructure gaps are material
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Technology gaps are material
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Example – energy storage limitations
Regulatory barriers are material
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Example – transmission lines
Examples – California Environmental Quality Act (CEQA),
National Environmental Policy Act (NEPA) reviews substantially
delay and often stop even new, low-carbon investment (e.g.,
cogeneration increases local emissions despite reducing regional
emissions)
A state (or nation) that cares seriously about addressing
climate change needs to identify strategic energy
investments and clear the way
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Stimulus package is directionally correct, but sorely deficient
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Types of Market Programs
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Cap and trade/allowance-based
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Averaging/performance-based
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Sources average to a performance standard and must make up any
shortfall by purchasing credits
Credits/debits generated automatically by reference to credit line
Performance standard can be periodically adjusted, if necessary
Examples: lead phase-out from gasoline, low carbon fuel standard, EPA
recreational marine engine standards
Discrete emission reductions (Offsets)
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Sources must surrender allowances for their emissions
Traded commodity is certified in advance
Examples: acid rain program, EU ETS, RECLAIM
Requires case-by-case certification
Credits generated for surplus reductions relative to baseline
Examples: ERCs, Clean Development Mechanism (CDM)
Emissions Charges and Financial Vehicles
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Examples: carbon tax, clean air investment fund (e.g., AQIP)
Encourages demand-side reductions
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Potential Benefits from Market Programs
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Minimize costs (typically 25+% savings)
Preserve operational flexibility
Deliver price signal
Encourage conservation
Encourage innovation
Plug gaps in legal authority
Provide source of financing
Increase penetration of clean fuels and products through
cost signal and monetary reward
Preserve political will for ambitious environmental goals
by minimizing cost impact and preserving economic
opportunity
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Desirable Elements of Market Program
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Large scale and diversity of market
Banking (and borrowing when appropriate)
Safety valve/transitional safe harbor
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Ceiling price payment to investment fund until market matures
Transparency
Confidence in estimation or quantification methods
Select a market design that takes into account the
variability or uncertainties regarding sector activity levels
Offsets (cost and liquidity benefits)
Clear and consistent enforcement
Provision for mid-course corrections
Linkage to and ultimate integration with other jurisdictions
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Challenges and Specific Problems
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Gaps in legal authority
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Mixed and somewhat inconsistent goals
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No binding international agreement
Incomplete Congressional action
Legal impediments (in addition to policy concerns) for state action
Desired technology outcomes
Cost minimization
Leakage and Competitive Issues
Narrow market – price spikes
Distributional impacts
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Gaps in Legal Authority
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In absence of Congressional action, and following Mass v.
EPA, if EPA’s endangerment finding is upheld, then it is
likely to regulate GHG emissions under the Clean Air Act
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CAA Title II – motor vehicle standards
EISA – renewable fuels standards
Stationary sources
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Preconstruction permit program
Potential section 111 new and existing source performance standards
Other authorities may be available (e.g., NAAQS, hazardous air
pollutants, stratospheric ozone protection, international measures),
but are not likely to be used
State role (Compact Clause and policy concerns)
International
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Mixed Goals
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Strategic technology development
Cost minimization – reducing GHG tons at least cost
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Structure of Markets – Possible Hybrid Approach
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Targeted technology markets – sector-specific
performance standard plus averaging and trading
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“Siloed (or Closed)” Categories
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Renewable electricity standard
Low carbon fuel standard
Motor vehicle standards
Possible accelerator - Innovative technology credits (ITCs):
forward-generated
Open Sectors – tonnage reductions at lowest cost
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Leakage and Energy Balance Concerns
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Source: Sweeney/Weyant Draft Analysis of Measures to Meet the
Requirements of California’s Assembly Bill 32
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At Stake for California Development
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If California’s program remains its own
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Each GHG ton could be 2-5 times more expensive in CA than in
other states and regions
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Significant cost differences will drive investment (even low
carbon investment) outside of the state, partially thwarting
the state’s GHG reduction goals AND distorting the state’s
energy balance
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CA marginal cost ~ $100+/ton GHG in 2020
~$18-22/ton for other regions of the country
Climate stabilization requires that we bring energy supply close to
energy demand to minimize transmission losses and
transportation emissions
A national program avoids these problems, but also could
reward CA investment if the national program provides a
mechanism to monetize the low carbon characteristics
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Distributional Concerns
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Different starting points among sources
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Fuel differences
Technology differences
Difference in entity’s ability to recover costs
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Power sector – differences between utilities and merchant plants
Commodity manufacturers – need to compete in international
markets
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Illustration of Potential Challenges – Starting and End Points,
Rates of Reduction
T/MWH
A
B
A starts in
the hole
2012
2020
Common start, common end, common rate
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Illustration – Separate Credit Trading Line for Performance-Based System
T/MWH
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Credit generation line
B
2012
2020
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TECHNOLOGY
MARKETS
innovative
technology
credits
(ITC)
low-carbon
biomass fuels
(cellulosic
ethanol,
biodiesel),
carbon
capture and
sequestration
Advanced
battery,
advanced
combustion,
other vehicle
and engine
advances
OPEN
MARKET
low carbon
fuel
standard
Deliverers of electric
power
TONS
Refineries
motor
vehicles
Glass Plants
Transition to
cap and trade
or integrate
with national
program
Cement Plants
Landfills
TONS
Renewable
power
CAP AND
TRADE
Other
renewable
portfolio
standard
Other qualified advanced low carbon
technologies and programs
Internal Trading and Banking Only; No Safety Valve
P-B AVERAGING
AND TRADING
+
OFFSETS
ONE-WAY
TRADING
Unrestricted Trading, Banking; No Safety Valve IF
Program Linked at Outset; Otherwise Transitional Safety
Valve
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