Transcript Example Headline - Pennsylvania Public Utility Commission

Market Mechanisms to Curb
Greenhouse Gases: Challenges and
Future Directions
Joe Kruger
February 20, 2007
Overview
• Taxes vs. cap and trade
• The evolution of cap and trade from SO2 to
greenhouse gases
• New cap and trade programs in Europe and
states
• Conclusions
Emissions Trading
• Set a target or cap
• Distribute tradable permits (allowances) to industry
• Companies choose emission reduction strategies
and may trade allowances
• Government measures emissions and assesses
penalties if emissions exceed allowances
• Cap provides certainty that a quantity of emissions
will not be exceeded but leaves uncertainty about
price
Taxes
• Set a price for carbon or carbon dioxide
• Measure emissions (or fuel use) and collect
fee
• Creates certainty about price of policy (but
not quantity of emissions)
• What about the revenues?
Lessons from SO2 for GHG
• General lessons:
– Emissions trading is an effective instrument
– May be even more appropriate for ghgs because
no “hotspots”
• Specific elements:
–
–
–
–
Hands-off role of regulators
Flexibility of timing important (banking)
Importance of monitoring and verification
Political importance of allowance distribution
What might be different in a
ghg system?
• Scope and point of regulation
• Higher stakes for distribution of allowances:
auction vs. free allocation
• Mechanisms to limit price uncertainty (safety
valve)
• Additional incentives for R&D, technology
deployment
• Global dimensions of problem
Scope & Point of Regulation
High stakes for allowance
distribution
• Huge asset value of allowances
• In a competitive market, “opportunity cost”
of free allowances passed on
– Special issues for power sector; competitive
markets vs cost of service regulation
• How much compensation is needed?
• Allocation need not be tied to point of
regulation
Mitigating Price Uncertainty
• Climate change is a long-term problem
• Fuel markets and other factors can cause price
uncertainty/spikes
• Price uncertainty makes long-term technology
investment difficult
• Safety valve mechanisms may improve political
feasibility for first mandatory step
• But ultimately we will need transition from price
certainty to emissions certainty
Additional incentives for
R&D, technology deployment
• In the short-term, technologies not available
to make the ecologically necessary reductions
(e.g., carbon capture and storage)
• Is it possible to incentivize by the carbon
price alone?
• Most legislative proposals provide additional
incentives for R&D, technology deployment
Billion tons of carbon equivalent per year
Global dimension of problem
10
industrial countries
developing countries
8
6
4
2
0
1990
2000
2010
2020
2030
2040
2050
Summary of the EU
Trading System
• Participants: 25 Member States (MS)
• Timing: Periods are 2005-2007 and 20082012
• Coverage:
– Sectors: Energy activities (including electric
power), iron & steel, minerals, pulp and paper
– ~12,000 installations covering 46% of CO2
emissions
• Links to Kyoto mechanisms
• Volatility
– Poor market information?
– Fuel prices?
– Too many allowances?
• New caps and allocations
are under discussion for
2008-2012 period
€ 32
€ 31
€ 30
€ 29
€ 28
€ 27
€ 26
€ 25
€ 24
€ 23
€ 22
€ 21
€ 20
€ 19
€ 18
€ 17
€ 16
€ 15
€ 14
€ 13
€ 12
€ 11
€ 10
€9
€8
9/15/2005
9/22/2005
9/29/2005
10/6/2005
10/13/2005
10/20/2005
10/27/2005
11/3/2005
11/10/2005
11/17/2005
11/24/2005
12/1/2005
12/8/2005
12/15/2005
12/22/2005
12/29/2005
1/5/2006
1/12/2006
1/19/2006
1/26/2006
2/2/2006
2/9/2006
2/16/2006
2/23/2006
3/2/2006
3/9/2006
3/16/2006
3/23/2006
3/30/2006
4/6/2006
4/13/2006
4/20/2006
4/27/2006
5/4/2006
5/11/2006
5/18/2006
5/25/2006
6/1/2006
6/8/2006
6/15/2006
6/22/2006
6/29/2006
7/6/2006
7/13/2006
7/20/2006
7/27/2006
8/3/2006
8/10/2006
8/17/2006
8/24/2006
8/31/2006
9/7/2006
9/14/2006
– $9 billion in transactions in
2005
– $19 billion in the first 9
months of 2006
Price [€/ton]
EU Market
• Active trading
29,75
27,18
21,90
16.13
11,05
8.95
EUA Spot Price [€/ton],
September 2005 – September 2006
4-gen
6-set
30-ago
23-ago
16-ago
9-ago
2-ago
26-lug
19-lug
12-lug
5-lug
28-giu
21-giu
14-giu
7-giu
30
20
55.00
50.00
15
45.00
10
40.00
35.00
5
30.00
UK Winter Power Price [GBP/MWh]
EUA 2005 Forward Price
31-mag
24-mag
17-mag
10-mag
3-mag
26-apr
19-apr
12-apr
5-apr
29-mar
22-mar
15-mar
8-mar
1-mar
22-feb
15-feb
8-feb
1-feb
25-gen
18-gen
11-gen
EUA 2005 Forward Price [€/tCO2]
EUA & UK Power Prices
UK Winter Power Price [GBP/MWh]
70.00
65.00
25
60.00
Regional Greenhouse Gas
Initiative (RGGI)
• Seven states signed MOU
in December; three
additional states to join
• Program covers power
sector
• Cap at current levels by
2009; 10% reduction by
2019;
• At least 25% of allowances
for “public benefit”
California
• Economy-wide cap on
emissions
– 1990 emissions by 2020
– Likely to include
trading program in
some sectors
– Explornig links to
RGGI, EU trading
programs
Conclusions/Predictions
• Trading programs are evolving to address climate change
• U.S. will benefit from the European and RGGI experiences
• Ultimately, we will have a mandatory program with
–
–
–
–
Economy-wide approach
A safety valve for price certainty
Less free allocation and a transition to auctions over time
Cap and trade increasingly seen as part of policy mix with
technology policies/R&D
– Strengthening of cap will be tied to actions by trade partners (e.g.,
China)