Transcript Climate Change Policy and Regulatory Jurisdiction
Climate Change Policy and Regulatory Jurisdiction James Bushnell UC Energy Institute Comments drawn from Bushnell, Peterman, and Wolfram, “Local Solutions to Global Problems: Climate Change Policy and Regulatory Jurisdiction” 1
Environmental Policy Trends • More jurisdictions are embracing “market based” environmental regulatory systems • Actions are being taken at a more “local” level relative to environmental problems – Climate change initiatives of US cities – US state policies (RGGI and California) – Individual offsets • Are these trends in conflict?
2
US Climate Change Policies • Northeast Regional Greenhouse Gas Initiative (RGGI) • California AB 32 3
Carbon Emissions at US Power Plants, 2002 4
Environmental Policy Options • Traditional “command and control” regulation • Subsidies and other preferences for “alternative (clean) energy” • Market Based Regulations – Taxes, – traditional cap & trade – Downstream or “life-cycle” based accounting 5
Challenges to achieving real emissions reductions “local” policies face several potential challenges: 1. Leakage.
Regulations cause economic activity to move to less regulated regions.
2. Reshuffling.
Regulations cause buyers and sellers to adjust their counterparties, without changing the location of the economic activity.
6
Example of leakage Previous work has shown that polluting industries grew less quickly in nonattainment counties than in attainment counties (Becker and Henderson, JPE, 2000).
7
Reshuffling mechanics To mitigate leakage, it is tempting to impose regulations on consumers.
Potential for reshuffling.
Reshuffling is different from leakage as it does not involve any change in where the economic activity takes place.
Like an ineffective boycott, it simply involves a change in who transacts with whom.
8
Reshuffling example Diamond market before boycott Homogenous good Homogenous buyers 9
Reshuffling example Diamond market
with
boycott Red = subject to boycott Green = participant in boycott 10
Reshuffling example Diamond market
with
boycott Red = subject to boycott Green = participant in boycott 11
Reshuffling example Diamond market
with
boycott Red = subject to boycott Green = participant in boycott 12
Reshuffling example Diamond market
with
boycott Red = subject to boycott Green = participant in boycott 13
An effective boycott Diamond market
with
boycott Red = subject to boycott Green = participant in boycott 14
An effective boycott Diamond market
with
boycott Red = subject to boycott Green = participant in boycott Boycotts are effective when the fraction of participating buyers is
greater
than the fraction of “clean” sellers.
15
An effective boycott Diamond market
with
boycott Red = subject to boycott Green = participant in boycott Boycotts are effective when the fraction of participating buyers is
greater
than the fraction of “clean” sellers.
16
Other potential examples of reshuffling in the GHG context Low-carbon fuel standard.
– Designed to reduce the lifecycle GHG emissions of transportation fuels.
– For instance, by favoring corn-based ethanol produced using lower carbon growing techniques, CA may simply reshuffle where the “clean” ethanol goes.
Generally, attempts to “get to” upstream sources are potentially subject to reshuffling.
17
What Works?
• • Any
cost imposing
regulation will create incentives for leakage/reshuffling – Emissions standards, cap-and-trade – Downstream cap-and-trade, life-cycle cost assessments
Subsidies
for alternatives produce no incentive to evade (just the opposite) –
Mandates
(like RPS) do create costs for buyers • Reshuffling concerns apply – If extremely effective - subsidies can increase consumption of the bad elsewhere • Demand-side leakage 18
How bad can it be?
Determinants of unintended consequences • Leakage – Relationship of environmental costs to relocation costs • Reshuffling – Relationship of environmental costs to costs of “switching” • Subsidies – Elasticity of demand for the product being replaced 19
How Much is Out There?: TWh "compliant" with various regulations Non-Cal WECC Cal Non-Cal WECC Cal Non-Cal WECC Cal
0 50 100
TWh
150 200 20 250
Importing Clean Power All WECC Sources Eligible for Import into California CA Forecast Demand CA Emissions Target 0 200 Electricity Output [TWh] 400 600 21
Importing Clean Power Assuming California Generation Unchanged CA Forecast Demand CA Emissions Target 0 200 Electricity Output [TWh] 400 22 600
Summary • All climate change policies will be more “local” than the problem – And subject to evasion of jurisdiction • Ironically, less flexible (and less efficient) policies are often less vulnerable to evasion – Subsidies & very specific mandates • The “best” policy choice will vary by product and industry 23
Thank You.
24
Modeling Source-Based California C&T Options • Immediate question: What would 2007 have looked like with Carbon regulation?
• Data derived from actual 2007 market outcomes • “Re-dispatch” or simulate the market under various carbon regulation assumptions – West-wide cap, – CA Source-based – updating • Simplified “3 node” market model of transmission • Solved as a complementarity problem – Each firm equilibrates MR and MC (including emissions costs) – Permit prices endogenously linked to emissions cap – Buidling on work of Zhao, Hobbs, and Pang, & Helman and Hobbs 25
p
sim
p
actual
Figure 1: Supply Costs, Imports and Others
Demand MC sim
q others q others q imports q cems q sim q tot
26
p
sim
p
actual
Figure 2: Emissions Rates and Supply costs
Demand MC sim
q others q others q imports q cems q sim q tot
27
Market Equilibrium Conditions 28
Output Based Updating • Policy allocates new permits based upon production quantities – Provides incentive to continue “local” production – Can weaken incentives provided by cap and-trade by (indirectly) reducing costs of pollution – Can stimulate “cleaner” production 29
Output-Based Updating Marginal Revenue Emissions market Allocations/costs Marginal Generation Cost 30
Summary Results Region CA Actual No Cap Regional cap 40.98
34.22
40.57
Cal only cap Cal cap w/updating 26.80
27.17
NW Carbon (mmtons) SW Total Carbon Price 23.37
23.12
17.87
23.28
23.27
157.31
146.11
102.22
221.65
203.45
160.66
152.79
152.27
202.87
202.71
NA 0 60 18 41 31
Summary Results Region Actual No Cap Regional cap CA 81913 81362 95655 Cal only cap Cal cap w/updating 64671 66048 Energy (GWH) NW SW 29607 33011 31738 33367 33352 178367 175473 155521 191040 189618 32
Carbon Emissions: by region and fuel type 33