Transcript Policies to Address Climate Change: Opportunities and Challenges Catherine Wolfram UC Berkeley CEA 42nd Annual Meetings June 7, 2008 University of British Columbia, Vancouver.

Policies to Address Climate Change:
Opportunities and Challenges
Catherine Wolfram
UC Berkeley
CEA 42nd Annual Meetings
June 7, 2008 University of British Columbia, Vancouver
Starting point for economics of climate change: science
2
Source IPCC
Economic Research on Climate Change
For the most part, economists take as given that anthropogenic
GHG emissions are leading to climate change.
Given that we want to mitigate climate change, economic
research has focused on:
- Marginal Benefits of Abatement.
- Marginal Costs of Abatement.
This talk will focus on the marginal cost side.
Optimal regulation of greenhouse gases
$/ton
MCA
MBA
A*
Abatement (tons)
Outline of Talk
•
Overview of work on damages.
•
Background statistics to frame ideas on costs of abatement.
•
Policies to abate greenhouse gases:
- Market-based (cap-and-trade and taxes).
- Standards.
- Implementation issues: leakage and reshuffling.
•
Conclusions.
Economic research on marginal benefits of abatement
•
Sector-specific analyses:
-
Effects of climate change on US agriculture (Deschenes and
Greenstone, AER, 2007; Fisher, Hanemann and Schlenker,
AER, 2005).
-
Effects of climate change on mortality, energy use, conflict.
•
Macro-level analyses of impacts of rising temperatures.
•
Proper discounting of benefits of future avoided damages in
the future.
Where GHGs come from - sector
US CO2 Emissions by Sector
Industrial NG &
Oil
Industrial Coal
Transportation
Commercial
NG & Oil
Household NG
& Oil
Electricity
Generation
Where GHGs have come from – geography
Overview of policies to mitigate climate change
1. Cap and Trade
2. Taxes
3. Renewable Portfolio Standard
4. Low Carbon Fuel Standard
5. Energy Efficiency
Overview of policies to mitigate climate change
1. Cap and Trade
2. Taxes
Multi-sector
3. Renewable Portfolio Standard
4. Low Carbon Fuel Standard
5. Energy Efficiency
Single-sector
Cap-and-trade policies to reduce GHGs
Cap-and-trade has become the darling of policy-makers.
•
Used in Europe (EU Emissions Trading Scheme).
•
Both US presidential candidates favor it.
•
Part of Lieberman-Warner, leading US climate change
legislation.
•
Two leading regional US initiatives will use it
-
California (all sectors, 1990 levels by 2020).
-
Regional Greenhouse Gas Initiatives (RGGI) in the Northeast
(just electricity sector, stabilize at early 2000 levels beginning
in 2009).
Why is cap-and-trade so popular?
•
Economic efficiency.
•
Environmentalists like it because it achieves a given emissions
level.
•
Past success stories (SO2 Acid Rain Program).
•
Not a taxx.
Challenges to achieving real emissions reductions
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.
*Bushnell,
James, Carla Peterman and Catherine Wolfram, “Local Solutions to Global Problems: Climate Change Policies and Regulatory Jurisdiction,”
Review of Environmental Economics and Policy, forthcoming.
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).
Possible examples of leakage in the GHG context
Source-based regulation of electricity sector could cause an
increase in the amount of power generated outside California.
•
Under a source-based cap, nearly 70% of the reductions
within California could be offset by increases in out-of-state
emissions.*
Industry could leave California or the US for developing countries.
*Fowlie,
Meredith, “Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage,” CSEM WP #175.
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.
Reshuffling example
Diamond market before boycott
Homogenous good
Homogenous buyers
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
An effective boycott
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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.
Reshuffling in California’s electricity industry
Importing Clean Power
200
All WECC Sources Eligible for Import into California
100
150
CA Forecast Demand
0
50
CA Emissions Target
0
*Bushnell,
200
400
Electricity Output [TWh]
600
James, Carla Peterman and Catherine Wolfram, “California’s Greenhouse Gas Policies: How Do They Add Up?” CSEM WP # 166.
Which policies are most vulnerable to leakage & reshuffling?
Leakage
•
Cost-imposing standards provide economic actors with an
incentive to engage in activities that lead to leakage.
Reshuffling
•
Reshuffling is made easier if:
- Regulations are imposed on consumers (upstream).
- Regulations allow for flexibility in compliance (market-based).
Leakage and reshuffling are both less problematic the larger the
regulator’s jurisdiction.
Other issues in implementing cap-and-trade
Allocation of allowances
- Advantages of allocation: get political buy-in from regulated
companies.
- Advantages of auctions: raise revenues.
Whether and how much to rely on offsets.
- Advantages of heavy reliance: cost efficiencies (many
opportunities for GHG mitigation in developing countries).
- Disadvantages of offsets: “additionality” question.
Overview of policies to mitigate climate change
1. Cap and Trade
2. Taxes
3. Renewable Portfolio Standard
4. Low Carbon Fuel Standard
5. Energy Efficiency
Greenhouse gas taxes
Possible advantages over cap-and-trade:
•
No price volatility: marginal damages related to stock of CO2,
marginal costs related to current emissions.
•
Less room for corruption because it does not create artificial
scarcities.
•
Revenue generating (double-dividend).
Still vulnerable to leakage and reshuffling if implemented
regionally.
Why aren’t they being considered?
*Nordhaus,
Political non-starter.
William, “To Tax or Not to Tax: Alternative Approaches to Slowing Global Warming” Review of Environmental Economics and
Policy, 2007.
Alternatives to market-based policies
Several other types of regulation are being actively considered in
conjunction with cap-and-trade policies:
-
Renewable Portfolio Standard for electricity generation.
-
Low-Carbon Fuel Standard for transportation.
-
Energy efficiency standards and subsidy programs.
Why are these are even on the table?
-
Solve additional market failures (IP protection for new
technologies, principal agent or behavioral problems).
-
Subsidies are politically more viable.
-
Transport sector wants to be left out of any cap-and-trade
scheme.
What is a Renewable Portfolio Standard?
Mandates that retail electricity providers buy a certain percentage
of their electricity from renewable resources.
- Exist in 25 states and DC.
- Some talk about a federal RPS.
- Some states have carve-outs for particular technologies.
- Vary in their definition of renewable (e.g., many exclude largescale hydro)
Together with the production tax credit, RPS’ are the main drivers
of renewable capacity additions.
- 93% of binding RPS’ have been met with wind.
*Wiser,
Ryan and Galen Barbose, “Renewable Portfolio Standards in the United States: A Status Report with Data Through 2007”
Lawrence Berkeley National Labs working paper.
DSIRE: www.dsireusa.org
June 2008
Renewables Portfolio Standards
MN: 25% by 2025
(Xcel: 30% by 2020)
*WA: 15% by 2020
ND: 10% by 2015
WI: requirement varies by
utility; 10% by 2015 goal
MT: 15% by 2015
OR: 25% by 2025 (large utilities)
5% - 10% by 2025 (smaller utilities)
☼ OH: 25%** by 2025
*UT: 20% by 2025
IA: 105 MW
IL: 25% by 2025
☼ CO: 20% by 2020 (IOUs)
*10% by 2020 (co-ops & large munis)
ME: 30% by 2000
10% by 2017 - new RE
☼ NH: 23.8% in 2025
MA: 4% by 2009 +
1% annual increase
RI: 16% by 2020
SD: 10% by 2015
☼ *NV: 20% by 2015
CA: 20% by 2010
VT: (1) RE meets any
increase in retail sales by
2012; (2) 20% by 2017
MO: 11% by 2020
☼ NC: 12.5% by 2021 (IOUs)
☼ AZ: 15% by 2025
10% by 2018 (co-ops & munis)
CT: 23% by 2020
☼ NY: 24% by 2013
☼ NJ: 22.5% by 2021
☼ PA: 18%** by 2020
☼ MD: 20% by 2022
☼ *DE: 20% by 2019
☼ DC: 11% by 2022
☼ NM: 20% by 2020 (IOUs)
*VA: 12% by 2022
10% by 2020 (co-ops)
TX: 5,880 MW by 2015
State RPS
HI: 20% by 2020
State Goal
☼ Minimum solar or customer-sited RE requirement
* Increased credit for solar or customer-sited RE
**Includes separate tier of non-renewable “alternative” energy resources
Solar water
heating eligible
Leakage and reshuffling in the RPS?
As a subsidy program, the RPS is not vulnerable to leakage.
It could be vulnerable to reshuffling, except that there is very little
existing renewable capacity.
Table 1: Renewable Supply in the West
State
2006 Renewable Supply
TWh
AZ
CA
CO
ID
MT
NV
NM
OR
UT
WA
WY
*Bushnell,
.1
23.9
.9
.7
.5
1.3
1.3
1.9
.2
2.5
.8
% of state
load
.1%
9.1%
1.8%
3.1%
3.8%
3.9%
6.0%
3.9%
0.8%
2.9%
5.1%
Target
Renewable
Supply
%
15%
10-20%
10%
-15%
20%
10-20%
5-25%
-15%
--
Future Renewable Supply
TWh
(1)
2020
13.5
55.1
6.1
-2.6
8.5
4.3
12.0
-15.7
--
Date Target
to be Met
2025
2010
2020
-2015
2015
2020
2025
-2020
--
James, Carla Peterman and Catherine Wolfram, “California’s Greenhouse Gas Policies: How Do They Add Up?” CSEM WP # 166.
Advantages and disadvantages of the RPS
The RPS is relatively flexible as a standard.
•
Renewable technologies compete against one another.
The RPS is input-based, not output-based.
•
Does nothing to encourage the development of carbon capture
and sequestration technologies, nuclear power.
•
Certain technologies have not been included (biomass cofiring).
Low Carbon Fuel Standard
An intensity standard:
•
Limits the carbon emissions per unit of output.
Proposed in California, discussed on a national scale.
Proponents argue that biofuel producers need assurance of given
market size.
Opponents argue that, as an intensity standard, it will not
necessarily lead to lower GHG emissions.
Implementation on a regional level may lead to reshuffling.
*Holland,
Stephen, Jonathan Hughes and Chris Knittel, “Greenhouse Gas Reductions under a Low Carbon Fuel Standard?” working paper.
United States Refrigerator Use v. Time
Annual Drop from 1974 to 2001 = 5% Per Year
Energy Efficiency
Since the 1970s, standards have helped to promote energy
efficiency improvements.
•
CAFE, appliance standards, building codes.
Standards may continue to be needed to overcome market
failures.
•
Principal-agent problems, behavioral.
= energy efficiency measure
= electric sector measures
= transport sector measures
Conclusions
•
Even well designed, market-based regional policies to address
climate change are subject to leakage and reshuffling.
•
Regions (states, provinces, small countries) can “export” two
things:
- Regulatory infrastructure.
- Technology.
•
Different policies are better suited to those two goals.
•
National (US) legislation is an enormous undertaking.