Ch. 6. Externality Examples

• Cap and Trade– Acid rain and SO2– CO2 and greenhouse gases

Term Project: Addressing the Deficit

Possible groups

•identify and assess spending cut policies for addressing deficit•identify and assess revenue generation strategies for addressing the deficit•Tax reform strategies•addressing entitlement programs (Social Security, Medicare, and especially Medicaid,

SO2 Reductions

•Cap and Trade Application: Global WarmingCap and Trade Application: Global Warming6 . 2

•Global WarmingGlobal Warming6 . 2

The Kyoto TreatyThe Kyoto Treaty

International conferences to address the problem of International conferences to address the problem of global warming began in 1988. The peak of activity was global warming began in 1988. The peak of activity was a 1997 meeting in Kyoto, Japan.a 1997 meeting in Kyoto, Japan.

After intense negotiation, the 38 industrialized nations After intense negotiation, the 38 industrialized nations agreed to begin to combat global warming by reducing agreed to begin to combat global warming by reducing their emissions of greenhouse gases to 5% below 1990 their emissions of greenhouse gases to 5% below 1990 levels by the year 2010.levels by the year 2010.

These goals were written into a treaty that has since These goals were written into a treaty that has since been ratified by 35 of the 38 signatory countries, and been ratified by 35 of the 38 signatory countries, and that went into effect in early 2005. that went into effect in early 2005.

A notable omission from the ratification list is the A notable omission from the ratification list is the United States, which has shown no interest in signing United States, which has shown no interest in signing on to this level of emissions reduction.on to this level of emissions reduction.

•Global WarmingGlobal Warming6 . 2

Can Trading Make Kyoto More Cost-Can Trading Make Kyoto More Cost-Effective?Effective?

international emissions tradinginternational emissions trading Under the Kyoto treaty, the Under the Kyoto treaty, the industrialized signatories are industrialized signatories are allowed to trade emissions rights allowed to trade emissions rights among themselves, as long as the among themselves, as long as the total emissions goals are met.total emissions goals are met.

•Copenhagen Conference 2010Agreement to begin GHG reduction by 2020

The United Nations Climate Change Conference, Durban 2011

The outcomes included a decision by Parties to adopt a universal legal agreement on climate change as soon as possible, and no later than 2015.

•Global WarmingGlobal Warming6 . 2

Can Trading Make Kyoto More Cost-Effective?Can Trading Make Kyoto More Cost-Effective?

•Global WarmingGlobal Warming6 . 2

Can Trading Make Kyoto More Cost-Effective?Can Trading Make Kyoto More Cost-Effective?

•Global WarmingGlobal Warming6 . 2

Can Trading Make GHG reduction More Cost-Effective?Can Trading Make GHG reduction More Cost-Effective?

Participation of Developing CountriesParticipation of Developing CountriesBy the year 2030, developing nations will produce more than half of the world’s By the year 2030, developing nations will produce more than half of the world’s emissions, with China and India leading the way.emissions, with China and India leading the way.

It is much cheaper to use fuel efficiently as you develop an industrial base than it is It is much cheaper to use fuel efficiently as you develop an industrial base than it is to “retrofit” an existing industrial base to use fuel efficiently. By some estimates, an to “retrofit” an existing industrial base to use fuel efficiently. By some estimates, an international trading system that included developing nations would lower the cost to international trading system that included developing nations would lower the cost to the developed world of complying with the Kyoto treaty by another factor of four. the developed world of complying with the Kyoto treaty by another factor of four.

The developing nations wanted no part of that argument, however. They pointed out, The developing nations wanted no part of that argument, however. They pointed out, rightly, that the problem that the world faces today is the result of environmentally rightly, that the problem that the world faces today is the result of environmentally insensitive growth by the set of developed nations.insensitive growth by the set of developed nations.

Why should they be forced to be environmentally conscious and clean up the mess Why should they be forced to be environmentally conscious and clean up the mess that the United States and other nations have left behind?that the United States and other nations have left behind?

Waxman-Markey (ACESA)Waxman-Markey (ACESA)

• • • Require electric utilities to meet 20% of their electricity demand Require electric utilities to meet 20% of their electricity demand through renewable energy sources and energy efficiency by 2020through renewable energy sources and energy efficiency by 2020

•• • Invest in new clean energy technologies and energy efficiency, Invest in new clean energy technologies and energy efficiency, billion), and basic scientific research and development ($20 billion).billion), and basic scientific research and development ($20 billion).

• • • Mandate new energy-saving standards for buildings and Mandate new energy-saving standards for buildings and appliances, and promote energy efficiency in industry.appliances, and promote energy efficiency in industry.

•• • Reduce carbon emissions from major U.S. sources by 17% by Reduce carbon emissions from major U.S. sources by 17% by 2020 and over 80% by 2050 compared to 2005 levels.2020 and over 80% by 2050 compared to 2005 levels.

• • • Protect consumers from energy price increasesProtect consumers from energy price increases

Carbon Tax vs Cap and Trade?Carbon Tax vs Cap and Trade?

• C&T tends to give permits away freeC&T tends to give permits away free

• Wasteful lobbyingWasteful lobbying

• Administering taxes more testedAdministering taxes more tested

• SR need for lower abatement costsSR need for lower abatement costs

• C&T trading may be volatileC&T trading may be volatile

Objective and IssuesObjective and Issues• What are economic implications of greenhouse What are economic implications of greenhouse

gas reduction efforts?gas reduction efforts?• What are fuel sources for electricity generation in What are fuel sources for electricity generation in

Iowa?Iowa?• Why do we rely on this mix?Why do we rely on this mix?• What are implications of changing the mix?What are implications of changing the mix?

– CostsCosts– EnvironmentEnvironment– AgricultureAgriculture– HealthHealth

• How do we decide?How do we decide?

Capping Greenhouse Gases

• Electric Sector deals with CO2 reductionsElectric Sector deals with CO2 reductions• Emissions lowered by:Emissions lowered by:

– Domestic capsDomestic caps– SequestrationSequestration– International offsets and creditsInternational offsets and credits

• Higher prices lead to Higher prices lead to – reduced fossil fuel usereduced fossil fuel use– Shift to lower emission fuelsShift to lower emission fuels

• Economic impactsEconomic impacts– Lower jobs and GDP Lower jobs and GDP

http://www.eia.doe.gov/oiaf/servicerpt/hr2454/pdf/sroiaf(2009)05.pdf

http://www.usclimatenetwork.org/resource-database/EPA%20analysis%20of%20W-M%20draft_Full.pdf

Electricity Consumers in IowaElectricity Consumers in Iowa

kWh (Energy) Consumed by Customer Typein Iowa, 2005

INDUSTRIAL43%

COMM/ LIGHT IND.24%

RESIDENTIAL33%

Sources:(1) FERC Financial Report, FERC Form 1 (Annual Report), (IOU and Municipals)(2) Iow a Association of Electric Cooperatives (IAEC), (RECs)

Iowa Electricity - GenerationIowa Electricity - Generation

kWh (Energy) by Each Producer in Iowa, 2005

INVESTOR OWNED

75%

ELEC COOP13%

GOVT/MUNI12%

Sources:(1) FERC Financial Report, FERC Form 1 (Annual Report), (IOU and Municipals)(2) Iowa Association of Electric Cooperatives (IAEC), (RECs)

Generation Portfolio in IowaGeneration Portfolio in Iowa

Electricity Production by Source in Iowa, 2005

Coal77.6%

Conventional Hydro2.2%

Gas5.6%

Nuclear10.3%

Wind & Other Renewables

4.0%

Petroleum0.3%

Source: 1990 - 2005 Net Generation by State by Type of Producer by Energy Source (EIA-906)

Role of Coal--InternationalRole of Coal--International

• 70% of world use is for power generation70% of world use is for power generation

• 2004-2006: 7% growth in use2004-2006: 7% growth in use– China 15%China 15%– Russia 7%Russia 7%– Japan 5%Japan 5%– U.S. 2.6%U.S. 2.6%

U.S. Coal StatisticsU.S. Coal Statistics

• 1 billion tons used annually1 billion tons used annually

• 1.44 billion tons by 20251.44 billion tons by 2025

• 275 years of reserves275 years of reserves

• Lowest cost delivered fuel sourceLowest cost delivered fuel source

CFI Contracts, the CCX Tradable CommodityThe commodity traded at CCX is the CFI contract, each of which represents 100 metric tons of CO2 equivalent.  CFI contracts are comprised of Exchange Allowances and Exchange Offsets.  Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule.  Exchange Offsets are generated by qualifying offset projects

Chicago Climate Exchange (CCX), launched in 2003, is the world’s first and North America’s only active voluntary, legally binding integrated trading system to reduce emissions of all six major greenhouse gases (GHGs), with offset projects worldwide. 

CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument® (CFI®) contracts

http://www.chicagoclimatex.com/index.jsf

Goals of CCX:

•To facilitate the transaction of GHG allowance trading with price transparency, design excellence and environmental integrity •To build the skills and institutions needed to cost-effectively manage GHGs •To facilitate capacity-building in both public and private sectors to facilitate GHG mitigation •To strengthen the intellectual framework required for cost effective and valid GHG reduction •To help inform the public debate on managing the risk of global climate change

http://www.chicagoclimatex.com/index.jsf

Quoted in mt CO2 2008

CCX CFI Vintage 2009 (Quoted in mt CO2)

                                                                                       

2009

Cap and Trade IssuesCap and Trade Issues

• Setting the right capSetting the right cap

• Who should be taxedWho should be taxed

• Allocating permitsAllocating permits

• Emission leakages (regulation)Emission leakages (regulation)

• Adverse selection of projects in developing Adverse selection of projects in developing countriescountries

Inter-generational ConsiderationsInter-generational Considerations

• Uncertainties of Climate ChangeUncertainties of Climate Change– How much change from human activityHow much change from human activity– How much harm from climate changeHow much harm from climate change

• Future Generation issuesFuture Generation issues– How much do we care for futureHow much do we care for future– How rich will they beHow rich will they be– How risk averse are weHow risk averse are we

Inter-generational Inter-generational ConsiderationsConsiderations

• How willing are we to forego current How willing are we to forego current consumption to benefit future generationsconsumption to benefit future generations

• Choice of discount rateChoice of discount rate– Higher discounting Higher discounting

http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/