Changing Political Landscape and Paths Forward

Dallas BurtrawFebruary 9, 2010

Alternatives for US policy• Waxman-Markey/Kerry-Boxer• Energy leg., electricity-sector only

leg., standards• Cantwell-Collins (dividends)• Clean Air Act

The current situation?

The Waxman-Markey/Kerry Boxer approach solves many problems (competitiveness, low

income, electric utilities, cost) and suffers under the biggest one (allocation).

10

0 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

Percent of Emissions

Do

llar

s

Area of Rectangle= Allowance Value

Marginal Cost Schedule

Area of Triangle = Resource Cost

100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

Percent of Emissions

Do

llar

s

Area of Rectangle= Allowance Value

Marginal Cost Schedule

Area of Triangle = Resource Cost

Partial Equilibrium Costs in Cap-and-Trade

PA

How households are affected depends much more importantly on what happens to the rectangle than on the size of the triangle.

Common Pool Resource1. Nonexcludable2. Depletable

Philosophical reference: the resource is owned in common.

Public Antagonism1. Wall Street shouldn’t get it2. Government shouldn’t get it3. Whose money is it anyway?4. Uncertainty…

• Climate change poses an extraordinary coordination and cost-sharing challenge.

• That challenge is amplified by the fundamental uncertainty about climate science.

• Economic response and technological change add additional uncertainty about costs.

• We find that policy implementation adds further uncertainty with respect to the effects on households.

• The more complex the policy, likely, the greater will be the uncertainty for individual households.

Does Policy Propagate Uncertainty?

Three Uncertain Aspects (2016):LDC Provisions, Renewables & Technology, Energy Efficiency*

Modeling H.R. 2454:

Net Avg CS Loss per hh

Allowance Price

OPTIMISTIC WAXMAN-MARKEY $137 $13.20

PESSIMISTIC WAXMAN-MARKEY $421 $23.43

75% CAP-AND-DIVIDEND $228 $17.37

Consumer Surplus Loss by Income Quintile

Avg

The Middle Class Energy Tax

Uncertainty fuels the notion that the technocrats don’t know what they are doing.

If the little guys can’t understand what is happening, the big guys win.

…The devil is in the details.

Options for Allocation

1. Interest group politics2. Surgical allocation to address leakage3. Invest4. Return to consumers

a. dividendsb. tax reform

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National Comparison

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.07Reduce Income Tax

Income Deciles

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Dark Blue: Effect of cap/taxLight Blue: Net effect after accounting for revenue

- National Tax Journal 2009

Cap and Dividend(nontaxable)

Income Deciles

Permit Price $20.87

Public finance view:achieve efficiencyuse other tools to achieve distributional goalsFor example, couple climate policy with separate tool for income redistribution

Common pool resource view: achieve fair, popular climate policyuse other tools to achieve efficiencyFor example, couple with reform of the tax preference for home mortgages

Strategy: Reinvest Dividends Couple with existing education, incentive programs Tax preferred expenditures Borrow future year dividends at zero-interest Tax-free revolving loan funds (Nudge) More

How will households designate the value that may be returned to them through dividends?

Thank you

LDC Provisions and Energy Efficiency/Technology Development in 2016

OPTIMISTIC CASE PESSIMISTIC CASE Percent Electricity LDC Allocated through fixed

charge on electricity bills Allocated through variable charge on

electricity bills

30.00

Various electricity efficiency provisions

Electricity consumption reduced at 2.8 cents/kwh

maps into $54/ton*

Revenue lost 5.30

Development of CCS technology Abatement at $50/ton** Revenue lost 1.75 Renewable energy Abatement at $34/ton** Revenue lost 3.39

Clean vehicle technology Abatement at $75/ton** Revenue lost 3.00 SUBTOTAL 43.44 *Affects households through both lower electricity bills and lower allowance price. **Affects households through lower allowance price.

Modeling H.R. 2454:

Remaining Provisions Held Constant

Percent Natural gas LDCs, home heating oil, some energy efficiency, trade vulnerable industries

Captured in MAC curve

25.44

Low-income consumers Per-capita dividend to low income households 15.00 Merchant coal, refiners Shareholders 7.25 Adaptation provisions Per-capita dividend to all households 2.64 International provisions Lost revenue overseas 7.00 SUB-TOTAL 57.33

Electricity Price Effects of Allowance AllocationAuction

Free Allocation to Generators

Free Allocation to Consumers (LDCs)…But, Allowance

Price Increases by 12-15% With Subsidy to Elec. Consumption

Reduces Price only in Regulated Regions

Efficiency Advantage Lowest Social Cost but Higher Prices