Ray KoppResources for the Future

Economics of Climate PolicyWorkshop Series

October 10, 2007

Presentation Plan

• Status report on federal climate policy development

• How to think about federal legislative proposals

• Lessons learned from the EU Emissions Trading Scheme

• What happens next

ABC NEWS - WASHINGTON POST - STANFORD POLLReleased April 20, 2007

2007 Policy Developments

• Congressional action in the House & Senate• State policy developments continue

– California AB 32 regulatory policy moving forward– More states join RGGI– Western Climate Initiative (7 states & 2 Canadian

provinces) sets GHG targets

• Supreme Court rules on CAA & CO2

– EPA begins to develop GHG transport regulation

• More companies speak out - US CAP• 4th IPCC reports released

Congressional Action

Important questions to ask1. What is the scope of the regulatory program?

2. Who gets regulated?

3. What are the emission reduction targets?

4. What do we know about the expected cost?

5. Are there attempts to limit cost uncertainty?

6. How are the allowances allocated?

7. What about competitiveness impacts?

The Bills 110th Congress

• Sanders-Boxer S.309: economy-wide cap

• Kerry-Snowe S.485: economy-wide cap

• McCain-Lieberman S.280: economy-wide cap

• Bingaman-Specter S. 1766: economy-wide cap

• Waxman H.R. 1590: economy-wide cap

• Alexander-Lieberman S. 1168: electricity sector cap (CO2)

• Feinstein-Carper S. 317 : electricity sector cap (CO2)

• Stark H.R. 2069: economy-wide tax (CO2)

• Larson H.R. 3416 economy-wide tax (CO2)

Who Gets Regulated?

• Upstream– Stark, Larson

• Downstream– Feinstein-Carper, Alexander-Lieberman

• Hybrid– McCain-Lieberman, Bingaman-Specter

• Power plants downstream (M-L large emitters downstream)• Transport upstream

• Unspecified– Sanders-Boxer, Kerry-Snowe, Waxman

0

2,000

4,000

6,000

8,000

10,000

1990 1995 2000 2005 2010 2015 2020 2025 2030

Mil

lio

n m

etr

ic t

on

s C

O2

equ

ival

ent Historical Emissions

(1990-2005)

Business-As-Usual Projections (AEO 2006)

Bingaman-Specter1 (S. 1766)

Sanders-Boxer (S. 309)

Kerry-Snowe (S. 485)

Lieberman-McCain (S. 280)

Udall-Petri1 (May draft)

Waxman(H.R. 1590)

Historical Electricity Emissions (1990-2005)

BAU ElectricityProjections (AEO 2006) Alexander-Lieberman

(S. 1168)

Feinstein-Carper (S. 317)

Emission Reduction Targets

Cost to Reach the TargetMIT Model Runs – Allowance Prices

0

10

20

30

40

50

60

70

80

90

100

2005 2010 2015 2020 2025 2030

2005$/ton CO2

6.7 GTCO25.9 GTCO25.5 GTCO2

14

Cost to Reach the TargetEIA Analysis of Electricity Prices

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

1990 1995 2000 2005 2010 2015 2020 2025 2030

2004¢ per kwh

BAU6.8 GTCO26.2 GTCO2

17

Cost Certainty• Stark – tax certainty, $3/ton rising $3 each year• Larson – tax certainty, $16.5/ton rising 10% real• Bingaman-Specter – $12/ton “safety valve” rising 5%

real• McCain-Lieberman – allowance borrowing up to 25% for

5 years• Kerry Snowe – no provisions• Alexander Lieberman – no provisions• Waxman – no provisions• Feinstein-Carper – allowance borrowing up to 10% for 5

years• Carbon Market Efficiency Board (Warner-Lieberman)

Allowance / Revenue Allocation• Bingaman-Specter

– 55% free to industry (phased out), 22% auctioned (phased in), 14% for CCS and bio-seq., 9% to states

• Lieberman-McCain– Discretion of EPA with some guidance for free allocation and

auction Larson – $16.5/ton rising 10% real• Alexander Lieberman – 75% free to industry (heat input)• Feinstein-Carper – 85% free to industry (based on

output)• Kerry Snowe – Discretion of the President• Waxman – Discretion of the President• Stark 100% tax revenue to Treasury• Larson 1/6 to R&D, 1/12 to industry, remainder to reduce

payroll taxes

Competitiveness

• Competitiveness is tied to energy intensity and the degree to which domestic industries can pass along costs

• RFF studies find total production costs would rise by 1-2% for each $10/t of CO2 pricing

• Recent EU studies found higher impacts in some industries– 6% in basic oxygen furnace steel and 13% in cement for same

CO2 prices• How can competitiveness issues be addressed?

– Harmonized policies– “Boarder tax” adjustments, permit requirements for imports– Gratis permit allocation

European Union EmissionsTrading Scheme (EU-ETS)

• Began 2005 and includes the 27 countries of the EU

• The program is run in two phases.

– Phase 1 from 2005 – 2007, Phase 2 from 2008 – 2012, coinciding with the Kyoto commitment period.

• Cap covers only CO2, about 12,000 sources, about ½ of EU CO2 emissions

• Transport is not currently included in the system, although air transport will be added in 2011

EU ETS StructureNational Allocation Plan (NAP)

• Decision #1: How much of Kyoto target will be in trading program?

• Decision #2: What will be the allocations for each sector?

• Decision #3: How will allowances be allocated to each installation?

• Currently finalizing 08-12 plans.

Kyoto Target

Allocation to ETS

Allocation to Trading Sectors

Allocation to Installations

EU ETS StructureAllowance Allocation

• Hybrid gratis-auction allocation scheme for Phase 2

• European Commission placed upper limit of 10% on auction

• Phase 2 allocation appears designed to purposefully distribute the cost of the program

EU ETS StructureHas the Program Worked?

• Phase 1 was developed and implemented quickly – problems arose

• Phase 2 seems set for an orderly start Jan. 2008 and will avoid many Phase 1 problems– Current Dec. 2008 price = 21.50 euros ($30)

• However, some issues remain– Price stability– Coverage– Beyond 2012

EU ETS StructureLessons for the US?

• Allowance Allocation matters – A Lot

• These systems work, make them broad

• Add as much certainty as possible to the path of future emissions and allowance prices

• Keep the system simple and transparent

Next Steps: Fight over Allowance Allocation

• Using allowances to distribute the burden– Regulated entities and cost pass through– Unregulated entities

• Large energy consumers• States

• Method of allocation– Gratis historical “grandfathering” & dynamic output

based allocation– Auctioning

Bingaman-SpecterEarly action 1.0

Natural Gas 2.1

Refining 3.7

Low-Income Asst 4.0

Agriculture sequestration 5.0

Coal 6.4

Adaptation 8.0

CCS Bonus 8.0

States 9.0

Carbon Intensive Manufacturing 10.1

Technology 12.0

Electric Power ($53b @ $25/ton CO2e) 28.3

Next Steps: Rising Energy Prices

• Energy prices will increase throughout the country, but in varying degrees– e.g., electricity prices likely to rise most in

areas of coal fired generation

• Magnitude of increase in proportion to severity and timing of the GHG cuts

Next Steps: Winners and Losers

• Credible policy will alter expectations regarding future energy prices

• Household energy consumption decisions will be altered & benefit producers of energy efficient durables

• Low income households will need increased energy assistance

• Energy intensive manufacturers will be disadvantaged.– Especially those facing foreign competition from

countries with low or zero GHG prices

Next Steps: States

• States are already moving forward – CA and Northeast states in the lead

• State action raises fear of patchwork regulation & further motivates federal action– Will federal policy preempt state programs?– How much of a role will states play in permit

allocation?

Next Steps: Adaptation

• Actions to mitigate climate change pose challenges, but these may pale in comparison to the challenges posed by adaptation.

• The recent IPCC report is clear – the climate is changing now

• But, one sees little if any attention paid to this fact in terms of federal policy proposals

www.weathervane.rff.org