Energy cost floors to support alternative developments:

1
Energy cost floors to support alternativedevelopm
ents

• Cap and Trade and Carbon Taxes

2
Overview

• GHG Background
• Carbon Price
• Policy Options

3
Greenhouse Gases

• The strength of the greenhouse effector global
  warming potentialof each gas is different (IPCC)
• The most common greenhouse gas is carbon dioxide
  and by convention other greenhouse gases are
  converted to a carbon dioxide equivalent (CO2-e),
  taking into account their internationally agreed
  global warming potentials

Source Commonwealth of Australia, Carbon
Pollution Reduction Scheme Australias Low
Pollution Future, White Paper (December 2008)
4
Global Warming Policy Response

• UNFCCC and IPCC
• Keep global temperature increase under 2o C
• Stabilize GHG emissions to 450-550ppm
• Kyoto Protocol, 2008-2012
• Swedens Carbon Tax, introduced in 1991
• EU Emissions Trading Scheme, introduced in 2005
• Regional Greenhouse Gas Initiative (RGGI)
• Western Climate Initiative (WCI)
• Midwestern Gas Accord
• New Zealand ETS, passed September 2008
• Australian Carbon Pollution Reduction Scheme
• Imminent Federal U.S. Program

5
Reducing GHG emissions means reducing emissions
from fossil fuel
Source US EPA, INVENTORY OF U.S. GREENHOUSE GAS
EMISSIONS AND SINKS 1990-2006 (April 2008)
6
Policy options for reducing emissions

• Market failure Externality
• Polluter Pays Principle (OECD)
• Standards
• Market-based
• Cap and Trade
• Carbon Tax

7
How to achieve lower CO2-e emissions?

• Reduce production

• Technological innovation
• Fuel efficiency
• Emissions capture (CCS)
• Cleaner alternative energy

Substitution
8
Standards

• What Government sets a limit, performance target
  or technology requirement for CO2-e emissions
• Advantages
• Certainty
• Disadvantages
• Unfair
• Negotiated compliance
• Delayed investment (grandfathering)
• No incentive for further improvement
• Administrative costs/not scalable

9
Market-based

• What Introduces a price for CO2-e emissions for
  the market to best allocate resources
• Advantages
• Short term lower cost
• Long term incentive for continuous reductions
• Scalable
• Require less information?
• Less vulnerable to negotiated compliance/enforceme
  nt
• Diffusion Incentive to buy less polluting
  technologies
• Disadvantage
• Must monitor levels of emissions from sources
• Market must exist
• Hampered economic growth

10
Source Environmental Economics,
http//www.env-econ.net/carbon_tax_vs_capandtrade.
html
11
Carbon Tax

• What Levy on a unit of CO2-e emissions with the
  aim of bridging the gap between private and
  social cost
• Advantage
• Revenue source/alternative
• Less monitoring?
• Disadvantages
• Regressive
• Works best when the market works best
• Competitive disadvantage
• Inflation
• Getting it right

12
Source Environmental Economics,
http//www.env-econ.net/carbon_tax_vs_capandtrade.
html
13
Cap Trade

• Mechanics
• Emitters of GHG need a permit for every ton of
  CO2-e emitted (distribution choice)
• Quantity emitted will be monitored and reported
• At the end of a period, a permit is surrendered
  for every ton of emissions produced that period
• Number of permits issued in a period is limited
• Emitters will compete to purchase permits

14
Cap Trade Example
Source Commonwealth of Australia, Carbon
Pollution Reduction Scheme Australias Low
Pollution Future, White Paper (December 2008)
15
Cap Trade

• What Government sets a cap on total emissions
  and creates a corresponding number of tradable
  emissions permits
• Advantages
• Sets the emissions target in quantity (not price)
• Certainty of regulation
• Flexibility of market
• Politically palatable
• Outlet for environmentalists
• Disadvantages
• Monitoring
• Systems development
• Coverage
• Setting quota
• Barrier to entry
• Market manipulation

16
Policy Options by Level of Strong Support
Source Rabe Borick, Climate Change and America
Public Opinion The National and State
Perspective (December 10, 2008)/Report of the
Virginia Climate Change Survey (October 21,
2008), Miller Center of Public Affairs