Federal Climate Change Legislation : Key Issues for Commissions

1
Federal Climate Change Legislation Key Issues
for Commissions

• Andy Keeler
• John Glenn School of Public Affairs
• The Ohio State University

2
Outline

• Legislative specifics that matter
• Issues for Commission Decision-making
• Cap-and-trade in Perspective

3
Legislative specifics that matter

• Allowance price
• Allowance allocation and use of resources
• Exemptions and special treatment
• Specifics on Interaction with State Programs

4
Allowance Price Matters

• Directly determines the costs and incentives
• Tighter targets higher prices
• Lieberman-Warner / Boxer has tighter short-term
  targets than Bingaman-Specter

5
How big will price effects be?

• Predictions are highly imperfect
• Economic assumptions
• Technology assumptions
• Institutional assumptions offsets, state
  programs, etc.
• Predicted effects in 2020 are good research but
  highly uncertain

6
EIA Model Predictions for 2020

• Lieberman Warner (L-W)
• 0.17 / gallon gasoline
• .81 cents / kwh electricity (coal)
• Bingaman - Specter
• 0.12 / gallon gasoline
• .28 cents / kwh electricity (coal)
• Inherent uncertainty is huge - but much lower for
  Bingaman than LW because of the safety valve

7
Cost Containment (Price Risk) in Legislation

• What happens if reducing CO2 is more difficult
  and expensive than predicted?
• Tradeoff between environmental certainty and
  economic certainty
• Economic risk high prices, shortages, economic
  dislocation (political backlash)
• Environmental risk Busting the Cap not
  meeting GHG reduction goals

8
Emergency-Metaphor Policiessafety valves,
circuit breakers, and emergency off-ramps

• Reduce the price of allowances by making
  additional allowances available
• Crucial distinctions
• Relax the long-term cap, or all released
  allowances made up in the future (borrowing)
• Price certainty, trigger certainty, or additional
  allowances released without certainty

9
Emergency-Metaphor Policies

• Safety Valve unlimited allowances available at
  a known price
• Circuit Breaker annual cap is frozen (stops
  declining) as long as prices are above a known
  price
• Emergency Off-Ramp a reserve of future-year
  allowances is auctioned annually with a (known)
  minimum price

10
Cap Neutrality

• The safety valve is not cap-neutral additional
  allowances sold at the safety valve price
  represent additional emissions
• The circuit breaker is not cap-neutral but
  there are limits to the quantity of emissions
  above the cap
• The allowance reserve is cap-neutral (in
  theory)

11
Triggers

• A safety valve works off a known, pre-announced
  price
• Reserves, circuit breakers, and other borrowing
  mechanisms can be designed to work off announced
  triggers or at the discretion of regulators (e.g.
  Carbon Market Efficiency Board)

12
Carbon Market Efficiency Board

• The Carbon Fed would have discretion to change
• Offset quantities
• Borrowing restrictions
• ????
• There are positive and negative consequences of
  building such discretion into a cap-and-trade
  system

13
Cost Containment in Legislative Proposals

• Emergency off-ramp (Boxer / L-W) price effects
  are not certain, cap-neutral, has a pre-announced
  minimum price (starts at 22-30 per ton CO2)
• Safety valve (Bingaman-Specter) certain,
  pre-announced (current version 12 per ton CO2),
  excess emission above the cap

14
Whats the price?

• Discussions about the safety valve in particular,
  and about all of these mechanisms, should focus
  more on the price at which they kick in
• A 12 safety valve is very different than a 50
  safety valve

15
Cost containment short-term and long-term

• Well-managed borrowing mechanisms are likely to
  be a good tool for short-term price volatility
• Long-run price uncertainty would be better
  managed by safety valve mechanisms (with
  accompanying drawbacks)

16
Long-term Targets and Prices

• Targets in most federal legislation are set
  through 2050
• Common sense says that targets that far in the
  future could be changed
• Setting long-term targets does
• Create a status quo
• Concretize aspirational goals
• May have significance in IRP processes

17
Allowance Allocation Who Gets the Money?

• 20 allowances for year 1 of Lieberman-Warner
  115 billion in allowance value
• Allowances can technically be allocated to just
  about anyone. Who gets them is a lot of politics
  with a little bit of equity and public policy
  thrown in for good measure.

18
Allocation to LDCs

• L-W gives about 10 of total allowances to LDCs
  (Bingaman punts on this point) and 3 to gas
  distributors
• Use to keep prices low
• Use to reduce energy use
• Use for GHG-reducing generation and transmission
  investments
• The use of these allowances is under state
  commission regulation but may also have
  legislative direction

19
Allocation to Generation Owners

• L-W gives generation owners 18 of allowance pool
  to start, then shrinks that over time (Bingaman
  roughly 25)
• Wholesale competition generators receive windfall
• Embedded cost regulation generators face
  commission regulation in using allowance value
  (public uses vs. shareholder equity)
• This potentially creates a significant equity
  issue

20
Individual Allocations to LDCs and generation
owners

• For LDCs, L-W allocates initially based on
  electricity volume (favors areas with low-GHG
  sources like hydro or nuclear)
• For generation owners, L-W allocation is based on
  emissions history (favors coal)
• Future allocations could be based on these same
  criteria, or be updated by output, alternative
  energy progress, or some other criterion

21
Special Treatment and Exceptions

• Exemptions from the system
• Special treatment through bonus allowances
• Special treatment through other mechanisms

22
Exemptions from the System

• There has been a move to exempt gas used directly
  for home heating from a federal cap-and-trade
  system
• The argument goes that gas is more GHG-efficient,
  and so should be encouraged
• This is bad public policy all fossil energy
  sources should be covered to avoid leakage and
  create correct long-term incentives
• Exemptions are the wrong tool to provide special
  treatment

23
Bonus Allowances

• Can be used to increase the returns to specific
  technologies
• Example carbon capture and storage in L-W gets
  rewarded twice once through reducing allowance
  needs, and again through bonus allowances with
  cash value
• Bonus allowances are really no different than
  cash payments, but do not require a direct budget
  allocation

24
Additional Incentives for Alternative Energy

• Renewable portfolio standards
• Inslee feed-in tariff bill
• Production Tax credits, etc

25
Federal Legislation and State Programs

• Model of CAA and tailpipe standards states can
  be more stringent than federal regulation does
  not apply well
• A state with a more stringent cap will take on
  more emissions reduction effort, but national
  emissions will be unchanged
• States can be rewarded for aggressive programs
  through allowance allocation

26
Commission Decisions

• Allowance prices and ratemaking
• End user prices vs. public investments in
  conservation
• Managing Conservation Programs
• Commissions and the public interest

27
Allowance prices and ratemaking

• What is prudent behavior with respect to
  allowance prices with respect to the decisions of
  regulated generation?
• Example if allowance prices turn out to be
  higher than expected, was a coal plant a prudent
  expenditure
• This works both ways if allowance prices turn
  out to be lower than expected, was a nuclear
  plant a prudent expenditure?

28
End user prices vs. public investments in
conservation

• Commissions will have to determine how to
  allocate allowance value (that they control) to
• Reduce revenue requirements and prices
• Target assistance to low-income consumers and
  vulnerable industries
• Fund conservation and other GHG reduction
  activities

29
Managing Conservation Programs

• L-W has significant funding through allowance
  allocation for state-run conservation programs
• Coordination and emphasis of commission programs
  and other pubic programs
• Potential dramatic expansion of programs presents
  quality and accountability challenges

30
The Public Interest

• How do commissions treat state and national goals
  for GHG reduction relative to more traditional
  elements of their view of the public interest
• As a constraint
• As something to actively pursue beyond the letter
  of climate legislation

31
Is cap-and-trade the right policy?

• Would a tax be better?
• Does it really solve the climate change problem
  or should we just be investing in technology?

32
Tax vs. Cap-and-trade

• A tax is an excellent policy from a technical
  standpoint
• Transparent
• Avoids wrangling over allowances
• Taxes have political liabilities
• people hate taxes
• NGOs hate lack of quantitative certainty
• Industry hates the lack of free allowances

33
Does cap-and-trade solve climate change

• NO - but nothing else does, either
• Massive investment in a portfolio of
  technologies, worldwide action, behavioral
  change, etc. are all required
• Pricing GHG emissions is necessary (but not
  sufficient)

34
Does cap-and-trade solve climate change

• Will increase RD and innovation
• Will reward conservation investments and behavior
• All reductions in emissions lessen climate change
  risks its not 0/1 and buy time for technology
  and adaptation

35
Does cap-and-trade solve climate change

• US action is a necessary step in international
  progress
• Pricing carbon does not preclude technology or
  standards based policies and generally tends
  to reinforce them