Cap and Trade Application: Global Warming

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• Cap and Trade Application Global Warming

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• Global Warming

• The Kyoto Treaty

• International conferences to address the problem
  of global warming began in 1988. The peak of
  activity was a 1997 meeting in Kyoto, Japan.
• After intense negotiation, the 38 industrialized
  nations agreed to begin to combat global warming
  by reducing their emissions of greenhouse gases
  to 5 below 1990 levels by the year 2010.
• These goals were written into a treaty that has
  since been ratified by 35 of the 38 signatory
  countries, and that went into effect in early
  2005.
• A notable omission from the ratification list is
  the United States, which has shown no interest in
  signing on to this level of emissions reduction.

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• Global Warming

• Can Trading Make Kyoto More Cost-Effective?

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

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• Global Warming

• Can Trading Make Kyoto More Cost-Effective?

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• Global Warming

• Can Trading Make Kyoto More Cost-Effective?

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• Global Warming

Can Trading Make GHG reduction More
Cost-Effective?

• Participation of Developing Countries

• By the year 2030, developing nations will produce
  more than half of the worlds 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 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 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, rightly,
  that the problem that the world faces today is
  the result of environmentally insensitive growth
  by the set of developed nations.
• Why should they be forced to be environmentally
  conscious and clean up the mess that the United
  States and other nations have left behind?

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Objective and Issues

• What are economic implications of greenhouse gas
  reduction efforts?
• What are fuel sources for electricity generation
  in Iowa?
• Why do we rely on this mix?
• What are implications of changing the mix?
• Costs
• Environment
• Agriculture
• Health
• How do we decide?

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Capping Greenhouse Gases

• Electric Sector deals with CO2 reductions
• Emissions lowered by
• Domestic caps
• Sequestration
• International offsets and credits
• Higher prices lead to
• reduced fossil fuel use
• Shift to lower emission fuels
• Economic impacts
• Lower jobs and GDP

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Waxman-Markey (ACESA)

• Require electric utilities to meet 20 of their
  electricity demand through renewable energy
  sources and energy efficiency by 2020
• Invest in new clean energy technologies and
  energy efficiency, billion), and basic scientific
  research and development (20 billion).
• Mandate new energy-saving standards for
  buildings and appliances, and promote energy
  efficiency in industry.
• Reduce carbon emissions from major U.S.
  sources by 17 by 2020 and over 80 by 2050
  compared to 2005 levels.
• Protect consumers from energy price increases

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Carbon Tax vs Cap and Trade?

• CT tends to give permits away free
• Wasteful lobbying
• Administering taxes more tested
• SR need for lower abatement costs
• CT trading may be volatile

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Capping Greenhouse Gases (CO2, NOx, methane,
flourinated gases)
S280 Scenarios
Lieberman-Warner Climate Security Act S. 2191
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http//www.usclimatenetwork.org/resource-database/
EPA20analysis20of20W-M20draft_Full.pdf
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Electricity Consumers in Iowa
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Iowa Electricity - Generation
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Generation Portfolio in Iowa
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Role of Coal--International

• 70 of world use is for power generation
• 2004-2006 7 growth in use
• China 15
• Russia 7
• Japan 5
• U.S. 2.6

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U.S. Coal Statistics

• 1 billion tons used annually
• 1.44 billion tons by 2025
• 275 years of reserves
• Lowest cost delivered fuel source

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Figure 5.1 (with increasing cost MD function)
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http//www.chicagoclimatex.com/index.jsf
Chicago Climate Exchange (CCX), launched in
2003, is the worlds first and North Americas
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
CFI Contracts, the CCX Tradable Commodity The
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
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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

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2008
Quoted in mt CO2
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CCX CFI Vintage 2009 (Quoted in mt CO2)
                                                                                                                                                                               
2009
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Cap and Trade Issues

• Setting the right cap
• Who should be taxed
• Emission leakages (regulation)
• Adverse selection of projects in developing
  countries

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Inter-generational Considerations

• Uncertainties of Climate Change
• How much change from human activity
• How much harm from climate change
• Future Generation issues
• How much do we care for future
• How rich will they be
• How risk averse are we

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Inter-generational Considerations

• How willing are we to forego current consumption
  to benefit future generations
• Choice of discount rate
• Higher discounting

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SO2 Reductions
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