Climate Change Policy: What Is Achievable and What Are the Options

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Climate Change Policy What Is Achievable and
What Are the Options

• Billy Pizer
• January 23, 2008

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Let's Get Serious About Climate Change Policy
 Whats Really Achievable at What Cost?

• Billy Pizer
• January 23, 2008

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Five Questions

• How do we quantify global, long-term goals and
  what do they mean?
• What we know about costs of these goals?
• What does cost-benefit analysis say?
• What are other countries doing and what are the
  choices for U.S. policy?
• What are the choices for international
  architecture?

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Impacts of Climate Change
5
650
550
450
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Impacts of Climate Change
450
550
650
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Equivalent Ways of Saying the Same Thing
CO2 equivalent concentration(parts per million by volume) CO2 concentration(parts per million by volume) Radiative forcing(watts per meter squared)



450
350
2.5
550
450
3.4
650
550
4.7
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Emission Stabilization Scenarios
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IPCC Scenario Exercise
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Scenario Storylines
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EMF Baselines
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Baselines Goals
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Ways to think about costs

• Loss of income
• Typically expressed as a percent of future income
  a 1 loss of GDP in 2030
• GDP is growing, perhaps almost 3 per year
• But per capita GDP is only growing by half that.
• And median GDP is only growing by half that again
  or about 0.7
• Big or small?
• All existing environmental regulation 2
• Prices
• Impacts on industry and jobs

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CO2 prices?
Average monthly electricity bill 80
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Annual cost of 10 CO2 price
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Industry Impacts
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2030 CO2 Prices to Stabilize
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CCSP Estimated Prices for
650 CO2e
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CCSP Estimated Prices for
550 CO2e
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2030 GDP loss to Stabilize
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CCSP Estimated GDP Loss for
650 CO2e
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CCSP Estimated GDP Loss for
550 CO2e
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A Word on Negative Costs

• Energy efficiency gains that are already cost
  effective
• Why not already done?
• Will CO2 pricing create incentives to do these
  actions now?
• If not, what will?
• Spillovers from new technologies
• New carbon saving technologies lead to other
  discoveries with net benefits.
• Why does other research not do the same thing?

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Summary on Costs

• would require 25/tCO2 prices
  in 2030 and cost less than 1 of income.
• would require 50-100/tCO2
  prices in 2030 and cost less than 1-2 of income.
• We know very little about what it would cost to
  stabilize at
• All estimates assume perfect implementation over
  time, countries, sectors otherwise, more
  expensive

650 CO2e
550 CO2e
450 CO2e
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Bill Nordhaus Estimates Costs and Benefits
My best estimate (/ton CO2) 21 27
33 40 49
(x 1.82 and converting to CO2)
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Distribution of Emissions Likely to see important
transitions in relative emissions across
countries Will have profound implications for
distribution of emission reductions
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European Union

• Emissions Trading Scheme (ETS) for energy
  activities (including electric power), iron
  steel, minerals, pulp and paper. warm-up
  phase 05-07, Kyoto 08-12
• 12,000 installations covering 46 of CO2
  emissions
• 25 Member States (MS) propose allocation and cap
  in National Allocation Plans (NAP)
• Price around 20-25 /ton.
• Changes post 2012.

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Canada

• Emissions trading for Large Final Emitters (LFE)
  oil gas, electricity, mining, manufacturing
  (proposed early 2005)
• Intensity-cap emission limit indexed to output.
• Safety valve extra allowances at C15/tCO2
• Early 2006 program was on hold
• Alberta started similar provincial program in
  2007.

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New Zealand

• Carbon tax at NZ15-25 / tCO2 in 2007, aligned to
  international carbon price (announced 2002)
• Vulnerable energy intensive industries can opt
  for voluntary agreement instead.
• Agricultural methane and N2O (more than half NZ
  emissions) excluded.
• Abandoned 12/05. May pursue emissions trading.

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Japan

• Existing efficiency and renewable programs.
• Voluntary commitments by industry.
• Discussed possibility of 2,500-3,000 / tC tax
  (5-6 / tCO2), but did not pursue.
• Public and private programs to buy offsets.

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Australia

• Did not ratify Kyoto, turned around in 2007
• New South Wales trading program since 2003 for
  power plants.
• Australian states pursued regional cap and trade.
• New government is pursuing national emissions
  trading.

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Comparison of Emission Reduction Goals in
Legislative Proposals in the 110th Congress (as
of October 29, 2007)
Business-As-Usual Projections (AEO 2006)
Bingaman-Specter1 (S. 1766)
Historical Emissions (1990-2005)
Udall-Petri1 (May draft)
Lieberman-Warner (S. 2191)
Lieberman- McCain (S. 280)
Kerry-Snowe2 (S. 485)
Waxman (H.R. 1590)
Sanders-Boxer (S. 309)
Feinstein-Carper (S. 317)
BAU Electricity Projections (AEO 2006)
Historical Electricity Emissions (1990-2005)
Alexander-Lieberman (S. 1168)
This graph depicts emissions targets from some of
the major climate change bills in Congress.
Targets are based on comparison with historical
year emissions. Kerry-Snowe, Sanders-Boxer, and
Waxman specify future emissions as a percentage
of 1990 emissions. For Lieberman-Warner,
Lieberman-McCain, Udall-Petri, and
Bingaman-Specter, emission targets for covered
sectors are related to historical emissions for
those sectors, and total emissions are assumed to
match those in the corresponding historical year.
1 Bill contains flexibility mechanisms which
allow actual emissions to rise above the target.
2 The Kerry-Snowe target is overlaid by others
it is nearly identical to Sanders-Boxer before
2020 and to Lieberman-Warner from 2020-2030.
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Read the Full Report

• Read or download the full report, Assessing U.S.
  Climate Policy Options
• www.rff.org/cpfreport

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Key US Policy Questions

• Cap level and offset rules.
• Emphasis on prices versus quantities.
• coverage, allocation, competitiveness,
  technology

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Derive National Target
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Use of Offsets Dramatically Affects Price
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SO2 Current Vintage Allowance Price
FIP released
Final CAIR
Supplemental proposal
Proposed CAIR(more stringent cap in 2010)
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NOx OTC Current Vintage Price
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EUA Spot Price /ton, September 2005
September 2006

• (OTC Market)

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Quantitative Targets and Prices

• Arguments for targeting both.
• Quantitative targets connect better to
  environmental outcome, but require long-horizons
  and global participation to be meaningful by
  themselves.
• Prices connect better to technology development
  and, in a national program with relatively
  short-term markets, to long-term goals.

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Straw Proposal

• Emissions trading with offsets and a target price
  of 25/ton CO2 in 2020.
• Price floor and ceiling at 50 of this price,
  respectively (12 and 37).
• All prices should rise over time at 5.
• Possibly additional mechanisms to promote
  stability within the 50 band.

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A bottom-up approach

• Initial agreement on policy commitments in key
  countries. No restriction on form of commitment,
  no non-compliance provisions (but still possible
  to ratchet up commitments)
• Common authority for international credits
  (projects, policy reform, REDD).
• Nations free to choose when and whether to link
  systems, but all encourages to make use of
  international credits.
• Rolling 5-year reviews of domestic policies
  modeled after OECD country reviews focus on
  mitigation, technology, and developing country
  engagement.
• Annual meetings to discuss reviews, coordinate
  action, adjust commitments. Major round of
  reviewing and new commitments every five years,
  with an emphasis on holding countries publicly
  accountable for achieving or not achieving prior
  commitments.

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Strengths of bottom-up approach

• Focuses international effort where value is
  highest promoting, evaluating, coordinating
  action versus regulating.
• Opens the door to encourage a much wider range of
  domestic actionstaxes, technology, and sectoral
  policies.
• Can and should evolve towards top-down through
  increased coordination, gradual harmonization,
  and eventual linking.

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Strengths of top-down approach

• Top-down means domestic actions developed after
  and under the guidance of an international
  agreementpresumably targets and timetableswith
  non-compliance provisions.
• Ability to regulate global emission level, to
  assign responsibility for emission reductions,
  and to create incentives for international
  compliance.
• Promotes international emissions trading to
  encourage least-cost emission reductions.

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Summary

• Environmental concerns would encourage 450 CO2e.
• Economic analysis difficult lt550 CO2e.
• Crude benefit analysis suggests 650 CO2e.

prices Income loss
650 CO2e 25 lt1
550 CO2e 50-100 1-2
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Summary (2)

• National governments pursuing a variety of
  policies. Current prices in the 15-30 /ton
  range.
• Sensible US policy will need to target prices and
  quantities until policies are effectively
  longer-term and global. Could be a cap with
  price floor and ceiling.
• Variety of international architectures possible
  unclear what will be most successful at
  encouraging lower emissions. Key question what
  will get China engaged?