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

Billy Pizer

January 23, 2008

Let's Get Serious About Climate Change Policy:  What’s Really

Achievable at What Cost? Billy Pizer

January 23, 2008

3

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?

4

Impacts of Climate Change

5

Likely global warming from stabilization at different greenhouse gas concentrations

0

1

2

3

4

5

6

7

8

9

400 500 600 700 800 900 1000 1100

Eventual greenhouse gas concentration (ppm CO2 equivalent)

Te

mp

era

ture

in

cre

as

e f

rom

pre

se

nt

(°C

)

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2

4

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8

10

12

14

16

Te

mp

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ture

in

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as

e f

rom

pre

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nt

(°F

)

Upper end of likely range

Best estimate

Lower end of likely range

Note: "Likely" is defined as greater than a 66% probability of occurrence. Source: IPCC Fourth Assessment Report.Projections for 2100

6

Impacts of Climate Change

7

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)

8

Emission Stabilization Scenarios

IPCC Scenario Exercise

10

Scenario Storylines

11

EMF Baselines

12

Baselines & Goals

13

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

14

CO2 prices?

Average monthly electricity bill ~ $80

15

Annual cost of $10 CO2 price

16

Industry Impacts

17

2030 CO2 Prices to Stabilize$

per

to

nn

e C

O2

18

CCSP Estimated Prices for

0

50

100

150

200

250

300

2010 2020 2030 2040 2050 2060

$/to

n C

O2

IGSMMERGEMiniCAM

19

0

50

100

150

200

250

300

2010 2020 2030 2040 2050 2060

$/to

n C

O2

IGSMMERGEMiniCAM

CCSP Estimated Prices for

20

% o

f g

lob

al i

nco

me

2030 GDP loss to Stabilize

21

0

1

2

3

4

5

6

7

8

2010 2020 2030 2040 2050 2060

% l

oss

of

inco

me

IGSMMERGEMiniCAM

CCSP Estimated GDP Loss for

22

0

1

2

3

4

5

6

7

8

2010 2020 2030 2040 2050 2060

% l

oss

of

inco

me

IGSMMERGEMiniCAM

CCSP Estimated GDP Loss for

23

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?

24

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

25

Bill Nordhaus Estimates Costs and Benefits

My best estimate ($/ton CO2): $21 $27 $33 $40 $49 (x 1.82 and converting to CO2)

Distribution of Emissions

Likely to see important transitions in relative emissions across countries

Will have profound implications for distribution of emission reductions

27

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.

28

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 C$15/tCO2

Early 2006 program was on hold

Alberta started similar provincial program in 2007.

29

New Zealand

Carbon tax at NZ$15-25 / 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.

30

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.

31

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.

32

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

eq

uiv

ale

nt

Comparison of Emission Reduction Goals in Legislative Proposals in the 110th Congress (as of October 29, 2007)

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.

Historical Emissions (1990-2005)

Business-As-Usual Projections (AEO 2006)

Bingaman-Specter1 (S. 1766)

Sanders-Boxer (S. 309)

Kerry-Snowe2 (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)

Lieberman-Warner (S. 2191)

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.

33

Who’s Regulated Allowance Allocation Price Stability Offsets Technology Competitiveness

Lieberman-Warner (S. 2191)

Economy-wide cap: large sources downstream at emitter; transport emissions at refinery; F-gas producers and importers. (75% of US GHG emissions covered.)

40% free to industry (including electric generators; with phase out); 10% to electricity consumers; 24% auctioned to fund technology deployment, transition assistance, and adaptation; 12% set aside for CCS and sequestration; 9% to states; 5% for early action.

“Climate Fed” with discretion to increase use of borrowing and offsets and temporarily expand cap. Borrowing: up to 15% of allowances, for no more than 5 years.

Up to 15% of obligation can be met with domestic sequestration, and another 15% through international allowances and credits.

Technology deployment incentives for zero- and low-carbon generation, advanced coal, cellulosic biomass, and advanced vehicles (55% of auction revenues)

Bulk, energy-intensive imports from countries w/o comparable policy require permits after 2020.

Bingaman-Specter (S. 1766)

Economy-wide cap: coal and process emissions at emitters; oil refiners, NG processors, and oil/NG importers; and F-gas producers and importers.

53% free to industry (with phase out); 24% auctioned to support R&D, transition assistance, adaptation; 14% set aside for CCS and sequestration; 9% to states.

$12/metric ton CO2 safety valve, rising at 5% per year above inflation.

Unlimited domestic offsets including methane and SF6. Limits on international offsets (10% of cap) and domestic agricultural offsets (5% of cap).

Detailed technology development programs funded from allowance auction revenues (12-26% of auction revenues).

Bulk, energy-intensive imports from countries w/o comparable policy require permits after 8 years.

Udall-Petri (May draft and staff

talks)

Economy-wide cap: primarily upstream sources (e.g., producers and importers of fuels).

20% free to industry. 80% auctioned to support RD&D; developing country engagement; adaptation, dislocation aid; sequestration; debt reduction.

$12/metric ton CO2

safety valve, rising at 2-8% per year above inflation.

Unlimited geological sequestration offsets. 5% of allowances set aside to fund biological sequestration and 1% for CCS projects.

Establishes ARPA-E to fund technology advancement projects (24% of auction revenues).

Inaction by developing countries can justify delay in safety valve escalation.

Lieberman-McCain (S. 280)

Economy-wide cap: large downstream at emitter; transport emissions regulated at refinery.

Discretion of EPA, with guidance for some free allocation and an auction to fund R&D, transition assistance, adaptation measures.

Borrowing: up to 25% of allowances, for no more than 5 years.

Up to 30% of obligation can be met with domestic sequestration projects and international offsets.

Revenues from some auctioned allowances used for RD&D.

K erry -S now e (S. 485)

USDA sets rules for domestic biological sequestration.

Waxman (H.R. 1590)

Economy-wide cap: point of regulation at discretion of EPA.

Discretion of the President with guidance from the EPA. No provisions.

No provisions.

Sanders-Boxer (S.309) Economy-wide cap: EPA has discretion to implement a market-based allowance program to achieve cap.

Vehicle emission rules; efficiency & renewable standards for electric generation; additional bill-specific mandates.

Feinstein-Carper (S. 317)

85% free to industry, based on generation (updated annually), and phased out by 2036.

Borrowing up to 10%, for no more than 5 years.

International offsets up to 25% of cap; extensive domestic biological offsets.

Distributes auction revenues to multitude of technology programs.

Alexander-Lieberman

(S. 1168)

Electricity-sector cap: power plants. (S. 1168 also covers utility SO2, NOX, and mercury emissions.) 75% free to industry, based on heat

input. No provisions.

Domestic offsets in five categories, including methane, SF6, efficiency, and forest sequestration.

NSPS for CO2 emissions from new electric generation units.

No provisions.

Stark (H.R. 2069)

100% revenues to US Treasury. $3/metric ton CO2, rising $3 annually.

Tax refunds for fuel CO2 sequestered downstream: CCS, plastics.

No provisions.

Larson (H.R. 3416)

Economy-wide tax: fossil fuels taxed by CO2 content at the point of production and import. 1/6 of revenues to R&D, 1/12 to industry

transition assistance (with phase out), remainder to payroll tax rebates.

$16.5/metric ton CO2, rising 10% plus inflation annually.

Tax refunds for domestic sequestration and HFC destruction projects.

1/6 of tax revenues up to $10 billion annually goes to clean energy technology R&D.

Dingell (Summary of

draft)

Economy-wide tax: fossil fuels taxed by CO2 content at point of production and import. Also, tax on gasoline (but diesel exempt).

Revenues used to expand EITC and help fund entitlement programs. Gas tax revenues go to highway trust fund (40% mass transit, 60% roads).

$15/metric ton CO2, rising at inflation. $0.5/gallon gasoline tax (in addition).

No provisions. No provisions.

Tax applied to fossil fuel imports; fossil fuel exports are exempt.

34

Read the Full Report

Read or download the full report, Assessing U.S. Climate Policy Options:

www.rff.org/cpfreport

35

Key US Policy Questions

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

technology…

36

Global Scenario: US-CAP Led Absolute Targets starting 2010

0

10

20

30

40

50

60

70

80

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Gt C

O2e

/yr

Emissions from Trop. Def.Rest of Non-Annex IChina & IndiaRest of Annex IUS2 degrees: 1.5% decline/yr2.5 degrees: 1.5% decline/yr

Derive National Target

37

Use of Offsets Dramatically Affects Price

38

SO2 Current Vintage Allowance Price

$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

$1,800.00

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

allo

wan

ce p

rice

($/

ton

SO

2)

Proposed CAIR(more stringent cap in 2010)

Supplemental proposal

Final CAIR FIP released

39

NOx OTC Current Vintage Price

0

1000

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3000

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5000

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7000

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1997 1998 1999 2000 2001 2002 2003 2004 2005

allo

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rice

(d

oll

ars

per

to

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40

EUA Spot Price [€/ton], September 2005 – September 2006

(OTC Market)

16.13

27,18

29,75

11,05

21,90

8.95€ 8€ 9

€ 10€ 11€ 12€ 13€ 14€ 15€ 16€ 17€ 18€ 19€ 20€ 21€ 22€ 23€ 24€ 25€ 26€ 27€ 28€ 29€ 30€ 31€ 32

9/15

/200

59/

22/2

005

9/29

/200

510

/6/2

005

10/1

3/20

0510

/20/

2005

10/2

7/20

0511

/3/2

005

11/1

0/20

0511

/17/

2005

11/2

4/20

0512

/1/2

005

12/8

/200

512

/15/

2005

12/2

2/20

0512

/29/

2005

1/5/

2006

1/12

/200

61/

19/2

006

1/26

/200

62/

2/20

062/

9/20

062/

16/2

006

2/23

/200

63/

2/20

063/

9/20

063/

16/2

006

3/23

/200

63/

30/2

006

4/6/

2006

4/13

/200

64/

20/2

006

4/27

/200

65/

4/20

065/

11/2

006

5/18

/200

65/

25/2

006

6/1/

2006

6/8/

2006

6/15

/200

66/

22/2

006

6/29

/200

67/

6/20

067/

13/2

006

7/20

/200

67/

27/2

006

8/3/

2006

8/10

/200

68/

17/2

006

8/24

/200

68/

31/2

006

9/7/

2006

9/14

/200

6

Pric

e [€

/to

n]

41

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.

42

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.

44

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.

45

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 actions—taxes, technology, and sectoral policies.

Can and should evolve towards top-down through increased coordination, gradual harmonization, and eventual linking.

46

Strengths of top-down approach

Top-down means: domestic actions developed after and under the guidance of an international agreement—presumably targets and timetables—with 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.

47

Summary Environmental concerns would encourage

450 CO2e.

Economic analysis difficult <550 CO2e.

Crude benefit analysis suggests 650 CO2e.

prices Income loss

650 CO2e $25 <1%

550 CO2e $50-100 1-2%

48

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?