Mark Jaccard

1
Future Climate Policy and Socially Responsible
Investment

• Mark Jaccard
• School of Resource and Environmental Management
• Simon Fraser University
• June, 2009

2
Addressing a global risk
Richer countries start and then help / pressure
poorer countries to follow. Rich countries going
first a decade of country-specific commitments
and/or industry- and technology-specific
obligations (electricity, vehicles, industry,
buildings). Inducing poorer countries to follow
technology and financial assistance (e.g.
emission trading, foreign aid) and/or tariffs on
imports from non-compliant countries. Kyoto-gtCope
nhagen or unilateral action by Europeans, US etc?
3
Climate policy and competitiveness a red herring?
We have to price carbon emissions.
Competitiveness is often presented as an excuse
for not acting. In the long run, there are no
competitiveness issues because ALL countries must
have policies that apply similar carbon costs on
ALL industries. In the short run, sectoral
differentiation and/or border tax adjustments can
exempt exporters and charge importers (using tax
adjustments or allowance requirements under cap
and trade).
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Actions and policies for greenhouse gas reduction

• Actions by households and firms
• Energy efficiency (if using fossil fuels)
• Fuel switching (away from fossil fuels)
• Emissions capture and storage
• The rest (industrial processes, landfill
  management, agriculture, forestry)
• --------------------------------------------------
  ------------------
• Policies by government to drive actions
• Information
• Subsidies
• Regulation (prescriptive)
• Regulation (market-oriented, like cap and trade)
• Emission charges (carbon tax)

5
Past action-policy focus Canadian governments
1988-2008
Actions focus on energy efficiency assumption
that this is the cheapest and easiest action, so
do it first. Policies use information programs
and subsidies to increase energy efficiency if
energy efficiency is profitable, this is all that
is needed.
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Canadian targets, policies, emissions
Project Green
Climate Change Plan for Canada
EcoENERGY
900
Action Plan 2000
e)
National Action Program
2
800
Green Plan
700
600
500
Canadian GHG Emissions (Mt CO
400
300
200
100
0
1990
1995
2000
2005
2010
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True costs of energy efficiency

• Overlooks risks and quality differences in
  technologies (transit vs. cars, lightbulbs)
• ignores new tech and long payback risk (option
  value)
• ignores consumers preferences (consumers
  surplus) as technologies are rarely perfect
  substitutes
• Possibly 20. But in nickels and dimes
  difficult risky to collect.
• If losses of option value and consumers surplus
  are included, efficiency cost can increase
  significantly depending on how these are
  estimated.

8
Feedbacks of energy efficiency

• Misplaced optimism about the aggregate effect of
  energy efficiency actions (in terms of
  environmental improvement) in the absence of
  policies that penalize or prohibit emissions
• direct rebound relates to individual services
  and may be small in many cases but large in some
  (e.g. mobility)
• productivity rebound gains in energy
  productivity help drive economic growth through
  the extension of existing energy services
  (decorative and security lighting) and the
  development of new energy services (patio heaters)

9
Household electricity evidence the other
category
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Policy challenges with energy efficiency
subsidies
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Properly estimating the net effect of subsidies
on emissions

• Free riders evidence suggests 25-75
  (unavoidable)
• Direct rebound evidence suggests 5-20
• Productivity rebound evidence suggests very
  high potential for energy efficiency subsidies
  (new devices, new energy services), less so for
  fuel switching subsidies and carbon capture
  subsidies

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The big history lessonNon-compulsory policy
not a substitute for compulsory

• Information (labeling, ads, awards)
• Subsidies to unregulated emitters (tax credits,
  grants, low-interest loans, offsets)
• Command-and-control regulations (effic.
  standards)
• Financial charges (greenhouse gas taxes)
• Market-oriented regulations (cap and trade,
  vehicle standards, renewable portfolio standards)

Non-compulsory policy
?
Compulsory policy
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Policy honesty
What climate policy experts know. Effective
climate policy requires a price on GHG
emissions. If a politicians proposal does not
raise the price of carbon, you should conclude
that the proposal is not serious. William
Nordhaus, Yale. Of the requirements for
effective climate policy the first is the
pricing of carbon Nicholas Stern, UK
government.
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Emissions pricing policies direct and indirect
Economy-wide carbon tax with revenue
recycling Absolute cap and tradable permits for
the entire economy - carbon permits required for
all fuels, hence similar price impact on gasoline
and heating fuels as carbon tax - likely auction
of at least some permits to recycle revenue to
low income households Hybrid of cap and trade
for industry with carbon tax for
rest Technology, fuel or sector-specific
regulations (renewable electricity, low carbon
fuel, low emission vehicles)
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Taxes versus capsreal-world complexities
Neither taxes nor caps applied economy-wide thus
far. Taxes applied at different rates according
to the sector (Norway, Sweden, Denmark, UK,
Germany, etc.). Considerable uncertainty about
future tax levels. Caps applied to industry (EU
ETS) but new proposals throughout OECD (US,
Europe, Japan, Australia) extending cap to more
of economy. Considerable uncertainty about future
cap levels. With caps, proposed price floors and
price ceilings increase emissions certainty in
order to decrease price uncertainty.
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What role for other policies?
Information still critical, but as a complement
to emissions pricing (awareness, capacity
building). Subsidies also have a role in
advancing low- and zero-emission transformative
investments that are still too expensive under
initial emissions price levels. Regulations have
an important role (1) to overcome information
asymmetries, (2) to create niche markets for new
technologies, and (3) to improve the prospects
for zero- and low- emission choices in buildings,
land-use, and energy-related services like
district heating and transportation.
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Canadian federal policy
Cap applied only to industry 50 of emissions
(comes into force in 2010). Intensity cap rather
than absolute cap (better term is performance
standard) 18 below 2006 intensity by 2010,
declining 2 per year thereafter. Price ceiling
(safety valve) 15 /tCO2 for emissions in excess
of cap. Money from purchasing extra permits goes
into technology fund which government allocates
to private projects like CO2 pipeline. Safety
valve is phased out by 2018. International
offsets limited to 10 of required intensity
reduction. No limit on domestic offsets.
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Estimating the policy outcome
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Canadian provincial response
Alberta policy almost identical to federal
policy. Quebec and Ontario join Western Climate
Initiative (WCI) started by California. Proposal
for absolute cap, economy-wide, with limited
offsets. British Columbia joins WCI and launches
an aggressive multi-policy approach, including
zero-emission electricity requirement in January
2007 and carbon taxes in February 2008.
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European Union emissions trading system

• Initial EU Emissions Trading System (EU-ETS)
• trial period 2005-2007, with 25 countries (now
  27)
• cap applied only to industry 12,000 facilities
• permits allocated freely, usually based on
  historial emissions
• allows some use of offsets
• experience the causes of permit price crash
  (allocation, no banking or borrowing to next
  phases)
• Ongoing
• Kyoto phase 2008-2012
• Discussions to include transportation fuels and
  other fuels like home heating in future
• Third phase envisioned for 2013-2020 (EU target
  to be 20 and perhaps 30 below 1990 emissions by
  2030).

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US policy development federal and state

• RGGI (northeast) and WCI (California initiated)
• RGGI limited initially to electricity with some
  auction
• WCI cap and trade more broadly applied to include
  vehicle and home heating fuels
• WCI combined with array of market-oriented
  regulations, such as LCFS, VES, RPS, LCES
• US Congress Waxman-Markey
• absolute, total stock cap (to the year 2050)
• covers most emissions (gasoline, other final
  fuels)
• free allowances at first, then shifting to
  auctions
• some domestic and international offsets
  (discounted 20)
• adjustments for economic cycle (banking and
  borrowing)
• mechanisms to prevent investment leakage to
  countries with weaker climate policy

22
Sorting through the spin
Targets are meaningless. Must link to emissions
pricing (cap or tax) and regulations that experts
confirm will achieve target. An intensity cap
does not guarantee target. Must be an absolute
cap. Tax and an absolute cap have about the same
effect on energy prices for a given
reduction. Emissions pricing (by tax or cap)
should cover almost all emissions, including
final energy like gasoline, heating oil, natural
gas and electricity. Offsets likely to reduce
effectiveness, perhaps significantly.
23
Implications for socially responsible
investorsaction uncertainty

• Socially responsible options are not obvious
  all options involve trade-offs with respect to
  impacts, risks, effectiveness
• energy efficiency?
• natural gas?
• small-scale renewables?
• large hydro?
• nuclear power?
• fossil fuels with carbon capture and storage?
• There will be niche opportunities
• carbon capture?
• energy storage?
• energy use monitoring devices?

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Simulation of 60 reduction in Canada by 2050
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Carbon price path to 2050?
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Policy uncertainty and investment risk
What will be the price of carbon? How uncertain
will the price be? Will there be price floors and
price ceilings in a cap and trade system? Will
offsets be included in cap and trade policies?
Will they be discounted? Will they be deemed
unacceptable in future? Socially responsible
investors A duty to lobby government for
policies that reduce green investment risk?
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Extra slides
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Global emissions rising faster than expected
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(No Transcript)
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Tipping point? Retreating Arctic ice
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Offset details
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Implications are offsets helpful or harmful?

• Definition of offset a subsidy, usually from
  one private entity to another, to help fund an
  action that reduces emissions from what they
  otherwise would be (business as usual)
• Voluntary offset individuals and corporations
  can voluntarily acquire offsets in order to
  reduce their net emissions
• Regulated entity offset a cap and trade system
  could allow a regulated entity to meet some or
  all of its emission reductions by acquiring
  offsets from unregulated entities (Alberta,
  Canada, CDM of the Kyoto Protocol)
• Issue with offsets they are subsidies
• do they provide additionality and are they really
  permanent?
• do they prevent or delay actions that must also
  happen?

33
Offsets via the Clean Development Mechanism
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Tax versus cap details
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The carbon tax efficient approach to emissions
pricing
Set a uniform price on CO2 and all other GHG
emissions based on their CO2 equivalence. The
price should be scheduled to rise over time
although the rate of increase may be adjusted
with future information about the severity of the
climate risk, the cost of emission reduction and
the efforts of other countries. Revenues from
the tax can be returned to the economy in various
ways depending on criteria like political optics,
economic efficiency, and low income impacts. If
other countries have lower or no emissions
pricing, imports might be taxed, based on their
full cycle emissions intensity, and exports might
have their tax payments rebated (border
adjustments)
36
Emissions caps as an alternative pricing policy
Set a regulated declining cap on the annual flow
of emissions (or set a cap on the total stock of
emissions over a long time period). Give away
(grandfather) and/or auction a total number of
tradable permits that equals the cap. The market
price of traded permits results in emissions
pricing that is comparable to the tax approach
(but the role of politicians in raising prices is
less transparent). In sectors of the economy
with high administrative costs of permit trading,
caps (and permits) can be applied upstream to
industries that produce fuels containing carbon.
Thus, gasoline producers and importers would
require permits based on the carbon content of
the fuels they supply to consumers.
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Taxes versus capsthe theory
emission quantity certainty
emission price certainty
emission caps
emission taxes

• Taxes have somewhat lower costs to society
  without need for permit traders and new
  government oversight functions.
• Taxes are difficult politically, even when
  revenue-neutral