Ray Kopp Resources for the Future

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• Ray KoppResources for the Future
• Economics of Climate Policy
• Workshop Series
• October 10, 2007

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Presentation Plan

• Status report on federal climate policy
  development
• How to think about federal legislative proposals
• Lessons learned from the EU Emissions Trading
  Scheme
• What happens next

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ABC NEWS - WASHINGTON POST - STANFORD
POLLReleased April 20, 2007
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2007 Policy Developments

• Congressional action in the House Senate
• State policy developments continue
• California AB 32 regulatory policy moving forward
• More states join RGGI
• Western Climate Initiative (7 states 2 Canadian
  provinces) sets GHG targets
• Supreme Court rules on CAA CO2
• EPA begins to develop GHG transport regulation
• More companies speak out - US CAP
• 4th IPCC reports released

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Congressional Action

• Important questions to ask
• What is the scope of the regulatory program?
• Who gets regulated?
• What are the emission reduction targets?
• What do we know about the expected cost?
• Are there attempts to limit cost uncertainty?
• How are the allowances allocated?
• What about competitiveness impacts?

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The Bills 110th Congress

• Sanders-Boxer S.309 economy-wide cap
• Kerry-Snowe S.485 economy-wide cap
• McCain-Lieberman S.280 economy-wide cap
• Bingaman-Specter S. 1766 economy-wide cap
• Waxman H.R. 1590 economy-wide cap
• Alexander-Lieberman S. 1168 electricity sector
  cap (CO2)
• Feinstein-Carper S. 317 electricity sector cap
  (CO2)
• Stark H.R. 2069 economy-wide tax (CO2)
• Larson H.R. 3416 economy-wide tax (CO2)

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Who Gets Regulated?

• Upstream
• Stark, Larson
• Downstream
• Feinstein-Carper, Alexander-Lieberman
• Hybrid
• McCain-Lieberman, Bingaman-Specter
• Power plants downstream (M-L large emitters
  downstream)
• Transport upstream
• Unspecified
• Sanders-Boxer, Kerry-Snowe, Waxman

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Emission Reduction Targets
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Cost to Reach the TargetMIT Model Runs
Allowance Prices
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Cost to Reach the TargetEIA Analysis of
Electricity Prices
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Cost Certainty

• Stark tax certainty, 3/ton rising 3 each
  year
• Larson tax certainty, 16.5/ton rising 10 real
• Bingaman-Specter 12/ton safety valve rising
  5 real
• McCain-Lieberman allowance borrowing up to 25
  for 5 years
• Kerry Snowe no provisions
• Alexander Lieberman no provisions
• Waxman no provisions
• Feinstein-Carper allowance borrowing up to 10
  for 5 years
• Carbon Market Efficiency Board (Warner-Lieberman)

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Allowance / Revenue Allocation

• Bingaman-Specter
• 55 free to industry (phased out), 22 auctioned
  (phased in), 14 for CCS and bio-seq., 9 to
  states
• Lieberman-McCain
• Discretion of EPA with some guidance for free
  allocation and auction Larson 16.5/ton rising
  10 real
• Alexander Lieberman 75 free to industry (heat
  input)
• Feinstein-Carper 85 free to industry (based on
  output)
• Kerry Snowe Discretion of the President
• Waxman Discretion of the President
• Stark 100 tax revenue to Treasury
• Larson 1/6 to RD, 1/12 to industry, remainder to
  reduce payroll taxes

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Competitiveness

• Competitiveness is tied to energy intensity and
  the degree to which domestic industries can pass
  along costs
• RFF studies find total production costs would
  rise by 1-2 for each 10/t of CO2 pricing
• Recent EU studies found higher impacts in some
  industries
• 6 in basic oxygen furnace steel and 13 in
  cement for same CO2 prices
• How can competitiveness issues be addressed?
• Harmonized policies
• Boarder tax adjustments, permit requirements
  for imports
• Gratis permit allocation

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European Union EmissionsTrading Scheme (EU-ETS)

• Began 2005 and includes the 27 countries of the
  EU
• The program is run in two phases.
• Phase 1 from 2005 2007, Phase 2 from 2008
  2012, coinciding with the Kyoto commitment
  period.
• Cap covers only CO2, about 12,000 sources, about
  ½ of EU CO2 emissions
• Transport is not currently included in the
  system, although air transport will be added in
  2011

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EU ETS StructureNational Allocation Plan (NAP)

• Decision 1 How much of Kyoto target will be in
  trading program?
• Decision 2 What will be the allocations for
  each sector?
• Decision 3 How will allowances be allocated to
  each installation?
• Currently finalizing 08-12 plans.

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EU ETS StructureAllowance Allocation

• Hybrid gratis-auction allocation scheme for Phase
  2
• European Commission placed upper limit of 10 on
  auction
• Phase 2 allocation appears designed to
  purposefully distribute the cost of the program

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EU ETS StructureHas the Program Worked?

• Phase 1 was developed and implemented quickly
  problems arose
• Phase 2 seems set for an orderly start Jan. 2008
  and will avoid many Phase 1 problems
• Current Dec. 2008 price 21.50 euros (30)
• However, some issues remain
• Price stability
• Coverage
• Beyond 2012

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EU ETS StructureLessons for the US?

• Allowance Allocation matters A Lot
• These systems work, make them broad
• Add as much certainty as possible to the path of
  future emissions and allowance prices
• Keep the system simple and transparent

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Next Steps Fight over Allowance Allocation

• Using allowances to distribute the burden
• Regulated entities and cost pass through
• Unregulated entities
• Large energy consumers
• States
• Method of allocation
• Gratis historical grandfathering dynamic
  output based allocation
• Auctioning

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Bingaman-Specter
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Next Steps Rising Energy Prices

• Energy prices will increase throughout the
  country, but in varying degrees
• e.g., electricity prices likely to rise most in
  areas of coal fired generation
• Magnitude of increase in proportion to severity
  and timing of the GHG cuts

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Next Steps Winners and Losers

• Credible policy will alter expectations regarding
  future energy prices
• Household energy consumption decisions will be
  altered benefit producers of energy efficient
  durables
• Low income households will need increased energy
  assistance
• Energy intensive manufacturers will be
  disadvantaged.
• Especially those facing foreign competition from
  countries with low or zero GHG prices

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Next Steps States

• States are already moving forward CA and
  Northeast states in the lead
• State action raises fear of patchwork regulation
  further motivates federal action
• Will federal policy preempt state programs?
• How much of a role will states play in permit
  allocation?

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Next Steps Adaptation

• Actions to mitigate climate change pose
  challenges, but these may pale in comparison to
  the challenges posed by adaptation.
• The recent IPCC report is clear the climate is
  changing now
• But, one sees little if any attention paid to
  this fact in terms of federal policy proposals

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www.weathervane.rff.org