Topics Today 92508

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Topics Today (9/25/08)

• Case Studies on Air Pollution Reduction
• SO2 market.
• Mobile air pollution sources (cars).
• Exam 1 next Thursday (10/2/08).
• Practice questions and a review sheet are posted
  on the web.
• Well go over the practice questions in class on
  Tuesday.
• No office hours today extra office hours on
  Monday 330 500 pm (in addition to normal
  hours).
• Lucianas extra office hours Monday 515-715pm
  Tuesday 400-600pm.

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Air Pollution Policy
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Air Pollution Policy
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Air Pollution Policy
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Air Pollution Policy
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Least Cost Pollution Control Tradable Pollution
Permits

P permit price when cap is Q P permit price
when cap is Q
MAC2
MAC1
MACAggregate
P
P
Q
Q
Q
? Pollution Reduction
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U.S. Market for SO2 Allowances

• Sulfur dioxide (SO2) is a primary product of
  coal-burning power plants.
• SO2 pollution lowers the pH scale of rainfall,
  leading to the problem commonly known as acid
  rain.
• Increased acidity of lakes and rivers.
• Slower growth, injury or death of forests.
• Visibility impairment.
• SO2 can impair respiratory function and is linked
  to a variety of respiratory ailments.

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U.S. Market for SO2 Allowances
What Are Allowances? An allowance authorizes a
unit within a utility or industrial source to
emit one ton of SO2 during a given year or any
year thereafter. At the end of each year, the
unit must hold an amount of allowances at least
equal to its annual emissions, i.e., a unit that
emits 5,000 tons of S02 must hold at least 5,000
allowances that are usable in that year.
Allowances are fully marketable commodities.
Once allocated, allowances may be bought, sold,
traded, or banked for use in future years.
Allowances may not be used for compliance prior
to the calendar year for which they are allocated.
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U.S. Market for SO2 Allowances

• The process of setting up a market for pollution
  emissions involves three steps
• Establish an overall cap on pollution (i.e. Q)
• For the U.S. SO2 market the cap was set in the
  1990 Clean Air Act amendment.
• Reduce SO2 emissions from fixed sources by 50
  from 1980 levels (17.3 million tons).
• Allocate permits (allowances) to polluters
• In the U.S. SO2 market, a grandfathering scheme
  was used.
• Allocated to polluters based on their 1985-87
  pollution.
• Facilitate trading between polluters
• In the U.S. SO2 market the trading was generally
  unrestricted.
• Stiff penalties to those firms who exceeded their
  allowances.

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U.S. Market for SO2 Allowances
Utilities can reduce emissions by employing
energy conservation measures, increasing reliance
on renewable energy, reducing usage, employing
pollution control technologies, switching to
lower sulfur fuel, or developing other alternate
strategies.
Units that reduce their emissions below the
number of allowances they hold may trade
allowances with other units in their system, sell
them to other utilities on the open market or
through EPA auctions, or bank them to cover
emissions in future years. Allowance trading
provides incentives for energy conservation and
technology innovation that can both lower the
cost of compliance and yield pollution prevention
benefits.
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Market for SO2 Allowances
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Price Trends SO2
Note a futures contract is a contract to buy or
sell a commodity (the permit here) at a certain
date in the future. CCFE is the Chicago Climate
Futures Exchange
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Market for SO2 Allowances

• Reasons why the program resulted in a robust
  market
• There were wide differences in the cost of
  abating emissions.
• The policy was flexible.
• The implementation was simple.
• The provisions were enforced the governments
  property right to no pollution above the standard
  is secure.

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Is the SO2 allowance program cheaper than the
command-and-control approach?

• Can be highly successful at obtaining emissions
  reductions cost-effectively Stavins (Choices,
  2005) Trading volume has increased over the
  life of the program, and the robust market has
  resulted in an estimated cost savings of up to 1
  billion annually, compared with the cost of
  command-and-control regulatory alternatives that
  were considered by Congress in prior years,
  representing a 30-50 cost savings.

Source Stavins, R. 2005 Lessons from SO2
Allowance Trading. Choices, 1st Quarter,
20(1)53-57.
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Price Trends CO2
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Chicago Climate Exchange Interview with Richard
Sandor (Founder)

• How does the climate exchange work? The CCX is
  what is called a cap-and-trade system there is a
  cap on the total amount of emissions. In our
  case, companies have to reduce emissions in the
  aggregate by 6 percent between 2000 and 2010. If
  any particular company reduces emissions more
  than that, they are free to sell those extra
  credits on the market. Companies that can't make
  the necessary reductions can buy somebody else's
  excess.

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Chicago Climate Exchange Interview with Richard
Sandor (Founder)

• Who's involved with the CCX?We have 17 percent
  of the Dow Jones industrial average, including
  IBM, DuPont, United Technologies, Intel. We have
  11 percent of the Fortune 100, including Ford
  Motor Co., Honeywell and International Paper. We
  have about 25 percent of the top power companies
  in America, including AEP, the biggest burner of
  coal in the Western hemisphere. We also have
  eight cities, from Chicago to Portland, and eight
  universities from Tufts in the east to UC San
  Diego in the West.

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Chicago Climate Exchange Interview with Richard
Sandor (Founder)

• Why are they agreeing to cut emissions when
  there's no law requiring it?Some do it because
  they see an easy way to make reductions beyond
  the minimum 6 percent. They can then sell the
  credit and make extra money. There are also many
  companies who just want to be involved in the
  processif you're not at the table, you're on the
  menu. If there's going to be legislation, they
  want to get an early start.

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Chicago Climate Exchange Interview with Richard
Sandor (Founder)

• They're betting America will institute a
  mandatory cap-and-trade system.Exactly. Some
  companies, like Ford, joined because they knew
  they were going to be involved in other
  cap-and-trade systems around the worldthey have
  manufacturing plants in Manchester and Marseilles
  and Japan, and they were operating in countries
  that were subject to the Kyoto Protocol whose
  signatories must start cap-and-trade systems by
  2008.

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Chicago Climate Exchange Interview with Richard
Sandor (Founder)

• What has happened to the price of carbon in the
  United States?The price of carbon started out at
  a dollar a ton. It hung around there for a while,
  but the world changed on Super Tuesday. When it
  became clear that all three candidatesClinton,
  Obama and McCainall favored a national
  cap-and-trade system, the price of carbon went
  from 1.90 to 7.

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CCX Carbon Prices
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Reducing Air Pollution from Mobile Sources (Cars)

• External costs from driving
• Road congestion.
• Air pollution.
• Consequences on land use
• Low transport cost encourages dispersed
  settlement urban sprawl.
• Public transportation makes less sense when
  development is less dense.

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Reducing Air Pollution from Mobile Sources (Cars)

• Congestion pricing (Singapore)
• Central business district parking fees higher
  during normal business hours.
• Downtown access requires special license.
• Electronic peak-hour pricing on roadways.
• Lower registration fees and road taxes for
  off-peak cars, identified by special license
  plate.
• Result higher marginal cost of driving.

Source N.C. Chia and S.Y. Phang. 2001. Motor
vehicle taxes as an environmental management
instrument the case of Singapore. Environmental
Economics and Policy Studies, 4(2) 67-93.
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Reducing Air Pollution from Mobile Sources (Cars)

• Reading by Portney 4.
• Corporate Average Fuel Economy (CAFÉ) standards
  in the U.S.
• 1975 designed to reduce dependence on foreign
  oil.
• Goal is to increase mileage standards.
• Current debate revolves around the appropriate
  standard.

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Reducing Air Pollution from Mobile Sources (Cars)

• CAFÉ standards
• Pre-1977 cars averaged 16 mpg trucks averaged
  13 mpg.
• Late 1970s legislation
• Cars must average 27.5 mpg by 1985.
• Trucks must average 20.7 mpg.

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Reducing Air Pollution from Mobile Sources (Cars)

• CAFÉ standards
• After initial legislation
• Fuel economy improved by 50 between 1978 and
  1985. Reasons?
• CAFÉ standards.
• Higher gas prices.
• Oil consumption dropped by 14 of current total.
• Smaller and lighter cars and trucks led to
  estimated 2000 more fatalities (annually) by
  1993.

Source National Research Council report on CAFÉ
standards.
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Reducing Air Pollution from Mobile Sources (Cars)

• CAFÉ standards
• Average fuel economy declined by 8 since 1986.
• Truck share of fleet
• 1975 20
• 2001 51

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Reducing Air Pollution from Mobile Sources (Cars)

• Costs of increasing standards under CAFÉ

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Reducing Air Pollution from Mobile Sources (Cars)

• Skepticism of CAFÉ (Portney)
• Marginal cost of driving decreases with fuel
  economy.
• Incentive to drive more.
• Driving increases 1 to 2 for each 10 reduction
  in the cost of driving.
• Incentives to keep old, polluting cars longer.
• CAFÉ increases costs of new cars.
• Called new source bias.
• Auto companies can meet standards by reducing
  safety.

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Reducing Air Pollution from Mobile Sources (Cars)

• CAFÉ vs. Gas Tax
• Gas tax
• Motivate new car buyers to demand better fuel
  economy.
• Incentive to drive less, carpool, ride public
  transportation.
• Reduce driving for all cars, not just new cars.
• Portneys recommendation
• Gradually increase gas tax.
• Rebate the tax revenues by reducing other taxes
  (e.g. income taxes).

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Trends in Gas Prices
Widely documented effects of recent gas prices on
new car markets, driving speeds, amount of
driving, and public transportation.