Longterm permit program for long term climate change mitigation

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Long-term permit program for long term climate
change mitigation

• Stephen C. Peck
• President, Flèche

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Overview

• The greenhouse issue
• Principles underlying policy
• Permit program to stay below 550 PPMV C02
• Other GHGs and carbon sequestration
• Incentives for RD and Renewables
• Conclusions

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The Global Warming Issue

• Environmental science
• Political/economic science
• Technical behavioral mitigation options
• Current focus of policy debate
• Phase II of Kyoto?

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Principles underlying policy

• Stay below a C02 concentration ceiling
• Flexibility in space means equal marginal costs
• Flexibility in time is similar with 1 p.a.
  depreciation
• 1.01 ton in t ?1 ton reduction in t1
• 1.01MC (t) MC (t1)/1.05 implies
• MC (t1) 1.06MC (t)
• After target reached, MC (t) MC (dDT )

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The least cost program for 550 PPMV

• Target concentration achieved in 2070 with
  marginal cost of 225/ton C
• Extrapolating back at 6 p.a. implies that
  marginal cost in 2010 is 6.50/ton C
• In 2010, price of crude oil rises by 0.80/BBL,
  of natural gas rises by 0.10/TCF and coal by
  3.60/ST

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Permit program to achieve 550 PPMV

• A depreciating permit is created that allows
  emission of 1 ton C in 2070, 1.01 tons in 2069,
  (1.01)2 in 2068,.
• Government 1) determines annual amount and
  distributes the permits, 2) ensures surrender of
  permits following combustion, and 3) issues
  permits for capture and sequestration

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Number of permits issued

• Between 2010 and 2070, 425 billion permits can be
  issued worldwide
• 2010 C02 concentration of 400 PPMV is 120 PPMV gt
  preindustrial concentration of 280 PPMV. By 2070,
  120 PPMV will have depreciated to 70 PPMV,
  leaving available atmospheric capacity of (550
  280 70) 200 PPMV which is 425 billion C
  permits

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Behavior of permit prices

• Permits are financial assets and appreciate at
  the real interest rate of 5 p.a.
• P(t1)/P(t) 1.05
• MC(t1)/1.01MC (t)
• Thus MC (t1) 1.06MC (t) as in the least cost
  program, so this market scheme is optimal
• Permit price in 2070 is 225 extrapolating back
  at 5 p.a. it is 11.25 in 2010
• 11.25 buys 1.7 T, so MC (2010) 11.25/1.7 6.5

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Permit issue behavior

• OECD would issue 250 billion permits if no
  constraint150 if constrained to 550 PPMV
• ROW would issue 375 billion permits if no
  constraint 275 if constrained to 550 PPMV
• With full participation, 20-year sum of 50
  billion permits each might be issued to OECD and
  ROW in 2010 annual issue thereafter of one
  years worth of permits

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Permits should be issued so inter-bloc permit
trading is unlikely

• This can be achieved with the efficient number of
  permits allocated to each bloc
• One nation, A, has 34 GW of coal and the other,
  B, has 32 GW of gas. Emissions are proportional
  to 234 132 100 units C. For a 16 cut in
  emissions, replace 8 GW of coal with renewable.
• Efficient permit allocation is 52 to A 32 to
  B.
• Inter-government exchange kept as safety valve

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With partial participation, members should adopt
a contingent strategy

• Assume US, OOECD and FSU join in 2010
• ROW can be offered inducements training
• Members can use a contingent strategy for
  increasing their annual permit additions if e.g.
  ROW membership is impossible, members can
  increase annual permit additions until permit
  price reaches zero

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Extensions of basic framework

• Effect of delayed commitment by ROW
• More complex models of carbon cycle
• Add other GHG such as CH4, N20
• Implement cost benefit approach with
  dividend-paying permits
• GHG sequestration activities

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Incentives for RD and capital intensive GHG
reducing technologies

• Marginal cost rising at 6 annually provides a 12
  year doubling time
• Most GHG reducing technologies are capital
  intensive. Ex post fall in oil and gas prices
  subsequent to their construction can be
  disastrous to investors and thus an ex ante
  disincentive
• Use some permit revenues as contingency fund

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Conclusions

• Long term depreciating GHG permit allows the
  optimal mixing of government activities with
  those of the private markets
• Approach allows for GHG sequestration
• Approach provides incentives for private RD and
  a contingency fund for capital- intensive GHG
  reducing approaches

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Reactions (informal) to Peck-Teisberg approach

• Bush CEA staffer.has potential
• Clinton international economic policy advisor.
  attractive
• Climate economics modelers supportive to
  wonderful
• Carbon permit trading scholars tell the
  Europeans
• Large oil companies interesting
• Some electric companies proactive while not
  ruinous
• My mother doesnt understand it, but its
  wonderful