HAPPY EARTH DAY

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HAPPY EARTH DAY

• Lots going on on campus today
• Creating Dialogs Clarice Smith Center
• Talk by Mark Sagoff

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Announcements

• I have previous homeworks, midterm exams, and
  memos, including 2 Homework 3s with no name.
• Dont forget to turn in Homework 4 at end of
  class.
• Memo 2 due on Wednesday, April 29.
• If you really need it, you may have an extension
  to May 6. (You dont really want this, do you?)
  
• Links fixed.
• Background readings online.

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• I am a bit behind on grading (of course). Quiz,
  homework 3 discussion section grades
  (including changes) should be entered this
  evening.

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• Todays class
• Initial allowances in carbon cap-and-trade
  Auctions versus give-aways
• Border adjustments
• Carbon taxes
• Three policy debates
• The overwhelming advantages of cap-and-trade (or
  carbon taxes)

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• Exam Q (from Monday)
• A cap-and-trade system that only covers
  electricity generators will encourage/discourage/h
  ave no effect on consumers to buy plug-in
  hybrids, were they to become available.
• Circle correct verb and explain.

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Initial allowances in a cap-and-trade system

• Initial Allowances
• Auctions vs. Free allocation
• This is separate from covered sources (upstream
  v. downstream)
• Most proposals eventually have 100 percent
  auctions
• Van Hollen Cap and Dividend bill (4/1/09)

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• Keith Trent, chief strategy, policy and
  regulatory officer for Duke Energy, said his
  company is hoping for at least a 10-year
  transition period to a 100 percent auction so it
  can install emission controls without raising
  electricity costs too high." (Washington Post,
  4/9/09)

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• But environmental advocate Erich Pica, director
  of economic programs for Friends of the Earth,
  said giving utilities free allowances would be
  less efficient than rebating the revenue from
  auctions directly to taxpayers. A 100 percent
  auction, Pica said, "forces the polluters from
  Day One to pay for the transition to a clean
  energy economy, and keeps low- and middle-income
  consumers whole during the transition." (Same
  Washington Post article)
• Obama budget (Go to p. 129)

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Two important lessons (hint, hint)

• The decision about how to allocate the allowances
  does not affect how the cap-and-trade works.
• The dollar value of allowances does not measure
  how costly the program is to the overall economy.

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Border Adjustment

• Border Adjustment A policy provision to
  discourage industries from moving to countries
  with less strict environmental policies.
• Best way Tariff on imports based on countrys
  greenhouse policy.
• We are hoping this wont be an issue because

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Carbon tax

• If cap-and-trade works by raising fossil fuel
  prices, lets skip the credits and just raise
  fuel prices directly through taxes!
• Pigovian tax A tax chosen specifically to
  reduce production of an undesirable activity.
  The size of the tax should be related to the
  benefits/costs of the activity. (Non-technical
  definition.)
• Named after Pigou, 1920s British economist.

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Carbon tax

• Upstream system
• Simpler than cap-and-trade.
• Fossil fuels are already taxed.
• Can start now!
• Taxes more flexible Easier to change our minds.
• Use revenue to replace other taxes
• Reduce income taxes, social security taxes, or
  corporate income tax. (This is like 100 percent
  auction).
• The purpose is not to raise revenue. The purpose
  is to reduce GHG emissions.
• Also known as Carbon Tax Shift or Carbon Tax Cut.
  

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• Market-based Policies
• Market-based policy A policy that works through
  the price system (rather than through direct
  regulation.)
• Cap-and-trade and taxes are the only market-based
  policies.
• Market-based policies are always less costly than
  command-and-control regulation.
• Flexibility within sources
• Flexibility across sources.
• This point is really, really important

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• Three Debates
• Tax vs. Cap-and-trade
• Market-based policies vs. non-market policies
• What should the cap be? Or, what should the tax
  be?
• Exam Q The advantage of cap-and-trade is that
  it has less of an effect on the economy than a
  carbon tax-swap. Discuss.

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• Insurance Each policy introduces some
  uncertainty and some certainty.
• Cap-and-trade
• Certain Quantity of emissions (i.e., cap)
• Uncertain Price of a carbon credit.
• Tax
• Certain Price of carbon (this is the tax)
• Uncertain Quantity of emissions. (How much
  carbon reduction will occur with a tax of
  25/ton?)
• Tax has price insurance. Cap-and-trade has
  quantity insurance
• There is no right or wrong here. We (the public)
  might want the price to be certain, or we might
  want the quantity of carbon emissions to be
  certain.
• The point is, you cant have both kinds of
  certainty. Youll always have some uncertainty
  about what will happen.

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Carbon cap-and-trade vs. Energy-efficiency
regulations

• Question from last years final exam
• Some proponents of taking action against
  climate change have suggested that tighter CAFE
  (mileage) standards and stricter
  energy-efficiency standards for buildings and
  appliances would be better approaches than a
  carbon cap-and-trade. Discuss.

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• Cap-and-trade accomplishes in one year what CAFE
  standards accomplish in 20.
• Furthermore, you cannot accomplish more faster
  with CAFE because of the new source problem.
• Cap-and-trade stimulates the market for new cars.
  CAFE weakens the market for new cars.
• Energy efficiency focuses on one part of the
  problem. Cap-and-trade focuses on all parts.
• Number of cars
• Number of miles driven
• How cars are driven.

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• CAFE is better than a full cap-and-trade because
  it wont have as large an effect on the economy.