1 Climate Change Policy and Regulatory Jurisdiction James Bushnell UC Energy Institute Comments...

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Climate Change Policy and Regulatory Jurisdiction

James Bushnell

UC Energy Institute

Comments drawn from Bushnell, Peterman, and Wolfram, “Local Solutions to Global Problems: Climate Change Policy and Regulatory Jurisdiction”

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Environmental Policy Trends

• More jurisdictions are embracing “market-based” environmental regulatory systems

• Actions are being taken at a more “local” level relative to environmental problems– Climate change initiatives of US cities– US state policies (RGGI and California)– Individual offsets

• Are these trends in conflict?

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US Climate Change Policies

• Northeast Regional Greenhouse Gas Initiative (RGGI)

• California AB 32

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Carbon Emissions at US Power Plants, 2002

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Environmental Policy Options

• Traditional “command and control” regulation

• Subsidies and other preferences for “alternative (clean) energy”

• Market Based Regulations– Taxes, – traditional cap & trade– Downstream or “life-cycle” based accounting

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Challenges to achieving real emissions reductions

“local” policies face several potential challenges:

1. Leakage. Regulations cause economic activity to move to

less regulated regions.

2. Reshuffling.Regulations cause buyers and sellers to adjust

their counterparties, without changing the location of the economic activity.

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Example of leakage

Previous work has shown that polluting industries grew less quickly in nonattainment counties than in attainment counties (Becker and Henderson, JPE, 2000).

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Reshuffling mechanics

To mitigate leakage, it is tempting to impose regulations on consumers.

Potential for reshuffling.

Reshuffling is different from leakage as it does not involve any change in where the economic activity takes place.

Like an ineffective boycott, it simply involves a change in who transacts with whom.

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Reshuffling exampleDiamond market before boycott

Homogenous good

Homogenous buyers

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Reshuffling exampleDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

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Reshuffling exampleDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

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Reshuffling exampleDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

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Reshuffling exampleDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

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An effective boycottDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

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An effective boycottDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

Boycotts are effective when the fraction of participating buyers is greater

than the fraction of “clean” sellers.

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An effective boycottDiamond market with boycott

Red = subject to

boycott

Green = participant

in boycott

Boycotts are effective when the fraction of participating buyers is greater

than the fraction of “clean” sellers.

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Other potential examples of reshuffling in the GHG contextLow-carbon fuel standard.

– Designed to reduce the lifecycle GHG emissions of transportation fuels.

– For instance, by favoring corn-based ethanol produced using lower carbon growing techniques, CA may simply reshuffle where the “clean” ethanol goes.

Generally, attempts to “get to” upstream sources are potentially subject to reshuffling.

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What Works?• Any cost imposing regulation will create incentives

for leakage/reshuffling– Emissions standards, cap-and-trade– Downstream cap-and-trade, life-cycle cost assessments

• Subsidies for alternatives produce no incentive to evade (just the opposite)– Mandates (like RPS) do create costs for buyers

• Reshuffling concerns apply

– If extremely effective - subsidies can increase consumption of the bad elsewhere

• Demand-side leakage

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How bad can it be?Determinants of unintended consequences

• Leakage– Relationship of environmental costs to

relocation costs

• Reshuffling– Relationship of environmental costs to costs of

“switching”

• Subsidies– Elasticity of demand for the product being

replaced

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How Much is Out There?: TWh "compliant" with various regulations

0 50 100 150 200 250

Cal

Non-Cal WECC

Cal

Non-Cal WECC

Cal

Non-Cal WECC

SB 1368

RPS

AB 32 (zero carbon)

Location

TWh

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CA Emissions Target

CA Forecast Demand

0

50

100

150

200

Cumulative CO2 [MMT]

0 200 400 600

Electricity Output [TWh]

All WECC Sources Eligible for Import into California

Importing Clean Power

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CA Emissions Target

CA Forecast Demand

0

50

100

150

200

Cumulative CO2 [MMT]

0 200 400 600

Electricity Output [TWh]

Assuming California Generation Unchanged

Importing Clean Power

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Summary

• All climate change policies will be more “local” than the problem– And subject to evasion of jurisdiction

• Ironically, less flexible (and less efficient) policies are often less vulnerable to evasion– Subsidies & very specific mandates

• The “best” policy choice will vary by product and industry

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Thank You.

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Modeling Source-Based California C&T Options

• Immediate question: What would 2007 have looked like with Carbon regulation?

• Data derived from actual 2007 market outcomes• “Re-dispatch” or simulate the market under various carbon

regulation assumptions– West-wide cap, – CA Source-based – updating

• Simplified “3 node” market model of transmission• Solved as a complementarity problem

– Each firm equilibrates MR and MC (including emissions costs)– Permit prices endogenously linked to emissions cap – Buidling on work of Zhao, Hobbs, and Pang, & Helman and Hobbs

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qsim

psim

pactual

Demand

qothers

qtot

MCsim

qcems

Figure 1: Supply Costs, Imports and Others

qothers

qimports

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qsim

psim

pactual

Demand

qothers

qtot

MCsim

qcems

Figure 2: Emissions Rates and Supply costs

qothers

qimports

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Market Equilibrium Conditions

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Output Based Updating

• Policy allocates new permits based upon production quantities– Provides incentive to continue “local”

production– Can weaken incentives provided by cap-

and-trade by (indirectly) reducing costs of pollution

– Can stimulate “cleaner” production

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Output-Based Updating

Marginal Revenue

Marginal GenerationCost

Emissions marketAllocations/costs

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Carbon (mmtons) Carbon Region CA NW SW Total Price

Actual 40.98 23.37 157.31 221.65 NANo Cap 34.22 23.12 146.11 203.45 0Regional cap 40.57 17.87 102.22 160.66 60

Cal only cap 26.80 23.28 152.79 202.87 18Cal cap w/updating 27.17 23.27 152.27 202.71 41

Summary Results

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Summary Results

Region Energy (GWH)CA NW SW

Actual 81913 29607 178367No Cap 81362 33011 175473Regional cap 95655 31738 155521

Cal only cap 64671 33367 191040Cal cap w/updating 66048 33352 189618

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Carbon Emissions:by region and fuel type