Developments in US Climate Policies: The Effects of Cap and Trade on International Market

Developments in US Climate Policies: The Effects of Cap and Trade on

International Market

“Comparing North American and European approaches to climate change”

at Wilfrid Laurier University 09/28/2007

Toshi Arimura RFF, George Mason University and Sophia University

(with Dallas Burtraw, Alan Krupnick,Karen Palmer, RFF)

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Outline

1. Developments in State/Regional Programs1. RGGI

2. California and Western States

3. CCX

2. Developments in Federal Policy Cap and Trade Proposals in Congress

3. Concluding Remarks

1.Developments in State/Regional Programs

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Backgrounds on US environmental policies

State governments often implement environmental policies before the federal government does

California is known to be the leader

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States with GHG Emissions Targets (PEW Center, Feb ‘07)

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1.1.The Regional Greenhouse Gas Initiative （ RGGI ）

Cap and trade programs among 10 states in north eastern part of US

Electric Power Sector Starting in 2009. Current Emission Level in

2015 10% Reduction by 2019 ( 35% reduction

compared with BAU) Banking

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RGGI

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RGGI

The economy in this region amounts to 20% of US GDP

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CO2 CapState Cap 2004 State Cap 2004

9 States

150.6 143.3 NJ 22.9 21.1

CT 10.7 9.8 DE 7.6 7.5

ME 5.9 4.7 MD n/a 32.0

NH 8.6 8.8 MA 26.7 26.4

VT 1.2 0.4 RI 2.7 2.2

NY 64.3 62.2 PA n/a 130.5

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Allowance Allocation

100% auction in many states (VT, NY, ME, MA, CT) ： Contrast to EU

At least, 25% of the revenue for energy efficiency and clean technology, new technology.

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Offset

Up to 3.23% of allocations (50% of emission reduction)

Trigger Prices Up to 5% if the allowance prices reaches $7 10% if the price reaches $10 CDM credits or projects in other regions are

permitted if the price reaches $10

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CO2 Prices and Impacts on Economy

Carbon Prices ： RGGI RGGI: $5 in 2024 w/o Federal Cap HAIKU （ RFF): $4 in 2010 and $11 in 2024

Electricity Prices From +0.5% to +5% in RGGI model 3% in RFF model

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Impacts on International Market

The price does not reach $10 until 2019. The demand for CDM is limited during the

Kyoto commitment period. However, with banking, there may be

demand for CDM before 2019.

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Influences on Federal Cap and Trade Programs

RGGI can serve as a Platform for federal programs

Recent emphasis on auction in federal proposals

1.2. California and Western States

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US versus CA: Electricity Consumption per capita

(CA Climate Change Portal)

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CO2 Emission per capita by state(CA Climate Change Portal)

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AB32 （ California Global Warming Solutions Act ）

1990 emission level by 2020 Details are discretion to CA Air Resource

Board Market-based approach as an option. Market Advisory Board recommend the

mixture of auction and free allocation Link to EU ETS?

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New Movements in Western states

Cap and trade proposals among 6 western states (Arizona, California, New Mexico, Oregon, Utah and Washington ) and 2 Canadian provinces (British Columbia and Manitoba)

15 percent below 2005 levels by 2020 The western six states account for 20% of

US GDP.

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1.3. Chicago Climate Exchange

Only existing market of GHG in US Voluntary market Emitters in US, Canada and Mexico More than 50 members Phase I(2003-2006), Phase II(2007-2010) 6% reduction in 2010 Offsets and Trade of CER

2.Cap and Trade Proposalsin US Congress

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Movements in Congress

The number of bills, resolutions, and amendments addressing global climate change and GHG emissions reached 106 in the 109th Congress

At least, 9 cap and trade proposals in the 110th Congress

Trend Targets in longer term Auction (Influence of RGGI) Convergence among proposals in 110th Congress

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(at least) 9 Cap and Trade Proposals (as of August 2007)

Sanders/Boxer (S309) Feinstein/Carper (S317) Lieberman/McCain (S280) Kerry/Snowe (S.485) Alexander/Lieberman (S.1168) Bingaman/Specter (S.1766) Waxman (H.R.1590). Udall/Petri Draft Lieberman/Warner Draft

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Regulated Entities

Absolute Cap (intensity target in earlier B/S ) Scope

Electricity Sector : Feinstein/Carper, Alexander-Lieberman

Economy Wide: Others

Downstream vs. Upstream Downstream vs Upstream + Downstream (L/M) Discretion of EPA

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Emission Targets in Federal Proposals

0

2,000

4,000

6,000

8,000

10,000

1990 1995 2000 2005 2010 2015 2020 2025 2030

Mill

ion

metr

ic to

ns C

O 2 e

qu

ivale

nt

Historical Data (1990-2005) Business as Usual ProjectionsBingaman-Specter (S. 1766) Udall-Petri (May draft)Lieberman-McCain (S. 280) Kerry-Snowe (S. 485)Sanders-Boxer (S. 309) Waxman (H.R. 1590)Historical Electricity Emissions BAU Electricty ProjectionsFeinstein-Carper (S. 317) Alexander-Lieberman (S. 1168)Bingaman/Specter(January Draft)

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Characteristics of Allowance Allocation

Mixture of free allocation and auction. More emphasis on auction. The share of

auction increases over time (B/S &F/C) Technology Program Allocation to state governments

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Example of Allocation: Bingaman/Specter

53% free to industry (with phase out); 24% auctioned to support R&D, transition

assistance, adaptation; (increases to 53%) 9% to states. 14%: set aside allowances

8% for CCS (carbon capture and sequestration) 5% agricultural sequestration 1% early reduction

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Usage of the Auction Revenue in Bingaman/Specter

The usage of auction revenue: among 24% : 12% for technology 8% for adaptation 4% for Low-Income Assistance

Impacts on International Markets

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Programs for Developing Countries

Fund for low carbon technology deployment in developing countries (Bagman/Specter)

10% of allowances for technology in developing countries (Udall/Petri)

Support for low-carbon and efficiency technologies in developing countries (Sanders/Boxer)

10% auction revenue for international climate change relief measures (Lieberman/Warner)

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International Credits/Offsets

CDM: Feinstein/Carper, Old B/S Projects in Developing Countries:

Lieberman/McCain JI: Feinstein/Carper Foreign credits: Bingaman/Specter,

Lieberman/Warner

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Indirect Linking to foreign markets

Developing Countries:CDM projects and non-CDM projects

US Federal

Market

RGGI

CA & Western 6 States

EUETS

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US Importer Requirements(Bingaman/Specter)

Bulk, energy-intensive imports from countries w/o comparable policy require permits after 10 years.

Two cases If a country does not have a comparable policy.. If a country has a comparable policy, then… In either case, this requirement can increase the

demand for foreign credits, CDM

Lieberman/Werner has a similar idea

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Two Carbon Tax proposals.

Stark (H.R. 2069) : $3/CO2 ton, rising $3 annually.

Larson (H.R. 3416): $16.5/ CO2 ton, rising 10% plus inflation annually.

Tax applied to fossil fuel imports; fossil fuel exports are exempt.

Contrasts to EU ETS

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Price Stability and Cost Containment

Borrowing: Lieberman/McCain, Lieberman/Werner

Safety Valve Price (B/S and U/P) $12 rising annually. (initially $7 in B/S draft)

Banking

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Carbon Market Efficiency Board(Lieberman/Warner)

Modeled after FRB to oversea the allowance market

The board can permit more flexible borrowing in emergency to mitigate impacts to economy.

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Technology Programs

Mixture with other regulatory approach Revenue of the auction for technology

program Carbon Capture Sequestration ： B/S Fund for geological sequestration (S/B) Zero emission clean coal Generation (F/S)

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Other Regulation

Cap and trade proposal with other regulatory measures Energy Efficiency (S/B, K/S) RPS （ K/S) Vehicle Emission Standard （ S/B,K/S ）

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Carbon Price and Impacts to Economy

　Udall/Petri

(109th Congress)

EIA

Lieberman/ McCain

EIA

Bingaman/Specter

NCEP

Emission Cap

Based on the average emissions from the

previous three years before the bill

2004 level in 2012.

1990 level in 2020.

20% below 1990 level

in 2030.

2012 level 　in 2012.

2006 level by ’20.

1990 level by ’30

Price ($2005/ CO2

TOE)

Reach Safety Valve price $6.76 in 2018

$14 to $31 in 2020.

$31 to $58 in2030

$5.5in 2012.

$24 in 2030

GDP -0.16% to -0.21%

in 2030.

-0.3% to -0.5%

in 2030

+0.12%

in 2030

Electricity Price

+5.66% to +6.34%

in 2020

+ 10% in 2020

+21% in 2030

+7% in 2020

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3. Concluding Remarks

Despite the deviation from Kyoto Protocol, the state governments are starting cap and trade programs

Discussion on federal level cap and trade programs

Despite the lack of an international agreements, the US markets will be indirectly linked to cap and trade programs in international markets.

Some extras

if time left

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Programs for Low Income People

Funds and incentives for mitigating effects on poor (L/W, L/M)

Energy Assistance Fund: up to $6 billion per year (auction revenue) to low income households (B/S)

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Domestic Offsets

Agricultural and Biological sequestration. (Feinstein/Carpe, Lieberman/McCain, Sanders/Boxer, Kerry/Snowe)

Experience in CCX

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Credits for Early Actions

1% allowance allocation from 2012 to 2020 (Bagman/Specter)

Credit for reductions before 2012 (Lieberman/McCain ) Goal to “recognize and reward early reductions” (Kerry-

Snowe) 8% of allowances for early action in 2012, phasing to zero

in 2020 (Lieberman/Warner) Credit for reductions from 2000-2010, limit 10% of cap

(Feinstein/Carper) Bonus allowances to first 30 new or modified coal-fired

utilities meeting new performance (Alexander/Lieberman)

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New Entrants

Pool of allowances for new entrants employing clean and efficient technology (Bingaman/Specter)

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Adaptation

Fund to provide adaptation assistance for workers and communities and to help mitigate effects of climate change on fish and wildlife habitats (F/C )

Allowances to mitigate economic costs of the act (L/M ) Allowances to communities and companies that are

disproportionately adversely affected by global warming or the transition to a lower carbon economy (S/B )

Funds for adaptation (L/W, K/W) Climate Adaptation Fund (including wild life

conservations) (B/S)