Climate Change & Energy Policy

Dr. Daniel Matisoff - POL 1101

Addressing Climate Change To stabilize climate, must reduce annual

emissions by 7 billion tons/year (GT) by 2050, or 25 billion tons (GT) compared with Business As Usual (BAU) scenario

For example: 1.5 GT by doubling expected fuel economy to 60mpg or by halving miles driven Efficient lighting & appliances – 2GT Power plant efficiency – 1GT Sequestration – 1GT 2 million wind turbines or doubling nuclear

capacity – 1GT ea

Difficulties of addressing climate change Political complexity

Addressed across many levels of government Types of policies, jurisdictions International complexity

Scientific complexity Climate is extremely complex Climate change is not easily observable to humans

Changes occur over decades, importance of global averages; temperature at the poles

Humans observe weather, not climate (the two are often confused)

Economic complexity Uncertainty in long term costs, benefits Discount rates

Discount rates and carbon valuationAt what rate to we expect the economy to grow Interest rates grow money

At a 6% interest rate $100 today is worth $106 next year HUGE values assumption

How much do we value the future? At at 3% discount rate, an environmental benefit 25 years

from now is worth 50% of that today The future is meaningless! Even at a discount rate of 1% the value of $1 million 300 years

from now is just $50k! At 5%, worth just 50 cents!

Changing the discount rate between 5% and 2.5% leads to a change in the mean value of carbon today between $4.70 to $35.10 (at 95% percentile, 3% rate = $65)

Policy Options: Carbon Tax “Double Dividend Hypothesis” We don’t know optimal amount of carbon, so a

set limit doesn’t make sense - tax avoids setting limit, avoids problems with high costs

Preferred by oil & gas Currently implemented in Australia ~$23/ton, rising over time

Cap & Trade Set caps, allow trading Encourages compatibility with Europe May be costly, but carbon is ideal pollutant

for trading scheme No regional impacts of carbon concentration

High transaction costs for small firms Preferred by the electric utility industry Businesses like grandfathered allowances,

do not like auctioned allowances Function as a subsidy

What’s currently being done? Comprehensive programs:

EU ETS – cap & trade program Australia – Carbon Tax

“Second Best” Programs U.S.

Transportation (CAFE standards; Gas Tax) Forestry Agriculture Energy (renewable incentives; subsidies, loan guarantees, etc)

State Based programs RGGI / WCI Energy policies (RPS, net metering, tax benefits, etc) Building standards

Voluntary Programs (My research) Why adopt? Marketing, Performance, Liability reduction, Early experience Don’t seem work

China

Cap & Trade vs. Tax Cap & Trade sets quantity, makes price

uncertain Tax sets price, makes quantity uncertain Some other tradeoffs

Compatibility with EU WTO compatibility Treatment / compatibility of offsets

Other possibilities: World Tech Fund

Addressing Uncertainty The Precautionary Principle

Burden of proof falls on demonstrating that an action does NOT cause environmental harm

In general, should refrain from things that might cause harm unless prove otherwise

Based in risk aversion Who wants to gamble with me?

Do you buy insurance on your house or car? In a sense, carbon mitigation is similar – managing risk against a

low (sort of) probability event Many other reasons to develop clean energy, energy

security Foreign policy reasons Air quality Coal is really, really bad (human, environmental costs)

Reframing Climate Change Policy Co-benefits

All the other benefits we get from addressing coal, oil, etc

Cleaner air & water Reduced mercury, radioactive pollutants, arsenic, SOx,

NOx, PM Increased energy security / reduced support for

hostile dictatorships Improved transportation Or maybe we just feel better about ourselves

U.S. Wind Resources

Renewables Generation (electric)

Renewables growing fast (1/3 of new production)Wind has nearly tripled since 2003; 13x since 1990! 45% increase in 2011Increase in Landfill GasIncrease in Solar (Increase of 100% in 2011!)

Renewable Electric growth

Renewable electricity growth by sector

Conservation / Demand Reduction Many times cheaper than increasing supply Most energy we produce is wasted Some EU countries have higher standard of

living, 30-50% less energy per person A house built today uses 50% energy of house

built in 1974 Why aren’t we making more progress?

(Matisoff, 2010) Complexities of cap & trade High discount rates Short term incentives

Keeping up with the Jones’ Noonan, Matisoff, Hsieh (2011) Why do people adopt zoned hvac systems?

Do peer effects play a role? MLS sales in Chicago – 1990 – 2003 Use geo-spatial location data to examine spatial

correlation across changes in zoned HVAC adoptions

We do observe peer effects If you adopt a zoned HVAC, your neighbor is more likely

to do so

Comparative cost of new electricity generation (includes transmission & fuel)Source Cost per MWhNuclear 113.9Biomass 112.5Geothermal 101.7Hydroelectric 86.4Solar (PV) 210.7 (311.8 thermal)Wind 97 (243.2 offshore)Coal 94.8Advanced Coal 109.4Coal Gasification w/capture & Storage 136.2Nat Gas – Conventional CC 66.1Nat Gas – Advanced CC 63.1Advanced CC w/ CCS 89.3Conventional Combustion 124.5Advanced Combustion

My Current Research Why do firms switch fuels? (or not)

In the short run (through shifts in load, multi-fuel plants) In the long run (through investment)

Collect fossil fuel use, plant characteristics data for all power plants in the U.S. 1994 - 2010 Look at changes in fuel consumption at the individual

plant level, holding company level over time as function of fuel price, possible substitutes

Hypotheses: Price impacts fuel use decisions Price volatility of fuels impacts fuel use decisions Cost recovery regulations impact fuel use decisions Regulatory uncertainty impacts fuel use decisions

Legitimate arguments / counter arguments against addressing Climate Change via emissions reduction More cost effective to address consequences of climate

change, than to address CO2

Uncertainty & cataclysmic climate change Worst projections are apocalyptic

The consequences of not doing anything and being wrong are cataclysmic

vs. the consequences of doing something and being wrong Cleaner air & water? We spend 1-2% more on energy? We address oil

dependency? Cap & Trade won’t actually do much about foreign oil

dependency (in the short run) Need to address oil separately

The China & India Question This can be addressed through import tariffs & U.S. & EU

coordinated action

My take Addressing climate change is prudent, cost-

effective, & makes sense across many criteria Put a price on carbon – let the market work it

out Storing carbon, geoengineering can be

included, but don’t pick “winners” Don’t give away carbon permits more than

necessary Recycle revenue via dividend or reduced labor

taxes Tax / cap upstream, to impact less targets and

achieve greater coverage Use import tariffs to pressure China & India to

do something

Conclusions Huge problems with fossil fuels For a little more, we can solve our energy

problems with demand reduction and renewables Co-benefits!

Huge corporate interests in the way, will take enormous political will

We can learn how to solve storage problems Wind is cheap! Effective, and clean!

(distribution issues) Solar is on its way!

So – what else do I do? Why do states adopt energy policies? Do they

learn from each other? Largely politics Yes, they learn from each other

Are firms becoming more transparent? Are they improving carbon management? Maybe – more firms are tracking carbon; more

firms are thinking about it as a risk Quality of information is very poor Firms are becoming LESS likely to disclose to

public