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A. Denny Ellerman Center for Energy and Environmental Policy Research Massachusetts Institute of Technology http://web.mit.edu/ceepr/www/ Perspectives from Abroad Colloquia Sustainable Energy Ireland Dublin, Ireland May 21, 2003. Massachusetts Institute of Technology - PowerPoint PPT Presentation
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MIT CEEEPR
Markets for the Environmentand Renewable Energy
A. Denny EllermanCenter for Energy and Environmental Policy Research
Massachusetts Institute of Technologyhttp://web.mit.edu/ceepr/www/
Perspectives from Abroad ColloquiaSustainable Energy Ireland
Dublin, IrelandMay 21, 2003
Massachusetts Institute of TechnologyCenter for Energy and Environmental Policy
Research
MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
MIT CEEEPR
Some Preliminaries
• Societies, governments, and markets– From Locke’s social contract to Lincoln’s “of
the people, by the people, and for the people”
• Natural markets, banned markets, and constructed markets– Decisions reflect societal values
• Non-appropriability as the underpinning for constructed markets
MIT CEEEPR
An Environmental Market:U.S. Cap and Trade Programs
• Basic requirement: one ton = one allowance– Demand has been created, but non-specific– Radical refocusing of the government role: from
specific mandate to accounting– Measuring instead of inspecting
• Simultaneous recognition and issuance of tradable “rights to emit”
• Simplicity, strict accountability, & flexibility
MIT CEEEPR
A Renewable Energy Market:Renewable Obligation Certificates
• Basic requirement: ROCs = % obligation– Creates demand for certificates (ROCs)– Producers of renewable energy earn ROCs– Specific mandate abandoned, market will take care of
supply
• Unbundling of electricity and “renewability”– Like in environmental markets– Allows separate markets to operate– No build requirements for utilities – Also, subtle shift from capacity to generation
MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
MIT CEEEPR
U.S. Cap-and-Trade Programs
• The Acid Rain (SO2 allowance trading) Program– Nationwide, single source beginning in 1995
• RECLAIM Programs for NOx and SO2 in the Los Angeles Basin – Multi-source, local program starting in 1994
• The Northeastern NOx Budget Program– Seasonal program (May-Sept) enacted by coordinated
individual state action beginning in 1999– Expanded by federal action to include all eastern U.S. in
2003
MIT CEEEPR
What are the Results?• Cost savings have been achieved
– 50% savings in the Acid Rain Program– Markets have emerged in all programs and
significant trading has been observed
• Better environmental performance than conventional regulatory alternatives– 1st year effect with & without banking– Big, dirty units reduce the most – 100% (real) compliance because of treatment
of high abatement cost facilities
MIT CEEEPR
First Year Effect in “Big Dirties”
0
2
4
6
8
10
12
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Millio
n t
on
s S
O2
Program starts
ALLOWANCES
EMISSIONS
COUNTERFACTUAL EMISSIONS
MIT CEEEPR
First Year Effect in Other Units
0
2
4
6
8
10
12
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Mill
ion
to
ns
SO
2
PROGRAM STARTS
ALLOWANCESEMISSIONS
COUNTERFACTUAL EMISSIONS
MIT CEEEPR
Why Did the “Big, Dirties” Reduce the Most?
• Deep abatement technology is capital intensive
• Economics depends on units of output over which the (large) fixed costs can be spread
• Cap & Trade Programs pay per unit of abatement, while conventional regulatory programs do not
MIT CEEEPR
Why 100% Compliance?Exception and Equity
• Cost heterogeneity implies C & C rule will not fit all…imposes unique hardship on some
• Leads to administrative appeal and equitable exception that relaxes or delays requirement
• One-sided process…those facing less cost than others never offer to do more
• Fine line between equity and special pleading
MIT CEEEPR
Special Pleading Has Been Made Uneconomic
• Cheaper to buy an offset than seek exception
• Trading provides for automatic off-setting
• Also, harder to claim unique hardship in a market with many buyers… highest cost is price of an allowance
• Easier to enforce allowance-emissions matching than prescriptive rules
• Flexibility, simplicity & strict accountability
MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
MIT CEEEPR
How has Renewable Energy Procurement Fared?
Contracted (MWe)
On stream
(EOY 2002)
% “Live”
NFFO 1 (1990) 152 141 93%
NFFO 2 (1991) 472 172 36%
NFFO 3 (1994) 627 293 47%
NFFO 4 (1997) 843 195 23%
NFFO 5 (1998) 1,177 119 10%
TOTAL 3,271 920 28%
MIT CEEEPR
NFFO and RO Capacity(England & Wales)
NFFO Contracts (1990-98) 3,271 MWe
NFFO Completed (12/31/02) 920 MWe
RO Accredited Effective 4/1/02 1,215 MWe
RO Accredited since 4/1/02 717 MWe
Total RO Accredited as of 1/31/03 1,932 MWe
MIT CEEEPR
ROC Performance to date(England, Wales, & Scotland)
(% Share) Capacity
(MWe)
ROCs (GWh)
(Apr 02-Jan03)
Capacity Factor
Biomass 1,038 (48%) 818 (18%) 11%
Landfill & sewage gas
547 (24%) 2,375 (53%) 59%
Hydro 201 (9%) 428 (10%) 29%
Wind 507 (22%) 870 (19%) 23%
TOTAL 2,293 4,490 27%
MIT CEEEPR
Another Similarity:Markets Supplant Regulation?
• Emissions Trading– RECLAIM and NOx programs superseded conventional
programs with ample authority• Too complicated to implement by regulation
– Acid Rain Program was “de novo”
• Renewables: Market replaces direct procurement • Separability, decentralization & specialization• Avoiding pitfalls of informational asymmetries and
the political uses of administrative discretion• More general than environment and renewables
MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
MIT CEEEPR
Market Interactions
• Many markets interact– Substitution and budget constraints
• Environmental markets are similar– Caps are independent & costs are additive
– But sometimes, abatement of one pollutant reduces/increases another pollutant
– If both capped, markets are interdependent
• Renewable energy markets will interact with CO2 markets, for instance the EU Trading Scheme
MIT CEEEPR
The ROC/CO2 Interaction
• Renewable energy emits no CO2 and is often seen as an instrument of climate policy
• Any CO2 market will provide some impetus to renewable energy production
• If CO2 and ROC markets co-exist– Tighter CO2 caps will reduce ROC prices, and– Larger ROs will reduce CO2 prices– Potentially one could drive the other price to
zero
MIT CEEEPR
Is There Something Wrong with this Interaction?
• Something unique and non-appropriable about renewables? – Set the RO at the right level – Don’t worry about interactions
• If the RO is a surrogate carbon policy,– Justified only as a 2nd best instrument
• Interaction is appropriate if CO2 price is rising
– Otherwise, an RO is superfluous or inefficient
MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
MIT CEEEPR
Why Markets Now?
• Technological Trends– Information revolution has greatly reduced cost
of monitoring, reporting and processing
• Societal Trends– Greater willingness to rely on “markets” and less
faith in “government” and “experts”
• Environmental Problems are Different– Blunt tools work only on big obvious problems
MIT CEEEPR
Some Concluding Thoughts
• Exciting new world of constructed markets– Reflecting broad underlying trends– Not besotted market ideology
• More intelligent use of government– Sorting out government and market roles by
equal application of market and public failure– Adapting to diminishing supply of civil
servants
• The right attitude for policy…
MIT CEEEPR
“If it is feasible to establish a market
to implement a policy,
no policy-maker can afford
to do without one.”
Pollution, Property and Prices
J. H. Dales (1968)