Transcript BHI:Cap-and-trade done right and done wrong June 2, 2009

Cap-and-Trade Done Right and Done Wrong
Heartland Institute
Third International Conference on Climate Change
Economics Panel
Washington DC
June 2, 2009
David G. Tuerck, PhD
Professor and Chairman of Economics
Executive Director, The Beacon Hill Institute
Suffolk University, Boston
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Questions to be Addressed Today
 Is there an optimal response to global warming?
 Can cap-and-trade be an optimal response?
 Is Waxman-Markey* the optimal response?
 Does cap-and-trade make sense as a stimulus
measure?
*American Clean Energy and Security Act of 2009.
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What “Optimal” Means
• Internalizing “externalities.”
• Maximizing the present value of
“utility” (consumption).
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What “Stimulus” Means
• Creating jobs and investment where there is
involuntary unemployment and a lack of
investment demand.
• Nothing to do with “optimal” allocation of
resources.
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What is Cap-and-Trade?
• Place a cap on total emissions.
• Give or auction emission permits to
companies.
• Let companies that find it more costly to
reduce emissions purchase emission
permits from companies that find it less
costly.
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Elements of an Optimal Policy
• Impose the correct “carbon price” or “fee.”
• William Nordhaus, A Question of Balance (2008):
– The 2005 social (external) cost of a ton of carbon = $30.
– Annual external cost per capita in U.S. = $150 (i.e., five tons
of carbon per year per person).
– A ton of carbon is emitted by 10,000 miles of driving.
– Set fee accordingly.
• Choose between granting and auctioning permits.
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Cap-and-Trade Proposals
Legislation
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Year
Proposed reduction in GHG emissions by 2050
Lieberman-McCain
2007
60% below the 1990 level
Kerry-Snowe
2007
65% below the 2000 level
Sanders-Boxer
2007
80% below the 1990 level
Waxman
2006
80% below the 1990 level
Feinstein
2006
70% below the 1990 level
Lieberman-Warner
2007
70% below the 2005 level
Waxman-Markey
2009
83% below the 2005 level
This Version of Waxman-Markey
• Based on the Waxman-Markey
Discussion Draft.*
• Used by EPA for its analysis.**
* http://energycommerce.house.gov/index.php?option=com_content&task=view&id=1560.
**U.S. Environmental Protection Agency, “EPA Preliminary Analysis of the Waxman-Markey
Discussion Draft,” April 20, 2009.
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Waxman-Markey Titles
I.
Clean Energy (standards, CCS*, smart grid)
II.
Energy Efficiency (buildings, appliances, transport)
III. Reducing Global Warming Pollution (cap and trade)
IV. Transitioning to a Clean Energy Economy
(subsidies for transition costs)
*Carbon capture and sequestration.
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Waxman-Markey Details
• Reduce GHG emissions to:
– 3% below 2005 levels by 2012
– 20% below 2005 levels by 2020
– 42% below 2005 levels by 2030
– 83% below 2005 levels by 2050.
• Satisfy 15% of compliance by submitting allowances,
pay 8% premium.
• Rebates for industrial sector until 70% global
compliance.
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Praise for Waxman-Markey
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•
“Increase new building efficiency by 50 percent” (Center for American
Progress Action Fund).
•
Create “millions of new jobs for Americans” (Barack Obama).
•
Save “American consumers and businesses $465 billion annually in
2030” (Union of Concerned Scientists).
•
“Simultaneously address the climate crisis, the economic crisis, and
the national security threats that stem from our dependence on
foreign oil” (Al Gore).
•
“Restore America’s leadership of the world” (Al Gore).
Nordhaus on Global Warming
Yale economist who created the “DICE”* model:
• Do not: do nothing or do too much.
• Implement policy that charges the optimal price (or “fee”) on
carbon: $27/tonne in 2005.
• Apply to all sectors and countries.
• Avoid controls, subsidies for green energy.
*Dynamic Integrated Model of Climate and the Economy.
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Alternative Scenarios
Benefits and Costs of CO2 Abatement Policies
WORLD
No controls for 250 years
Optimal
Waxman-Markey
Only U.S. cuts
OECD cuts in concert
World cuts in concert
U.S. ONLY
No controls for 250 years
Optimal
Waxman-Markey
Only U.S. cuts
OECD cuts in concert
World cuts in concert
Change in utility
(consumption)
relative to nocontrols baseline
Trillions of 2005
US dollars
% change
in utility
0.0
3.4
0.00
0.17
22.6
17.3
0.0
-5.2
0.0
2.2
-2.6
-3.4
-9.5
-0.13
-0.17
-0.48
21.1
19.2
11.5
-1.5
-3.3
-11.1
3.8
7.0
20.7
0.00
0.62
0.00
0.17
4.13
3.17
0.00
-0.96
0.00
0.40
-3.42
-3.09
-1.74
-0.95
-0.86
-0.48
3.86
3.51
2.10
-0.27
-0.61
-2.03
3.85
3.85
3.85
%
Environmental Damages
Change in
Present
PV relative
Value
to baseline
Trillions of 2005 US dollars
Source: Based on DICE-2007 model. .
Note: Assumes U.S. damages and abatement costs reflect the U.S. share of world GDP.
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Abatement
Costs: PV
Carbon Fees
2100
202
778
14
2200
755
677
Effects on Fuel Costs
2007
2008
Alternative fees
Carbon fee
$/tonne
34.00
122.00
714.00
Equivalent fee on CO2
$/tonne
9.27
33.27
194.73
Increments to prices
Gasoline
Retail price
$/gal
2.76
3.21
0.08
0.30
1.73
Natural gas
Residential price
$/'000 cu ft
14.2
15.5
0.51
1.82
10.66
Electricity: coal
Retail price
c/kWh
9.13
9.81
0.72
2.58
15.07
Electricity: natural gas
Retail price
c/kWh
9.13
9.81
0.32
1.16
6.80
Source: Energy Information Agency.
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Effects on Global Temperature Relative to 1900
Global Temperature change (degrees C)
2005
2050
2100
2200
No controls for 250
years
0.73
1.81
3.30
5.30
Optimal
0.73
1.68
2.76
3.45
Only U.S. cuts
0.73
1.77
3.12
5.08
OECD cuts in concert
0.73
1.71
2.88
4.70
World cuts in concert
0.73
1.51
1.72
2.00
Waxman-Markey:
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EPA Analysis of Waxman-Markey
• Only economic costs, not benefits.
• Abatement cost would rise from $22 billion in
2015 to $206-277 billion in 2050.
• “Allowance price” (fee) would rise from $6281/tonne of carbon in 2020 to $272-352/tonne
in 2050.
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Waxman-Markey: A Stimulus?
• Cap-and-Trade cannot create stimulus for 2009-2010, given that
it starts in 2012.
• Stimulus measures are supposed to boost spending
temporarily, not fix externalities.
• Cap-and-trade is about long-term effort to reduce CO2
emissions, not the creation of a stimulus.
• The higher cost of energy due to cap and the costlier
renewables create negative stimuli.
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Waxman-Markey: A Stimulus?
(Cont’d)
•
Steer existing jobs and investment from old energy to
renewable energy.
•
Drive investment from U.S. to countries with no caps.
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Answers to the Questions Asked
in Slide Number 1:
 Yes, there is an optimal response to global
warming.
 Yes, Cap-and-Trade can be an optimal response.
 No, Waxman-Markey is not an optimal response
(and far from it).
 No, Cap-and-Trade does not make sense as a
stimulus measure.
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In Summary
• Nordhaus is an attempt at Cap-and-Trade
done right.
• Waxman-Markey is Cap-and-Trade done
wrong (very wrong).
– Imposes carbon fees that are too high.
– Pushes highest fees onto future generations.
– Is not the way to do a stimulus.
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