Transcript Climate Change Policy and Regulatory Jurisdiction

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”
1
Environmental Policy Trends
• More jurisdictions are embracing “marketbased” 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?
2
US Climate Change Policies
• Northeast Regional Greenhouse Gas
Initiative (RGGI)
• California AB 32
3
Carbon Emissions at US Power
Plants, 2002
4
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
5
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.
6
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).
7
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.
8
Reshuffling example
Diamond market before boycott
Homogenous good
Homogenous buyers
9
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
10
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
11
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
12
Reshuffling example
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
13
An effective boycott
Diamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
14
An effective boycott
Diamond 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.
15
An effective boycott
Diamond 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.
16
Other potential examples of
reshuffling in the GHG context
Low-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.
17
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
18
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
19
AB 32 (zero carbon)
How M uch is Out The re ?:
TWh "com pliant" w ith various re gulations
Non-Cal WECC
Cal
Location
RPS
Non-Cal WECC
Cal
SB 1368
Non-Cal WECC
Cal
0
50
100
150
200
250
TWh
20
Importing Clean Power
200
All WECC Sources Eligible for Import into California
100
150
CA Forecast Demand
0
50
CA Emissions Target
0
200
400
Electricity Output [TWh]
600
21
Importing Clean Power
200
Assuming California Generation Unchanged
100
150
CA Forecast Demand
0
50
CA Emissions Target
0
200
400
Electricity Output [TWh]
600
22
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
23
Thank You.
24
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
25
Figure 1: Supply Costs, Imports and Others
Demand
MCsim
psim
pactual
qimports
qothers
qothers
qcems
qsim
qtot
26
Figure 2: Emissions Rates and Supply costs
Demand
MCsim
psim
pactual
qimports
qothers
qothers
qcems
qsim
qtot
27
Market Equilibrium Conditions
28
Output Based Updating
• Policy allocates new permits based
upon production quantities
– Provides incentive to continue “local”
production
– Can weaken incentives provided by capand-trade by (indirectly) reducing costs of
pollution
– Can stimulate “cleaner” production
29
Output-Based Updating
Marginal Revenue
Emissions market
Allocations/costs
Marginal Generation
Cost
30
Summary Results
Region
CA
Carbon (mmtons)
NW
SW
Total
Carbon
Price
Actual
No Cap
Regional cap
40.98
34.22
40.57
23.37
23.12
17.87
157.31
146.11
102.22
221.65
203.45
160.66
NA
0
60
Cal only cap
Cal cap w/updating
26.80
27.17
23.28
23.27
152.79
152.27
202.87
202.71
18
41
31
Summary Results
Region
CA
Energy (GWH)
NW
SW
Actual
No Cap
Regional cap
81913
81362
95655
29607
33011
31738
178367
175473
155521
Cal only cap
Cal cap w/updating
64671
66048
33367
33352
191040
189618
32
Carbon Emissions:
by region and fuel type
33