Transcript How States Can Make a Difference on Climate Change

Creating Winners Through Climate
Change Policy
--A Look at a Federal & State Policy Options-Ned Helme, Executive Director
***
NGA Center for Best Practices
February 28, 2002
Washington, DC
Center for Clean Air Policy

Non-profit research-advocacy group founded
in 1985 by state governors to find marketbased solution to acid rain
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Applying similar approaches to ozone,
greenhouse gases, and air toxics at state,
regional, nat’l, int’l levels
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Leader in OTAG process and in international
climate change policy negotiations.
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Proponent of states as “laboratory of
democracy”
Presentation Outline
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CCAP’s State Projects
» Highlights of CCAP state initiatives
» Lessons from state experience

Impacts of allowance allocation on
national cap-and-trade approach
» CCAP study
» Studies on electricity sector caps
CCAP’s Vision for State
Action
Statewide Target
Policy Mechanisms
Emissions
Trading
Negotiated
Agreements
Regulatory
Approaches
Funding
Mechanisms
Voluntary
Programs
Example:
Example:
Example:
Example:
Example:
MA electricity
sector 4-P
NJ Silver/Gold
Track
Building Codes
Public Benefit
Charges
Transportation
Education
 Targets and Mechanisms for each sector 
CCAP’s State Roundtable
on Global Climate Change
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Launched in December 1998 to discuss and
advance state action on climate change.
Participants include senior environmental,
energy, transportation, and land-use officials
from 14 states.
Forum for sharing ideas, building motivation
& momentum, and developing coordinated
strategies for reducing GHG emissions.
Moving from specific innovative ideas to
broader multi-sector approaches, including
statewide caps, inventories, and
mechanisms.
State Actions: Lessons from
New York
CCAP’s Role:
 Developing recommendations for NY on state
actions to reduce GHG emissions.
Key Insights:
 Important to develop an overarching strategy
that:
» Looks at options in all sectors
» Utilizes a variety of policy mechanisms (i.e.,
emissions trading, negotiated agreements,
regulatory approaches, funding mechanisms, and
voluntary mechanisms)
CCAP’s Transportation and
Climate Change Roundtable
CCAP’s Transportation & Climate Change Initiative:
 Forum where Roundtable States discuss
opportunities to reduce transportation emissions.
Key Lessons:
 Many options offer co-benefits, such as reducing
air pollution, mitigating congestion, and improving
“quality of life”.
 Important to look at VMT as well as vehicle
technology.
 Quantification of reductions is difficult, but not
impossible.
Using Funding Mechanisms:
Public Benefit Funds
CCAP’s Public Benefit Charge Fund Project:
 Seeking to develop & implement criteria that
target energy-efficiency (EE) & renewable
energy (RE) technologies that maximize
reductions in various emissions.
Key Lessons:
 Results will be applicable to any “pot” of
money specifically set aside for EE/RE.
» 19 states have public benefit funds
» Other states have funds specifically set aside for
EE & RE projects
Emissions from Electricity
Generation: Distributed Generation
CCAP’s Distributed Generation Project:
 Analyzing the impacts of distributed
generation on net emissions from electricity
sector using in-house model.
 Initially looked at short-term impacts on New
England, but long-term impacts on NE and
other regions can be done.
Key Preliminary Findings:
 In short-term:
» Existing diesel DG may pose NOx emissions
problem.
» Little impact on CO2 emissions.
Assessing & Controlling Emissions
from Distributed Generation
CCAP’s Distributed Generation Project:


Analyzing the impacts of distributed generation
on net emissions from electricity sector using inhouse model.
Initially looked at short-term impacts on New
England, but long-term impacts on NE and other
regions can be done.
Key Preliminary Findings:

In short-term:
» Existing diesel DG may pose NOx emissions
problem.
» Little impact on CO2 emissions.
Future CCAP State Projects
Working with additional states.
 More focused discussion on inventories
and policy mechanisms.
 Continued evaluation of state policy
opportunities to reduce GHG emissions.

CCAP / CRA Study:
Upstream Carbon Trading
 Project goal was to identify winners and
losers, look at alternative ways to design
program to support domestic climate policy.

Key insights on design of cap-and-trade
program that balances equity & efficiency.

Provide better understanding of program
costs.
Applicability of Study to
States

A number of states have developed or are
considering cap-and-trade approaches for
emissions trading.
» Others developing framework for potential trading
through state registries.

Opportunities for state input into national policy
design discussions, including multi-pollutant cap
and economy-wide proposals.
 Method for allocating allowances under cap-andtrade is key question for policy design.
Project Overview

Collaborative modeling effort between CCAP,
Charles River Associates (CRA) and
modeling team.

Work grew out of CCAP’s GHG Emissions
Trading Braintrust.

Used CGE model to look at alternative
designs of upstream, economy-wide cap-andtrade program for carbon dioxide.
CRA: Modeling Background

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Dynamic, computable general equilibrium (CGE) model.
Upstream, economy-wide cap-and-trade program for
carbon dioxide.
Model assumes Kyoto target with Annex B trading.
Economy is on the economic efficiency frontier (except for
taxes)—i.e., no free efficiency.
Does not capture technology detail, including energy
efficiency & technological improvements.
Compliance occurs through substitutions among energy
sources as well as substitutions between goods and
services, labor and energy.
Output includes overall costs to economy, impacts on
prices, employment, production & stock value.
Main Findings/Insights


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Cost of economy-wide CO2 control program can be
substantially reduced if allowances are auctioned and
revenues are recycled as marginal tax rate
reductions instead of grandfathering most allowances
Conventional wisdom suggests energy industry
would suffer loss in shareholder value from
implementation of Kyoto accord.
» Study suggests that design of the trading system
can create winners as well as losers.
Grandfathering heavily to emitting sources can
overcompensate those sources to the detriment of
other affected parties and the larger economy.
Implications for Policy

Can design program so that energy sector stock
values are held harmless (no declines or windfalls).

Depending on program design, revenues may be
available for a variety of beneficial uses.

Results apply to an economy-wide trading program,
but not necessarily a single-sector trading program.
Design Issues Investigated in
CRA Study
Allowance Allocation
 Grandfathering—allowances given to trading system
participants based on historical emissions in 3
scenarios:
» g/f equal to 93% of 1990 emissions
» g/f equal to 25% of 1990 emissions
» g/f to energy industry to protect BAU equity value

Auction—participating companies purchase
allowances to cover emissions. Revenues recycled.
Design Issues Investigated in
CRA Study Cont.
Revenue Recycling
 Cover government revenue losses
 Reduce marginal tax rates
 Payments to losing companies, consumers
 Payments to labor, communities (didn’t evaluate but
also possible)
Economic Efficiency

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Most efficient approach = 100% auction allocation in
which revenues are used first to compensate
government for revenue losses with remaining
revenues distributed through personal income tax
(PIT) recycling
In this scenario, allowances are used as follows:
» 56% to maintain government revenues
» 44% distributed through PIT recycling
Equity Value

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An auction allocation results in moderate equity
losses (4-6%) in the oil, gas and power sectors, and
larger (64%) losses in the coal sector.
Depending on the amount given to affected
industries, grandfathering based on past emissions
can result in protection of current stock value, or
significant gains or losses for particular sectors:
» Providing 93% of 1990 emissions (Kyoto target) to electric
utilities would increase stock value by 50% over BAU
» Same historic allocation formula would cut coal by 56%
because of low direct emissions from coal mines,etc.
Change in Equity Value
Change in Equity Value
60%
Coal Mining
40%
Crude Oil and Natural
Gas Extraction
20%
No change in
Equity Value
Electricity Generation
0%
Gas Distribution
-20%
Petroleum Refining
-40%
-60%
Iron and Steel
-80%
Other Sectors
Full
Auctioning
Full
Grandfathering
91% Auction/
9% Grandfathering
Balancing Efficiency and
Equity
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Grandfathering just 9% of total allowances would be
sufficient to preserve current equity value of major
energy companies
91% of allowances could be auctioned under this
scenario with revenues recycled through tax redux
This combined auction/grandfather approach cuts
cost to economy by 40% below cost of pure
grandfather
» Note: the 9% figure compensates only shareholders;
additional allowances would need to be provided to
compensate labor and communities.
Balancing Efficiency and Equity
Grandfathering to Maintain Energy Company Equity Value:
Fraction of Allowances for Energy Industries and for Auction
Coal Mining
3.2%
Crude Oil and
Natural Gas
Extraction
1.7%
Electricity
Generation
2.4%
Allowances for
Auction
91%
Gas Distribution
0.7%
Petroleum Refining
1.3%
Note: Revenues from auction go both to make up government budge shortfalls and to
reductions in marginal income tax rates
Economic Efficiency
Welfare Loss Under Different Allocation & Recycling Scenarios
(Percentage loss relative to BAU)
Maintain energy
co. value/PIT
recycling
Full
grandfathering/PIT
recycling
100% Auction/PIT
recycling
Auction/per person
rebates
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
RFF Study of Electricity Sector
Study
Resources for the Future evaluated the
impact of allocation decisions under national
carbon cap on electricity sector
Main Findings
 Allocation through an auction is roughly onehalf the cost to society of Grandfathering or
GPS
 Under auction, net change in the value of
existing assets across the industry is 6% of
the net present value of allowances (20012020).

Change in Value of Assets:
National Aggregation
(1997 $/MW in 2001 under Limited Restructuring; 35 million mtC)
Change in DPV Producer Surplus ($/MW)
300,000
AU ($25)
GF ($38)
GPS ($40)
200,000
100,000
0
-100,000
-200,000
-300,000
Existing
Coal
Existing
Natural
Gas
Existing
Oil
Existing
NonEmitting
All
New Coal
New
New Non- All New
Existing
Natural Emitting
Gas
All
Electricity Sector Cap: ICF
Study
Emission allocation can increase a
companies value, especially prominent
for carbon.
 Grandfathering carbon allowances to a
company provides assets that can rival
the value of their generating assets.
 Carbon value of permits is greater than
NOx and SO2 values.

Value of Allowance Book –
Grandfathered Allocation
2,000
1,600
($/kW)
1,200
800
400
Coal
Nuclear
Base Case
Generation Asset
Coal
Nuclear
3P Case
NOx and SO2 Allocation
Coal
Nuclear
4P Case
CO2 Allocation
Summary of Results of
CCAP Economy-Wide Modeling

An auction allocation with government compensation
and PIT recycling is the most efficient approach—
about half the cost of pure grandfathering allocation.

Traditional grandfathering of allowances may
overcompensate the electricity sector while other
sectors and interests still lose.

Energy industry shareholders can be made whole
with only 9% of the total allowances, while minimizing
adverse impacts on program efficiency.
Implications for State & Federal
Trading System Design

Tees up a discussion of different approaches to
allowance allocation/revenue recycling.
» Is it desirable to compensate (or overcompensate)
affected industry sectors?
» Recycling revenues to taxpayers can be very
efficient. What is the best approach?
» To what extent should other affected interests
(communities, labor) be compensated?
» What about compensating government for
revenue losses?
» Other uses for revenues might include
contributions to state EE/RE funds (e.g., PBC
programs)
For more information

Study on allocation impacts see:
Allowance Allocation: Who Wins and Loses Under a
Carbon Dioxide Control Program

CCAP’s website: www.ccap.org