Transcript Oregon PUC Workshop

Federal Climate Change
Legislation : Key Issues for
Commissions
Andy Keeler
John Glenn School of Public
Affairs
The Ohio State University
Outline
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Legislative specifics that matter
Issues for Commission Decision-making
Cap-and-trade in Perspective
Legislative specifics that
matter
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Allowance price
Allowance allocation and use of resources
Exemptions and special treatment
Specifics on Interaction with State
Programs
Allowance Price Matters
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Directly determines the costs and
incentives
Tighter targets => higher prices
Lieberman-Warner / Boxer has tighter
short-term targets than BingamanSpecter
How big will price effects be?
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Predictions are highly imperfect
Economic assumptions
 Technology assumptions
 Institutional assumptions – offsets, state
programs, etc.
Predicted effects in 2020 are good research
but highly uncertain
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EIA Model Predictions for 2020
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Lieberman – Warner (L-W)
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~ $0.17 / gallon gasoline
~.81 cents / kwh electricity (coal)
Bingaman - Specter
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~ $0.12 / gallon gasoline
~.28 cents / kwh electricity (coal)
Inherent uncertainty is huge - but much lower
for Bingaman than LW because of the safety
valve
Cost Containment (Price Risk)
in Legislation
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What happens if reducing CO2 is more
difficult and expensive than predicted?
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Tradeoff between environmental certainty
and economic certainty
Economic risk – high prices, shortages,
economic dislocation (political backlash)
Environmental risk – “Busting the Cap” –
not meeting GHG reduction goals
Emergency-Metaphor Policies—safety valves,
circuit breakers, and emergency off-ramps
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Reduce the price of allowances by
making additional allowances available
Crucial distinctions
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Relax the long-term cap, or all released
allowances made up in the future
(borrowing)
Price certainty, trigger certainty, or
additional allowances released without
certainty
Emergency-Metaphor Policies
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Safety Valve – unlimited allowances
available at a known price
Circuit Breaker – annual cap is frozen
(stops declining) as long as prices are
above a known price
Emergency Off-Ramp – a reserve of
future-year allowances is auctioned
annually with a (known) minimum price
Cap Neutrality
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The safety valve is not cap-neutral –
additional allowances sold at the safety
valve price represent additional
emissions
The circuit breaker is not cap-neutral –
but there are limits to the quantity of
emissions above the cap
The “allowance reserve” is cap-neutral
(in theory)
Triggers
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A safety valve works off a known, preannounced price
Reserves, circuit breakers, and other
borrowing mechanisms can be
designed to work off announced triggers
or at the discretion of regulators (e.g.
Carbon Market Efficiency Board)
Carbon Market Efficiency Board
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The “Carbon Fed” would have discretion
to change
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Offset quantities
Borrowing restrictions
????
There are positive and negative
consequences of building such
discretion into a cap-and-trade system
Cost Containment in
Legislative Proposals
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Emergency off-ramp (Boxer / L-W) –
price effects are not certain, capneutral, has a pre-announced minimum
price (starts at $22-30 per ton CO2)
Safety valve (Bingaman-Specter) –
certain, pre-announced (current version
$12 per ton CO2), excess emission
above the cap
What’s the price?
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Discussions about the safety valve in
particular, and about all of these
mechanisms, should focus more on the
price at which they kick in
A $12 safety valve is very different than
a $50 safety valve
Cost containment: short-term
and long-term
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Well-managed borrowing mechanisms
are likely to be a good tool for shortterm price volatility
Long-run price uncertainty would be
better managed by safety valve
mechanisms (with accompanying
drawbacks)
Long-term Targets and Prices
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Targets in most federal legislation are
set through 2050
Common sense says that targets that
far in the future could be changed
Setting long-term targets does
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Create a status quo
Concretize aspirational goals
May have significance in IRP processes
Allowance Allocation: Who
Gets the Money?
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$20 allowances for year 1 of LiebermanWarner => $115 billion in allowance
value
Allowances can technically be allocated
to just about anyone. Who gets them is
a lot of politics with a little bit of equity
and public policy thrown in for good
measure.
Allocation to LDCs
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L-W gives about 10% of total
allowances to LDCs (Bingaman punts
on this point) and 3% to gas distributors
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Use to keep prices low
Use to reduce energy use
Use for GHG-reducing generation and
transmission investments
The use of these allowances is under
state commission regulation – but may
Allocation to Generation
Owners
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L-W gives generation owners 18% of
allowance pool to start, then shrinks that
over time (Bingaman roughly 25%)
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Wholesale competition generators receive
windfall
Embedded cost regulation generators face
commission regulation in using allowance
value (public uses vs. shareholder equity)
This potentially creates a significant
equity issue
Individual Allocations to LDCs and
generation owners
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For LDCs, L-W allocates initially based on
electricity volume (favors areas with low-GHG
sources like hydro or nuclear)
For generation owners, L-W allocation is
based on emissions history (favors coal)
Future allocations could be based on these
same criteria, or be updated by output,
alternative energy progress, or some other
criterion
Special Treatment and
Exceptions
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Exemptions from the system
Special treatment through bonus
allowances
Special treatment through other
mechanisms
Exemptions from the System
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There has been a move to exempt gas used
directly for home heating from a federal capand-trade system
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The argument goes that gas is more GHGefficient, and so should be encouraged
This is bad public policy – all fossil energy
sources should be covered to avoid leakage
and create correct long-term incentives
Exemptions are the wrong tool to provide
special treatment
Bonus Allowances
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Can be used to increase the returns to
specific technologies
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Example – carbon capture and storage in
L-W gets rewarded twice – once through
reducing allowance needs, and again
through bonus allowances with cash value
Bonus allowances are really no different
than cash payments, but do not require
a direct budget allocation
Additional Incentives for
Alternative Energy
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Renewable portfolio standards
Inslee feed-in tariff bill
Production Tax credits, etc
Federal Legislation and State
Programs
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Model of CAA and tailpipe standards –
states can be more stringent than
federal regulation – does not apply well
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A state with a more stringent cap will take
on more emissions reduction effort, but
national emissions will be unchanged
States can be rewarded for aggressive
programs through allowance allocation
Commission Decisions
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Allowance prices and ratemaking
End user prices vs. public investments
in conservation
Managing Conservation Programs
Commissions and the public interest
Allowance prices and
ratemaking
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What is prudent behavior with respect to
allowance prices with respect to the
decisions of regulated generation?
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Example – if allowance prices turn out to be
higher than expected, was a coal plant a
prudent expenditure
This works both ways – if allowance prices turn
out to be lower than expected, was a nuclear
plant a prudent expenditure?
End user prices vs. public
investments in conservation
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Commissions will have to determine
how to allocate allowance value (that
they control) to
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Reduce revenue requirements and prices
Target assistance to low-income
consumers and vulnerable industries
Fund conservation and other GHG
reduction activities
Managing Conservation
Programs
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L-W has significant funding through
allowance allocation for state-run
conservation programs
Coordination and emphasis of
commission programs and other pubic
programs
Potential dramatic expansion of
programs presents quality and
accountability challenges
The Public Interest
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How do commissions treat state and
national goals for GHG reduction
relative to more traditional elements of
their view of the public interest
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As a constraint
As something to actively pursue beyond
the letter of climate legislation
Is cap-and-trade the right
policy?
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Would a tax be better?
Does it really solve the climate change
problem – or should we just be investing
in technology?
Tax vs. Cap-and-trade
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A tax is an excellent policy from a
technical standpoint
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Transparent
Avoids wrangling over allowances
Taxes have political liabilities
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“people hate taxes”
NGOs hate lack of quantitative certainty
Industry hates the lack of free allowances
Does cap-and-trade “solve
climate change”
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NO - but nothing else does, either
Massive investment in a portfolio of
technologies, worldwide action,
behavioral change, etc. are all required
Pricing GHG emissions is necessary
(but not sufficient)
Does cap-and-trade “solve
climate change”
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Will increase R&D and innovation
Will reward conservation investments
and behavior
All reductions in emissions lessen
climate change risks – it’s not 0/1– and
buy time for technology and adaptation
Does cap-and-trade “solve
climate change”
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US action is a necessary step in
international progress
Pricing carbon does not preclude
technology or standards – based
policies – and generally tends to
reinforce them