Emissions Trading Systems (HJ)

Efficient Abatement Under Certainty $/ton Marginal damage P Marginal cost E Emissions Efficient Abatement Under Uncertainty Marginal damage $/ton P P’ P* Marginal cost E E’ E* Emissions Efficient Abatement Under Uncertainty $/ton P* Marginal damage P P’ Marginal cost E* E E’ Emissions Tax vs. Cap-&-Trade • What are the differences? – – – – • Who favors which? – – – – Issues in Cap-&-Trade Design • Coverage – Sectors – Gases • • • • • • • Stringency of the target, and path Method of allowance allocation Banking and borrowing Point of regulation Safety valve Revenue use International linkage – Trade in goods – Trade in allowances Likely Ultimate US Response: A Cap-&-Trade System Bingaman (upstream) Boxer, McCainLieberman, Kerry, Feinstein (downstream) Transport fuel Ind. & comm. Electric power Households, agriculture, small entities Government ETS Credits? ETS Price History /t 10.0 7.5 5.0 2.5 0.0 20/11/06 19/12/06 19/1/07 19/2/07 EUA 2007 Historical Closing Prices 19/3/07 Spot & Forward Prices Delivery Bid Offer Close Spot 1.00 1.02 1.01 EUA 2007 1.05 1.07 1.06 EUA 2008 15.60 15.65 15.63 EUA 2009 16.10 16.20 16.15 EU ETS OTC Closing Prices ( /t) Analysis of Current US Bills • Simplified versions to span the range – Emissions 2012-2050 for “core” examples – Safety valve version (not handed out) • Handling of actions abroad – Europe, Japan, Canada, Aus & NZ decline gradually from Kyoto period to 50% below 1990 by 2050 – All others begin in 2025, to 2015 level by 2030, hold 2000 level 2035-2050 • Ignore command-&-control features Allowance Allocation: Congressional Bills and Core Cases 9,000 Emissions, mmt of CO2-e 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1990 1995 2000 2004 2008 2012 2015 2020 2025 2030 2035 2040 2045 Year Bingaman Discussion Draft 2007 McCain-Lieberman 2007 Udall-Petri 2006 Waxman 2007 Boxer-Sanders 2007 Kerry-Snow e 2006 203 bmt 167 bmt Feinstein August 2006 287 bmt 2050 GHG Emissions and Allowance Allocation 14000 Total GHGs, mmt CO2-e 12000 10000 8000 6000 4000 2000 0 2005 2010 2015 2020 2025 2030 2035 Year 203-A llo wances 203-Emissio ns Ref 2040 2045 2050 CO2-e Prices 200 287 bmt 150 203 bmt 100 Case with banking 167 bmt 50 0 2015 2020 2025 2030 2035 2040 2045 2050 Year Welfare Changes 0.00 -0.20 -0.40 Welfare Change, % Price, $/tCO2-e 250 -0.60 -0.80 -1.00 -1.20 203 bmt -1.40 -1.60 -1.80 2015 2020 2025 2030 Year 2035 2040 2045 2050 Effects on Petroleum Prices Price Index, 2005=1.0 2.5 2 1.5 1 Ref 0.5 203 bmt 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Year CO2-e Prices 250 Effect of banking on price & cost 203 bmt 150 203 bmt NB 100 50 0 2010 2015 2020 2025 2030 2035 2040 2045 2050 Year Welfare Changes 0.00 -0.20 Welfare Change, % Price, $/tCO2-e 200 -0.40 -0.60 -0.80 -1.00 203 bmt -1.20 -1.40 -1.60 203 bmt NB -1.80 -2.00 2010 2015 2020 2025 2030 Year 2035 2040 2045 2050 Primary Energy Use, 203 Case 200 Energy Use (EJ) Reduced Use Biomass Liquids 150 Renewable Elec. Hydro 100 Nuclear Gas Shale 50 Petrol. Prod. Coal 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Year Distribution of Reductions, 203 bmt Case 12000 mmtCO2-e 10000 8000 6000 4000 2000 0 2005 2010 2015 2020 2025 Non-CO2 emissions 2030 2035 2040 CO2 Emissions 2045 2050 Issues in Allowance Allocation • Why does it matter? • Auction vs. distribute for free • Who should get permits if given away? – Economics – Politics • Revenue recycling and “double dividend” • Special issues of regulated utilities Permit Value ($ from auction or rent given away) 2015 2020 2025 2030 2035 2040 2045 2050 Total Potential Auction/Tax Revenue (billions $/yr) 287 bmt 132 161 196 239 289 353 429 523 203 bmt 289 324 358 395 428 457 481 490 167 bmt 365 392 414 425 423 399 346 250 US Pop. 321 334 347 359 369 379 388 397 Potential Tax disbursement/family of 4 ($/yr)* 287 bmt 1,650 1,930 2,260 2,660 3,140 3,730 4,420 5,260 203 bmt 3,600 3,870 4,130 4,390 4,630 4,830 4,950 4,930 167 bmt 4,550 4,690 4,760 4,740 4,580 4,210 3,560 2,520 CO2 Revenue as a Percentage of Non-CO2 Federal Tax Revenue 287 bmt 203 bmt 167 bmt 0.07 0.07 0.08 0.08 0.08 0.09 0.10 0.10 0.15 0.14 0.14 0.13 0.12 0.12 0.11 0.10 0.19 0.17 0.16 0.14 0.12 0.10 0.08 0.05