Ch. 6. Externality Examples

1. Ch. 6. Externality Examples • Cap and Trade • Acid rain and SO2 • CO2 and greenhouse gases

2. Term Project: Addressing the Deficit • Possible groups • identify and assess spending cut policies for addressing deficit • identify and assess revenue generation strategies for addressing the deficit • Tax reform strategies • addressing entitlement programs (Social Security, Medicare, and especially Medicaid,

4. SO2 Reductions

6. 6 . 2 Cap and Trade Application: Global Warming

8. 6 . 2 • The Kyoto Treaty • International conferences to address the problem of global warming began in 1988. The peak of activity was a 1997 meeting in Kyoto, Japan. • After intense negotiation, the 38 industrialized nations agreed to begin to combat global warming by reducing their emissions of greenhouse gases to 5% below 1990 levels by the year 2010. • These goals were written into a treaty that has since been ratified by 35 of the 38 signatory countries, and that went into effect in early 2005. • A notable omission from the ratification list is the United States, which has shown no interest in signing on to this level of emissions reduction. Global Warming

9. 6 . 2 • Can Trading Make Kyoto More Cost-Effective? • international emissions trading Under the Kyoto treaty, the industrialized signatories are allowed to trade emissions rights among themselves, as long as the total emissions goals are met. • Copenhagen Conference 2010 • Agreement to begin GHG reduction by 2020 The United Nations Climate Change Conference, Durban 2011 The outcomes included a decision by Parties to adopt a universal legal agreement on climate change as soon as possible, and no later than 2015. Global Warming

10. 6 . 2 • Can Trading Make Kyoto More Cost-Effective? Global Warming

11. 6 . 2 • Can Trading Make Kyoto More Cost-Effective? Global Warming

12. 6 . 2 Can Trading Make GHG reduction More Cost-Effective? • Participation of Developing Countries • By the year 2030, developing nations will produce more than half of the world’s emissions, with China and India leading the way. • It is much cheaper to use fuel efficiently as you develop an industrial base than it is to “retrofit” an existing industrial base to use fuel efficiently. By some estimates, an international trading system that included developing nations would lower the cost to the developed world of complying with the Kyoto treaty by another factor of four. • The developing nations wanted no part of that argument, however. They pointed out, rightly, that the problem that the world faces today is the result of environmentally insensitive growth by the set of developed nations. • Why should they be forced to be environmentally conscious and clean up the mess that the United States and other nations have left behind? Global Warming

15. Waxman-Markey (ACESA) • Require electric utilities to meet 20% of their electricity demand through renewable energy sources and energy efficiency by 2020 • Invest in new clean energy technologies and energy efficiency, billion), and basic scientific research and development ($20 billion). • Mandate new energy-saving standards for buildings and appliances, and promote energy efficiency in industry. • Reduce carbon emissions from major U.S. sources by 17% by 2020 and over 80% by 2050 compared to 2005 levels. • Protect consumers from energy price increases

16. Carbon Tax vs Cap and Trade? C&T tends to give permits away free Wasteful lobbying Administering taxes more tested SR need for lower abatement costs C&T trading may be volatile

17. Objective and Issues • What are economic implications of greenhouse gas reduction efforts? • What are fuel sources for electricity generation in Iowa? • Why do we rely on this mix? • What are implications of changing the mix? • Costs • Environment • Agriculture • Health • How do we decide?

18. Capping Greenhouse Gases • Electric Sector deals with CO2 reductions • Emissions lowered by: • Domestic caps • Sequestration • International offsets and credits • Higher prices lead to • reduced fossil fuel use • Shift to lower emission fuels • Economic impacts • Lower jobs and GDP

20. http://www.eia.doe.gov/oiaf/servicerpt/hr2454/pdf/sroiaf(2009)05.pdfhttp://www.eia.doe.gov/oiaf/servicerpt/hr2454/pdf/sroiaf(2009)05.pdf

27. http://www.usclimatenetwork.org/resource-database/EPA%20analysis%20of%20W-M%20draft_Full.pdfhttp://www.usclimatenetwork.org/resource-database/EPA%20analysis%20of%20W-M%20draft_Full.pdf

28. Electricity Consumers in Iowa

29. Iowa Electricity - Generation

30. Generation Portfolio in Iowa

32. Role of Coal--International • 70% of world use is for power generation • 2004-2006: 7% growth in use • China 15% • Russia 7% • Japan 5% • U.S. 2.6%

33. U.S. Coal Statistics 1 billion tons used annually 1.44 billion tons by 2025 275 years of reserves Lowest cost delivered fuel source

36. http://www.chicagoclimatex.com/index.jsf Chicago Climate Exchange (CCX), launched in 2003, is the world’s first and North America’s only active voluntary, legally binding integrated trading system to reduce emissions of all six major greenhouse gases (GHGs), with offset projects worldwide. CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument® (CFI®) contracts CFI Contracts, the CCX Tradable Commodity The commodity traded at CCX is the CFI contract, each of which represents 100 metric tons of CO2 equivalent.  CFI contracts are comprised of Exchange Allowances and Exchange Offsets.  Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule.  Exchange Offsets are generated by qualifying offset projects

37. http://www.chicagoclimatex.com/index.jsf • Goals of CCX: • To facilitate the transaction of GHG allowance trading with price transparency, design excellence and environmental integrity • To build the skills and institutions needed to cost-effectively manage GHGs • To facilitate capacity-building in both public and private sectors to facilitate GHG mitigation • To strengthen the intellectual framework required for cost effective and valid GHG reduction • To help inform the public debate on managing the risk of global climate change

38. 2008 Quoted in mt CO2

39. 2009

40. Cap and Trade Issues Setting the right cap Who should be taxed Allocating permits Emission leakages (regulation) Adverse selection of projects in developing countries

41. Inter-generational Considerations • Uncertainties of Climate Change • How much change from human activity • How much harm from climate change • Future Generation issues • How much do we care for future • How rich will they be • How risk averse are we

42. Inter-generational Considerations • How willing are we to forego current consumption to benefit future generations • Choice of discount rate • Higher discounting

43. http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/