Climate Change & Energy Policy

1. Climate Change & Energy Policy Dr. Daniel Matisoff - POL 1101

2. Addressing Climate Change • To stabilize climate, must reduce annual emissions by 7 billion tons/year (GT) by 2050, or 25 billion tons (GT) compared with Business As Usual (BAU) scenario • For example: 1.5 GT by doubling expected fuel economy to 60mpg or by halving miles driven • Efficient lighting & appliances – 2GT • Power plant efficiency – 1GT • Sequestration – 1GT • 2 million wind turbines or doubling nuclear capacity – 1GT ea

4. Difficulties of addressing climate change • Political complexity • Addressed across many levels of government • Types of policies, jurisdictions • International complexity • Scientific complexity • Climate is extremely complex • Climate change is not easily observable to humans • Changes occur over decades, importance of global averages; temperature at the poles • Humans observe weather, not climate (the two are often confused) • Economic complexity • Uncertainty in long term costs, benefits • Discount rates

5. Discount rates and carbon valuation • At what rate to we expect the economy to grow • Interest rates grow money • At a 6% interest rate $100 today is worth $106 next year • HUGE values assumption • How much do we value the future? • At at 3% discount rate, an environmental benefit 25 years from now is worth 50% of that today • The future is meaningless! • Even at a discount rate of 1% the value of $1 million 300 years from now is just $50k! • At 5%, worth just 50 cents! • Changing the discount rate between 5% and 2.5% leads to a change in the mean value of carbon today between $4.70 to $35.10 (at 95% percentile, 3% rate = $65)

6. Policy Options: Carbon Tax • “Double Dividend Hypothesis” • We don’t know optimal amount of carbon, so a set limit doesn’t make sense - tax avoids setting limit, avoids problems with high costs • Preferred by oil & gas • Currently implemented in Australia • ~$23/ton, rising over time

7. Cap & Trade • Set caps, allow trading • Encourages compatibility with Europe • May be costly, but carbon is ideal pollutant for trading scheme • No regional impacts of carbon concentration • High transaction costs for small firms • Preferred by the electric utility industry • Businesses like grandfathered allowances, do not like auctioned allowances • Function as a subsidy

8. What’s currently being done? • Comprehensive programs: • EU ETS – cap & trade program • Australia – Carbon Tax • “Second Best” Programs • U.S. • Transportation (CAFE standards; Gas Tax) • Forestry • Agriculture • Energy (renewable incentives; subsidies, loan guarantees, etc) • State Based programs • RGGI / WCI • Energy policies (RPS, net metering, tax benefits, etc) • Building standards • Voluntary Programs (My research) • Why adopt? Marketing, Performance, Liability reduction, Early experience • Don’t seem work • China

9. Cap & Trade vs. Tax • Cap & Trade sets quantity, makes price uncertain • Tax sets price, makes quantity uncertain • Some other tradeoffs • Compatibility with EU • WTO compatibility • Treatment / compatibility of offsets • Other possibilities: • World Tech Fund

10. Addressing Uncertainty • The Precautionary Principle • Burden of proof falls on demonstrating that an action does NOT cause environmental harm • In general, should refrain from things that might cause harm unless prove otherwise • Based in risk aversion • Who wants to gamble with me? • Do you buy insurance on your house or car? • In a sense, carbon mitigation is similar – managing risk against a low (sort of) probability event • Many other reasons to develop clean energy, energy security • Foreign policy reasons • Air quality • Coal is really, really bad (human, environmental costs)

11. Reframing Climate Change Policy • Co-benefits • All the other benefits we get from addressing coal, oil, etc • Cleaner air & water • Reduced mercury, radioactive pollutants, arsenic, SOx, NOx, PM • Increased energy security / reduced support for hostile dictatorships • Improved transportation • Or maybe we just feel better about ourselves

12. U.S. Wind Resources

14. Renewables Generation (electric) Renewables growing fast (1/3 of new production) Wind has nearly tripled since 2003; 13x since 1990! 45% increase in 2011 Increase in Landfill Gas Increase in Solar (Increase of 100% in 2011!)

15. Renewable Electric growth

16. Renewable electricity growth by sector

17. Conservation / Demand Reduction • Many times cheaper than increasing supply • Most energy we produce is wasted • Some EU countries have higher standard of living, 30-50% less energy per person • A house built today uses 50% energy of house built in 1974 • Why aren’t we making more progress? (Matisoff, 2010) • Complexities of cap & trade • High discount rates • Short term incentives

18. Keeping up with the Jones’ • Noonan, Matisoff, Hsieh (2011) • Why do people adopt zoned hvac systems? • Do peer effects play a role? • MLS sales in Chicago – 1990 – 2003 • Use geo-spatial location data to examine spatial correlation across changes in zoned HVAC adoptions • We do observe peer effects • If you adopt a zoned HVAC, your neighbor is more likely to do so

19. Comparative cost of new electricity generation (includes transmission & fuel)

20. My Current Research • Why do firms switch fuels? (or not) • In the short run (through shifts in load, multi-fuel plants) • In the long run (through investment) • Collect fossil fuel use, plant characteristics data for all power plants in the U.S. 1994 - 2010 • Look at changes in fuel consumption at the individual plant level, holding company level over time as function of fuel price, possible substitutes • Hypotheses: • Price impacts fuel use decisions • Price volatility of fuels impacts fuel use decisions • Cost recovery regulations impact fuel use decisions • Regulatory uncertainty impacts fuel use decisions

21. Legitimate arguments / counter arguments against addressing Climate Change via emissions reduction • More cost effective to address consequences of climate change, than to address CO2 • Uncertainty & cataclysmic climate change • Worst projections are apocalyptic • The consequences of not doing anything and being wrong are cataclysmic • vs. the consequences of doing something and being wrong • Cleaner air & water? We spend 1-2% more on energy? We address oil dependency? • Cap & Trade won’t actually do much about foreign oil dependency (in the short run) • Need to address oil separately • The China & India Question • This can be addressed through import tariffs & U.S. & EU coordinated action

22. My take • Addressing climate change is prudent, cost-effective, & makes sense across many criteria • Put a price on carbon – let the market work it out • Storing carbon, geoengineering can be included, but don’t pick “winners” • Don’t give away carbon permits more than necessary • Recycle revenue via dividend or reduced labor taxes • Tax / cap upstream, to impact less targets and achieve greater coverage • Use import tariffs to pressure China & India to do something

23. Conclusions • Huge problems with fossil fuels • For a little more, we can solve our energy problems with demand reduction and renewables • Co-benefits! • Huge corporate interests in the way, will take enormous political will • We can learn how to solve storage problems • Wind is cheap! Effective, and clean! (distribution issues) • Solar is on its way!

24. So – what else do I do? • Why do states adopt energy policies? Do they learn from each other? • Largely politics • Yes, they learn from each other • Are firms becoming more transparent? Are they improving carbon management? • Maybe – more firms are tracking carbon; more firms are thinking about it as a risk • Quality of information is very poor • Firms are becoming LESS likely to disclose to public