Climate Change Policy: What Is Achievable and What Are the Options

1. Climate Change Policy: What Is Achievable and What Are the Options Billy Pizer January 23, 2008

2. Let's Get Serious About Climate Change Policy:  What’s Really Achievable at What Cost? Billy Pizer January 23, 2008

3. Five Questions • How do we quantify global, long-term goals and what do they mean? • What we know about costs of these goals? • What does cost-benefit analysis say? • What are other countries doing and what are the choices for U.S. policy? • What are the choices for international architecture?

4. Impacts of Climate Change

5. Projections for 2100 650 550 450

6. Impacts of Climate Change 450 550 650

7. Equivalent Ways of Saying the Same Thing 450 350 2.5 550 450 3.4 650 550 4.7

8. Emission Stabilization Scenarios 450 CO2e 650 CO2e 550 CO2e

9. IPCC Scenario Exercise

10. Scenario Storylines

11. EMF Baselines

12. 650 CO2e 550 CO2e 450 CO2e Baselines & Goals

13. Ways to think about costs • Loss of income • Typically expressed as a percent of future income – “a 1% loss of GDP in 2030” • GDP is growing, perhaps almost 3% per year • But per capita GDP is only growing by half that. • And median GDP is only growing by half that again – or about 0.7% • Big or small? • All existing environmental regulation ~2% • Prices • Impacts on industry and jobs

14. CO2 prices? Average monthly electricity bill ~ $80

15. Annual cost of $10 CO2 price

16. Industry Impacts

17. $ per tonne CO2 450 CO2e 550 CO2e 650 CO2e 2030 CO2 Prices to Stabilize

18. CCSP Estimated Prices for 650 CO2e

19. CCSP Estimated Prices for 550 CO2e

20. % of global income 450 CO2e 550 CO2e 650 CO2e 2030 GDP loss to Stabilize

21. CCSP Estimated GDP Loss for 650 CO2e

22. CCSP Estimated GDP Loss for 550 CO2e

23. A Word on Negative Costs • Energy efficiency gains that are already “cost effective” • Why not already done? • Will CO2 pricing create incentives to do these actions now? • If not, what will? • Spillovers from new technologies • New carbon saving technologies lead to other discoveries with net benefits. • Why does other research not do the same thing?

24. Summary on Costs • would require $25/tCO2 prices in 2030 and cost less than 1% of income. • would require $50-100/tCO2 prices in 2030 and cost less than 1-2% of income. • We know very little about what it would cost to stabilize at • All estimates assume perfect implementation over time, countries, sectors; otherwise, more expensive 650 CO2e 550 CO2e 450 CO2e

25. Bill Nordhaus Estimates Costs and Benefits My best estimate ($/ton CO2): $21 $27 $33 $40 $49 (x 1.82 and converting to CO2)

26. Distribution of Emissions Likely to see important transitions in relative emissions across countries Will have profound implications for distribution of emission reductions

27. European Union • Emissions Trading Scheme (ETS) for energy activities (including electric power), iron & steel, minerals, pulp and paper. “warm-up” phase: 05-07, Kyoto: 08-12 • ~12,000 installations covering 46% of CO2 emissions • 25 Member States (MS) propose allocation and cap in National Allocation Plans (NAP) • Price around 20-25 €/ton. • Changes post 2012.

28. Canada • Emissions trading for Large Final Emitters (LFE): oil & gas, electricity, mining, manufacturing (proposed early 2005) • Intensity-cap: emission limit indexed to output. • Safety valve: extra allowances at C$15/tCO2 • Early 2006 program was on hold • Alberta started similar provincial program in 2007.

29. New Zealand • Carbon tax at NZ$15-25 / tCO2 in 2007, aligned to international carbon price (announced 2002) • Vulnerable energy intensive industries can opt for voluntary agreement instead. • Agricultural methane and N2O (more than half NZ emissions) excluded. • Abandoned 12/05. May pursue emissions trading.

30. Japan • Existing efficiency and renewable programs. • Voluntary commitments by industry. • Discussed possibility of ¥2,500-3,000 / tCtax ($5-6 / tCO2), but did not pursue. • Public and private programs to buy offsets.

31. Australia • Did not ratify Kyoto, turned around in 2007 • New South Wales trading program since 2003 for power plants. • Australian states pursued regional cap and trade. • New government is pursuing national emissions trading.

32. Comparison of Emission Reduction Goals in Legislative Proposals in the 110th Congress (as of October 29, 2007) Business-As-Usual Projections (AEO 2006) Bingaman-Specter1 (S. 1766) Historical Emissions (1990-2005) Udall-Petri1 (May draft) Lieberman-Warner (S. 2191) Lieberman- McCain (S. 280) Kerry-Snowe2 (S. 485) Waxman (H.R. 1590) Sanders-Boxer (S. 309) Feinstein-Carper (S. 317) BAU Electricity Projections (AEO 2006) Historical Electricity Emissions (1990-2005) Alexander-Lieberman (S. 1168) This graph depicts emissions targets from some of the major climate change bills in Congress. Targets are based on comparison with historical year emissions. Kerry-Snowe, Sanders-Boxer, and Waxman specify future emissions as a percentage of 1990 emissions. For Lieberman-Warner, Lieberman-McCain, Udall-Petri, and Bingaman-Specter, emission targets for covered sectors are related to historical emissions for those sectors, and total emissions are assumed to match those in the corresponding historical year. 1 Bill contains flexibility mechanisms which allow actual emissions to rise above the target. 2 The Kerry-Snowe target is overlaid by others: it is nearly identical to Sanders-Boxer before 2020 and to Lieberman-Warner from 2020-2030.

34. Read the Full Report Read or download the full report, Assessing U.S. Climate Policy Options: www.rff.org/cpfreport

35. Key US Policy Questions • Cap level and offset rules. • Emphasis on prices versus quantities. • …coverage, allocation, competitiveness, technology…

36. Derive National Target

37. Use of Offsets Dramatically Affects Price

38. SO2 Current Vintage Allowance Price FIP released Final CAIR Supplemental proposal Proposed CAIR(more stringent cap in 2010)

39. NOx OTC Current Vintage Price

40. EUA Spot Price [€/ton], September 2005 – September 2006 (OTC Market)

41. Quantitative Targets and Prices • Arguments for targeting both. • Quantitative targets connect better to environmental outcome, but require long-horizons and global participation to be meaningful by themselves. • Prices connect better to technology development and, in a national program with relatively short-term markets, to long-term goals.

42. Straw Proposal • Emissions trading with offsets and a target price of $25/ton CO2 in 2020. • Price floor and ceiling at ±50% of this price, respectively ($12 and $37). • All prices should rise over time at 5%. • Possibly additional mechanisms to promote stability within the ±50% band.

44. A bottom-up approach • Initial agreement on policy commitments in key countries. No restriction on form of commitment, no non-compliance provisions (but still possible to ratchet up commitments) • Common authority for international credits (projects, policy reform, REDD). • Nations free to choose when and whether to link systems, but all encourages to make use of international credits. • Rolling 5-year reviews of domestic policies modeled after OECD country reviews; focus on mitigation, technology, and developing country engagement. • Annual meetings to discuss reviews, coordinate action, adjust commitments. Major round of reviewing and new commitments every five years, with an emphasis on holding countries publicly accountable for achieving or not achieving prior commitments.

45. Strengths of bottom-up approach • Focuses international effort where value is highest: promoting, evaluating, coordinating action versus regulating. • Opens the door to encourage a much wider range of domestic actions—taxes, technology, and sectoral policies. • Can and should evolve towards top-down through increased coordination, gradual harmonization, and eventual linking.

46. Strengths of top-down approach • Top-down means: domestic actions developed after and under the guidance of an international agreement—presumably targets and timetables—with non-compliance provisions. • Ability to regulate global emission level, to assign responsibility for emission reductions, and to create incentives for international compliance. • Promotes international emissions trading to encourage least-cost emission reductions.

47. Summary • Environmental concerns would encourage 450 CO2e. • Economic analysis difficult <550 CO2e. • Crude benefit analysis suggests 650 CO2e.

48. Summary (2) • National governments pursuing a variety of policies. Current prices in the 15-30 $/ton range. • Sensible US policy will need to target prices and quantities until policies are effectively longer-term and global. Could be a cap with price floor and ceiling. • Variety of international architectures possible; unclear what will be most successful at encouraging lower emissions. Key question: what will get China engaged?