Climate Change Policy

1. Climate Change Policy Jonas Monast Nicholas Institute for Environmental Policy Solutions Duke University

3. Background (or “Stating the Obvious”) • Using markets to solve an environmental problem • Concept – internalizing costs • Cap-and-trade  Alternative to a tax or command-and-control regulations

4. Background (or “Stating the Obvious”) part 2 • Quantity-based approach to emissions control • Cap: An absolute limit on GHG emissions allowed during a period • Trade: Parties are allowed to bid among themselves for the fixed emission “allowances” • Distribution of allowances • Auctioned by the government • Allocated for free (“grandfathered”) and traded in a market

5. Basic Elements of Cap and Trade • Regulation placing a cap on GHG emissions • Point of regulation • Upstream: carbon content of fossil fuels • Downstream: point of emission • Allowances for emissions • Allocation – will return to this • Market: • Brokered deals • Exchanges • Auctions • Rules governing trades • Who can trade • Over what period of time • Enforcement • Emissions measurement and monitoring • Compliance enforcement

6. Main Issues How much will it cost? Who pays?

7. Current carbon markets • EU ETS • RGGI • Western Climate Initiative (under development)

8. Lessons from the EU ETS Importance of accurate emissions data Windfall profits Banking

9. EUA Spot Market – 2007-2009

10. Congressional Action on Cap-and-Trade • Byrd-Hagel – Sense of the Senate that the U.S. should not sign Kyoto (95-0) • U.S. abandons Kyoto Protocol in 2001 • McCain-Lieberman 2005 • Lieberman-Warner 2008 • Dingell-Boucher discussion draft 2008 • Waxman-Markey 2009 • Kerry-Boxer 2009

12. Congress in early 2009: Somewhat Chaotic • U.S House: • Chairman Waxman? • One Bill or Three? • U.S. Senate: • What Committee is in Charge? • One Bill or Three?

13. Early 2009: Two Possible Futures

14. Scenario A:Presidential leadership • President makes it a top agenda item, engages with Congressional leadership • Leadership of both Houses forces engagement and equitable tradeoffs • Legislation passes in this Congress

15. Scenario B: Chaos • No effective Presidential leadership • Leadership vacuum in Senate draws in all ideas, good, bad and ugly • Chairmanship fight in House undercuts progress • 2009 spent posturing, without clear leadership. • 2010 likely dominated by 2010 election positioning • Climate policy may be left undone • International negotiations are difficult or impossible

16. Many issues to resolve • Cost containment • Allocation of allowances • Trade/Competitiveness • Complementary technology programs, esp. nukes • Building the offsets market • Building a state/federal partnership • Market oversight and transparency

17. Cost Containment: Root of the Issue * CMEB actions could shift emissions to expanded offsets

18. New Option: Fixed Allowance Reserve • Limited quantity of allowances set aside • Introduced to market in response to price run-up • Reserve built from allowances within the long-term cap • forwarded from future caps at initiation of program • unsold at auction • Drawn down by allowances introduced to market as high price response • Payback required

19. Key Issues to Resolve

20. Allowance Allocation • Allowances can be • Allocated for free (“grandfathered”) • Auctioned • When allocated for free… • Who receives the allowances and how they receive them makes an enormous difference (wealth transfer) • Points of allocation ≠ points of regulation • E.g., you can regulate power plants and allocate the allowances to households • In reality, though, the regulated tend to get the allowances

21. Allowance Value: Central Issue in Debate Last year’s lesson: K.I.S.S.

22. Senator Corker: “What this bill does is it takes in trillions of dollars and then pre-prescribes how that money is spent, going out into areas to people who have nothing whatsoever to do with emitting Carbon. Twenty-seven percent of the allocations go out to entities in this country that have nothing whatsoever to do with emitting carbon. That is a huge unnecessary transference of wealth.”

23. Problem: A lot of stakeholders have an established interest in allowance value • Boxer’s February Principles as an example: • Keep consumers whole as our nation transitions to clean energy; • Invest in clean energy technologies and energy efficiency measures; • Assist states, localities and tribes in addressing and adapting to • global warming impacts; • Assist workers, businesses and communities, including • manufacturing states, in the transition to a clean energy • economy; • Support efforts to conserve wildlife and natural systems • threatened by global warming; and • Work with the international community, including faith leaders, • to provide support to developing nations in responding and • adapting to global warming. In addition to other benefits, these • actions will help avoid the threats to international stability and • national security posed by global warming.

24. State/Federal Partnership • With State and Regional leadership, there is a reluctance to yield to federal preemption • Architecture of a Compromise: • Provisions that create market value – allowance creation, offsets – should be uniquely federal • Provisions that are traditionally in state control – codes, land use – should remain so. • Provisions that are not cleanly in either camp need be negotiated – i.e., tailpipe standards, ability of state to retire allowances unused. • Could a state only retire allowances equal to “additional” reductions made through state policies?

25. Why Offsets? BAU GHG in atmosphere • More mitigation • Same Cost • Political Buy-in • Some Uncertainty Cap no offsets Cap w/ offsets Time

26. Offsets Questions • Impossible to do in one slide • Critical Politically, for cost control and for stakeholders • Key issues: • Standards and protocols for additionality, leakage • Control for reversal risk • Project-based or standard-based accounting • Percentage limitations on usage? • Inclusion of international allowances, esp. averted deforestation

27. Market Oversight and Manipulation • Who is the Regulator? FERC, CFTC, SEC, EPA, • other? • How is the market structured? • Cash market? • Deriviatives market? • Are Over-the-Counter Trades allowed? • Margin Limits? • Limits in Market Participation? • Accounting Treatment?

28. Where are we now? • Copenhagen • U.S. Senate