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Instrument Choice

Instrument Choice. Bob Wyman April 9, 2010. Regulation One Way or Another. International diplomacy has stalled Increased interest in sectoral programs This coincides with California’s focus Congress has stalled But EPA will play a resurgent role Endangerment Finding December 2009

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Instrument Choice

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  1. Instrument Choice Bob Wyman April 9, 2010

  2. Regulation One Way or Another • International diplomacy has stalled • Increased interest in sectoral programs • This coincides with California’s focus • Congress has stalled • But EPA will play a resurgent role • Endangerment Finding December 2009 • Light Duty Vehicle Rule to be Final as of March 31, 2010 • New and Modified Stationary Source GHG Controls as of April 2010 • State programs will likely not be preempted • State and regional efforts continue to develop on schedule • California’s AB32 and Other Programs (AB1493, SB1368, SB375, low carbon fuel standard, 33% RPS by 2020): economy-wide program • Western Climate Initiative (WCI) • Midwest Greenhouse Gas Accord • Regional Greenhouse Gas Initiative (RGGI) already governs electricity sector • Courts are plugging the gap • 2nd and 5th Circuits – recognize federal common law of nuisance • NEPA, CEQA, ESA claims challenging individual projects based on climate impacts

  3. How Tough Will This Be?

  4. Caveat • A carbon price signal is not enough • Infrastructure gaps are material • Example – transmission lines • Technology gaps are material • Example – energy storage limitations • Regulatory barriers are material • Examples – California Environmental Quality Act (CEQA), National Environmental Policy Act (NEPA) reviews substantially delay and often stop even new, low-carbon investment (e.g., cogeneration increases local emissions despite reducing regional emissions) • A state (or nation) that cares seriously about addressing climate change needs to identify strategic energy investments and clear the way • Stimulus package is directionally correct, but sorely deficient

  5. Types of Market Programs • Cap and trade/allowance-based • Sources must surrender allowances for their emissions • Traded commodity is certified in advance • Examples: acid rain program, EU ETS, RECLAIM • Averaging/performance-based • Sources average to a performance standard and must make up any shortfall by purchasing credits • Credits/debits generated automatically by reference to credit line • Performance standard can be periodically adjusted, if necessary • Examples: lead phase-out from gasoline, low carbon fuel standard, EPA recreational marine engine standards • Discrete emission reductions (Offsets) • Requires case-by-case certification • Credits generated for surplus reductions relative to baseline • Examples: ERCs, Clean Development Mechanism (CDM) • Emissions Charges and Financial Vehicles • Examples: carbon tax, clean air investment fund (e.g., AQIP) • Encourages demand-side reductions

  6. Potential Benefits from Market Programs • Minimize costs (typically 25+% savings) • Preserve operational flexibility • Deliver price signal • Encourage conservation • Encourage innovation • Plug gaps in legal authority • Provide source of financing • Increase penetration of clean fuels and products through cost signal and monetary reward • Preserve political will for ambitious environmental goals by minimizing cost impact and preserving economic opportunity

  7. Desirable Elements of Market Program • Large scale and diversity of market • Banking (and borrowing when appropriate) • Safety valve/transitional safe harbor • Ceiling price payment to investment fund until market matures • Transparency • Confidence in estimation or quantification methods • Select a market design that takes into account the variability or uncertainties regarding sector activity levels • Offsets (cost and liquidity benefits) • Clear and consistent enforcement • Provision for mid-course corrections • Linkage to and ultimate integration with other jurisdictions

  8. Challenges and Specific Problems • Gaps in legal authority • No binding international agreement • Incomplete Congressional action • Legal impediments (in addition to policy concerns) for state action • Mixed and somewhat inconsistent goals • Desired technology outcomes • Cost minimization • Leakage and Competitive Issues • Narrow market – price spikes • Distributional impacts

  9. Gaps in Legal Authority • In absence of Congressional action, and following Mass v. EPA, if EPA’s endangerment finding is upheld, then it is likely to regulate GHG emissions under the Clean Air Act • CAA Title II – motor vehicle standards • EISA – renewable fuels standards • Stationary sources • Preconstruction permit program • Potential section 111 new and existing source performance standards • Other authorities may be available (e.g., NAAQS, hazardous air pollutants, stratospheric ozone protection, international measures), but are not likely to be used • State role (Compact Clause and policy concerns) • International

  10. Mixed Goals • Strategic technology development • Cost minimization – reducing GHG tons at least cost

  11. Structure of Markets – Possible Hybrid Approach • Targeted technology markets – sector-specific performance standard plus averaging and trading • “Siloed (or Closed)” Categories • Renewable electricity standard • Low carbon fuel standard • Motor vehicle standards • Possible accelerator - Innovative technology credits (ITCs): forward-generated • Open Sectors – tonnage reductions at lowest cost

  12. Leakage and Energy Balance Concerns

  13. Source: Sweeney/Weyant Draft Analysis of Measures to Meet the Requirements of California’s Assembly Bill 32

  14. At Stake for California Development • If California’s program remains its own • Each GHG ton could be 2-5 times more expensive in CA than in other states and regions • CA marginal cost ~ $100+/ton GHG in 2020 • ~$18-22/ton for other regions of the country • Significant cost differences will drive investment (even low carbon investment) outside of the state, partially thwarting the state’s GHG reduction goals AND distorting the state’s energy balance • Climate stabilization requires that we bring energy supply close to energy demand to minimize transmission losses and transportation emissions • A national program avoids these problems, but also could reward CA investment if the national program provides a mechanism to monetize the low carbon characteristics

  15. Distributional Concerns • Different starting points among sources • Fuel differences • Technology differences • Difference in entity’s ability to recover costs • Power sector – differences between utilities and merchant plants • Commodity manufacturers – need to compete in international markets

  16. Illustration of Potential Challenges – Starting and End Points,Rates of Reduction T/MWH A B A starts in the hole 2020 2012 Common start, common end, common rate

  17. Illustration – Separate Credit Trading Line for Performance-Based System T/MWH A Credit generation line B 2020 2012

  18. TECHNOLOGY MARKETS low-carbon biomass fuels (cellulosic ethanol, biodiesel), carbon capture and sequestration OPEN MARKET low carbon fuel standard Deliverers of electric power Refineries Glass Plants Cement Plants Landfills Other CAP AND TRADE TONS Transition to cap and trade or integrate with national program Advanced battery, advanced combustion, other vehicle and engine advances motor vehicles innovative technology credits (ITC) P-B AVERAGING AND TRADING TONS Renewable power renewable portfolio standard + OFFSETS Other qualified advanced low carbon technologies and programs ONE-WAY TRADING Internal Trading and Banking Only; No Safety Valve Unrestricted Trading, Banking; No Safety Valve IF Program Linked at Outset; Otherwise Transitional Safety Valve

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