Towards an adaptive regulatory framework

Slide 1:Towards an adaptive regulatory framework Hadi Dowlatabadi Sustainable Development Research Initiative,University of British ColumbiaAdjunct Professor, Carnegie Mellon University, Pittsburgh, PA. University Fellow, Resources For the Future, Washington DC.

Slide 2:Outline The challenge of regulating a new realm. A review of what we know. An adaptive management problem? Implementation possibility? Conclusion

Slide 3:Regulating something new Regulators worry: What to control? At what level? On what timescale? With what spatial pattern? Allowing which exceptions? � Industry worry: How does it impact products and processes? What will it cost? How quickly can it be implemented? How will it impact competitiveness? �

Slide 4:Science! Pro-regulations: Trawl for an impact that captures public imagination. Exaggerated baseline projections implying high impacts. Low-ball control cost projections. Anti-regulations: Emphasize uncertainty in science and causality. Search for multi-stress co-determinants of impacts. Exaggerate control cost estimates, and its consequences.

Slide 5:Process Encampments form: Antagonists spear-headed by conservative firms. Protagonists spear-headed by NGO fundamentalists. Protracted debate*: Free from new insights. Informed by thin computer models.

Slide 6:Thin models? Assume we put the regulation in place: What will it cost?

Slide 7:Baseline & Cost uncertainties

Slide 8:Challenge of cost projection Knowing the present baseline: Economic Environmental Knowing the future baseline absent intervention. Economic Environmental Knowing response patterns. Efficacy of intervention Distribution of economic impacts Distribution of environmental impacts

Slide 9:Review of what we know (1) Baselines are routinely overestimated. A higher baseline amplifies concern. and often arises from rosy economic outlooks. Command & control schemes have cost about as much as expected per unit emission controlled. While incentive schemes have tended to be less expensive than expected: But because the incentives and flexibility have been applied together there is confusion about relative roles of flexibility and markets. A review of why costs have been lower than expected reveals that trading has rarely, if ever, led to lower realized costs. Porter�s hypothesis is not borne out for any industry group. On average $1 in control cost lead to �18 production cost savings. For some, like steel, the cost of compliance has been higher than the cost of control ($1.42). For others, like plastics, the cost of compliance has been lower than the cost of control ($0.12).

Slide 10:Review of what we know (2) Response is patchy: Where trade is permitted, there will be pollution hotspots. Most consumers (industry and households) do not act in their own best interests): 3/4 of cogeneration units installed in the UK are not economical. 2/3 of US households do not use any energy savings information when purchasing appliances. Market pressure does not lead to informed choice. 1/7 of US households spend > 10% of income on residential energy costs. Why would they not exercise informed choice? Exposure to full market forces only changes the fraction who exercise informed choice from 1/4 to 1/3.

Slide 11:Review of what we know (3) The good news: From a technical standpoint the back-stop control cost is far lower than expected. Announcement effect really works. E.g., the UK share of new diesel car registrations doubled from 13% to 26% in response to an announced tax on automobile GHG emissions* starting in March 2002.

Slide 12:UK GHG tax announcement effect

Slide 13:Review of what we know (3) The good news: From a technical standpoint the back-stop control cost is far lower than expected. Announcement effect really works. E.g., the UK share of new diesel car registrations doubled from 13% to 26% in response to an announced tax on automobile GHG emissions* starting in March 2002. The bad news: Negligible behavioural response. Oil price rises equivalent to carbon taxes, at times, in excess of $250/tC have not curbed SUV sales. Little substance to numerous voluntary initiatives.

Slide 14:A typical challenge GHG controls are alien territory to both firms and regulators Why expect firms to excel at controls (under any implementation scheme) when there is no track record? Why expect regulators to get the policy right? Firms are heterogeneous in their innovation strategy (from radical innovators, to incremental modifiers, to laggards) Why treat everyone as being the same? Why not exploit the differences creatively?

Slide 15:An alternative? Phase I: we need to know how to control and what level is feasible at what cost. Given novelty of the challenge, we need experiments (not models) to see that is possible. Start small policy experiments with innovator firms. Learn what is possible Monitor costs and impacts. Phase II: set targets based on phase I demonstrations. Use flexible instruments to encourage cost reductions. Promote adoption of the �innovations� by incremental modifier firms. They will refine technologies to lower their costs, taking niche solutions and applying them more broadly. Phase III: eliminate hotspots: Promulgate BAT regulations for permit buyers.

Slide 16:Phase I Start with an RFP to firms from key sectors/industry groups, outlining the challenge, offering: Cost sharing in R&D for controls Cost reimbursement if controls turn out to be impractical. Full evaluation of efficacy and costs (5 years). IP rights to innovations. A 15 year regulation clock starting when R&D starts.

Slide 17:Phase II Negotiate the control target with information from Phase I. Set up flexible (permits or taxes) aimed at meeting the control target. Those who invest in controls set their 15 year clock. Trades are permitted for 10 years.

Slide 18:Phase III Evaluation of the phase II reveals: Most cost effective technology. Those who have not invested so far. Develop command and control regulations Based on the technology identified above (or its equivalent performance) for all firms who have not yet engaged in controls.

Slide 19:Conclusion A scheme is proposed where innovators (firms, farms, foresters, municipalities, �) in partnership chart a course towards meeting new policy objectives. Fruitless debate is replaced with informative experiments. Regulations & targets are established after trusted information has been collected. Flexibility is offered where it can be best used. Inflexibility is imposed where flexibility is abused.