cap and trade programs lessons for california s carbon regulations
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Cap-and-Trade Programs: Lessons for California’s Carbon Regulations. James Bushnell University of California Energy Institute. Quantity Mechanisms Standards vs. cap-and-trade.

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cap and trade programs lessons for california s carbon regulations

Cap-and-Trade Programs:Lessons for California’s Carbon Regulations

James Bushnell

University of California

Energy Institute

quantity mechanisms standards vs cap and trade
Quantity MechanismsStandards vs. cap-and-trade
  • Under what conditions would command and control approaches achieve environmental goals at the same total cost as a permit program?
  • Every source has the same cost of clean-up
    • The problem of costly retrofitting and technology innovation
  • More generally: when potential gains from shifting clean-up across sources (or technologies) are outweighed by the transaction costs of the program
hypothetical marginal cost of abatement curve for nox
Hypothetical marginal cost of abatement curve for NOx

3. Low NOx burners for power plants with gas turbines ($1500/ton)

Dollars per

unit of

abatement

1. Low NOx burners for power plants with steam turbines ($1000/ton)

$1500

$1200

2. Mid-kiln firing for cementmanuf ($1200/ton)

$1000

100 110 120

Abatement (`000s tons)

standards can produce large differences in compliance costs
Standards can produce largedifferences in compliance costs

Power Plants

Refineries

$/unit

$/unit

MCApp

MCA

MCAv

MCA

Abatement (tons)

Abatement (tons)

Q standard

Q standard

trades reduce emissions at less costly sources
Trades Reduce Emissions at less costly sources

Power Plants

Refineries

Qtrade

$/unit

$/unit

MCApp

MCAv

MCA

MCA

Qpollution

Qpollution

Qpollution

Abatement (tons)

Abatement (tons)

Pollution (tons)

Pollution (tons)

trades reduce emissions at less costly sources1
Trades Reduce Emissions at less costly sources

Power Plants

Refineries

Qtrade

$/unit

$/unit

MCApp

MCAv

MCA

MCA

Qpollution

Qpollution

Qpollution

Qpollution

Abatement (tons)

Abatement (tons)

Pollution (tons)

Pollution (tons)

gains from emissions trade
“Gains” from Emissions Trade

Power Plants

Refineries

Qtrade

Qtrade

$/unit

$/unit

Savings

MCApp

MCAv

Costs

Qpollution

Qpollution

Abatement (tons)

Abatement (tons)

Pollution (tons)

Pollution (tons)

factors that favor cap and trade
Factors that favor cap-and-trade
  • Significant variation in mitigation costs across sources
    • Large uncertainty about cost heterogeneity
    • potential for innovation in mitigation alternatives
  • Pollution effects are comparable across sources
    • Damage is not completely localized
    • upwind/downwind problem
  • Low Monitoring Costs
    • To date programs limited to stationary sources
    • Continuous monitoring costs $124,000/plant
    • All current programs targeted at sources
      • Not much experience with offsets (negative emissions)
  • Regulatory jurisdiction captures the relevant market
    • “Leakage” from regulated to unregulated sources or regions
  • Firms have comparable incentives to reduce compliance costs
monitoring issues
Monitoring Issues:
  • We’re pretty good at measuring output from stationary sources
  • It is not possible to meaningfully measure the “sources” of physical electricity consumed
    • Load-based must focus on financial transactions
  • It is easier to deceive regulators about financial transactions than physical emissions
    • MRTU and the “common” pool
    • Assignment of output from plants via accounting
    • “Exports” from within California (MW greenwashing)
firm incentives and cap and trade
Firm Incentives and Cap-and-Trade
  • Basic model assumes all firms have equivalent incentives to reduce emissions costs
  • Firms can face differing incentives
    • Regulatory treatment of firms
      • Merchant vs. cost-of-service
    • Market power
      • In permits or in the product produced
    • Allocation mechanisms can distort incentives
      • The problem with endogenous allocations
  • These factors can lead to a distortion in who mitigates emissions, and by how much.
slide12
Nox control summary statistics

Regulated electricity markets

(87,828 MW; 286 Units)

Restructured electricity markets

(88,370 MW; 302 Units)

Data sources: EPA CEMS, EIA 767/860, ICAC, MJ Bradley and Associates.

cap and trade and coverage areas
Cap-and-Tradeand coverage areas
  • Regions must be “big” enough
    • Induce liquidity in trades, take advantage of cost differences
    • Limit market power (RECLAIM problems)
    • Reduce leakage problems (GHG problems)
  • Regions must not be too big
    • Coverage should match damage or else “hot spots” can form
      • Pollution migrates up wind (or clean-up happens “downwind”)
    • East-coast Nox SIP-call program
slide14
Nox Flow Patterns and Concentrations 

1997 8 hour standard:

80 ppb

concluding thoughts
Concluding Thoughts
  • In several ways, carbon is an ideal candidate for cap-and-trade, if applied on a sufficiently large scale
  • These policies will be interacting with other more directed regulations
    • These may lmit the scope for cap-and-trade to influence choices
  • Focusing on getting “real” reductions from California may miss the point
    • California is a drop in the carbon bucket
    • Leakage may not matter that much in the big picture
  • Must have a program that extends beyond California and the US
  • What policies would most impact other states and Countries?
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