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Federal Climate Change Legislation : Key Issues for Commissions. Andy Keeler John Glenn School of Public Affairs The Ohio State University. Outline. Legislative specifics that matter Issues for Commission Decision-making Cap-and-trade in Perspective. Legislative specifics that matter.

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federal climate change legislation key issues for commissions

Federal Climate Change Legislation : Key Issues for Commissions

Andy Keeler

John Glenn School of Public Affairs

The Ohio State University

  • Legislative specifics that matter
  • Issues for Commission Decision-making
  • Cap-and-trade in Perspective
legislative specifics that matter
Legislative specifics that matter
  • Allowance price
  • Allowance allocation and use of resources
  • Exemptions and special treatment
  • Specifics on Interaction with State Programs
allowance price matters
Allowance Price Matters
  • Directly determines the costs and incentives
  • Tighter targets => higher prices
  • Lieberman-Warner / Boxer has tighter short-term targets than Bingaman-Specter
how big will price effects be
How big will price effects be?
  • Predictions are highly imperfect
    • Economic assumptions
    • Technology assumptions
    • Institutional assumptions – offsets, state programs, etc.

Predicted effects in 2020 are good research but highly uncertain

eia model predictions for 2020
EIA Model Predictions for 2020
  • Lieberman – Warner (L-W)
    • ~ $0.17 / gallon gasoline
    • ~.81 cents / kwh electricity (coal)
  • Bingaman - Specter
    • ~ $0.12 / gallon gasoline
    • ~.28 cents / kwh electricity (coal)

Inherent uncertainty is huge - but much lower for Bingaman than LW because of the safety valve

cost containment price risk in legislation
Cost Containment (Price Risk) in Legislation
  • What happens if reducing CO2 is more difficult and expensive than predicted?
    • Tradeoff between environmental certainty and economic certainty
    • Economic risk – high prices, shortages, economic dislocation (political backlash)
    • Environmental risk – “Busting the Cap” – not meeting GHG reduction goals
emergency metaphor policies safety valves circuit breakers and emergency off ramps
Emergency-Metaphor Policies—safety valves, circuit breakers, and emergency off-ramps
  • Reduce the price of allowances by making additional allowances available
  • Crucial distinctions
    • Relax the long-term cap, or all released allowances made up in the future (borrowing)
    • Price certainty, trigger certainty, or additional allowances released without certainty
emergency metaphor policies
Emergency-Metaphor Policies
  • Safety Valve – unlimited allowances available at a known price
  • Circuit Breaker – annual cap is frozen (stops declining) as long as prices are above a known price
  • Emergency Off-Ramp – a reserve of future-year allowances is auctioned annually with a (known) minimum price
cap neutrality
Cap Neutrality
  • The safety valve is not cap-neutral – additional allowances sold at the safety valve price represent additional emissions
  • The circuit breaker is not cap-neutral– but there are limits to the quantity of emissions above the cap
  • The “allowance reserve” is cap-neutral (in theory)
  • A safety valve works off a known, pre-announced price
  • Reserves, circuit breakers, and other borrowing mechanisms can be designed to work off announced triggers orat the discretion of regulators (e.g. Carbon Market Efficiency Board)
carbon market efficiency board
Carbon Market Efficiency Board
  • The “Carbon Fed” would have discretion to change
    • Offset quantities
    • Borrowing restrictions
    • ????
  • There are positive and negative consequences of building such discretion into a cap-and-trade system
cost containment in legislative proposals
Cost Containment in Legislative Proposals
  • Emergency off-ramp (Boxer / L-W) – price effects are not certain, cap-neutral, has a pre-announced minimum price (starts at $22-30 per ton CO2)
  • Safety valve (Bingaman-Specter) – certain, pre-announced (current version $12 per ton CO2), excess emission above the cap
what s the price
What’s the price?
  • Discussions about the safety valve in particular, and about all of these mechanisms, should focus more on the price at which they kick in
  • A $12 safety valve is very different than a $50 safety valve
cost containment short term and long term
Cost containment: short-term and long-term
  • Well-managed borrowing mechanisms are likely to be a good tool for short-term price volatility
  • Long-run price uncertainty would be better managed by safety valve mechanisms (with accompanying drawbacks)
long term targets and prices
Long-term Targets and Prices
  • Targets in most federal legislation are set through 2050
  • Common sense says that targets that far in the future could be changed
  • Setting long-term targets does
    • Create a status quo
    • Concretize aspirational goals
    • May have significance in IRP processes
allowance allocation who gets the money
Allowance Allocation: Who Gets the Money?
  • $20 allowances for year 1 of Lieberman-Warner => $115 billion in allowance value
  • Allowances can technically be allocated to just about anyone. Who gets them is a lot of politics with a little bit of equity and public policy thrown in for good measure.
allocation to ldcs
Allocation to LDCs
  • L-W gives about 10% of total allowances to LDCs (Bingaman punts on this point) and 3% to gas distributors
    • Use to keep prices low
    • Use to reduce energy use
    • Use for GHG-reducing generation and transmission investments
  • The use of these allowances is under state commission regulation – but may also have legislative direction
allocation to generation owners
Allocation to Generation Owners
  • L-W gives generation owners 18% of allowance pool to start, then shrinks that over time (Bingaman roughly 25%)
    • Wholesale competition generators receive windfall
    • Embedded cost regulation generators face commission regulation in using allowance value (public uses vs. shareholder equity)
  • This potentially creates a significant equity issue
individual allocations to ldcs and generation owners
Individual Allocations to LDCs and generation owners
  • For LDCs, L-W allocates initially based on electricity volume (favors areas with low-GHG sources like hydro or nuclear)
  • For generation owners, L-W allocation is based on emissions history (favors coal)
  • Future allocations could be based on these same criteria, or be updated by output, alternative energy progress, or some other criterion
special treatment and exceptions
Special Treatment and Exceptions
  • Exemptions from the system
  • Special treatment through bonus allowances
  • Special treatment through other mechanisms
exemptions from the system
Exemptions from the System
  • There has been a move to exempt gas used directly for home heating from a federal cap-and-trade system
    • The argument goes that gas is more GHG-efficient, and so should be encouraged
  • This is bad public policy – all fossil energy sources should be covered to avoid leakage and create correct long-term incentives
  • Exemptions are the wrong tool to provide special treatment
bonus allowances
Bonus Allowances
  • Can be used to increase the returns to specific technologies
    • Example – carbon capture and storage in L-W gets rewarded twice – once through reducing allowance needs, and again through bonus allowances with cash value
  • Bonus allowances are really no different than cash payments, but do not require a direct budget allocation
additional incentives for alternative energy
Additional Incentives for Alternative Energy
  • Renewable portfolio standards
  • Inslee feed-in tariff bill
  • Production Tax credits, etc
federal legislation and state programs
Federal Legislation and State Programs
  • Model of CAA and tailpipe standards – states can be more stringent than federal regulation – does not apply well
    • A state with a more stringent cap will take on more emissions reduction effort, but national emissions will be unchanged
  • States can be rewarded for aggressive programs through allowance allocation
commission decisions
Commission Decisions
  • Allowance prices and ratemaking
  • End user prices vs. public investments in conservation
  • Managing Conservation Programs
  • Commissions and the public interest
allowance prices and ratemaking
Allowance prices and ratemaking
  • What is prudent behavior with respect to allowance prices with respect to the decisions of regulated generation?
      • Example – if allowance prices turn out to be higher than expected, was a coal plant a prudent expenditure
      • This works both ways – if allowance prices turn out to be lower than expected, was a nuclear plant a prudent expenditure?
end user prices vs public investments in conservation
End user prices vs. public investments in conservation
  • Commissions will have to determine how to allocate allowance value (that they control) to
    • Reduce revenue requirements and prices
    • Target assistance to low-income consumers and vulnerable industries
    • Fund conservation and other GHG reduction activities
managing conservation programs
Managing Conservation Programs
  • L-W has significant funding through allowance allocation for state-run conservation programs
  • Coordination and emphasis of commission programs and other pubic programs
  • Potential dramatic expansion of programs presents quality and accountability challenges
the public interest
The Public Interest
  • How do commissions treat state and national goals for GHG reduction relative to more traditional elements of their view of the public interest
    • As a constraint
    • As something to actively pursue beyond the letter of climate legislation
is cap and trade the right policy
Is cap-and-trade the right policy?
  • Would a tax be better?
  • Does it really solve the climate change problem – or should we just be investing in technology?
tax vs cap and trade
Tax vs. Cap-and-trade
  • A tax is an excellent policy from a technical standpoint
    • Transparent
    • Avoids wrangling over allowances
  • Taxes have political liabilities
    • “people hate taxes”
    • NGOs hate lack of quantitative certainty
    • Industry hates the lack of free allowances
does cap and trade solve climate change
Does cap-and-trade “solve climate change”
  • NO - but nothing else does, either
  • Massive investment in a portfolio of technologies, worldwide action, behavioral change, etc. are all required
  • Pricing GHG emissions is necessary (but not sufficient)
does cap and trade solve climate change1
Does cap-and-trade “solve climate change”
  • Will increase R&D and innovation
  • Will reward conservation investments and behavior
  • All reductions in emissions lessen climate change risks – it’s not 0/1– and buy time for technology and adaptation
does cap and trade solve climate change2
Does cap-and-trade “solve climate change”
  • US action is a necessary step in international progress
  • Pricing carbon does not preclude technology or standards – based policies – and generally tends to reinforce them