Limiting the Magnitude of Future Climate Change (2010) / Chapter Skim
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4 Crafting a Portfolio of Climate Change Limiting Policies
4 Crafting a Portfolio of Climate Change Limiting Policies
Pages 91-136
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From page 91... ...
One means of doing so is to create price signals that reflect the costs associated with GHG emissions. The pricing instruments most commonly considered, carbon taxes1 and cap-and-trade programs, both create incentives that are compatible with cost-effective reduction of GHG emissions.2 It is our view that a pricing policy, properly designed, is essential for creating broad incentives for emissions reductions; but evidence suggests that pricing alone will not be sufficient to achieve the necessary emission reductions (Fischer and Newell, 2008; Goulder and Parry, 2008)
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From page 92... ...
are quite difficult to monitor. For maximizing GHG emissions reductions at minimum cost, more universal coverage is better.
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From page 93... ...
This higher cost of energy in general would promote greater investments in energy efficiency, and the relative price increase for high-carbon fuels would promote some substitution of fuels with lower carbon content. Because it involves monitoring fewer parties, an upstream approach would likely have lower administrative costs.
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From page 94... ...
emissions allowances, as this offers a way for policy makers to gain support from particular industries or constituencies who would otherwise strongly oppose a carbon pricing system. Research strongly suggests, however, that use of revenue-raising instruments (either taxes or auctioned emissions allowances)
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From page 95... ...
, it can be accomplished with a relatively small proportion of the total value. Using Funds from Taxes or Auctions The distribution of revenue from auctioned allowances or carbon taxes can, in principle, enhance policy efficiency or help reduce the regressive financial burden of emissions-reduction efforts.
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From page 96... ...
As discussed later, future allowance prices can be lowered by implementing complementary policies, for instance, policies that lower the demand for energy through efficiency measures, that increase low- or zero-carbon energy supplies, that allow offset credits for reductions not covered by the cap, and that promote the early introduction of carbon capture and storage (CCS)
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From page 97... ...
Putting considerable effort into establishing a baseline and verifying reductions is important but costly. As the transaction cost associated with certifying offset projects rises, their profitability, and hence their supply, falls.
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From page 98... ...
As of April 2009, it had registered some 1,596 projects resulting in over 280 million tons of emissions reductions as CER credits. By the end of 2012 it expects to have issued CERs of more than 1.5 billion tons.8 The CDM program also illustrates some sources of controversy associated with offsets, including the types of projects being certified (an alleged overemphasis on non-CO2 gases)
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From page 99... ...
. Meeting quantity limits is easier with a cap-andtrade policy than with a tax policy, simply because the cap can be set equal to the aggregate emissions goal, but the price that would achieve that goal is not known in advance and can only be approximated.
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From page 100... ...
This agency will need the authority to investigate, subpoena records from, and penalize entities that violate the rules of the offset program, including any third-party independent verifiers, developers of projects used for emissions reduction, and regulated entities seeking to use offsets to meet their regulatory obligations. In addition, Congress should consider including a citizen suit provi sion within cap-and-trade or tax legislation, allowing individuals to enforce the offset provisions against violators.
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From page 101... ...
Conversely, a tax policy provides more inherent certainty about cost, but less certainty about the resulting emissions levels. The uncertainty over emissions reductions associated with a tax approach can be lessened using the adaptive design features discussed below; however, to the ex 10 Integration is not trivial.
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From page 102... ...
A price ceiling would permit additional allowances to be purchased at a predetermined price set sufficiently high that it would become a binding constraint only if allowance prices exhibited drastic spikes. To prevent these purchases from breaking the cap, they would come from an allowance reserve, established from allowances set aside for this purpose from earlier years, from an expansion in the availability of domestic or international offsets, or perhaps from allowances borrowed from future allocations (Burtraw et al., 2009; Jacoby and Ellerman, 2004; Murray et al., 2009a; Pizer, 2002)
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From page 103... ...
A regime that allows unlimited borrowing raises at least one potential concern: that it could reduce flexibility to tighten the cap in cases where new scientific information suggests that doing so is necessary. Administrative Ease In general, a cap-and-trade policy and a tax policy require many of the same administrative functions (e.g., defining the goals, monitoring emissions, and ensuring compli afforded by markets.
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From page 104... ...
. The implication is that when marginal costs are quite sensitive to the level of emissions reduction but the damages from climate change are not, a carbon tax is preferred on efficiency grounds.
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From page 105... ...
Policy Durability The United States needs a sustainable policy for limiting GHG emissions -- one that can last for many decades. It will not be sufficient to enact a well-designed carbonpricing policy; it will be necessary as well to maintain that policy despite predictable political pressures to relax it or to create exceptions that undermine policy objectives.
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From page 106... ...
For a tax system, this means that future tax rates need to be raised. This can be handled by specifying in advance the percent increase in rate to occur as a function of the new emissions reductions needed.
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From page 107... ...
If current policies are not achieving the desired level of investments in technological innovation or of emissions reductions, then additional policies can be added to the mix, policies can be phased out, or the design of individual policies can be refined. In each case, it is important to have the evaluation and adjustment process spelled out in advance so that all participants understand the ground rules.
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From page 108... ...
In fact, the emissions budget is the cumulative cap, and annual increments of emissions reductions would have to conform to this cap. • As discussed earlier, a cap-and-trade system that allocates allowances with a market value provides clearer incentives for GHG emitters to insist on main taining a stable policy framework, thus advancing the goal of policy durability • Most countries that have thus far set reduction targets have relied on cap and trade as the main policy mechanism.17 A cap-and-trade system also creates incentives for low- and middle-income countries to institute their own coun try-wide or sectoral caps to derive revenue from selling emissions allowances in the U.S.
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From page 109... ...
Impracticality and High Cost of Early and Universal Coverage Difficulties in measuring emissions reductions, uncertainties about economic impacts, and concerns over risks associated with gaming and cheating are likely to make universal coverage of emissions sources and gases unlikely, at least initially. Additionally, the time delays involved in demonstrating and implementing new technologies that will be needed in some cases to respond efficiently to carbon prices may also create practical impediments to achieving public and political acceptance for early and broad pricing coverage.
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From page 110... ...
, but their adverse impacts on GHG emissions-reduction goals can often be modified through strategic complementary policies. • Price inelasticities.
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From page 111... ...
Building a Strategic Portfolio of Complementary Policies Although many of the carbon-pricing system shortcomings described above could eventually be resolved over time, they need to be considered in light of the urgency and difficulty of meeting a stringent 2050 emissions budget. Delays in beginning emissions reductions, or in creating new technology options for later deployment, will make an extremely challenging task more difficult.
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From page 112... ...
Near-Term, High-Leverage Opportunities In Chapter 3 we identified the major opportunities for reducing domestic GHG emissions: increasing energy efficiency, accelerating the introduction of renewable energy sources, advancing demonstration of advanced commercial-scale nuclear power, developing and deploying CCS technology, and advancing low-GHG-emitting transportation options. In the sections below, we describe how appropriate complementary policy interventions could help overcome existing barriers in each of these areas.
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From page 113... ...
In addition, many renewable energy sources are remote from load centers and will require new transmission infrastructure. • Determining the cost and performance of new commercial nuclear power.
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From page 114... ...
Chapter 5 discusses the nature of the government role. Managing Asset Turnover in the Energy Sector Developing and deploying new technology that limits GHG emissions is essential, but decarbonizing the energy sector also requires retrofitting, retiring, or replacing embedded carbon-intensive infrastructure.
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From page 115... ...
Examples of effective policy options in this regard include tax credits and direct buy-down of replacements. If complementary policies for influencing asset turnover are not implemented immediately, industry response to the early carbon pricing system should be closely monitored to determine if additional policy action is required to accelerate infrastructure
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From page 116... ...
The process of setting such standards is under way but too early in its development to know what potential savings can be realized. If the process is successful, it could result in an important near-term contribution to emissions reductions.
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From page 117... ...
Examples of Complementary Policy Options The question of what specific complementary policies are best suited to address the goals discussed above is the subject of considerable study and debate and is ultimately a decision for policy makers. Rather than try to provide a comprehensive list of options and assessments of each, Table 4.1 offers a series of examples that are illustrative of what can be done, in terms of both mandatory regulatory standards ("sticks")
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From page 118... ...
savings more than cover the Raises intergovernmental issues up-front cost. Building codes if the legislation is instituted at in many states have not been the federal or state level and updated for years.
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From page 119... ...
Policies for Increasing the Energy Efficiency of Transportation Mandatory Regulatory Standards Higher motor fuel taxes Will create an additional Will directly raise costs for economic incentive to reduce consumers. vehicle miles traveled (VMT)
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From page 120... ...
Voluntary Policies and Incentives Feebates2 and other financial Creates a clear financial Tax incentives and other incentives to spur consumer incentive for investment in government financial incentives interest in energy-efficient energy-efficient vehicles. will increase government vehicles Can stimulate markets for expenditures.
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From page 121... ...
qualifying energy sources, which leads to increased investment and deployment. Voluntary Policies and Incentives Enhance the development Private investments in Suffers from a high perceived and deployment of cellulosic biomass development risk related to the availability of biomass and biofuel can be increased through long-term supply and commercial government financial support viability.
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From page 122... ...
distributed generation and cogeneration Policies for Deploying New Commercial Nuclear Power and Coal with Carbon Capture and Storage Voluntary Policies and Incentives R&D for carbon capture CCS offers a technological Capture technologies are still not sequestration option for reducing GHG demonstrated in commercial full emissions from a critical U.S. scale power plant operations.
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From page 123... ...
claimed emissions reductions by suppliers at various stages of the fuel production cycle. Voluntary Policies and Incentives Tax incentives or subsidies Biofuels are a rapidly If emphasis is not placed on for the supply of low-GHG expanding market with great low-GHG sources (e.g., cellulosic biofuels opportunity for contributing feedstocks)
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From page 124... ...
. Performance standards for Can prevent existing plants Can increase the cost to consumer existing coal-fired power from using a disproportionate for energy, yielding public and plants share of the emissions budget.
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From page 125... ...
. In the extreme, if the pricing mechanism is not enacted or is abandoned, then the complementary policies would become the foundation of our nation's strategy to meet the 2050 GHG budget; thus, the policy portfolio would have to be adjusted accordingly.
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From page 126... ...
This can be seen in the tremen dous variations in implicit discount rates for energy efficiency that have been calculated from studies of appliance purchases (Ruderman et al., 1987) and in the large variation in the proportions of homes that are found to make energy-efficiency improvements in response to financial incentives (Stern et al., 1986)
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From page 127... ...
. For a sector facing multiple barriers, multipronged interventions can be far more effective than financial incentives or information alone.Well-designed policy interventions aimed at households can likely also increase the speed of adoption of new emissions-reducing household technology and promote household choices that contribute indirectly to reducing GHG emissions.
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From page 128... ...
If complementary policies were truly redundant with a cap-and-trade system (meaning the emissions reductions would take place in response to carbon prices even in the absence of these complementary policies) , then their addition to the policy portfolio would not affect carbon prices or overall program costs.
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From page 129... ...
This study also suggests that the inclusion of complementary policies can help reduce the possibility that emissions allowance prices will reach a level that is too high to be politically sustainable. The sequence in which some policies are enacted can affect their outcome.
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From page 130... ...
Because of the complexity of these interactions, there is a diversity of views among experts about the appropriate role of complementary policies. This is another rationale for why it will be necessary to learn from experience, and adapt as needed, as we proceed with implementing a policy portfolio.
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From page 131... ...
Conceptually, several unilateral border adjustment policy options are available for dealing with emissions leakage stemming from domestic emissions controls, including, for instance, • Import taxes on products -- or equivalently, requiring allowances from im ports -- with embodied carbon (that is, high levels of GHG emissions generated during their production) can level the playing field for domestic consumption; however, this does nothing to reduce the competitive disadvantage faced by exporters.
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From page 132... ...
Attempts to rank the desirability of these various approaches have proved inconclusive, since the ranking depends on many context-specific parameters. Simulations do confirm, however, that the largest share of leakage arises from the effects of climate policies on energy prices, and that adjustment policies can mitigate leakage on the margin but are quite limited in their capacity to affect total global emissions reductions (Fischer and Fox, 2009)
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From page 133... ...
In concept, both tax and cap-and-trade mechanisms offer unique advantages and could provide effective incentives for emissions reductions. In the United States and other countries, however, cap and trade has received the greatest attention, and we see no strong reason to argue that this approach should be abandoned in favor of a taxation system.
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From page 134... ...
Complementary policies should be focused on advancing the following major objectives: 1. Realize the practical potential for near-term emissions reductions.
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From page 135... ...
emissions budget.
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