California Punting on Cap & Trade

Bloomberg reports that California’s cap and trade program may still be some way off:

[CARB chair] Nichols told venture capitalists and clean-energy executives last week in Mountain View, California, that she was “thinking of punting,” saying the specifics of the emissions-trading program may not be ready for 1-2 more years.

“I think the cap-and-trade system needs to be thought through and I don’t think that has been done yet,” said Jerry Hill, a member of the Air Resources Board. “It would be a good idea to take our time to be sure what we do create is successful.”

Greentech VCs aren’t thrilled, but I think this is wise, and applaud CARB for recognizing the scale of the design task rather than launching a half-baked program. Still, delay is costly, and design complexity contributes to delay. California has a lot of balls in the air, with a hybrid design involving a dozen or so sectoral initiatives, a low-carbon fuel standard, and cap & trade. As I said a while ago,

My fear is that the analysis of GHG initiatives will ultimately prove overconstrained and underpowered, and that as a result implementation will ultimately crumble when called upon to make real changes (like California’s ambitious executive order targeting 2050 emissions 80% below 1990 levels). California’s electric power market restructuring debacle jumps to mind. I think underpowered analysis is partly a function of history. Other programs, like emissions markets for SOx, energy efficiency programs, and local regulation of criteria air pollutants have all worked OK in the past. However, these activities have all been marginal, in the sense that they affect only a small fraction of energy costs and a tinier fraction of GDP. Thus they had limited potential to create noticeable unwanted side effects that might lead to damaging economic ripple effects or the undoing of the policy. Given that, it was feasible to proceed by cautious experimentation. Greenhouse gas regulation, if it is to meet ambitious goals, will not be marginal; it will be pervasive and obvious. Analysis budgets of a few million dollars (much less in most regions) seem out of proportion with the multibillion $/year scale of the problem.

One result of the omission of a true top-down design process is that there has been no serious comparison of proposed emissions trading schemes with carbon taxes, though there are many strong substantive arguments in favor of the latter. In California, for example, the CPUC Interim Opinion on Greenhouse Gas Regulatory Strategies states, ‘We did not seriously consider the carbon tax option in the course of this proceeding, due to the fact that, if such a policy were implemented, it would most likely be imposed on the economy as a whole by ARB.’ It’s hard for CARB to consider a tax, because legislation does not authorize it. It’s hard for legislators to enable a tax, because a supermajority is required and it’s generally considered poor form to say the word ‘tax’ out loud. Thus, for better or for worse, a major option is foreclosed at the outset.

At the risk of repeating myself,

The BC tax demonstrates a huge advantage of a carbon tax over cap & trade: it can be implemented quickly. The tax was introduced in the Feb. 19 budget, and switched on July 1st. By contrast, the WCI and California cap & trade systems have been underway much longer, and still are no where near going live.

My preferred approach to GHG regulation would be, in a nutshell: (a) get a price on emissions ASAP, in as simple and stable a way as possible; if you can’t have a tax, design cap & trade to look like a tax (b) get other regions to harmonize (c) then do all that other stuff: removing institutional barriers to change, R&D, efficiency and renewable incentives, in roughly that order (c) dispense with portfolio standards and other mandates unless (a) through (c) aren’t doing the job.

State Emissions Commitments

For the Pangaea model, colleagues have been compiling a useful table of international emissions commitments. That will let us test whether, if fulfilled, those commitments move the needle on global atmospheric GHG concentrations and temperatures (currently they don’t).

I’ve been looking for the equivalent for US states, and found it at Pew Climate. It’s hard to get a mental picture of the emissions trajectory implied by the various commitments in the table, so I combined them with emissions data from EPA (fossil fuel CO2 only) to reconcile all the variations in base years and growth patterns.

The history of emissions from 1990 to 2005, plus future commitments, looks like this:

State emissions commitments, vs. 1990, CO2 basis

Note that some states have committed to “long term” reductions, without a specific date, which are shown above just beyond 2050. There’s a remarkable amount of variation in 1990-2005 trends, ranging from Arizona (up 55%) to Massachusetts (nearly flat).

Continue reading “State Emissions Commitments”

Is the BC Carbon Tax Fair?

That’s the title of a post today at The Progressive Economics Forum, introducing a new report from the Canadian Centre for Policy Alternatives.

The bottom line:

In this study, we model the distribution of BC’s carbon tax and recycling measures. Our results conirm that BC’s carbon tax, in and of itself, is regressive. However, the overall carbon tax and recycling framework is modestly progressive in 2008/09 ’” that is, low-income families get back more in credits, on average, than they pay in carbon taxes. If the low-income credit is not expanded, however, the regime will shift to become regressive by 2010/11. It is important for policy makers to rectify this situation in the 2009 and future budgets by minimally ensuring that the credit grows in line with the carbon tax.

A related problem:

A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.

I plotted the results in the report’s tables to show some of these effects. In 2009, the lowest income groups (quintiles 1-3) come out a little ahead, but the 4th quintile faces a net loss, while the top income group is overcompensated by the corporate tax cut:

BC carbon tax incidence and rebate distribution

Continue reading “Is the BC Carbon Tax Fair?”

WCI Design Recommendations

Yesterday the WCI announced its design recommendations.

Update 9/26: WorldChanging has another take on the WCI here.
I haven’t read the whole thing, but here’s my initial impression based on the executive summary:

Scope

Major gases, including CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.

What? In scope? How/where?
Large Industrial & Commercial, >25,000 MTCO2eq/yr

Combustion Emissions

Yes Point of emission

Process Emissions

Yes Point of emission
Electricity Yes “First Jurisdictional Deliverer” – includes power generated outside WCI
Small Industrial, Commercial, Residential Second Compliance Period (2015-2017) Upstream (“where fuels enter commerce in the WCI Partner jurisdictions, generally at a distributor. The precise point is TBD and may vary by jurisdiction”)
Transportation

Gasoline & Diesel

Second Compliance Period (2015-2017) Upstream (“where fuels enter commerce in the WCI Partner jurisdictions, generally at a terminal rack, final blender, or distributor. The precise point is TBD and may vary by jurisdiction”)

Biofuel combustion

No
Biofuel & fossil fuel upstream To be determined ?
Biomass combustion No, if determined to be carbon neutral  
Agriculture & Forestry No  

(See an earlier Midwestern Accord matrix here.)

Continue reading “WCI Design Recommendations”

How To Fix A Carbon Tax

Imagine that you and I live in a place that has just implemented a carbon tax. I, being a little greener than you, complain that the tax isn’t high enough, in that it’s not causing emissions to stabilize or fall. As a remedy, I propose the following:

  • At intervals, a board will set targets for emissions, and announce them in advance for the next three years.
  • On a daily basis, the board will review current emissions to see if they’re on track to meet the annual target.
  • The daily review will take account of such things as expectations about growth, the business cycle, weather (as it affects electric power and heating demand), and changing fuel prices.
  • Based on its review, the board will post a daily value for the carbon tax, to ensure that the target is met.

Sound crazy? Welcome to cap and trade. The only difference is that the board’s daily review is distributed via a market. The presence of a market doesn’t change the fact that emissions trading has its gains backwards: rapid adjustment of prices to achieve an emissions target that can only be modified infrequently (the latter due to the need to set stable quantity expectations). Willingness to set a cap at a level below whatever a tax achieves is equivalent to accepting a higher price of carbon. Why not just raise the tax, and have lower transaction costs, broader sector coverage, and less volatility to boot?

Certainly cap and trade is a viable second-best policy, especially if augmented with a safety valve or a variable-quantity auction providing some supply-side elasticity. However, I find the scenario playing out in BC quite bizarre.

Update: more detailed thoughts on taxes and trading in this article.

Regional Climate Initiatives – Model Roll Call – Part III

It seems like a good time for another installment to the regional climate initiative roll call.

Alaska

Alaska signed on as a WCI observer in 2007.

Like many states, Alaska has completed inventories of GHG emissions and potential climate impacts and identified early action items. Impacts are addressed in a joint commission report. I’ve read or skimmed a number of similar efforts from other states, and I have to say that this is the least coherent. It summarizes,

As has been often repeated, the State of Alaska is at the leading edge of impacts resulting from a warming climate. The Commission has recognized many negative and expensive effects of anticipated climate change. There are potential, positive eventualities, as well. The Commission’s concern over a reduction in federal spending implies an increased level of state spending may be in demand.

The report then scrupulously focuses on the positives, and stuffs the negatives to the back of each section. Unlike some states’ efforts, early actions identified by Governor Palin’s climate subcabinet focus exclusively on adaptation.

A mitigation working group is just getting started on a catalog of policies. The group’s first meeting notes contain a statement of purpose from commissioner Hartig:

The Governor appointed this committee because:

  • No debate on climate change, it’s now
  • Relatively small changes in atmosphere have significant effect on the environment.
  • Warming will have effects on habitats
    o Less sea ice
    o More intense forest fires, more insects
    o Change in distribution of species
    o Appearance of new species.
  • Our world shares one atmosphere ’“ there’s no opting out
  • We can build strategy from ground up, without unintended consequences
  • We all must take responsibility
  • The inventory shows the effects Alaska can have are unique and shows opportunities
  • Emissions reductions may not be difficult and there could be many ancillary benefits
  • If we fail to act there could be repercussions in the market
  • State lead-by-example will be an important part of state government leadership
  • Governor wants info and analysis of cap-and-trade, how it affects residents of Alaska

Among other things, I think Alaska’s efforts illustrate a common difficulty in climate policy: complex instruments like a cap & trade system require a major market design effort, which is hard for a state of 670,000 inhabitants to sustain. Small states either need to pursue simpler instruments (like a carbon tax) or pool their resources.

Montana

Near and dear to me is another state, small in population and big in resources. Montana has followed the CCS framework, preparing a GHG inventory and action plan. As elsewhere, there’s lots of detailed analysis, but not much evidence of models to glue it all together.

The appendices of the action plan cite:

  • EPA’s WaRM model, for tracking and reporting GHG emissions from waste management practices.
  • EPA’s MOBILE6 model, for GHG and other pollutant emissions from vehicles.
  • Lifecycle analyses, including GREET, examining the implications of a transition to coal-to-liquids transport fuel (CTL) – particularly relevant given Montana’s huge coal reserves (120 gigatons) and synfuel aspirations. The basic message, nicely discussed by Brandt & Farrell, is that use of CTL and other low-grade petroleum resources could lead to significant recarbonization of energy use, even with CCS.

RGGI

I took a brief look at RGGI in the first installment. Now trading is about to launch, with an initial auction on September 25. Individuals can bid if they have an account on the allowance tracking system (felons need not apply though). New York DEC has a useful brief explanation of the market. Significantly, NY is auctioning nearly 100% of allowances. However, it’s also one of four states that didn’t get their act together in time for the initial auction.

RGGI futures are now trading on the CCX, barely above minimums because the market is overallocated, with allowances above historic levels through 2014. As of yesterday, CCFE RGGI futures for ’08 to ’12 settled at $4.48 to $5.01 on low volume. Evidently RGGI can retire allowances that fail to meet the auction reserve price, but changing underlying allocations could take up to three years.

Regional Climate Initiatives – Model Roll Call – Part II

Minnesota

The Minnesota Next Generation Energy Act establishes a goal of reducing GHG emissions by 15% by 2015, 30% by 2025, and 80% by 2050, relative to 2005 levels.

From ScienceDaily comes news of a new research report from University of Minnesota’s Center fro Transportation Studies. The study looks at options for reducing transport emissions. Interestingly, transport represents 24% of MN emissions, vs. more than 40% in CA. The study decomposes emissions according to a variant of the IPAT identity,

Emissions = (Fuel/VehicleMile) x (Carbon/Fuel) x (VehicleMilesTraveled)

Vehicle and fuel effects are then modeled with LEAP, an energy modeling platform with a fast-growing following. The VMT portion is tackled with a spreadsheet calculator from CCAP’s Guidebook. I haven’t had much time to examine the latter, but it considers a rich set of options and looks like at least a useful repository of data. However, it’s a static framework, and land use-transportation interactions are highly dynamic. I’d expect it to be a useful way to construct alternative transport system visions, but not much help determining how to get there from here.

Minnesota’s Climate Change Advisory Group TWG on land use and transportation has a draft inventory and forecast of emissions. The Energy Supply and Residential/Commercial/Industrial TWGs developed spreadsheet analyses of a number of options. Analysis and Assumptions memos describe the results, but the spreadsheets are not online.

British Columbia

OK, it’s not a US region, but maybe we could trade it for North Dakota. BC has a revenue-neutral carbon tax, supplemented by a number of other initiatives. The tax starts at $10/TonCO2 and rises $5/year to $30 by 2012. The tax is offset by low-income tax credits and 2 to 5% reductions in lower income tax brackets; business tax reductions match personal tax reductions in roughly a 1:2 ratio.

BC’s Climate Action Plan includes a quantitative analysis of proposed policies, based on the CIMS model. CIMS is a detailed energy model coupled to a macroeconomic module that generates energy service demands. CIMS sounds a lot like DOE’s NEMS, which means that it could be useful for determining near-term effects of policies with some detail. However, it’s probably way too big to modify quickly to try out-of-the-box ideas, estimate parameters by calibration against history, or perform Monte Carlo simulations to appreciate the uncertainty around an answer.

The BC tax demonstrates a huge advantage of a carbon tax over cap & trade: it can be implemented quickly. The tax was introduced in the Feb. 19 budget, and switched on July 1st. By contrast, the WCI and California cap & trade systems have been underway much longer, and still are no where near going live. The EU ETS was authorized in 2003, turned on in 2005, and still isn’t dialed in (plus it has narrower sector coverage). Why so fast? It’s simple – there’s no trading infrastructure to design, no price uncertainty to worry about, and no wrangling over allowance allocations (though the flip side of the last point is that there’s also no transient compensation for carbon-intensive industries).

Bizarrely, BC wants to mess everything up by layering cap & trade on top of the carbon tax, coordinated with the WCI (in which BC is a partner).

US Regional Climate Initiatives – Model Roll Call

The Pew Climate Center has a roster of international, US federal, and US state & regional climate initiatives. Wikipedia has a list of climate initiatives. The EPA maintains a database of state and regional initiatives, which they’ve summarized on cool maps. The Center for Climate Strategies also has a map of links. All of these give some idea as to what regions are doing, but not always why. I’m more interested in the why, so this post takes a look at the models used in the analyses that back up various proposals.

EPA State Climate Initiatives Map

In a perfect world, the why would start with analysis targeted at identifying options and tradeoffs for society. That analysis would inevitably involve models, due to the complexity of the problem. Then it would fall to politics to determine the what, by choosing among conflicting stakeholder values and benefits, subject to constraints identified by analysis. In practice, the process seems to run backwards: some idea about what to do bubbles up in the political sphere, which then mandates that various agencies implement something, subject to constraints from enabling legislation and other legacies that do not necessarily facilitate the best outcome. As a result, analysis and modeling jumps right to a detailed design phase, without pausing to consider the big picture from the top down. This tendency is somewhat reinforced by the fact that most models available to support analysis are fairly detailed and tactical; that makes them too narrow or too cumbersome to redirect at the broadest questions facing society. There isn’t necessarily anything wrong with the models; they just aren’t suited to the task at hand.

My fear is that the analysis of GHG initiatives will ultimately prove overconstrained and underpowered, and that as a result implementation will ultimately crumble when called upon to make real changes (like California’s ambitious executive order targeting 2050 emissions 80% below 1990 levels). California’s electric power market restructuring debacle jumps to mind. I think underpowered analysis is partly a function of history. Other programs, like emissions markets for SOx, energy efficiency programs, and local regulation of criteria air pollutants have all worked OK in the past. However, these activities have all been marginal, in the sense that they affect only a small fraction of energy costs and a tinier fraction of GDP. Thus they had limited potential to create noticeable unwanted side effects that might lead to damaging economic ripple effects or the undoing of the policy. Given that, it was feasible to proceed by cautious experimentation. Greenhouse gas regulation, if it is to meet ambitious goals, will not be marginal; it will be pervasive and obvious. Analysis budgets of a few million dollars (much less in most regions) seem out of proportion with the multibillion $/year scale of the problem.

One result of the omission of a true top-down design process is that there has been no serious comparison of proposed emissions trading schemes with carbon taxes, though there are many strong substantive arguments in favor of the latter. In California, for example, the CPUC Interim Opinion on Greenhouse Gas Regulatory Strategies states, “We did not seriously consider the carbon tax option in the course of this proceeding, due to the fact that, if such a policy were implemented, it would most likely be imposed on the economy as a whole by ARB.” It’s hard for CARB to consider a tax, because legislation does not authorize it. It’s hard for legislators to enable a tax, because a supermajority is required and it’s generally considered poor form to say the word “tax” out loud. Thus, for better or for worse, a major option is foreclosed at the outset.

With that little rant aside, here’s a survey of some of the modeling activity I’m familiar with:

Continue reading “US Regional Climate Initiatives – Model Roll Call”