Feb17

Standing Behind Market-Based Reductions

Cap and Trade, Carbon Market, Obama Administration

 

Smokestack image courtesy Squeaky Marmot via Flickr Despite ample conjecture that another approach may be more politically palatable, the president’s top economic advisors are endorsing a market-based approach to emissions reductions as an engine for positive environmental and economic change. As part of the 2010 Economic Report of the President, the Council of Economic Advisors (CEA) suggests the president work to implement a cap-and-trade system to control greenhouse gas (GHG) emissions as a means to provide a solid economic footing to push toward a low-carbon future.

 

Citing the work of RFF researchers, among others, the CEA report underscored the importance of putting a price on carbon. A price, they write, allows firms to decide the best and most-affordable ways for them to reduce their emissions.

 

Still, given current and projected economic conditions, it will be important to ensure a cap on emissions is put in place with minimal harm to firms’ bottom lines. According to CEA officials, policymakers have a number of tools at their disposal to keep cap and trade costs under control and help firms transition to a low-carbon future:

 

Banking and Borrowing: Policymakers can allow firms to purchase and save emissions permits, as suggested in the House’s Waxman-Markey bill, giving purchasers the flexibility to decide when it’s most prudent to use the allowance and when another path could help them meet their reductions targets.

 

Price Ceilings and Floors: Provisions to keep market fluctuations in check could also help firms keep costs contained. Where banking would allow emitters to even out costs over time, limits on maximum and minimum permit price—ceilings and floors, respectively—could provide some framework for cost projections. Combing price ceilings and floors to create what’s known as a price collar could significantly reduce costs when compared to a cap-and-trade program without such mechanisms, according to recent RFF research cited in the CEA report.

 

Offsets: Allowing reductions from a sector not subject to the U.S. emissions cap is yet another way to help find the lowest-cost approach to reductions. While the authors of the CEA report say offsets can be a useful tool, they are quick to point out the importance of ensuring any offsets are real and can be verified. Absent verification, could emitters simply be paying for reductions that never occur and undermining the integrity of the cap.

 

The CEA report went on to point out that global cooperation will be essential to addressing climate concerns and that while the U.S. can’t act alone to address the problem, it must act.

 

Tiffany Clements is managing editor of Weathervane.

Published: Feb-17-10 | 0 Comments

Oct13

Looking Upstream to Streamline Carbon Regulation

Carbon Market, Congress, Price Collar

 

Sen. Maria Cantwell, D-Wash., is poised to add some spice to the Senate’s consideration of climate and energy legislation. She’s drafted a yet-to-be-introduced bill she’s calling CLEAR— Carbon Limits and Energy for America’s Renewal.

 

The bill is a “blessedly brief” 32 pages that could prove to be a game-changer in the climate debate, according to David Morris who lauds the bill with praise in a post at AlterNet.

 

He says Cantwell’s plan is fundamentally different from the legislation passed by the House last May. Instead of regulating carbon output it would regulate carbon input.

 

By shifting the responsibility upstream to the wellhead or mine or port of entry, the bill slashes administrative costs to a fraction of what they will be under Waxman-Markey. Only a few thousand energy-producing or importing firms would be covered, versus the hundreds of thousands or more entities covered under Waxman-Markey.

 

The bill calls for a 100 percent auction of carbon emissions permits, offers direct consumer refunds to help cushion the blow of energy price increases, and proposes strict trading structures that would keep speculation and hoarding in check.

 

Cantwell’s CLEAR bill would also place an upper and lower limit on auction prices, $21 and $7 respectively in 2012, which increases at an aggregate rate calculated from the rate of inflation and the rate of return on capital investments. This provision effectively places a price collar on auction prices, a mechanism popular with some climate and energy policy observers: see here, here, and of course here.

 

Tiffany Clements is managing editor of Weathervane.

Published: Oct-13-09 | 0 Comments

Sep10

Thursday's Reads

International, Waxman-Markey, Carbon Market, RGGI, Morning Reads

 

WSJ: The Regional Greenhouse Gas Initiative, RGGI, held its fifth permit auction Wednesday. An excess of permits and low electricity demand are expected to keep permit auction prices extremely low.

 

Reuters: Senate rumblings suggest climate may not make it through this session.

 

WSJ: The CTFC wants to be the agency in charge of regulating greenhouse gas credit markets. Meanwhile the EIA says it will expand its data collecting and analysis of energy and financial markets to aid Congress and the White House in meeting their goal of greater transparency.

 

Reuters: President Nicolas Sarkozy announced his plans to implement a carbon tax in France.

 

Reuters: The EU pledges more than $15 billion a year by 2020 to help developing nations combat climate change.

 

And what the Senate should consider as the top six priorities in the Waxman-Markey energy bill.

 

Did we miss something today? Let us know, leave a comment or email clements@rff.org.

Published: Sep-10-09 | 0 Comments

Aug26

Wednesday's Reads

Cap and Trade, Carbon Market, Climate Science, International, Biofuels

 

WSJ: The top official for the Intergovernmental Panel on Climate Change, considered the global authority on climate science, says he supports changing the scientific goal of an international agreement. Rajenda Pachauri says we should aim to lower the atmospheric concentration of carbon dioxide to 350 parts per million, instead of the IPCC’s 2007 goal of 450 parts per million.

 

NYT: The White House and CBO released updated budget numbers Tuesday; estimates put the nation’s 10 year deficit around $9 trillion. Meanwhile Reuters reports the numbers still count on raising some $627 billion in revenue between 2012 and 2019 through a cap-and-trade auction of emissions permits.

 

Reuters: The European Commission says some 4,000 airlines must find a way to reduce their carbon emissions or they will be unable to fly in the E.U.

 

NYT: A new report from The Nature Conservancy suggests that by 2030 energy production—specifically the pursuit of renewable domestically-produced energy—will occupy a land mass the size of Minnesota. Researchers hope to draw attention to habitat destruction and illustrate just how much land is used in the production of biofuels.

 

COP-15: Is it time to think about putting the global community on a carbon budget?

 

And, will wireless electricity change the world?

Published: Aug-26-09 | 0 Comments

Aug17

Lessons from the E.U.'s Emissions Trading Program

Border Adjustments, International, Cap and Trade, Carbon Market, Allocations

 

Image courtesy IFCCI Since 2005 major power generation and industrial emitters in the European Union have been monitoring their emissions and paying for the right to release CO2 and other greenhouse gasses into the atmosphere. While a landmark moment in multi-national environmental cooperation, observers have found that in its early years the E.U.‘s emissions trading scheme (ETS) has not been without its flaws.

 

Most observers agree that excessive distribution of free allocation permits has led to windfall profits for some entities, and there have been inadequate measures in place to curb price volatility. But according to RFF Senior Fellow Dallas Burtraw in this Weekly Policy Commentary, many of those early problems have been addressed and will be changed in later phases of the program. And, importantly, substantial shifting of industrial production and jobs overseas—as has been feared by many under a U.S. system—has not occurred in the European Union.

 

Hopeful that U.S. policymakers could learn from the early missteps of the E.U.’s program—especially in the critical areas of allowance allocation and industrial competitiveness—the German Marshall Fund recently released this report offering 10 key lessons from the E.U. ETS.

 

The paper makes as strong a case for moving quickly from free allowances to full auctioning in the electricity generation sector. By handing out free allowances, the government has a choice between windfall profits if it allows costs to be passed through (which the E.U. initially chose), and a distortion of incentives for consumers to conserve energy if it does not (which the U.S. has essentially chosen with its allocation to local distribution companies). Burtraw made a similar argument in his recent testimony before the Senate Finance Committee, calling for auctioning permits and returning these revenues to protect low-income consumers in vulnerable regions of the United States that face energy price increases.

 

The report also addresses one of the hottest debates in climate policy design— border adjustments:

 

Discussion of border adjustments in Europe has been accompanied by extreme nervousness about their potential political impact, both on the world trade system and on the international climate negotiations. The issue was greatly down played in the negotiation of the EU ETS Phase III in favor of free allocation to exposed sectors (though a clause in the E.U. Directive could provide a basis for enacting border adjustments in the future). However, recognizing the imperfections of free allocation as a solution, the French government in particular has raised the issue again, particularly as a way of protecting the integrity of an international environmental treaty.

 

Although the European Union may not strictly need border adjustments to protect industry at the current low price of carbon, given their seeming inevitability in the U.S. bill, it may be worth considering whether they could be part of a “transatlantic climate partnership” for creating leverage in international negotiations.

 

As the details of U.S. domestic schemes and an international plan emerging, experience with emissions trading is clearly becoming a “public good” that will be of great value around the world.

 

Tiffany Clements is managing editor of Weathervane.

Published: Aug-17-09 | 1 Comment

Aug03

Ecosystem Service Stacking: Can Money Grow on Trees?

Carbon Market, Congress, Forests, Offsets

 

Future commodity traders may look back on June 26, 2009 as the day that the Congress officially backed ecosystem service markets as the prominent vehicle of environmental conservation in the 21st Century. It was then that the sweeping American Clean Energy and Security Act of 2009 (H.R. 2454)—legislation in which carbon offset markets play a huge role—passed the House 219-212. Estimates from the EPA suggest by 2030, the U.S. offset market could be worth $4 billion. Forest offsets will likely constitute a large portion of the total market but agricultural lands will also have some significance.

 

While the ultimate fate of the bill remains uncertain, H.R. 2454 indicates that ecosystem service markets have a critical role in both the fight to slow climate change and the future of ecosystem conservation. In fact, reduced emissions from deforestation and degradation (REDD) and other forestry issues will likely be integral to an eventual agreement at the COP negotiations in Copenhagen this December.

 

Ecosystem Service Markets

 

While carbon markets are currently dominating discussions, they are certainly not the only type of ecosystem service market being utilized for environmental benefits. Other examples include water quality or nutrient trading, conservation easements, and habitat banking for endangered species. Section 404 of the Clean Water Act led to the establishment of wetland mitigation banks, which proved to be a successful conservation device. By 2005, 450 wetland banks had been established, with 59 selling out of credits completely.

 

Current ecosystem service markets have just scratched the surface. Robert Costanza and others estimated the global annual value of ecosystem services was $33 trillion. The voluntary carbon market in 2008 was estimated to be worth about $705 million. The forest carbon offset markets in H.R. 2454 provide an opportunity to expand and refine ecosystem service markets aggressively and incorporate them into the larger economic system domestically and worldwide.

 

Stacking

 

Widespread acceptance of carbon-related ecosystem services may present a vehicle for the expanded usage of other types of ecosystem services. Combining the value of these different services is called bundling or stacking, and it allows landowners and indigenous communities expanded opportunities to be compensated for maintaining and enhancing ecosystem functions. It is important to note that services will be stacked or bundled in a single ecosystem, but must be well-defined enough to separate into autonomous markets. The markets themselves will not necessarily be stacked.

 

One can imagine eventually linking carbon offsets with water quality credits or habitat credits. With a network of robust, functional ecosystem service markets a landowner could manage an entire portfolio on his/her land, balancing forest offsets with increased stream buffers that generate water quality market credits, understory clearing to generate endangered species habitat credits, and other types of natural capital. Such opportunities are a prospective avenue for alleviating poverty among rural or indigenous populations.

 

Oversight

 

Stacked but separate ecosystem service markets could possibly create incentives (though not guarantees) for landowners to take a more holistic management approach, looking at the functionality of entire natural systems rather than one specific usage. A fully integrated and functional ecosystem marketplace is currently far from becoming a reality, however. There are a number of issues that must be addressed to ensure the markets are robust and effective. Major concerns include:

 

  • Valuation: One advantage carbon has over other ecosystem services is that there are straightforward mechanisms for valuing tons of CO2. Determining accurate values for endangered species habitat credits or water filtration on a chunk of land will require better research and better valuation techniques than are currently available. Significant investments in scientific assessments and monitoring are needed before these markets can be established effectively.

     

  • Additionality: One of the major questions carbon markets must answer is how they can establish additionality, or proof that sequestration activities would not have occurred in the absence of the offset project investment. If other ecosystem markets link up with the carbon market on a piece of land, the landowners will likely need to show that actions that can earn other types of credits would not have occurred without additional investment.

     

  • Double-counting: If landowners hope to obtain multiple revenue streams, then they must manage for multiple ecosystem services. Selling water quality credits from land that is only being managed for carbon will not generate the correct incentives for landowners and will undercut the effectiveness of the water quality market. Added value of different services must be well-established enough to avoid multiple payments go to one specific type of action.

     

  • Capacity-building: International forest carbon offsets will be a sizable chunk of the total offset market, the vast majority of which will come from developing countries that currently lack the capacity to effectively establish, monitor, and certify offset projects. To ensure the veracity and efficacy of the market, massive capacity-building efforts are needed in places like the Congo Basin, Indonesia, and Central America. Other ecosystem service markets will also need similar building efforts, though they may be able to piggyback on the efforts to establish carbon-related infrastructure.

     

  • Permanence: What is the value of an ecosystem service credit if the ecosystem is damaged or destroyed soon after investment? This question will need a solid answer for markets to work properly. While permanence is currently a big concern in carbon markets, it will correspondingly affect other ecosystem markets. In order for these markets to grow and thrive, solid governance structures will be needed to establish appropriate risk premiums and other tools that can mitigate the problems related to permanence.

     

    • Stacked ecosystem services could prove to be a powerful conservation tool, but are not a silver bullet for protecting natural systems. They are designed to create incentives for people to manage land carefully. If carbon, water quality, endangered species, and other services simply morph into commodities to be traded back and forth without any robustness checks or on-the-ground coordination, then the transformative power of stacked ecosystem services will be lost. Moreover, regional issues will play a key role in determining which markets work and how. Carbon is a global good that can be traded across countries and continents; water quality and species habitat are very region-specific and will require smaller-scale markets that may or may not be trans-national.

     

    Despite these challenges, ecosystem service markets are an innovative and potentially useful approach to conserving and restoring damaged and sensitive parts of the biosphere. The emphasis on forest carbon in H.R. 2454 may provide an opportunity to refine and expand these markets to the benefit of both ecosystems and the people who depend on them.

     

    Daniel F. Morris is a research assistant at Resources for the Future and regular contributor to Common Tragedies.

     

    Published: Aug-03-09 | 0 Comments

    Jun15

    Experts Explore Challenges in Offset Market Design

    Carbon Market, Waxman-Markey, Offsets
     
    As the American Clean Energy and Security Act makes its way through the House Agriculture and Ways and Means Committees, offsets continue to crop up as a major point of contention. While understanding of offset markets matures, RFF continues to identify and address important economic and logistical issues of concern.

    Last month, RFF hosted a joint workshop with the EPA entitled “Modeling the Costs and Volumes of GHG Offsets.” Experts in forest, non-CO2 gas, and agriculture offsets came gathered for a technical discussion about the state of offset modeling and how it can contribute to the design and implementation of offset policy. The presentations from each panel are available here. Some of the major themes highlighted by the panelists include:

    Forestry

    • Forest offsets show huge potential to sequester carbon and control costs, but there are many challenges to implementation.
    • Threats to the integrity of offsets include tracking and measuring emissions leakage, establishing clear additionality, and assuring reliable levels of permanence.
    • Heavy use of forest offsets suggest major land use changes both in the U.S. and in other countries, though land conditions could substantially affect the potential for offset usage.
    • Contracts may be useful in some situations for dealing with leakage, permanence and other issues, but national standards may be needed in other contexts.

    Non-CO2 gases

    • Non-CO2 gases are major climate forcings and their mitigation costs are often lower than energy-related CO2.
    • The economics of individual projects are relatively well-understood, but the sectoral cost curves are less clear.
    • More guidance from government is necessary to reduce investment risk and encourage early action on offset opportunities.

    Agriculture

    • Models indicate that agriculture offsets will not play as big a role domestically as forestry-related offsets, but higher prices will bring more agriculture offsets into the market.
    • Agriculture offset opportunities may exist in areas where afforestation or other types of offsets are not realistic.
    • Technology may play a key role in providing more offsets.
     
    Daniel Morris is a research assistant at Resources for the Future and regular contributor to Common Tragedies.
    Published: Jun-15-09 | 0 Comments

    Jun11

    Perspectives From Bonn: EU-U.S. Leadership in International Emissions Trading

    Carbon Market, COP-15, International

     

    In a side event at the most recent round of negotiations of a comprehensive international climate agreement a panel of negotiators, policy experts and researchers gathered to discuss the framework of a global carbon trading market and opportunities for leadership from the U.S. and European Union in the design and implementation of such a scheme.


    At “Forging an EU-US Alliance: What Does a Comparable Effort in a Global Carbon Market Mean?,” (sponsored by the Mistra Foundation Climate Policy Research Program) panelists discussed roles for the EU and U.S. broadly in global markets for emissions and specifically examined offsets and sectoral crediting mechanisms.


    The Bonn event followed an Earth Day workshop in Washington (sponsored by CLIPORE, RFF, and the Embassy of Sweden) that highlighted specific research issues like competitiveness, leakage, and offsets and facilitated broader discussions of the relationship between the European Union and the U.S. in climate change negotiations.


    In her remarks RFF Fellow Shalini Vajjhala said international market design presents, “… a Russian doll of issues—from the international, to the national, to the regional, to the sectoral.”


    She pointed out that many market mechanisms are intended to be transitional. “Yet,” Vajjhala said, “there is very little consensus on how and when to make that transition.” 


    Underscoring key points from the Earth Day event, Vajjhala said forging a renewed trust between the EU and U.S., based on sound domestic action and specific targets, will be key to successful implementation of any international climate change agreement and determining just what transitional instruments might transition toward. 


    Find a full event recap from the UNFCC here, and video coverage of the panel discussion here.


    RFF Fellow Shalini Vajjhala was in Bonn, Germany for the most recent round of UNFCCC negotiations. She’ll share an update on adaptation in the most recent treaty draft here Friday.

    Published: Jun-11-09 | 0 Comments

    Jun04

    The Critical Flaw in Waxman-Markey

    Waxman-Markey, Carbon Market, Congress

    For given greenhouse gas reduction targets, the most critical issue in containing the costs of a domestic emissions control program is to raise revenue from the policy and recycle that revenue back to the economy in ways that improve economic efficiency. The problem with the Waxman-Markey bill is that the allowances in the proposed cap-and-trade system are largely given away to firms and households for free, which dramatically increases the costs of the policy to the economy. From a cost-containment perspective, the allowances should be auctioned off by the government, and the revenue used to reduce taxes that distort labor supply, savings, investment, and other behavior by households and firms.
     
    According to studies by researchers at Resources for the Future and elsewhere, the economic efficiency benefits of those tax reductions would offset around two-thirds or more of the economic costs of the cap-and-trade program (see for example When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets and Tax Deductions, Environmental Policy, and the Double Dividend Hypothesis). If there really is little prospect for auctioning the allowances, it would be better to abandon cap-and-trade altogether in favor of a carbon tax, with legislation requiring automatic recycling of the revenue in lower income taxes.
     
    Imposing a CO2 tax of say $20 per ton on CO2 emissions would raise annual revenues in the order of $100 billion in the near term. Ideally, this revenue would be recycled back to the economy in the form of cuts in the marginal rates of personal income taxes for individuals and corporate income taxes for firms. This would benefit the broader economy through encouraging more work effort, investment, and savings. And it would also reduce distortions from tax preferences that encourage excessive spending on employer-provided medical insurance, home ownership, and so on.
     
    RFF research suggests the economic efficiency gains from recycling $100 billion of emission tax revenues from a CO2 tax would be very substantial, perhaps in the order of $40 billion a year (see Tax Deductions and the Marginal Welfare Cost of Taxation). There is an offsetting effect as higher energy prices drive up production costs and (slightly) contract overall economic activity, which tends to exacerbate the distorting effects of taxes on work effort, investment, and savings. Nonetheless, if exploited the revenue recycling benefit would reduce, quite substantially, the overall costs to the economy of carbon abatement policies.
     
    Under Waxman-Markey, the revenue-recycling benefit is largely forgone as the huge bulk, some 85 percent, of the permits will be given away for free to firms and households (or to the extent that permits are sold the revenue is typically earmarked for spending projects). This means that the overall cost of the policy (for a comparable reduction in emissions) is dramatically larger than under a (revenue-neutral) CO2 tax. Work by RFF researchers suggest that the emissions reductions under Waxman-Markey, which rise to about 25 percent below baseline levels by 2020, could impose costs on the economy that are at least two or three times as large as those under equivalently-scaled emissions taxes (see: When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets and Tax Deductions, Environmental Policy, and the Double Dividend Hypothesis).

    Obviously there is no guarantee that revenues from a pure emissions tax would be used productively. More often than not in the past governments have used new revenue windfalls to increase spending rather than reduce other taxes. To the extent extra spending is driven by pressure from lobby groups (as opposed funding socially desirable projects) it may produce little, if any, benefit to the overall economy. The case for an emissions tax therefore depends critically on accompanying legislation requiring automatic reductions in other distortionary taxes.
     
    Of course policymakers might be concerned about the distributional incidence of emissions taxes, given that low-income families tend to spend a greater share of their budget on electricity and other energy goods. However, in my view the central goal of climate policy should be to establish a credible price on greenhouse gas emissions that rises progressively over time. Distributional issues are better addressed through the broader tax and benefit system, rather than introducing provisions to compensate households with preferences for relatively energy-intensive goods. 
     
    Unfortunately, to put it mildly, the prospects for a revenue-neutral CO2 tax in the United States do not look promising at present. Nonetheless, it still behooves economists to compare existing proposals with their least-cost counterparts, so policymakers are at least aware of the, often striking, trade-offs between apparent practical feasibility and broader societal costs.
     
     
    Ian W.H. Parry is Allen Kneese chair and senior fellow at Resources for the Future. His research focuses primarily on environmental, transportation, tax and public health policies.
    Published: Jun-04-09 | 1 Comment

    Jun01

    How Waxman-Markey Markets Stack Up

    Cap and Trade, Carbon Market, Congress, Waxman-Markey

     

    As lawmakers return to the Hill following a Memorial Day recess, as many as nine committees could take a stab at the Waxman-Markey energy bill, according Grist.


    When the legislative rubber hits the road, changes may come to Energy and Commerce’s opus (markups and amendments here). The changes may incorporate elements of other bills and drafts floating around the Capitol. Researchers here at RFF have taken a closer look all market-based climate change bills in play (or drafted) during the 111th Congress:
     

    Comparison of Markets in Climate Change Mitigation Legislation, 111th Congress

     

    Tiffany Clements is managing editor of Weathervane.

    Published: Jun-01-09 | 0 Comments

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