Weathervane

Dec02

RFF Researcher Weighs in on U.S. Climate Policy Options

Cap and Trade, Testimony, United States, Congress

Powerline image courtesy Darin Barry via Flickr Whether through an economy-wide cap-and-trade system, sector-specific regulations, a carbon tax or top down regulation from the EPA, a federal plan to curb greenhouse gas (GHG) emissions will likely emerge in 2010. With the House endorsing cap-and-trade, finding the most efficient and cost effective approach to regulation is now in the hands of the Senate.

Testifying before the Senate Energy and Natural Resources Committee RFF Senior Fellow Raymond Kopp said any approach to GHG emissions regulation should address four attributes:

The goals of the regulation
Technology available to reach those goals
The scale of the regulation
The costs of any regulatory plan

During his testimony, Kopp highlighted that meeting the four central goals listed above could be achieved through a cap-and-trade system. He explained that in setting an emissions price and limiting quantities, cap and trade provides the kind regulatory certainty investors and industry need to plan for future expenses and builds in measures to ensure an equitable distribution cost:

When combined with allowance trading, economic efficiency is achieved meaning that at any point in time those most able to reduce emissions at the lowest cost are motivated to do so. When the program allows for banking of allowances economic efficiency is gained over time into the distant future.

The scope of the program, that is, the sources that can be regulated under the cap, is limited only by the ability to effectively and efficiently monitor emissions, therefore, the program can be truly economy-wide.

Given an economy-wide program, the price signal tells all sources to deploy existing mitigation technology options and provides incentives to develop and deploy new technology.

Emissions caps can be set decades into the future serving to alter household and business expectations, thereby affecting current and near-term investment decisions, and accelerating the transformation of the economy.

Allowances have value and allocating allowances moves wealth around in the economy. This is a desirable for two reasons. First, a portion of that wealth can be used to deal with the equity and distributional issues, and second, a portion can be used finance long-term government support for R&D.

Kopp’s testimony concluded by saying that whatever the approach is taken it should be adaptable, aim to cover as many sources as possible in a hyper-efficient manner, incentivize technological development and work to correct systemic inequities.

Tiffany Clements is managing editor of Weathervane.

Published: Dec-02-09 | 0 Comments

Nov17

Treaty Deferral Buys U.S. Time, Clock Running on Consensus Building

COP-15, International, Testimony, Congress

The Senate Energy and Natural Resources Committee resumed its work on climate and energy legislation Tuesday, calling a hearing to discuss the international implications of climate change and U.S. climate policy. Topics ranged from the policies of key developing nations like India and China, the role of the international business community and the valuable lessons learned from the Kyoto Protocol.

The committee, and Congress in general, finds itself under somewhat less pressure as a contingent of world leaders have agreed next month’s United Nations climate negotiations won’t be last word in international post–Kyoto talks. Despite the concession that the conference is unlikely to produce a binding international agreement, Climate Advisers President and RFF visiting scholar Nigel Purvis used Tuesday’s hearing as an opportunity to point out an international timer for U.S. action has been set.

“The president, in his remarks to the Chinese president, suggested that the United States would be going to Copenhagen with some numbers. I suspect the administration is likely to consult with the Congress and leave some flexibility for the political process to work in this country after Copenhagen,” Purvis said. “But the window to influence what the U.S. puts on the table will be relatively small and at some point the international community would like a clear answer about what the U.S. is able to offer. At most I think we have six months or a year for the Congress and the president to find common ground.”

Purvis—also the executive director of the Commission on Climate and Tropical Forests, a bipartisan coalition of thought, industry, and political leaders—offered testimony that discussed the commission’s work and shared insight from his experience with previous negotiations. He said the lessons of Kyoto’s shortcomings can go a long way to ensuring the long-term success of Copenhagen negotiations:

Whereas Kyoto created mitigation obligations for developed nations only, the Copenhagen outcome is likely to mandate nationally appropriate mitigation actions by all major emitters.

Kyoto provided little opportunity to verify in real time whether nations were honoring their commitments, whereas Copenhagen is expected to enable a stronger system for measuring, reporting, and verifying progress.

Kyoto sought to dictate domestic policy through top-down, globally negotiated emissions targets; Copenhagen will take a bottom-up approach that is anchored in domestic laws and programs.

Kyoto demanded international commitments only, whereas Copenhagen will ask nations to show that their international commitments are backed by domestically enforceable laws and programs.

Kyoto was premised on a single and somewhat scientifically arbitrary five-year goal; Copenhagen is likely to be grounded in a shared, science-based vision of what needs to happen by 2050 to protect the climate for future generations.

This potential for progress is striking and encouraging. In these negotiations, the president, Congress, and the American people have been well-served by the U.S. negotiating team.

Purvis’s testimony, as well as testimony from other panelists and a statement from committee Chairman Sen. Jeff Bingaman, D-NM, can be viewed at the Senate Energy and Natural Resources Committee’s website.

Tiffany Clements is managing editor of Weathervane.

Published: Nov-17-09 | 0 Comments

Oct21

Much Ado About Allocations

Allocations, Testimony

Pennies image courtesy StormchaserMike via Flickr A week before Sen. Barbara Boxer kicks off a three-day-climate-and-energy hearing marathon, the Senate Energy and Natural Resources Committee convened to take a closer look at the impact of allowance allocations on consumers under a cap-and-trade system.

RFF Senior Fellow Karen Palmer was among the panelists asked to testify on the most efficient approach to easing the financial burden consumers are likely to face from a policy to cap carbon. In her testimony, Palmer outlined several methods to keep costs under control for consumers including giving allowances to electricity generators, channeling allowances through local electricity distribution companies (LDCs), and providing a direct rebate to consumers to offset the higher costs.

According to Palmer, the free distribution of emissions permits to electricity generators could unfairly burden some customers, since there isn’t a nationwide structure for electricity generation market regulation. Accordingly, regulators in individual states typically set rates making them highly variable.

Allocating polluting rights to LDCs, a plan that would take into account regulatory differences across the country, could also have some negative side effects. Palmer points out that in asking LDCs to pass the allocation value along to consumers, the price signals customers need to change their energy use behaviors are lost. Rather than noticing energy prices have gone up, customers see the same (or lower) rates on their monthly bills and don’t change their use. Moreover, she notes through LDC allocation:

Consumers will not be insulated from higher overall costs. The smaller increases that they see in their electricity bills as a result of allocation to distribution companies will come at the cost of higher increases in the price of gasoline and goods and services that have a high transportation cost component.

Hence, it is important to ask the question: Are households better off because of the effort to subsidize their electricity prices? In fact, on average, they are worse off because the value of other goods and services will be higher as a result and households will face a greater overall cost from climate policy.

To meet the goal of easing the financial burden associated with a climate policy, Palmer suggests a rebate given directly to consumers—an approach known as cap and dividend—may be the most efficient. According to Palmer:

Such an approach redirects the portion of the allowance value going to local distribution companies (both electric and gas) intended for ultimate distribution to commercial and industrial electricity consumers, as well as the portion scheduled to go to home heating and low-income households, to a cap-and-dividend allocation, leaving only the residential portion of allocation to local distribution companies intact. Such a reform of the [the House climate bill] H.R. 2454 policy would improve its efficiency, reducing the CO2 allowance price by roughly 14 percent in 2015, and lowering the annual cost to households by nearly $80, roughly half of the cost they incur under allowance allocation to local distribution companies as specified in the legislation.

Read Palmer’s complete testimony here, and Energy and Natural Resources Committee Chairman Bingaman’s remarks here.

Published: Oct-21-09 | 0 Comments

Oct15

The Role Regional Differences Play in U.S. Climate Policy

United States, Testimony, Waxman-Markey, Kerry-Boxer

The careful design of a policy to cap greenhouse gases will be key to ensuring any resulting economic burden is shared equally across industries and regions, according to Congressional Budget Office Director Doug Elmendorf who testified before the Senate Energy and Natural Resources Committee Wednesday.

Transitioning to a low-carbon economy— the essential goal of a carbon dioxide cap-and-trade program —would probably mean some growing pains in the form of job losses in fossil-fuel intensive industries, according to Elmendorf.

"The fact that (renewable energy) jobs turn up somewhere else for some people does not mean that there aren't substantial costs borne by people, communities, firms in affected industries in affected areas," he said.

A nationwide climate and energy policy means different things to different regions both in terms of industry and consumers. The U.S. covers a vast expanse of land and industries are built around a variety of resources— with a variety of CO₂ emission outputs. Moreover, energy consumption in homes and businesses varies across the country depending upon climate and available energy sources. (Check out a great interactive map that illustrates the differences from NPR.)

Such regional discrepancies have been the focus of research here at RFF, including this 2008 discussion paper from researchers Dallas Burtraw, Margaret Walls and Richard Sweeney, and a recently-published study in the journal Climatic Change.

In “Regional Patterns of U.S. Household Carbon Emissions,” RFF Nonresident Fellow James Sanchirico and coauthors Billy Pizer and Michael Batz use consumer expenditure data covering 1984–2000 to estimate the short-run geographical impacts of a hypothetical $10 per-ton tax on CO₂at a county level.

According to the authors, U.S. households, on average, spent almost $4,000 per household on electricity, fuel oil, natural gas, and gasoline in 2005, with expenditures varying considerably across regions and subpopulations. Substantial differences across regions lead to the direct impacts of the tax ranging from $97 dollars per year per household in Manhattan to $235 per year per household in Tensas Parish, Louisiana.

Tiffany Clements is managing editor of Weathervane.

Published: Oct-15-09 | 0 Comments

Aug05

Ensuring Effective Allowance Allocation in Climate Legislation

Allocations, Testimony, Waxman-Markey

Image Courtesy turtlephotography via Flickr. Despite rumblings that health care may eclipse all other legislation this session, the Senate Finance Committee continued its work on climate and energy legislation Tuesday by exploring possible mechanisms for emissions allowance allocation and revenue distribution in H.R. 2454.

How exactly the government goes about giving away permits and allocating proceeds from allowance auctions will prove to be important to both consumers and industry. But the implementation of the tool and the transparency of the process will also go a long way toward ensuring understanding from regulators, policymakers, and consumers.

Local electricity distribution companies (LDCs) are slated to receive some 35 percent of free allowances in the early years of a cap-and-trade program on the condition that they pass the benefit onto their consumers to help cushion the blow of increased energy prices.

According to testimony from RFF Senior Fellow Dallas Burtraw, the LDC provisions in H.R. 2454 neglect to spell out exactly how that value will be returned to energy consumers. He encouraged the Senate to assert its authority and streamline regulatory controls to prevent the excessive complexity that would arise under state-level rule making.

“State public utility commissions will play the determining role in how households are affected, not Congress, and this will be done in 50 different ways. In fact, there is great uncertainty about how the allowance value directed to local distribution companies will flow back to consumers,” Burtraw said.

He said that while channeling allowances through LDCs may help curb disparate regional effects, it could ultimately hurt consumers.

By giving electricity generators what amounts to a free pass to emit carbon dioxide, the bill is putting the reductions onus on other sectors of the economy. While consumers may pay the same amount for electricity they could see increased prices in other goods and services since manufacturers and distributors have to reduce their emissions to compensate for lower reductions from electricity generation.

Instead, Burtraw suggested the Senate consider incorporating a per-capita energy refund to ease consumer energy burdens. He said H.R. 2454 does a good job protecting the lowest-income consumers, along with those in the highest income deciles, but may not be so good for those in between.

“It would do a good job of protecting the bottom 20 percent of households and the top 10 percent. The increase in costs associated with the inefficient allocation to local distribution companies falls hardest on the middle range of household incomes,” he said. “In contrast, direct dividends to households allocate the value of allowances in a way that does not disadvantage the middle class, is less costly and administratively simpler.”

He argued that a reduction in the allocation to LDCs, with the difference returned directly to households as per-capita dividends would lower the overall cost of the program, protect middle class families, and retain the regional balance currently reflected in the House bill.

Burtraw's full testimony is available here. An archived webcast of the hearing can also be accessed from the Senate Finance Committee.

Published: Aug-05-09 | 0 Comments

Jul13

Meeting the 2 Degree Goal: Domestic Technology and Time Investments

International, Testimony, United States, Waxman-Markey, Congress

At the G8 forum last week in Italy, world leaders agreed (in this non-binding declaration) they will work to keep the Earth from warming by more than 2 degrees Celsius over pre-industrialized levels in the next 40 years. Some reports indicate this agreement fell short of ambitions to get major developing economies—namely China and India—to agree to more specific goals to reach the global target of a 50 percent reduction in total emissions by 2050.

Still, meeting the two degree goal in the next 40 years will be challenge enough. A reduction of that magnitude, approximately equivalent to a reduction of atmospheric C02 to 450 parts per million, would require the near-simultaneous and successful deployment of all available low-carbon energy technologies and massive international cooperation, according to a 2008 Congressional testimony from RFF’s Ray Kopp.

In his testimony, prepared last year for the Senate Energy and Natural Resources Committee, Kopp examined the International Energy Agency’s Energy Technology Perspectives 2008: Scenarios and Strategies to 2050, a report that outlined the scope of investment in new energy technologies to achieve a 2 degree reduction.

In his remarks, Kopp said public policy—especially a price on carbon to stimulate research, development and demonstration (RD&D)—will be integral in advancing new energy strategies and bringing them online. Still, specific energy sources each have their unique barriers to overcome:

Carbon Capture and Sequestration (CCS): Capturing and sequestering CO2 emissions from coal-fired power plants and eventually all fossil combustion is a foundational technology component of any emissions reduction plan targeting 450 ppm CO2 … Regulations for the storage of CO2 must be written, storage sites selected, almost assured local opposition to storage to overcome, and a vast CO2-transport infrastructure sited, financed, and constructed.

Nuclear Power: The IEA report suggests that 30 percent of global energy needs could be met by nuclear power, and in the IEA BLUE scenario, global nuclear power generation triples … Reactor safety concerns continue to limit public support for nuclear power. Long-term waste storage hangs over the head of the industry. Concerns of proliferation are very real and would be exacerbated by greatly increased growth in spent-fuel reprocessing, and a worldwide lack of skilled engineers is a drag on the expansion of the technology.

Bioenergy: Both for purposes of electricity generation and the production of liquid fuels for transport, bioenergy is essential in the IEA scenarios and is the largest renewable energy source … Bioenergy will compete worldwide for land used to produce food and fiber, raising the cost of all three. Accelerated bioenergy production in the United States can drive local land-use decisions and have direct impacts—both good and bad—on local rural development. Expanding the production of crops for bioenergy can affect U.S. environmental quality, including adverse impacts to biodiversity and water quality, as well as create international challenges to ecosystems and biodiversity through increased deforestation. Public policies to address the land-use issues raised by increased bioenergy production in the United States are just as important to the expansion of this technology as carbon pricing and R&D.

Wind and Solar Power: Wind and solar power. One of the great renewable energy successes is wind-generated electricity. While it has proven to be an increasingly economical renewable energy source, it can still benefit from a carbon charge and additional RD&D. However, wind is generated where the wind blows, not necessarily where you find the electricity load centers. Transmission thus becomes crucial. The current U.S. grid is not designed to take full advantage of western or offshore wind resources. Therefore carefully planned grid expansion will be required for a large-scale increase in wind-generated electricity. This is likely true for solar as well. A greatly expanded and improved electricity transmissions grid has been a U.S. priority for at least two decades; however, given the manner in which we regulate and finance transmission, very little progress has been made. In addition, intermittency will always be a problem with wind, meaning the electricity system must be designed to accommodate for intermittency with sufficient reserve capacity, storage, and interconnected systems.

Kopp went on to say that in addition to capital investments, the technological efforts will likely require time-consuming RD&D and equally lengthy policy discussions. He said one of the most promising ways to meet the reduction goal by 2050 is through avoided deforestation—a strategy included in the current U.S. climate bill.

Tiffany Clements is managing editor of Weathervane.

Published: Jul-13-09 | 0 Comments