1. Greenhouse Gases: Policy and Economics Kansas Energy Council June 18, 2007 Trisha Shrum, KEC Research Fellow

2. One thing everyone can agree on: If we reduce GHG emissions, we should do so at the Lowest Cost

3. Decisions that affect GHG emissions.... Build Coal Plants or Build More Wind? Produce fuel efficient cars or cars with more space and power? Public transportation or widened roads? Build “beyond code” or add granite countertops? Walk or Drive? SUV or Hybrid? Turn on A/C or Open Windows? Turn off the lights or leave them on? Incandescent or Compact Fluorescent? Buy new furniture or refinish the current pieces? Recycle or throw away? Dense development or sprawling suburbs? Steak or Tofu? Sell used items or throw them away? Turn up the heater or put on a sweater? Upgrade your furnace or redecorate? Energy Audit or Corporate Bonuses? Carpool or Solo? Paper or Plastic? Plow or No-Till? Tour Europe or Kansas?

4. GHG Tax vs. Cap-and-Trade Both – create a price incentive to reduce GHGs Both – proven to be effective at reducing pollution at a much lower cost than mandates and standards If we can predict the exact costs and benefits of reducing, they would create the same outcome. –But if our predictions are wrong, the tax provides higher net benefits to society.

5. GHG Tax vs. Cap-and-Trade Tax has predictable, steady prices More transparent Lower administrative costs Cap prices fluctuate widely –Acid Rain Permit Prices from $66 to $1550 –EU ETS Permit Prices: €0.29 to €31.50 Rules and regulations can become convoluted Creates valuable commodity Creates valuable commodity –Invites corruption & profiteering

6. Best Option: GHG Tax Tax can start low and set on a schedule of gradual increases –Lowest cost reductions occur first –Time for adjustments Major Obstacle = Political Feasibility –Offsetting tax cuts reduce opposition Also reduces economic cost by 50% to 75%

7. Second Best Option: Well-Designed Cap-and-Trade Hybrid System –Fixed number of long-term, tradable permits based on the long term reduction goal. –Unlimited annual permits at a fixed price

8. Second Best Option: Well-Designed Cap-and-Trade Essential Design Elements 1. Permit Auction 2. Banking of Permits 3. Borrowing of Permits 4. “Safety Valve” 5. Stringent penalties

9. State-Level Options Kansas is a heavy emitter of GHGs –High percentage of energy from coal –High per capita energy use While we push for national policies, we should look for ways to reduce emissions in Kansas –A limited GHG tax could provide both an incentive to reduce and resources to assist the transition to a lower-emission economy

10. Lowest Cost1. Economy-wide Greenhouse Gas Tax 2. Hybrid Cap-and-Trade System 3. Cap-and-Trade with banking, borrowing, and auction of permits 4. Traditional Cap-and-Trade System with auction of permits 5. Traditional Cap-and-Trade System with permit giveaways Highest Cost6. Non-market Mandates and Standards GHG Reduction Policy Options