1. Numerical Example of the Cost Savings Associated with Cap-and-Trade Systems
Firms
Historical Emissions
(Tons/Yr)
Marginal Abatement Cost ($/Ton)
Alkyone
600 50
Merope
100
Kelaino
Elektra
150
Sterope
800
200
Taygete
250
Maia
400
Industry Total
4,800
---
In this example, could Alkyone make a profit by selling an allowance to Maia for $200? How much?
Is this purchase advantageous for Maia? By how much?

2. Acid Deposition Process
Source: EPA

3. Acid Deposition Process
Sulfur dioxide (SO2) and nitrogen oxides (NOx) are the primary causes of acid rain. In the US, About 2/3 of all SO2 and 1/4 of all NOx comes from electric power generation that relies on burning fossil fuels like coal.
Acid rain occurs when these gases react in the atmosphere with water, oxygen, and other chemicals to form various acidic compounds. Sunlight increases the rate of most of these reactions. The result is a solution of sulfuric acid and nitric acid.

4. Has Acid Rain Cap and Trade Worked?

7. SO2 Environmental Results: The Cap and Trade Platform

8. Proposed Approach
Replace inefficient command and control regulation with an appropriate cap and trade program.
Design cap and trade program to:
Better encourage diverse mix of clean technologies and efficiency.
Promote technology development.
Ensure better environmental performance.

9. Cap and Trade Programs
Cap provides greater environmental certainty than command and control.
Provides greater flexibility and lower compliance cost.
With proper design, can encourage efficiency and new technology.

10. Historical Problems With Caps
Difficult to find the right cap level.
Allocation favors historic big polluters.
Doesn’t include/support new, efficient generators.
Under a cap, command and control programs provide no environmental value since total emissions will remain the same.
Command and control defeats the trading program benefit of reducing costs.

11. Critical Design Elements
Setting cap levels and timing
Applicability
Allocation of Allowances

12. Cap and Trade Program Basics
Set an emissions tonnage limit (cap or budget) for a class of sources in a region.
Allocate the right to emit tons (allowances) to individual sources.
At the end of the season, each source must have allowances equal to actual emissions.
Sources can control, overcontrol, sell, bank, buy allowances to comply.

13. Historical Approach to Caps
Fixed levels
Large, step reductions
Allocation based on historic heat input
Participation limited to fossil generators
New and clean units treated less favorably

14. Traditional Emission Cap Profile

15. Example of Declining Cap on SO2

16. Illustration of Declining Cap

17. Declining Cap/Circuit breaker
Each cap decreases by fixed percent each year. Glide slope defined in advance.
Decline for each pollutant stops if annual average allowance cost exceeds predetermined cost threshold ($/ton).
Decline starts again when the annual average cost is below threshold.

18. Declining NOx Cap

19. Allocation The most controversial issue after levels and timing.
Critical to encouraging efficiency and clean technology.
It is distributional.
Distribution is key to influencing policy goals.

20. Allocation Principles
Avoid creating artificial winners and losers.
Promote policy goals.
Keep it simple.
Be politically viable.

21. Allocation Options
Grandfathering primarily rewards old, high emitting plants.
Auction has theoretical benefits but is politically difficult.
Output-based, reallocating program provides maximum reward for efficiency, low emissions, new plants.

22. Effects of Output-Based Allocation
Concern expressed that output-based allocation will be too negative for coal.
In the near-term, base load coal plants are among the most efficient in the mix.
24 of the top generating companies, accounting for 50 percent of affected generation do better under output than input, including coal-heavy companies.

23. Allocation Effects on Companies
*Within 1%

24. Value of Allowances
Implications of allowance allocation to clean or non-emitting sources are not simple.
Does not directly change dispatch order. Does increase profitability.
Theoretically causes reduced bid/electricity price. Actual effect likely to be lower than theoretical due to uncertainties.
Alternatives need to be defined.

25. The CO2 Approach Must: Limit economic risk
Limit large structural or lifestyle changes
Not pick winners
Be market-based
Show a commitment
Be gradual
Promote new technology
Lead to commitments from other countries

26. Congressional Cap and Trade
Bingaman-Specter (S 1766)
Udall-Petri (Draft, May 2007)
Lieberman-McCain (S 280)
Kerry-Snowe (S 485)
Waxman (HR 1590)
Sanders-Boxer (S 309)
Feinstein-Carper (S 317)
Alexander-Lieberman (S 1168)
Stark (HR 2069)
Larson (HR 3416)

27. John Dingell Cap-and-Trade Program
Sep 26, 2007, The current version would phase in, each year for five years, a charge of $10 per ton of carbon content of coal, oil, and natural gas -- plus an additional 10 cents/gallon for gasoline and jet fuel (kerosene). By the end of the five-year period the charges would reach $50/ton of carbon plus 50 cents/gallon of gasoline and jet fuel. These equate to 63 cents a gallon of gas and 90 cents for one hundred kilowatt-hours, assuming the nationwide average fuel mix.
John Dingell (D-MI-Auto)

29. John Dingell Hybrid Carbon and Petroleum Tax Bill
$50-per-ton tax on carbon
50 cents per gallon tax on gasoline and jet fuel
Indexed to inflation
“No New Taxes” Regressivity/Rebates
Sep 26, 2007, The current version would phase in, each year for five years, a charge of $10 per ton of carbon content of coal, oil, and natural gas -- plus an additional 10 cents/gallon for gasoline and jet fuel (kerosene). By the end of the five-year period the charges would reach $50/ton of carbon plus 50 cents/gallon of gasoline and jet fuel. These equate to 63 cents a gallon of gas and 90 cents for one hundred kilowatt-hours, assuming the nationwide average fuel mix.
John Dingell (D-MI-Auto)

30. Arguments for a Carbon Tax
Effectiveness and Efficiency

31. Wide Array of Support .
Former vice president Al Gore supports the concept, as does James Connaughton, head of the White House Council on Environmental Quality during the George W. Bush administration. Lester Brown of the Earth Policy Institute supports such an initiative, but so does Paul Anderson, the CEO of Duke Energy

32. Control on Price Not Quantity
“Specifically, a carbon tax equal to the damage per ton of CO2 will lead to exactly the right balance between the cost of reducing emissions and the resulting benefits of less global warming.” William Pizer
“Corrective taxes are superior to direct regulation of harmful externalities when the state's information about control costs is incomplete."

33. What is the Behavioral Impact on Firms and Consumers?
The higher energy prices in table 2 should bring about a reduction in the demand for carbon-intensive fuels.
AEI, Climate Change: Caps vs. Taxes, 2007

34. Why the Changs?
improvements in efficiency, fuel switching

35. Impact of Carbon Tax on Emissions and Revenue

36. Equity Implications
Who gets hit hardest by Carbon Tax?

37. Reduction in Taxes
the "double dividend" that examines the economic conditions under which a carbon tax can be paired with a reduction in other taxes in a manner that improves the overall efficiency of the economy. Where such a double dividend is available, a carbon tax swap would be desirable, even if the environmental benefit of reduced carbon emissions failed to be realized.

38. Double Dividend Mitigate economic costs of tax
Lower capital/corporate taxes
Lower payroll taxes, offset regressive effects
Invest in energy efficiency
payroll taxes, the latter of which would lower the cost of employment and help offset the possibly regressive effects of higher energy prices on lower-income households

39. Predictability
No fluctuation in prices

40. Caveats India and China US can only impose a national system
"no regrets" principle

41. Political Support for Cap and Trade

42. Earth Blog
no one has the ‘right’ to emit greenhouse gases in reality – we share the biosphere with all other living organisms, and no organism except for humans expects any rights, especially not to put agents of global warming into the air. Non-human organisms just live, and die. However, at least with a mechanism like C&C the amount of carbon dioxide, methane, nitrous oxide and so on, that is emitted, is not dictated by the amount of money you have in the bank, or how many tanks or missiles you have.