1. Climate Change: The Move to Action (AOSS 480 // NRE 480) Richard B. Rood 734-647-3530 2525 Space Research Building (North Campus) rbrood@umich.edu http://aoss.engin.umich.edu/people/rbrood Winter 2010 April 8, 2010

2. Class News Ctools site: AOSS 480 001 W10AOSS 480 001 W10 On Line: 2008 Class2008 Class –Reference list from courseReference list from course Rood Blog Data Base

3. Projects Final presentation discussion; –April 22, 12:00 – 4:00, Place TBD. After class meetings –4/6: Near-term solutions –4/8: Michigan’s response –4/13: Transportation –4/15: Near-term solutions

4. Opportunities for civic engagement Outreach to the public –Op-eds, letters to the editor, contributions to blogs/web commentary –Speak to local groups (Lions clubs, Rotarians, etc.) Outreach to Congress AAAS Mass Media Fellowship – http://www.aaas.org/programs/education/MassMedia/index.shtml AMS Summer Policy Colloquium & Leadership Development Program – http://www.ametsoc.org/spc AAAS Science & Technology Policy Fellowships (sponsored by AAAS, AMS, AGU, GSA, AGI, and others) – http://fellowships.aaas.org – http://www.ametsoc.org/csf ClimatePolicy.org An American Meteorological Society Project

5. Strategies for engaging Congress Find the right staffers (usually the Legislative Assistant for energy and environment) –www.governmentguide.comwww.governmentguide.com firstname_lastname@senatorslastname.senate.gov firstname.lastname@mail.house.gov Send a short message asking to talk/meet with them –Why you want to talk –Why they want to talk to you You’re a constituent You work on an important aspect of the issue You work at an important institution in their district Ways you may increase your effectiveness when meeting with staffers –Be clear about what you want the member to do –Be relevant (tie what you’re asking to larger issues that affect constituents) –Be aware that policy choices go beyond scientific understanding Consider inviting the member (or the LA) to tour your research facility –Check with the Legislative Affairs Office for constraints or help

6. Events Pollack and Rood, Author’s Forum –A World Without Ice: A Conversation with Henry Pollack & Richard Rood Wednesday, April 14, 2010 5:30PM Library Gallery, room 100, Harlan Hatcher Graduate Library –For more info visit www.lsa.umich.edu/huminwww.lsa.umich.edu/humin

7. Readings on Local Servers Assigned –Supreme Court: Massachusetts versus EPASupreme Court: Massachusetts versus EPA –Sigman: Liability and Climate PolicySigman: Liability and Climate Policy Of Interest –Massachusetts Petition to the U.S. Supreme CourtMassachusetts Petition to the U.S. Supreme Court –US Govt Response to Massachusetts PetitionUS Govt Response to Massachusetts Petition Foundational Reading –University of Pennsylvania Law Review (2007)University of Pennsylvania Law Review (2007)

8. From Last Time Regional aspects of policy –Economics –Branding Revisit Economics and the Stern Report Revisit the Uncertainty Fallacy –The reduction of uncertainty leads to policy success –Need for policy accelerators or catalysts Farber’s paper

9. Climate Science-Policy Relation CLIMATE SCIENCE KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

10. Economics-Policy Relation ECONOMIC ANALYSIS KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE Economic analysis is not the compelling catalyst to converge the development of policy – at least on the global scale. Different story on the local scale.

11. Energy Security-Policy Relation ENERGY SECURITY KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

12. Energy-Economy-Climate Change ENERGYECONOMY CLIMATE CHANGE THESE THREE ARE BIG WHAT ARE THEIR ATTRIBUTES? ______________________________ HOW ARE THEY RELATED? ______________________________

13. What is short-term and long-term? 25 years 50 years75 years100 years0 years ENERGY SECURITY ECONOMY CLIMATE CHANGE Pose that time scales for addressing climate change as a society are best defined by human dimensions. Length of infrastructure investment, accumulation of wealth over a lifetime,... LONG SHORT There are short-term issues important to climate change. Election time scales

14. We keep arriving at levels of granularity TEMPORAL NEAR-TERMLONG-TERM SPATIAL LOCAL GLOBAL WEALTH Small scales inform large scales. Large scales inform small scales.

15. POPULATION CONSUMPTION Towards an integrated picture ECONOMIC ANALYSIS KNOWLEDGE UNCERTAINTY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE CLIMATE SCIENCE ENERGY Fragmented Policy IMPACTS

16. Think for a minute What are the things that we do that connect us together?

17. Back to: What are the things that connect us together?

18. Things that permeate society Law permeates society. There are some significant consistencies in law. But also there are remarkable differences in law.

19. From Farber: Legal Status Climate models establish a lower end estimate for global temperature impacts, but the distribution is less clearly bounded on the high side – or in simpler terms, the high- end risk may be considerable. The models are better at predicting temperature patterns than precipitation patterns, and global predictions are considerably firmer than more localized ones. Economic models are much less advanced, and their conclusions should be used with caution. Unfortunately, economists are not always careful about incorporating uncertainty into their policy recommendations.

20. From Farber: Legal Status Climate scientists have created a unique institutional system for assessing and improving models, going well beyond the usual system of peer review. Consequently, their conclusions should be entitled to considerable credence by courts and agencies. Model predictions cannot be taken as gospel. There is considerable residual uncertainty about climate change impacts that cannot be fully quantified. The uncertainties on the whole make climate change a more serious problem rather than providing a source of comfort. The policy process should be designed with this uncertainty in mind. For instance, rather than focusing on a single cost-benefit analysis for proposed regulatory actions, the Office of Management and Budget (OMB), which oversees federal regulatory policy, might do better to require the development of standardized scenarios for agencies to use.

21. In the past couple of years The picture of polar bears in the sea motivated a lot of discussion about the Endangered Species Act... –but, legal approaches have a difficult path, cause and effect, who are the damaged and damaging parties, what laws are relevant... Polar Bear as Endangered Species

22. So what are the legal pathways? Public nuisance Clean Air Act National Environmental Policy Act Federal policy of pre-emption –Less stringent federal regulations rather than more stringent state regulations Like tobacco liability litigation Like gun liability litigation Endangered Species Act

23. National Environmental Quality Act (1969) Purpose Sec. 2 [42 USC § 4321]. The purposes of this Act are: To declare a national policy which will encourage productive and enjoyable harmony between man and his environment; to promote efforts which will prevent or eliminate damage to the environment and biosphere and stimulate the health and welfare of man; to enrich the understanding of the ecological systems and natural resources important to the Nation; and to establish a Council on Environmental Quality.

24. What are the obstacles? Political Question / Judicial Competence –Court being asked, essentially, to make policy Standing –The ability to show particular, or personal harm. Causation –Demonstration that a particular, say, power plant or manufacturer has caused the harm

25. An interesting set of papers The complete issue of University of Pennsylvania Law Review (Vol, 155, 2007) –Intersection of climate science, economics, and law. University of Pennsylvania Law Review (2007)

26. A case that received a lot of attention Connecticut versus American Electric Power –Public nuisance –Determined that court was being asked to address what was essentially a policy question. Senator Imhoff a principal in having the case thrown out

27. A case that continues to attract attention Massachusetts versus US Environmental Protection Agency –Clean Air Act

28. A case that continues to attract attention Relevant text of Section 202(a) of the Clean Air Act” "The Administrator [of EPA] shall by regulation prescribe... standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare." Section 302(g) of the Clean Air Act defines "air pollutant" as "any air pollution agent or combination of such agents, including any physical... substance or matter which is emitted into or otherwise enters the ambient air." 302(h) states that "effects on welfare" include "effects on soils, water, crops,... wildlife, weather... and climate...”

29. California and Clean Air Act When the Clean Air Act was written California was given the ability to make more stringent standards. –States can choose either the California standard or the less stringent national standard (A motivator for federal policy is often the existence of many state and local policies.)

30. Supreme Court Decision Supreme Court found in favor of Massachusetts –Had argued that they were threatened by sea level rise. There was standing. –Had argued that carbon dioxide was a pollutant. Supreme Court said carbon dioxide is a pollutant based on the definition in the Clean Air Act. –EPA did have the regulatory authority to regulate CO 2.

31. Bush EPA Arguments That to control carbon dioxide from cars was an issue of efficiency, which was the sole domain of the Department of Transportation. That for the EPA to act would be a piecemeal approach to the problem, against the President’s wishes. That taking action on cars would have no real effect because of other sources of CO 2, including China. That there was a political history that precluded EPA from acting.

32. Since then California Attorney General Petition to EPACalifornia Attorney General Petition to EPA –“Global warming threatens California's Sierra mountain snow pack, which provides the state with one-third of its drinking water. California also has approximately 1,000 miles of coastline and levees that are threatened by rising sea levels.”

33. Since then 2008: EPA has not, formally, taken action, and even their own lawyers have been quoted in the press as saying that EPA is not on solid legal grounds for doing nothing. –A political decision. 2009: EPA Pressing using Clean Air Act to regulate CO 2EPA Pressing using Clean Air Act to regulate CO 2

34. More News 2009: 2 Days before Copenhagen –EPA Decides to EnforceEPA Decides to Enforce –How does U.S. Stake in Auto Industry impact this?

35. Even newer news 2010: Bipartisan Move to Block EPA Regulating CO2Bipartisan Move to Block EPA Regulating CO2 –Text of Joint ResolutionText of Joint Resolution

36. Where does litigation sit in the climate problem? Motivator for the development of policy. Law works on short-term and local scales. –Does not, often, extend to long-term and global scales. Deliberative, case-by-case

37. Law vs Policy Law, at least with U.S. EPA, leads to the idea of regulation. –In general, “people” prefer policy to regulation  business risk? Currently in U.S. Obama is pushing EPA to exercise its ability to regulate CO 2 as a pollutant. –Bush administration did not require EPA to do this Holdren, in lecture on March 23, talked about valuation of carbon, tax, fee, market, or regulation. (Holdren at UMich)Holdren at UMich

38. What is the role of law? Is it a motivator of policy? Is it an end to its self?

39. Energy-Economy-Climate Change Because of the global reach of Energy, Economy, and Global Warming, solutions need to be woven into the fabric of our behavior. Solutions need to be able to evolve from the near-term to the long-term. Solutions need to address both local and global attributes of the problem. Solutions are impacted by wealth There is no one solution; we need a portfolio of solution paths.

40. Think for a minute Global warming is a global issue that follows, primarily, from the consumption of fossil fuel energy, which is largely decided at the level of the individual. Hence, solutions must infiltrate all of society and influence our behavior. –Markets are at the top of list

41. Market-based solutions A leading policy mechanism is an environmental market which places valuation on carbon dioxide in the atmosphere and its impact on natural resources that are sensitive to the climate. Valuation (currency) becomes the common unit of transference, how we “talk” to each other.

42. What about the carbon market Basics of a market This is once again a place where the idea that there is a system “in balance.” And that small changes from the balance are important. In the presence of small changes, perhaps the system is self regulating.

43. Cap and Trade Mechanism Two Companies: Note numbers on x axis. 100 here and here Courtesy Justin Felt, Pointcarbon

44. Cap and Trade Mechanism Two Companies: 100 is the amount of emissions “allowed” Courtesy Justin Felt, Pointcarbon

45. Cap and Trade Mechanism Two Companies: Plant B more efficient than Plant A Courtesy Justin Felt, Pointcarbon

46. Cap and Trade Mechanism Two Companies: This efficiency is available for trade to Plant A to off set this Courtesy Justin Felt, Pointcarbon

47. Cap and Trade Mechanism Courtesy Justin Felt, Pointcarbon

48. Basics of the Market The expense of exceeding the cap will motivate reduction of pollution. –How can reduction be achieved? Companies with efficient methods will develop a something they can trade. –What is the cost of to compare with?

49. Carbon Markets California Climate Change Regional Greenhouse Gas Initiative EU ETS (Carbon Market) Chicago Climate Exchange Pointcarbon World Bank State of the Carbon Market

50. Market-based Solutions Based upon success of the sulfur market. –Provides flexibility in meeting the goal of reduced sulfur emissions For large parts of the world, money and markets constitute the link between different elements of society, nations. –Infrastructure of developed society –Assumption that it is value based

51. Sulfur Market as a paradigm for CO 2 Market How is the same how is it different? This is very important!

52. Cost-effective regulation Context: SO 2 emissions (1980 baseline) –14.92 million tons of SO 2 –primarily from coal-fired electricity generation –acidification of lakes, rivers, and forests Acid Rain Program (1990) –1990 amendments to Clean Air Act –SO 2 allowance market The “Cap” –8.95 million tons per year of SO 2 …therefore, –5.97 million tons per year of SO 2 abatement

53. Cost-effective regulation (cont.) “cost effectiveness”: what is the least-cost way of achieving a specific goal? Goal – “The Cap” – SO 2 emissions of 8.95 million tons per year Cost: SO 2 abatement cost –Aggregate cost: abatement cost summed over all electricity generators Policy tool – “Cap-and-trade” program – Theoretical finding: a market provides the incentive for companies to undertake least-cost abatement in the aggregate.

54. Cost-effective regulation (cont.) Estimates for the SO 2 market: Abatement cost without trading = $1.82 billion/yr Abatement cost with trading = $1.04 billion/yr (least-cost abatement) Cost savings = $0.78 billion/yr

55. Cost-effective regulation (cont.) The “trade” in “cap and trade” is environmentally neutral –The cap remains fixed regardless of trading activity The cap is the intersection of science-based knowledge and the market

56. Company compliance decisions Context: SO 2 “allowances” –An allowance = 1 ton of SO 2 emission –Companies (electricity generators) are given a “quota” - - a fixed number of allowances each year Compliance options: –Without trading: Reduce SO 2 emissions to comply with their quota Install new abatement technology (SO 2 “scrubbers”) Use cleaner fuel sources (e.g., switch to low-sulfur coal) Produce less electricity (typically not considered!)

57. Example Monroe Power Plant (Monroe, MI) –Owned by Detroit Edison –4 th largest coal-fired power plant in country 2004 data –95,364 allowances allocated –99,735 tons of emissions –4,371 tons in excess Purchased these on the market Or, banked them from a prior year

58. Marginal cost (MC) of abatement (cont.) (without trading) The area in red is the company’s total cost of abating to E 0. MC E $/E E0E0 MC @ E 0 0

59. Company compliance options (with trading as an option) Compliance options: –Without trading: Reduce SO 2 emissions to comply with their quota (scrubbers, low-sulfur coal) –With trading: Same options as above plus Purchase allowances at the market price (P)

60. Purchasing allowances as a compliance option At price P, the company purchases (E 0 – E * ) The area in red is the cost savings from purchasing allowances rather than undertaking abatement MC E $/E E0E0 P MC @ E 0 E*0

61. Cost-effective regulation (repeat) Estimates for the SO 2 market: Abatement cost without trading = $1.82 billion/yr Abatement cost with trading = $1.04 billion/yr (least-cost abatement) Cost savings = $0.78 billion/yr 43% reduction in abatement cost!!!

62. General results P < MC implies a buyer on the market –A buyer saves money by purchasing allowances to cover its emissions. P > MC implies a seller on the market –A seller makes money by undertaking extra abatement and selling its excess allowances. These incentives give rise to least-cost abatement. –We achieve cost-effective regulation The existence of this tension or balance between marginal cost and price of abatement implies that there is a market. There are options. –There is the requirement that The purchased allowance is a real reduction of sulfur That P (Price per share) comparable to Marginal Cost (of abatement).

63. Some Specifics of Acid rain program and evidence on the SO 2 market

64. Phase I: 1995-1999 –110 dirtiest electric power plants –7-8.7 million allowances allocated per year Phase II: 2000-2010 –All fossil-fueled electric power plants –9.2-10 million allowances allocated per year After 2010: 8.95 million allowances/year Banking of allowances permitted The Acid Rain Program

65. Trends in Wet Sulfate Deposition in the Eastern United States (1989-1991 vs. 1995-1998)

66. CA Electricity Crisis 9/11/01

67. CO 2 markets to implement climate policy Kyoto Protocol (1997) –Participating nations: ~ 7-8% below 1990 emissions –European Union’s CO 2 market most advanced –Expansion to all participating nations Kyoto’s Flexibility Mechanisms –Emissions Trading System (ETS) Can comply by purchasing CO 2 credits from the ETS market –Joint Implementation (JI) Can comply by purchasing CO 2 credits from an entity in an industrialized country –Clean Development Mechanism (CDM) Can comply by purchasing CO 2 credits from an entity in a developing country

68. EU Market

70. Miscellaneous issue: emission tax vs. cap-and-trade Regulated firms strongly prefer cap-and-trade –quota distributed for free – enormous $$ value! –compare to: tax per unit of emissions Monroe power plant example –95,364 SO 2 allowances allocated for free in 1994 –All allowances were used to cover emissions –What if taxed at $200/ton? 95,365 * 200 = $19,073,000

71. Emission tax vs. cap-and-trade (cont.) The regulator likes the certainty of the cap; tax has an uncertain effect on aggregate emissions –Environmentalists probably like this certainty, too Example: volatile SO 2 prices, yet certain cap.

72. Emission tax vs. cap-and-trade (cont.) What politician will support a tax program? –Clinton/Gore’s failed BTU tax, early in 1 st term Cap-and-trade is the “consensus” strategy …at the moment. –But is there any reason to expect it can reduce carbon dioxide?

73. Conclude: Political economy of cap-and-trade programs Environmentalist perspective –Set the cap as low as politically feasible Business perspective –Maintain flexibility in compliance options –Cap and trade is most flexible Regulator perspective –Buy-in from stakeholders Good for environment and cost effective –Enforceable Many environmental organizations are now advocates for cap-and-trade programs

74. Further Reading Tom Tietenberg, Environmental and Natural Resource Economics, 7 th Edition, 2006. –It includes several chapters on environmental regulation—both principles and applications. Ellerman, Joskow, Schmalensee, Montero, and Bailey, Markets for Clean Air: The U.S. Acid Rain Program, 2000. –An exhaustive evaluation of the acid rain program and SO 2 market by a team of great economists.

75. Some Market Issues How do we make a carbon market? What is the role of allowances? –Savings relative to what baseline? Cost of allowance relative to other choices?

76. Climate Science-Policy Relation CLIMATE SCIENCE KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

78. Even newer news 2010: Bipartisan Move to Block EPA Regulating CO2Bipartisan Move to Block EPA Regulating CO2 –Text of Joint ResolutionText of Joint Resolution http://www.reuters.com/article/idUSTRE61 Q2QU20100227?type=politicsNewshttp://www.reuters.com/article/idUSTRE61 Q2QU20100227?type=politicsNews http://www.washingtonpost.com/wp- dyn/content/article/2010/02/26/AR2010022 606084.html?hpid=topnewshttp://www.washingtonpost.com/wp- dyn/content/article/2010/02/26/AR2010022 606084.html?hpid=topnews

79. Energy Security-Policy Relation ENERGY SECURITY KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE

80. Economics-Policy Relation ECONOMIC ANALYSIS KNOWLEDGE UNCERTAINTY POLICY PROMOTES / CONVERGENCE OPPOSES / DIVERGENCE Economic analysis is not the compelling catalyst to converge the development of policy – at least on the global scale. Different story on the local scale.

81. Elements of environmental pollutant market ENERGY PRODUCTION FUEL SOURCES ABATEMENT SHARES OF POLLUTANT CREDITS F1cF1c F2cF2c FicFic F1AF1A F2AF2A FiAFiA A1A1 A2A2 AiAi GDP. POLLUTANT efficiency COST GAP Common Unit of Transference Cost  $

82. Granularity

83. Energy-Economy-Climate Change ENERGYECONOMY CLIMATE CHANGE THESE THREE ARE BIG WHAT ARE THEIR ATTRIBUTES? ______________________________ HOW ARE THEY RELATED? ______________________________

84. A moment with time scales 25 years 50 years75 years100 years0 years ENERGY ECONOMY CLIMATE CHANGE

85. We keep arriving at levels of granularity TEMPORAL NEAR-TERMLONG-TERM SPATIAL LOCAL GLOBAL WEALTH Small scales inform large scales. Large scales inform small scales.