Environmental Economics

"RFF on the Issues: State Options for Implementing the Clean Power Plan"

Shannon Wulf Tregar:

Last week, environmental regulators from 14 states sent a letter to the Environmental Protection Agency asking for guidance on how to how to implement the carbon emissions reduction goals outlined in the Clean Power Plan. The letter indicates states’ willingness to enact voluntary measures, despite the Supreme Court’s stay order.

In recent work, RFF’s Karen Palmer and Anthony Paul offer important considerations and effective, proven approaches for tailoring individual compliance plans to states’ needs. They examine three forms of incentive-based, comprehensive policies: a mass-based policy, a tradable performance standard, and a clean energy standard. They note: “Among the three policy options, a mass-based approach has many virtues, including ease of measuring compliance and simplicity in administration. It also may be easier for states that want to work together to implement a joint mass-based policy than it is to combine multiple rate-based approaches.”

via www.rff.org

From the "recent work" link: "A mass-based policy for emissions reductions (sometimes referred to as a cap-and-trade policy) is the most flexible type of policy to reduce CO2 emissions."

"ExxonMobil CEO Relieved It Finally Too Late To Do Anything About Climate Change"

Good ol' Rex:

Saying the multinational oil and gas conglomerate had “really dodged a bullet,” ExxonMobil CEO Rex Tillerson told reporters Wednesday how relieved he was now that it was finally too late to do anything about climate change.

The 64-year-old petroleum executive, who acknowledged that throughout his career he had feared the public might take action to curb rising temperatures by imposing emissions restrictions or mandating a switch to alternative energy, said he was just happy that the window for avoiding the planet’s environmental destruction had closed, and that the entire industry was now free to carry on as usual.

“I was really worried for a while there that some kind of law would be passed to stop us from releasing all those hydrocarbons into the atmosphere, but I guess not,” said Tillerson, describing how he felt as if a tremendous weight had been lifted from his shoulders now that catastrophic climate change was an inescapable certainty. “Seriously, it’s a huge load off. There were a number of real tense years after the recycling movement picked up momentum when we thought people might all turn away from fossil fuels next. But it’s just so reassuring to know that we passed the point where it’s no longer possible to stop global warming through environmental regulation or green energy or anything like that.”

“Now I can finally just relax,” he continued. “This really makes things so much easier.”

The CEO remarked that, back when it was still possible to halt the devastating effects of climate change, he constantly feared that the energy industry would be forced to make costly concessions toward sustainability, perhaps investing in expensive technology that would reduce oil and gas companies’ environmental impact, and thereby severely harm his corporation’s bottom line.

Tillerson told reporters that growing public interest in wind and solar energy gave him “a pretty good scare” for a while, but noted how he eventually came to realize the public’s engagement was largely limited to vocalizing support for the initiatives rather than taking any substantive action to move the overall energy sector in those directions. He also admitted to losing sleep in 2009 when Congress considered regulating carbon emissions with a cap-and-trade system, although he said he now felt silly for ever believing that might actually happen.

via www.theonion.com

"A Look at Six State Proposals to Tax Carbon"

Dallas Burtraw:

As the political likelihood of passing comprehensive national climate policy has remained low, many states have taken up the mantle. This devolution of climate policy has been further reinforced by the US Environmental Protection Agency’s (EPA’s) efforts to regulate carbon dioxide from existing power plants under the Clean Power Plan, which requires states to develop their own plans for compliance with emissions standards.

Certainly there is no shortage of policy ideas in the “laboratories of democracy” that indirectly aim at carbon emissions by promoting technology adoption or energy efficiency. Currently, two prominent examples of subnational policies aimed specifically at carbon emissions exist: California’s cap-and-trade system and the Northeast’s Regional Greenhouse Gas Initiative (RGGI), which also employs a cap-and-trade approach. Recently, six states have each proposed legislation to introduce a comprehensive state-wide carbon tax: Massachusetts, New York, Oregon, Rhode Island, Vermont, and Washington. (Vermont has a second legislative proposal that is more stringent but has less support in the legislature at this time.) And in California, where there is a robust cap-and-trade program, some legislators have suggested a transition to a tax.

It should not come as a surprise that these proposals have been introduced by Democratic members of state legislatures, and that these states have a history of ambitious greenhouse gas (GHG) mitigation goals. ...

Despite the similarities in political conditions across these six states, the designs of their proposed policies are heterogeneous—differing, for example, in terms of the pollutant covered by the policy. Historically, most policies have focused on targeting carbon dioxide emissions exclusively, as these are responsible for the majority of GHG impacts and are easiest to measure. Half of the states—Oregon, Washington, and Vermont—cover only carbon dioxide with their tax proposals. The others—Massachusetts, Rhode Island, and New York—go a step further and also include methane emissions, which make up a smaller proportion of total atmospheric warming emissions but are more potent. New York also proposes to include other nitrous oxides and any combustion-related GHG emissions.

The stringency of the proposed policies also varies across the states. As highlighted above, the coverage of pollutants differs. All else equal, the policies of those states with fewer pollutants covered are relatively less stringent. In addition to the coverage, the price (tax rate) also determines a policy’s stringency. The initial price level varies from $10 per ton of carbon dioxide equivalent (tCO2e) in Massachusetts to $50 per tCO2e in New York, with the other proposals falling in between. More important, however, is a policy’s price path, which determines how the tax rate evolves over time. The bills from Rhode Island and Washington both include automatic increases at the same rate as the Consumer Price Index (CPI), ensuring that the rate does not get outpaced by inflation. By 2026, in real terms (i.e., assuming no inflation), the price of the proposed policies varies from $15 per tCO2e in Rhode Island to $185 per tCO2e in New York (see figure). ...

via www.rff.org

What I'm watching right now

Watch video from yesterday's "Tax or Trade" seminar on #carbonpricing #climatepolicy options https://t.co/uagAa5EN7q pic.twitter.com/3rEOrLyLpd

— Resources f/t Future (@RFF_org) March 3, 2016

Teaching environmental policy to MBAs with Veconlab

App State has become quick to cancel classes with the buses won't run. When that happens we are asked to "winterize" our courses. In other words, we're supposed to keep the students busy while they are enjoying no class time. My go to assignment has been Veconlab's supply and opportunity cost experiment. Here is the abstract from Mandell et al. (2009):

This paper describes an individual choice experiment that can be used to teach students how to correctly account for opportunity costs in production decisions. Students play the role of producers who require a fuel input and an emissions permit for production. Given fixed market prices, they make production quantity decisions on the basis of their costs. Permits have a constant price throughout the experiment. In one treatment, students have to purchase both a fuel input and an emissions permit for each production unit. In a second treatment, they receive permits for free, and any unused permits are sold on their behalf at the permit price. If students correctly incorporate opportunity costs, they will have the same supply function in both treatments. This experiment motivates classroom discussion of opportunity costs and emissions permit allocation under cap-and-trade schemes. The European Union Emissions Trading Scheme provides a relevant example for classroom discussion, as industry earned significant windfall profits from free allocation of emissions allowances in the early phases of the program.

Mandell, Svante, Chrles Holt, Erica Myers, Dallas Burtraw, and Markus Wråke. Teaching Opportunity Cost in an Emissions Permit Experiment. RFF-DP-09-22, 2009.

My MBA managerial economics class missed last wednesday and monday and so I fielded and debriefed the experiment on those days. 

If students recognize the opportunity cost of free permits then the cap-and-trade and emissions tax regimes should result in the same supply curve. This doesn't happen for all of the students so the supply curve is too high for profit maximization when permits are freely distributed. Here is the estimated supply curve (OLS with random effects, n = 23, t = 16), quantity ranges from 0 to 3, price ranges from 1 to 10 and tax is equal to 0 for cap-and-trade and 1 for the tax regime:

Here is my pre-experiment video:

And here is my post-experiment video:

And just so you know, the Watauga County kids are going to school today for the first time in 8 days.

The SCOTUS has opened the door for a carbon tax?

Shannon Wulf Tregar:

The US Environmental Protection Agency’s Clean Power Plan suffered a setback this week as the Supreme Court blocked the agency from requiring states to submit compliance plans until the program is reviewed by a lower court. Beyond the Clean Power Plan, and given polarized opinions on various regulatory approaches to tackling climate change, some argue that carbon emissions reductions would be better addressed by a carbon tax.

RFF experts discuss the issue:

• Marc Hafstead and Roberton C. Williams III find that a carbon tax is unlikely to reduce the number of jobs in the US economy. Instead, jobs will shift away from polluting industries toward cleaner ones, a transition that can be made smoother by sound policy design.
• Similarly, Chad stone notes that a climate rebate delivered through existing tax and benefit systems could “fully offset the impact of a carbon tax on the purchasing power of low- and moderate-income households."
• Gilbert Metcalf discusses how including a carbon tax in overall tax reform could “contribute to the overall efficiency of the tax system.”

via www.rff.org

I'm not sure why a carbon tax is considered less polarizing than any other U.S. policy proposal next to Obamacare, but while we're at it there is also something called cap-and-trade that is unlikely to reduce the number of jobs in the U.S. economy, could generate revenue and rebates. All of the Clean Power Plan critics who are now looking for alternatives, all 3 of them, could consider it as well. 

Was the Acid Rain Program as successful as we thought?

The February NBER Digest summarizes a July, 2015 NBER working paper that takes another look at the EPA's Sulfur Dioxide Cap and Trade Program (Acid Rain Program) and finds good news and bad news.  The good news, there were significant cost savings from the Acid Rain Program.  Economists Rejoice.  The bad news: the cost savings were not as large as previously estimated, and the health costs of the Acid Rain Program were much higher than previously considered.  Much higher.  Off-the-charts-higher.  Economists cry.   

Since the passage of the Clean Air Act of 1990, the federal government has pursued a variety of policies designed to reduce the level of sulfur dioxide emissions from coal-fired power plants and the associated acid rain. In The Market for Sulfur Dioxide Allowances: What Have We Learned from the Grand Policy Experiment? (NBER Working Paper No. 21383), H. Ron Chan, B. Andrew Chupp, B. Andrew Chupp, Maureen L. Cropper, and Nicholas Z. Muller evaluate the cost savings and the health consequences of relying on a cap-and-trade sulfur dioxide allowance market to implement emissions reductions.

...

To study the cost savings associated with the Acid Rain Program, which allowed such trade, the authors model the cost of abatement for individual coal-fired power plants. They estimate how firms choose between the two leading technologies for sulfur dioxide abatement, burning low-sulfur coal and installing flue-gas desulfurization units. They use these estimates to compare abatement decisions corresponding to the Acid Rain Program and standards that achieve the same aggregate reduction in emissions by making uniform requirements on coal-fired plants, with no trading allowed. They find cost savings in 2002, with the Acid Rain Program in full swing, of approximately $250 million from trade in emission allowances. This is less than half of the previously estimated saving from tradable permits. The data suggest that many generating units were not complying with the Clean Air Act in the most economical manner.

...

The researchers find a greater level of particulate air pollution and associated premature mortality under the Acid Rain Program than under a hypothetical no-trade scenario in which units emitted SO₂ at a rate equal to 2002 allowance allocations plus observed drawdowns of their allowance banks. They estimate the cost of health damages associated with observed SO₂ emissions in 2002 under the Acid Rain Program to be $2.4 billion higher than would have been the case under the no-trade scenario. They conclude that the health impact of a cap-and-trade program depends on how the program is structured and on the correlation between marginal abatement costs and marginal damages across pollution sources.

via www.nber.org

Price of California Carbon Allowance Futures over time

Source: http://calcarbondash.org

Hat tip: TM

"Proof That a Price on Carbon Works"

From the New York Times editorial page:

Lawmakers who oppose taking action to lower greenhouse gas emissions by putting a price on carbon often argue that doing so would hurt businesses and consumers. But the energy policies adopted by some American states and Canadian provinces demonstrate that those arguments are simply unfounded.

Around the world, nearly 40 nations, including the 28-member European Union, and many smaller jurisdictions are engaged in some form of carbon pricing. In this hemisphere, British Columbia, Quebec, California and nine Northeastern states have raised the cost of burning fossil fuels without damaging the economy. Alberta, Canada’s biggest oil and gas producer, and Ontario have said they will adopt similar policies.

Carbon pricing comes in two forms: a direct tax on emissions or a cap on emissions. British Columbia, for instance, has levied a tax on emissions from fuels like gasoline, natural gas and heating oil. California and Quebec, which are working together, place a ceiling on overall emissions and allow utilities, manufacturing plants, fuel distributors and others to buy and sell permits that entitle them to emit greenhouse gases. Like the cap itself, the number of permits decline over time, becoming more expensive.

Many economists regard carbon taxes as the simpler and more elegant solution, and cap-and-trade systems like the one that failed in the United States Congress as complex and hard to explain. But both systems effectively raise the price of using fossil fuels, which encourages utilities and other producers to generate more energy from low-carbon sources like solar, wind and nuclear power.

British Columbia, which is home to 4.7 million people, has placed the highest price on emissions in North America, taxing a ton of carbon emitted at 30 Canadian dollars, or about $21. By comparison, emission permits in California and Quebec are trading at about $13 a ton. And permits sold for $7.50 a ton in a December auction in the Northeastern trading system known as the Regional Greenhouse Gas Initiative. That system covers emissions from power plants in nine states that include Connecticut, New York and Massachusetts.

British Columbia started taxing emissions in 2008. One big appeal of its system is that it is essentially revenue-neutral. People pay more for energy (the price of gasoline is up by about 17 cents a gallon) but pay less in personal income and corporate taxes. And low-income and rural residents get special tax credits. The tax has raised about $4.3 billion while other taxes have been cut by about $5 billion. Researchers have found that the tax helped cut emissions but has had no negative impact on the province’s growth rate, which has been about the same or slightly faster than the country as a whole in recent years.

Meanwhile, jurisdictions using the cap-and-trade approach like California, the nine Northeastern states and Quebec are investing the revenue generated by auctioning emission permits in mass transit, energy efficiency, renewable energy and other strategies to reduce carbon emissions. Some of the revenue is also dedicated to helping low-income families cope with higher energy costs.

In Alberta, a new government announced in November that it would impose a tax of 30 Canadian dollars on most greenhouse gas emissions by the start of 2018. The province’s leaders also said they would phase out the use of coal power plants and impose caps on carbon and methane emissions from Alberta’s oil and gas industry.

These actions deserve applause. But their real value may lie in providing a template for the rest of the world. Broad participation is essential to keeping warming below a point of no return; as a practical matter, it is also essential to keep companies from moving their operations to nations that do not impose a cost on carbon emissions.

In that context, China’s announcement last year that it would set up a national cap-and-trade system was hugely encouraging — the world’s largest emitter agreeing to tax itself to help solve a problem that, only a few years ago, it barely acknowledged. Yet Congress has refused to act even as it becomes clear that putting a price on greenhouse gas emissions is the most direct and cost-effective way to address climate change.

via www.nytimes.com

My office is always too cold or too hot

And my thermostat doesn't change the temperature (at least that is the way it seems after the campus began sustainability efforts and began posted about energy savings):

Carbon emissions per square foot of building space have declined by 13 percent since 2007 at 343 American colleges and universities, says a report released on Wednesday. But the report, based on a study conducted by the University of New Hampshire’s Sustainability Institute and the company Sightlines, also says that campus energy use has declined by only 2 percent over the same period.

The drop in energy use, modest as it is, can be attributed to colleges’ switching from coal and oil to natural gas, the report says. And while carbon emissions declined, it says, the total decline in emissions was only about 5 percent, which is roughly in line with that reported by other industries.

via chronicle.com

So, most of the sustainability gains on campus have been due to the change in relative prices for energy sources? Imagine what might happen if a carbon tax (or cap-and-trade) is implemented and coal prices rise.