1 climate change policy and regulatory jurisdiction james bushnell uc energy institute comments...
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Climate Change Policy and Regulatory Jurisdiction
James Bushnell
UC Energy Institute
Comments drawn from Bushnell, Peterman, and Wolfram, “Local Solutions to Global Problems: Climate Change Policy and Regulatory Jurisdiction”
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Environmental Policy Trends
• More jurisdictions are embracing “market-based” environmental regulatory systems
• Actions are being taken at a more “local” level relative to environmental problems– Climate change initiatives of US cities– US state policies (RGGI and California)– Individual offsets
• Are these trends in conflict?
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US Climate Change Policies
• Northeast Regional Greenhouse Gas Initiative (RGGI)
• California AB 32
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Carbon Emissions at US Power Plants, 2002
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Environmental Policy Options
• Traditional “command and control” regulation
• Subsidies and other preferences for “alternative (clean) energy”
• Market Based Regulations– Taxes, – traditional cap & trade– Downstream or “life-cycle” based accounting
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Challenges to achieving real emissions reductions
“local” policies face several potential challenges:
1. Leakage. Regulations cause economic activity to move to
less regulated regions.
2. Reshuffling.Regulations cause buyers and sellers to adjust
their counterparties, without changing the location of the economic activity.
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Example of leakage
Previous work has shown that polluting industries grew less quickly in nonattainment counties than in attainment counties (Becker and Henderson, JPE, 2000).
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Reshuffling mechanics
To mitigate leakage, it is tempting to impose regulations on consumers.
Potential for reshuffling.
Reshuffling is different from leakage as it does not involve any change in where the economic activity takes place.
Like an ineffective boycott, it simply involves a change in who transacts with whom.
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Reshuffling exampleDiamond market before boycott
Homogenous good
Homogenous buyers
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Reshuffling exampleDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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Reshuffling exampleDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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Reshuffling exampleDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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Reshuffling exampleDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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An effective boycottDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
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An effective boycottDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
Boycotts are effective when the fraction of participating buyers is greater
than the fraction of “clean” sellers.
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An effective boycottDiamond market with boycott
Red = subject to
boycott
Green = participant
in boycott
Boycotts are effective when the fraction of participating buyers is greater
than the fraction of “clean” sellers.
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Other potential examples of reshuffling in the GHG contextLow-carbon fuel standard.
– Designed to reduce the lifecycle GHG emissions of transportation fuels.
– For instance, by favoring corn-based ethanol produced using lower carbon growing techniques, CA may simply reshuffle where the “clean” ethanol goes.
Generally, attempts to “get to” upstream sources are potentially subject to reshuffling.
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What Works?• Any cost imposing regulation will create incentives
for leakage/reshuffling– Emissions standards, cap-and-trade– Downstream cap-and-trade, life-cycle cost assessments
• Subsidies for alternatives produce no incentive to evade (just the opposite)– Mandates (like RPS) do create costs for buyers
• Reshuffling concerns apply
– If extremely effective - subsidies can increase consumption of the bad elsewhere
• Demand-side leakage
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How bad can it be?Determinants of unintended consequences
• Leakage– Relationship of environmental costs to
relocation costs
• Reshuffling– Relationship of environmental costs to costs of
“switching”
• Subsidies– Elasticity of demand for the product being
replaced
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How Much is Out There?: TWh "compliant" with various regulations
0 50 100 150 200 250
Cal
Non-Cal WECC
Cal
Non-Cal WECC
Cal
Non-Cal WECC
SB 1368
RPS
AB 32 (zero carbon)
Location
TWh
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CA Emissions Target
CA Forecast Demand
0
50
100
150
200
Cumulative CO2 [MMT]
0 200 400 600
Electricity Output [TWh]
All WECC Sources Eligible for Import into California
Importing Clean Power
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CA Emissions Target
CA Forecast Demand
0
50
100
150
200
Cumulative CO2 [MMT]
0 200 400 600
Electricity Output [TWh]
Assuming California Generation Unchanged
Importing Clean Power
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Summary
• All climate change policies will be more “local” than the problem– And subject to evasion of jurisdiction
• Ironically, less flexible (and less efficient) policies are often less vulnerable to evasion– Subsidies & very specific mandates
• The “best” policy choice will vary by product and industry
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Thank You.
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Modeling Source-Based California C&T Options
• Immediate question: What would 2007 have looked like with Carbon regulation?
• Data derived from actual 2007 market outcomes• “Re-dispatch” or simulate the market under various carbon
regulation assumptions– West-wide cap, – CA Source-based – updating
• Simplified “3 node” market model of transmission• Solved as a complementarity problem
– Each firm equilibrates MR and MC (including emissions costs)– Permit prices endogenously linked to emissions cap – Buidling on work of Zhao, Hobbs, and Pang, & Helman and Hobbs
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qsim
psim
pactual
Demand
qothers
qtot
MCsim
qcems
Figure 1: Supply Costs, Imports and Others
qothers
qimports
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qsim
psim
pactual
Demand
qothers
qtot
MCsim
qcems
Figure 2: Emissions Rates and Supply costs
qothers
qimports
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Market Equilibrium Conditions
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Output Based Updating
• Policy allocates new permits based upon production quantities– Provides incentive to continue “local”
production– Can weaken incentives provided by cap-
and-trade by (indirectly) reducing costs of pollution
– Can stimulate “cleaner” production
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Output-Based Updating
Marginal Revenue
Marginal GenerationCost
Emissions marketAllocations/costs
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Carbon (mmtons) Carbon Region CA NW SW Total Price
Actual 40.98 23.37 157.31 221.65 NANo Cap 34.22 23.12 146.11 203.45 0Regional cap 40.57 17.87 102.22 160.66 60
Cal only cap 26.80 23.28 152.79 202.87 18Cal cap w/updating 27.17 23.27 152.27 202.71 41
Summary Results
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Summary Results
Region Energy (GWH)CA NW SW
Actual 81913 29607 178367No Cap 81362 33011 175473Regional cap 95655 31738 155521
Cal only cap 64671 33367 191040Cal cap w/updating 66048 33352 189618
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Carbon Emissions:by region and fuel type