-Chris Thompson -Michael Nemmetz -Steve Hessler -Su Zanne Wong

Implications of a Cap & Trade System in the

United States

Agenda•Global Warming and Greenhouse Gases•Introduction to Kyoto Protocol•Kyoto Protocol in ASEAN/EU Countries•Cap & Trade Program in the United States•Alternatives and Initiatives•Recommendations•Summary and Conclusion

The Problem• Population growth and

rapid economic development

• Free market failures• Lack of alternatives• Excessive CO2 in the

atmosphere• Global Warming

• "The challenge is either to build an economy that is sustainable or to stay with our unsustainable economy until it declines … the choice will be made by our generation, but it will affect life on earth for all generations to come."

Lester Brown, Worldwatch Institute

The Fundamentals of Cap and Trade

• Government establishes target reduction• Polluters buy and sell emission ‘allowances’• Allowances are reduced annuallyAllowances are reduced annually• Limits temperature increase by 2050Limits temperature increase by 2050• $50-$300 billion in government revenue$50-$300 billion in government revenue

Introduction to Kyoto Protocol

• February 16, 2005 • 183 Countries• Reduce GHG emissions by

5.2% of 1990 levels• Prevent significant human

altercation of the climate• Establishes emission trading

Mechanisms of Kyoto Protocol

• European Union– Emission Trading – Sulfur Dioxide ->

Carbon Dioxide • Privately• Over the counter• Spot market

Mechanisms of Kyoto Protocol

• ASEAN Countries– Emission Trading– Clean Development

Mechanisms• Equity transfers• Technology

transfer • Certified Emission

Reduction

Annex I Countries 1 Australia 12 Finland 23 Lithuania 34 Slovenia

2 Austria 13 France 24 Luxembourg 35 Spain

3 Belarus 14 Germany 25 Monaco 36 Sweden

4 Belgium 15 Greece 26 Netherlands 37 Switzerland

5 Bulgaria 16 Hungary 27 New Zealand 38 Turkey

6 Canada 17 Iceland 28 Norway 39 Ukraine

7 Croatia 18 Ireland 29 Poland 40 United Kingdom

8 Czech Republic 19 Italy 30 Portugal 41 United States

9 Denmark 20 Japan 31 Romania

10 Estonia 21 Latvia 32 Russian Federation

11 European Community

22 Liechtenstein 33 Slovakia

Impacts of Kyoto Protocol

• Investments

• Terms of Trade

• GDP Growth

Cost Implications

Slowed GDP Growth“Each one percent increase in U.S. GDP growth is accompanied by a 0.3 percent increase in energy us (Thorning)”

Factors of Slowed GDP

Job Implications• Unemployment

– Jobs in “green” sector– “Leakage”

Source: U.S. Department of Commerce: Bureau of Economic Analysis

Unemployment vs. GDP Growth Rate

Unemployment

GDP Growth

Cost Implications

• Competing in a global market– Incentive to turn “green”

– Public opinion

– Economic policies

• Kyoto Protocol

Cost Implications

• New accounting standards– Consistency– Comparability

• Costly implementation

Concerns about EquityUnder either a carbon tax or a carbon cap-and-trade policy,wealthy people would be able to take advantage of their classprivilege to use more fossil fuels – both nationally and globally.

In order to withstand popular opposition to higher fossil fuel prices,any climate policy must be widely regarded as fair by a broad baseof beneficiaries.

Alternatives to Cap and Trade

Policies and Legislation

• Education, Education, Education!• PSAs to promote consumer awareness• Promote Eco-Sustainable lifestyles• Increase Energy-Star offerings

Smart Grid Technology• 19th century meets

the 21st

– Increased efficiency of 5% is the equalivant of taking 21.6 million cars off the road

– The electric grid is responsible for 40% of all CO2

GE Smartgrid

Las Vegas, Lights off for Earth Day

Las Vegas, a typical night

Innovation• Promote and sponsor technological

innovation through grants and subsidies• Simplify tax code to allow for increased

rebates and incentives for using green energy• “I’m feeling Green!”

Coal will continue to be largest source of energy production…

But coal no longer needs to be seen as a dirty fuel source

Regional Initiatives

• Regional Greenhouse Gas Initiatives (RGGI)– goal of RGGI is to develop a

multi-state Cap-and-Trade program covering GHG emissions.

– Initially be aimed at developing a program to reduce carbon dioxide emissions from power plants in the participating states.

Summary

• Strong environmental and efficiency arguments for use of market-based mechanisms such as cap-and-trade

• Many institutional details that need careful attention for actual cap-and-trade system to realize environmental goals in a cost effective manner

Future Energy Consumption

Additional Questions to Consider

Is it ethical to privatize the sky and treat pollution as a commodity traded like private property?

Is it ethical to make a profit from carbon trading?

Will the complexity of a cap-and-trade system rival our tax system, opening similar opportunities for loopholes and favored treatment?

Would our political institutions be reliable to manage this massive new market over decades under tremendous pressure?

And if federal climate policy is not forthcoming from Congress fast enough…

What local, state, corporate, and regional policies for energy, agriculture, science, taxes, and trade could be pursued to meet the challenge?

Questions ?

For Further Reference

The following public interest organizations have a strong focus on climate policy design and development in the U.S.:

World Resources Institute www.wri.org

Pew Center on Global Climate Change www.pewclimate.org

Resources For the Future www.rff.org

Union of Concerned Scientists www.ucsusa.org