markets for the environment and renewable energy
DESCRIPTION
A. Denny Ellerman Center for Energy and Environmental Policy Research Massachusetts Institute of Technology http://web.mit.edu/ceepr/www/ Perspectives from Abroad Colloquia Sustainable Energy Ireland Dublin, Ireland May 21, 2003. Massachusetts Institute of Technology - PowerPoint PPT PresentationTRANSCRIPT
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MIT CEEEPR
Markets for the Environmentand Renewable Energy
A. Denny EllermanCenter for Energy and Environmental Policy Research
Massachusetts Institute of Technologyhttp://web.mit.edu/ceepr/www/
Perspectives from Abroad ColloquiaSustainable Energy Ireland
Dublin, IrelandMay 21, 2003
Massachusetts Institute of TechnologyCenter for Energy and Environmental Policy
Research
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MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
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MIT CEEEPR
Some Preliminaries
• Societies, governments, and markets– From Locke’s social contract to Lincoln’s “of
the people, by the people, and for the people”
• Natural markets, banned markets, and constructed markets– Decisions reflect societal values
• Non-appropriability as the underpinning for constructed markets
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MIT CEEEPR
An Environmental Market:U.S. Cap and Trade Programs
• Basic requirement: one ton = one allowance– Demand has been created, but non-specific– Radical refocusing of the government role: from
specific mandate to accounting– Measuring instead of inspecting
• Simultaneous recognition and issuance of tradable “rights to emit”
• Simplicity, strict accountability, & flexibility
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MIT CEEEPR
A Renewable Energy Market:Renewable Obligation Certificates
• Basic requirement: ROCs = % obligation– Creates demand for certificates (ROCs)– Producers of renewable energy earn ROCs– Specific mandate abandoned, market will take care of
supply
• Unbundling of electricity and “renewability”– Like in environmental markets– Allows separate markets to operate– No build requirements for utilities – Also, subtle shift from capacity to generation
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MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
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U.S. Cap-and-Trade Programs
• The Acid Rain (SO2 allowance trading) Program– Nationwide, single source beginning in 1995
• RECLAIM Programs for NOx and SO2 in the Los Angeles Basin – Multi-source, local program starting in 1994
• The Northeastern NOx Budget Program– Seasonal program (May-Sept) enacted by coordinated
individual state action beginning in 1999– Expanded by federal action to include all eastern U.S. in
2003
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What are the Results?• Cost savings have been achieved
– 50% savings in the Acid Rain Program– Markets have emerged in all programs and
significant trading has been observed
• Better environmental performance than conventional regulatory alternatives– 1st year effect with & without banking– Big, dirty units reduce the most – 100% (real) compliance because of treatment
of high abatement cost facilities
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MIT CEEEPR
First Year Effect in “Big Dirties”
0
2
4
6
8
10
12
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Millio
n t
on
s S
O2
Program starts
ALLOWANCES
EMISSIONS
COUNTERFACTUAL EMISSIONS
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MIT CEEEPR
First Year Effect in Other Units
0
2
4
6
8
10
12
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Mill
ion
to
ns
SO
2
PROGRAM STARTS
ALLOWANCESEMISSIONS
COUNTERFACTUAL EMISSIONS
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Why Did the “Big, Dirties” Reduce the Most?
• Deep abatement technology is capital intensive
• Economics depends on units of output over which the (large) fixed costs can be spread
• Cap & Trade Programs pay per unit of abatement, while conventional regulatory programs do not
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Why 100% Compliance?Exception and Equity
• Cost heterogeneity implies C & C rule will not fit all…imposes unique hardship on some
• Leads to administrative appeal and equitable exception that relaxes or delays requirement
• One-sided process…those facing less cost than others never offer to do more
• Fine line between equity and special pleading
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Special Pleading Has Been Made Uneconomic
• Cheaper to buy an offset than seek exception
• Trading provides for automatic off-setting
• Also, harder to claim unique hardship in a market with many buyers… highest cost is price of an allowance
• Easier to enforce allowance-emissions matching than prescriptive rules
• Flexibility, simplicity & strict accountability
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MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
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MIT CEEEPR
How has Renewable Energy Procurement Fared?
Contracted (MWe)
On stream
(EOY 2002)
% “Live”
NFFO 1 (1990) 152 141 93%
NFFO 2 (1991) 472 172 36%
NFFO 3 (1994) 627 293 47%
NFFO 4 (1997) 843 195 23%
NFFO 5 (1998) 1,177 119 10%
TOTAL 3,271 920 28%
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MIT CEEEPR
NFFO and RO Capacity(England & Wales)
NFFO Contracts (1990-98) 3,271 MWe
NFFO Completed (12/31/02) 920 MWe
RO Accredited Effective 4/1/02 1,215 MWe
RO Accredited since 4/1/02 717 MWe
Total RO Accredited as of 1/31/03 1,932 MWe
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ROC Performance to date(England, Wales, & Scotland)
(% Share) Capacity
(MWe)
ROCs (GWh)
(Apr 02-Jan03)
Capacity Factor
Biomass 1,038 (48%) 818 (18%) 11%
Landfill & sewage gas
547 (24%) 2,375 (53%) 59%
Hydro 201 (9%) 428 (10%) 29%
Wind 507 (22%) 870 (19%) 23%
TOTAL 2,293 4,490 27%
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Another Similarity:Markets Supplant Regulation?
• Emissions Trading– RECLAIM and NOx programs superseded conventional
programs with ample authority• Too complicated to implement by regulation
– Acid Rain Program was “de novo”
• Renewables: Market replaces direct procurement • Separability, decentralization & specialization• Avoiding pitfalls of informational asymmetries and
the political uses of administrative discretion• More general than environment and renewables
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MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
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MIT CEEEPR
Market Interactions
• Many markets interact– Substitution and budget constraints
• Environmental markets are similar– Caps are independent & costs are additive
– But sometimes, abatement of one pollutant reduces/increases another pollutant
– If both capped, markets are interdependent
• Renewable energy markets will interact with CO2 markets, for instance the EU Trading Scheme
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MIT CEEEPR
The ROC/CO2 Interaction
• Renewable energy emits no CO2 and is often seen as an instrument of climate policy
• Any CO2 market will provide some impetus to renewable energy production
• If CO2 and ROC markets co-exist– Tighter CO2 caps will reduce ROC prices, and– Larger ROs will reduce CO2 prices– Potentially one could drive the other price to
zero
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MIT CEEEPR
Is There Something Wrong with this Interaction?
• Something unique and non-appropriable about renewables? – Set the RO at the right level – Don’t worry about interactions
• If the RO is a surrogate carbon policy,– Justified only as a 2nd best instrument
• Interaction is appropriate if CO2 price is rising
– Otherwise, an RO is superfluous or inefficient
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MIT CEEEPR
Outline
• Introducing environmental & renewable markets
• The US Experience with Emissions Trading
• The UK Experience with Renewable Energy
• Interactions among markets
• Concluding Comments
![Page 24: Markets for the Environment and Renewable Energy](https://reader035.vdocument.in/reader035/viewer/2022062314/568148f9550346895db61fa4/html5/thumbnails/24.jpg)
MIT CEEEPR
Why Markets Now?
• Technological Trends– Information revolution has greatly reduced cost
of monitoring, reporting and processing
• Societal Trends– Greater willingness to rely on “markets” and less
faith in “government” and “experts”
• Environmental Problems are Different– Blunt tools work only on big obvious problems
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MIT CEEEPR
Some Concluding Thoughts
• Exciting new world of constructed markets– Reflecting broad underlying trends– Not besotted market ideology
• More intelligent use of government– Sorting out government and market roles by
equal application of market and public failure– Adapting to diminishing supply of civil
servants
• The right attitude for policy…
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MIT CEEEPR
“If it is feasible to establish a market
to implement a policy,
no policy-maker can afford
to do without one.”
Pollution, Property and Prices
J. H. Dales (1968)