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Cap and Trade for Regulating Greenhouse Gases

Presented byScott Murtishaw

Advisor to President Peevey, CPUC

NASUCA Mid-Year MeetingSan FranciscoJune 15, 2010

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Presentation Overview

•Definition of Cap and Trade (C&T)

•Why Choose C&T? Pros and Cons Compared to Other Approaches

•A Brief History of C&T

•Allowance Prices and Energy Prices

•Overview of Current and Impending GHG C&T Programs

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What is C&T? • Cap and trade is a regulatory approach to controlling

emissions of a given pollutant by establishing a total allowable level of pollution (the cap) over a given time period and issuing pollution allowances that permit the holder of an allowance to emit one unit of the pollutant. The issued allowances may be traded among regulated entities to provide flexibility to each entity.

• Basically:– Set a cap– Issue allowances– Allow trading

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Market-Based Mechanisms: Why & When

• Market-based compliance mechanisms: pollution taxes and C&T

• Potentially much lower compliance costs compared to command and control policies because marginal abatement cost equalized

• Appropriate when emissions can be accurately and cost-effectively measured, multiple compliance strategies are possible, and pollutant’s effects are widely dispersed

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Why not Use a Carbon Tax?

• Quantity certainty vs price certainty

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Emission Reduction Uncertainty under a Carbon Tax

Tax Rate, $/ton

Tons CO2 Reduced

Marg Abatement CostReduction

Target

T1

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Why not Use a Carbon Tax?

• Quantity certainty vs price certainty – If tax rate needs to be frequently adjusted do

you have price certainty anyway?

• Harmonized international carbon price

• Allowance prices automatically adjust to economic conditions

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Common Elements of C&T Allowances and Carbon Tax

• Accurate measurement of emissions– Need for measurement infrastructure– Either approach can be upstream or

downstream

• Need for Third Party Verification of Reports &/or Significant Auditing by EPA

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Williams & Zabel Carbon Price

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Williams & Zabel Carbon Price (2)

Energy Source Cost per kWh GHG Rate,

Metric Tons CO2 per MWh

Carbon Fee (per metric ton) to Reach $0.25

New Gas CC $0.11 0.35 $350

New Coal, Gasified $0.10 0.85 $176

Current Wholesale Prices (existing gas)

$0.06 0.45 $475

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Allowance Price Effect on Energy Costs at $10/MTCO2

Energy Type Unit CO2 Cost per Unit

% Change (2006 Prices)

Natural Gas, Residential MMBtu $0.54 3.9%

Natural Gas, Industrial MMBtu $0.54 6.9%

Gasoline Gallon $0.09 3.3%

Electricity, Old Coal MWh $9.50 31.7%

Electricity, New Coal MWh $8.50 28.3%

Electricity, Gas CT MWh $5.80 5.3%

Electricity, Gas CC MWh $3.70 5.3%

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A Brief History of C&T: Acid Rain • First significant use was by the U.S. to reduce

SO2 (acid rain) emissions from power plants– First compliance year was 1995– Emissions in 2007 approximately 43% lower than

1990– Compliance costs far lower than anticipated (Ellerman

et al. estimate 57% savings)– Near perfect compliance (accurate measurements

and steep penalties)

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A Brief History of C&T: Smog • Next major application of C&T was the NOx Budget

Program in several eastern states • Covers power plants and other large point sources• First compliance year was 1999• Emissions in 2007 approximately 74% lower than 1990• Near perfect compliance• Limitations on banking due to the short time frame

between emissions and smog formation• Various estimates of significant cost savings

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NOx Emission Trend in NBP States

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Western Climate Initiative/CA

• Scheduled to begin in 2012• Scope: 85% coverage

– Only large point source in first phase (2012 to 2014)

• Cap: 15% below 2005 by 2020 (CA: 1990 levels by 2020)

• At least 10% auction, 25% by 2020• Offsets limited to less than half of reductions

from 2012 baseline (about 6%)

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Existing GHG C&T: RGGI

• 10 northeastern states• Scope: Electricity generators only• Cap: Maintain avg 2000-2004 levels between

2009 & 2014 then drop to 10% below baseline by 2018

• First compliance year is 2011• > 75% auctioning • Overallocated due to recession and fuel-

switching, prices have dropped to floor price

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Existing GHG C&T: EU ETS

• Scope: Large point sources only (about 40%)– Will likely include aviation and other sources in Phase

III• Criticisms of Phase I (2005 – 2007)• Phase II Cap: Meet Kyoto targets (7% below

2005 by 2020)• 90+% free allocation, much less in Phase III• Offsets limited to about 13%• Allowances trading at $18 - $20, down from

nearly $40 in early 2008

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Federal Action, Waxman-Markey

• Scheduled to begin in 2012

• Scope: 80% coverage by 2016

• Cap: 20% below 2005 by 2020, 83% by 2050

• Generous offset limits – approx. 30% in 2012, increasing over time

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Allocation under Waxman-Markey in 2016

Intl Deforestation Reduction 5%

Electricity Distribution Companies 35%

NG Distribution Companies 9%

Low Income & Heating Oil Assistance 16%

Trade-Vulnerable Industries 13%

Energy Efficiency & Renewables 9%

Other 13%

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Contact Information:

Scott Murtishawscott.murtishaw@cpuc.ca.gov

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Elements of C&T• Setting the cap and its trajectory• Scope and point of regulation

– Which emissions sources are covered and who’s responsible for compliance

• Reporting• Allocation of allowances• Flexible compliance: provision for banking or

borrowing, offsets, safety valves• Penalties

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GHGs, GWPs, and Share of U.S. Emissions in 2007

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U.S. Fossil CO2 Emissions in 2007 by Fuel and Sector

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Trend in World CO2 Emissions

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Share of GHG Emissions by Country

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EU ETS Allowance Prices