RESEARCH STATISTICS Jobayer Hossain, PhD Larry Holmes, Jr, PhD October 16, 2008.
January 23, 2009 Holmes Hummel, PhD hummel@stanfordalumni
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January 23, 2009
Holmes Hummel, PhD
www.holmeshummel.net/ClimatePolicyDesign
Complementary Policies
for Climate Change:
Basis, Design, Strategy
1
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• Seeking a Price Response in Failed Markets
• Making the Case for Complementary Policies
• Considering a Federal Climate Action Plan
• Annex: Smart Grid (EISA Title XIII)
Complementary Policies
2
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U.S. Approach: Cap-and-TradeDeclining Cap
Covered Entities 3
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Polluters Compete for Scarce Permits
4
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Carbon Price Established by Market Activity
So, is it more profitable to:
buy a permit, OR reduce my own
emissions?
Profit opportunities are a main driver for innovation and investment,
and the climate challenge needs both.
5
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Carbon Price Established by Market Activity
Would anyone accept $40 for your permit?
$40
6
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Carbon Costs Passed to Consumers
$40$40 $40 $40 $40
35¢per gallon
2.5 ¢per kWh
0.6 ¢per therm People
Respond…?7
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2000 21002050
Achieving Reduction TargetsTo stabilize global warming, most uses of coal, oil, and gas will have to move to a different game: the clean energy economy.
5000
4000
3000
2000
1000
6000
7000
$100
$80
$60
$40
$20
$120
$150
An
nu
al U
.S.
Em
issi
on
s (M
tCO
2)C
arbo
n P
rice ($/MtC
O2)
$??
$??
$??
$??
$250
$200
$150
$100
$50
$300
$350
8
What price trajectorywould be sufficient to drive
people away from fossil fuels?
Modeling results are highly uncertain
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Moving to Clean Energy
Players seek better options as costs rise.
Cap-and-trade lets players choose at what price they leave the game
– and how they want to make that change.
$30$150$20
$100
$200$50
2050204020302020
Wind power
Rail Transport
Green buildings
Nuclear power
2010
Solar power
Hybrid vehicle
9
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Achieving Reduction Targets
Who will be the last greenhouse gas polluters
left in the game?
2050
Unlike the familiar game of Musical Chairs, the last players still vying for pollution permits are not exactly winners…
10
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Achieving Reduction Targets
The last ones remaining in the game are those who:
A) can afford to pay the most, or
B) have the least flexibility to change games.
The underlying assumption is that the most valuable uses of fossil fuels must be the ones for which people are willing to pay the most.
To stabilize global warming, most uses of coal, oil, and gas will have to move to a different game: the clean energy economy.
2050
11
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12
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Market Conditions
• Many small buyers and sellers
• Perfect freedom of entry and exit from the industry.
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
Perfect Competition
SELLERS
BUYERS
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Market Conditions
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
Perfect Competition
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Market Conditions
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
Perfect Competition
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Market Conditions
Perfect Competition
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$3.99
$3.99
$3.20
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Market Conditions
Perfect Competition
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$3.99
$3.99
$3.20
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Market Conditions
Perfect Competition
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$3.99
$3.99
$3.20
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$3.99
$3.99
$3.20
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$3.99
$3.99
$3.20
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$?? $/Btu?
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Persistent transaction costs
• No externalities arising from production and/or consumption which lie outside the market
$??
$/Btu?
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Persistent transaction costs
• Many, Very Large Externalities – climate change is just one…
$??
$/Btu?
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• Seeking a Price Response in Failed Markets
• Making the Case for Complementary Policies
• Considering a Federal Climate Action Plan
• Annex: Smart Grid (EISA Title XIII)
Complementary Policies
24
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25
#1 Complementary Policies Reduce the Cost of Price-Based Policies
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26
#1 Complementary Policies Reduce the Cost of Price-Based Policies
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6
Mid-range case, McKinsey 2007
Abatement costs <$50/ton
PotentialGigatons/yearIN 2030
COST($/tonCO2)
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27
#1 Complementary Policies Reduce the Cost of Price-Based Policies
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
Residential electronics
Residential buildings - Lighting
Fuel economy packages – Cars
Cellulosic
biofuels
Industry – Combined heat and power
Conservation tillage
Fuel economy packages – Light trucks
Coal mining – Methane mgmt
Industrial process improve-ments
Commercial buildings – New shell improvements
Abatement costs <$50/ton
Commercial electronics
Mid-range case, McKinsey 2007
PotentialGigatons/yearIN 2030
A price on carbon will not address all the non-price barriers to reducing GHGs –
or the price insensitive reasons people consume fossil fuels.
1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.61.21.2 1.41.4
COST($/tonCO2)
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28
#1 Complementary Policies Reduce the Cost of Price-Based Policies
Natural gas and petroleum systems mgmt
Afforestation of pastureland
Reforestation
Winter cover crops
New coal
power plants
with CCS
for EOR
Biomass power – Cofiring
Industry – CCS new builds on carbon-intensive processes
Shift dispatch of existing plants from coal to natural gas
Car hybridi-zation
Commercial electronics
Residential electronics
Residential buildings - Lighting
Fuel economy packages – Cars
Cellulosic
biofuels
Industry – Combined heat and power
Conservation tillage
Fuel economy packages – Light trucks
Coal mining – Methane mgmt
Industrial process improve-ments
Commercial buildings – New shell improvements
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
Abatement costs <$50/ton
Mid-range case, McKinsey 2007
PotentialPotential
Gigatons/yearGigatons/year
IN 2030IN 2030
1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6
COST($/tonCO2)
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29
#1 Complementary Policies Reduce the Cost of Price-Based Policies
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
Abatement costs <$50/ton
1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6
Natural gas and petroleum systems mgmt
Afforestation of pastureland
Reforestation
Winter cover crops
New coal
power plants
with CCS
for EOR
Biomass power – Cofiring
Industry – CCS new builds on carbon-intensive processes
Shift dispatch of existing plants from coal to natural gas
Car hybridi-zation
Potential
Gigatons/year
IN 2030
Mid-range case, McKinsey 2007
$40$40 / tonCO2
Reduction Reduction Target: Target:
1 GtCO2e1 GtCO2e
Reduction Reduction Target: Target:
1 GtCO2e1 GtCO2e
COST($/tonCO2)
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30
#1 Complementary Policies Reduce the Cost of Price-Based Policies
$10 Billion
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
Abatement costs <$50/ton
1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6
Potential
Gigatons/year
IN 2030
Mid-range case, McKinsey 2007
Reduction Target:
1 GtCO2e
$40$40 / tonCO2
Residential
buildings -Lighting
Fuel economy
packages – Cars
Fuel economy
packages –
Light trucks
COST($/tonCO2)
New coal
power plants
with CCS
for EOR
Shift dispatch of existing plants from coal to natural gas
New coal
power plants
with CCS
for EOR
Shift dispatch of existing plants from coal to natural gas
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31
-110
1.01.0 1.21.2
-50
0.20.2 0.40.4 0.80.80
-40
0.60.6-20-10
10
4050
7080
100
20
-100
-70-80
30
60
90
-120
-30
-60
-90
-230
Abatement costs <$50/ton
1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6
Potential
Gigatons/year
IN 2030
Mid-range case, McKinsey 2007Residential
buildings -Lighting
Fuel economy
packages – Cars
Fuel economy
packages –
Light trucks
New coal
power plants
with CCS
for EOR
COST($/tonCO2)
Shift dispatch of existing plants from coal to natural gas
#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels
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#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels
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#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels
Nuclear NuclearCoalPower
CoalPower
Natural GasPower
Natural GasPower
Carbon Price: $0/tCO2 $20/tCO2
Market Price
Market PriceSets Price
Sets Price
Pro
fit Pro
fit
Pro
fit
Pro
fit
Dis
pat
ch P
rice
per
MW
h
Dis
pat
ch P
rice
per
MW
h
Pro
fit Pro
fit
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Nuclear NuclearCoalPower
CoalPower
Natural GasPower
Natural GasPower
Carbon Price: $0/tCO2 $20/tCO2
Market Price
Market PriceSets Price
Sets Price
Pro
fit Pro
fit
Pro
fit
Pro
fit
Dis
pat
ch P
rice
per
MW
h
Dis
pat
ch P
rice
per
MW
h
#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels
Pro
fit
Pro
fit
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Gasoline Consumption
Price of Gasoline
#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels
~$150/tCO2
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World Resources Institute; 2003 data
#3 Stabilization Requires Reducing Emissions Outside a Managed Cap of Measurable Sources
OFFSETS
CAP
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• Seeking a Price Response in Failed Markets
• Making the Case for Complementary Policies
• Considering a Federal Climate Action Plan
• Annex: Smart Grid (EISA Annex XIII)
Complementary Policies
38
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Market Conditions
Perfect Competition
• Many small buyers and sellers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• Perfect freedom of entry and exit from the industry.
• Perfect knowledge
• Low transaction costs
• No externalities arising from production and/or consumption which lie outside the market
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Persistent transaction costs
• Many, Very Large Externalities – climate change is just one…
39
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Persistent transaction costs
• Many, Very Large Externalities – climate change is just one…
Complementary Policies
Price-Based Policies
40
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Market Conditions
Energy Sector
• Few sellers, many buyers
• Homogeneous products are supplied to the markets that are perfect substitutes.
• High capital requirements and regulatory barriers to entry
• Lack of transparency
• Persistent transaction costs
• Many, Very Large Externalities – climate change is just one… Price-Based Policies
41
1. Curing market failures
2. Coping with market failures
3. Covering emissions by sector
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World Resources Institute; 2003 data
OFFSETS INSIDE U.S.
CAPCAP
Designing Complementary PoliciesU
.S. G
HG
Em
issionsU
.S.
Sou
rces
End-Use
42
An “economy-wide” cap-and-trade policy does not distinguish between sectors
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World Resources Institute; 2003 data
TransportationTransportation
U.S
. GH
G E
missions
U.S
. S
ourc
es
End-Use
43
Designing Complementary Policies
DistanceMode
Fuel SourceFuel Economy
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Vehicle GHGStandards
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Vehicle GHGStandards
Low Carbon Fuel Standard
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
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World Resources Institute; 2003 data
Electric Power SectorElectric Power Sector
U.S
. GH
G E
missions
U.S
. S
ourc
es
End-Use
47
Designing Complementary Policies
TransportationTransportation
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
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California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Million Solar Roofs
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
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World Resources Institute; 2003 data
U.S
. GH
G E
missions
U.S
. S
ourc
es
End-Use
51
Designing Complementary Policies
Industrial Industrial GasesGases
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uCalifornia’s Strategy to Reduce Emissions
to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Million Solar Roofs
F-Gases &Refrigerants
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
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uCalifornia’s Strategy to Reduce Emissions
to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Million Solar Roofs
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
F-Gases &Refrigerants
SustainableForests
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uCalifornia’s Strategy to Reduce Emissions
to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Million Solar Roofs
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
F-Gases &Refrigerants
SustainableForests
Other
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uCalifornia’s Strategy to Reduce Emissions
to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004
Million Solar Roofs
Vehicle GHGStandards
Low Carbon Fuel Standard Transportation
& Other Vehicle Measures
Efficiency Standards& Incentive Programs
Renewable PortfolioStandard:33% by 2020
F-Gases &Refrigerants
SustainableForests
Cap-And-TradeMarket Response
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World Resources Institute; 2003 data
OFFSETS INSIDE U.S.
U.S
. GH
G E
missions
U.S
. S
ourc
es
End-Use
56
CAPCAP
Designing Complementary Policies
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Most of the Industrial GHG Emissions Covered by a Cap-and-Trade Policy are in 5 Sub-Sectors
Energy Intensive Industries
Capped
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Most of the Industrial GHG Emissions Covered by a Cap-and-Trade Policy are in 5 Sub-Sectors
ISO 50001: Int’l Energy Management Std.
Capped
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Complementary Policies for EE & RE
• National Action Plan for Energy Efficiency recommendations
• Renewable Portfolio Standard; Renewable Fuel Standard
• Generation performance standards; Low Carbon Fuel Standard
• Requiring efficiency to be an alternative in power plant EIS studies
• Remove barriers to grid access (“Free the Grid” report)
• Green power purchases and marketing
• Combined heat and power (CHP) standards, incentives, and/or barrier removal
• Public Benefits Charge – and all that it could fund59
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Policy Horizon
On the Books:
1. EPAct 2005
2. EISA 2007
3. Existing executive authorities across all departments
Looking ahead:
1. New Energy for America
2. SAFETEA-LU (Transportation Reauthorization)
3. Cap-and-Trade legislation
4. Mass vs. EPA regulations60
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• Seeking a Price Response in Failed Markets
• Making the Case for Complementary Policies
• Considering a Federal Climate Action Plan
• Annex: Smart Grid (EISA Title XIII)
Complementary Policies
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Supplemental questions on Smart Grid
1. What does Smart Grid do?
2. What characterizes a Smart Grid?
3. What does Smart Grid deliver?
… as specified in the Energy Independence and Security Act of 2007
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What does a Smart Grid do?(EISA Title XIII)
1. Dynamic optimization of grid operations and resources, with full cyber-security.
2. Development and incorporation of demand response, demand-side resources, and energy-efficiency resources.
3. Provision to consumers of timely information and control options.
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What characterizes a Smart Grid?(EISA TitleXIII)
1. Increased use of digital information and controls technology to improve reliability, security, and efficiency of the electric grid.
2. Deployment and integration of distributed generation (e.g. renewable resources)
3. Deployment and integration of advanced electricity storage and peak-shaving technologies, including plug-in electric and hybrid electric vehicles, and thermal-storage air conditioning.
4. Deployment of `smart' technologies (real-time, automated, interactive technologies that optimize the physical operation of appliances and consumer devices) for metering, communications concerning grid operations and status, and distribution automation.
5. Integration of `smart' appliances and consumer devices.
6. Development of standards for communication and interoperability of appliances and equipment connected to the grid, including grid infrastructure.
7. Identification and lowering of unreasonable or unnecessary barriers to adoption of smart grid technologies, practices, and services.
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What does a Smart Grid deliver?(EISA Title XIII)
1. The ability to measure or monitor electricity use as a function of time of day, power quality characteristics such as voltage level, current, cycles per second, or source or type of generation and to store, synthesize or report that information by digital means.
2. The ability to sense and localize disruptions or changes in power flows on the grid and communicate such information instantaneously and automatically for purposes of enabling automatic protective responses to sustain reliability and security of grid operations.
3. The ability to detect, prevent, communicate with regard to, respond to, or recover from system security threats, including cyber-security threats and terrorism, using digital information, media, and devices.
4. The ability of any appliance or machine to respond to such signals, measurements, or communications automatically or in a manner programmed by its owner or operator without independent human intervention.
5. The ability to use digital information to operate functionalities on the electric utility grid that were previously electro-mechanical or manual.
6. The ability to use digital controls to manage and modify electricity demand, enable congestion management, assist in voltage control, provide operating reserves, and provide frequency regulation.
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January 23, 2009
Holmes Hummel, PhD
www.holmeshummel.net/ClimatePolicyDesign
Complementary Policies
for Climate Change:
Basis, Design, Strategy
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