Developments in US Climate Policies: The Effects of Cap and Trade on International Market “Comparing North American and European approaches to climate change” at Wilfrid Laurier University 09/28/2007 Toshi Arimura RFF, George Mason University and Sophia University (with Dallas Burtraw, Alan Krupnick, Karen Palmer, RFF)

Outline 1.Developments in State/Regional Programs 1.RGGI 2.California and Western States 3.CCX 2.Developments in Federal Policy Cap and Trade Proposals in Congress 3.Concluding Remarks

1.Developments in State/Regional Programs

Backgrounds on US environmental policies  State governments often implement environmental policies before the federal government does  California is known to be the leader

States with GHG Emissions Targets (PEW Center, Feb ‘07)

1.1.The Regional Greenhouse Gas Initiative （ RGGI ）  Cap and trade programs among 10 states in north eastern part of US  Electric Power Sector  Starting in Current Emission Level in 2015  10% Reduction by 2019 ( 35% reduction compared with BAU)  Banking

RGGI

RGGI The economy in this region amounts to 20% of US GDP

CO 2 Cap StateCap2004StateCap States NJ CT DE ME5.94.7MDn/a32.0 NH8.68.8MA VT1.20.4RI NY PAn/a130.5

Allowance Allocation  100% auction in many states (VT, NY, ME, MA, CT) ： Contrast to EU  At least, 25% of the revenue for energy efficiency and clean technology, new technology.

Offset  Up to 3.23% of allocations (50% of emission reduction)  Trigger Prices  Up to 5% if the allowance prices reaches $7  10% if the price reaches $10  CDM credits or projects in other regions are permitted if the price reaches $10

CO 2 Prices and Impacts on Economy  Carbon Prices ： RGGI  RGGI: $5 in 2024 w/o Federal Cap  HAIKU （ RFF): $4 in 2010 and $11 in 2024  Electricity Prices  From +0.5% to +5% in RGGI model  3% in RFF model

Impacts on International Market  The price does not reach $10 until  The demand for CDM is limited during the Kyoto commitment period.  However, with banking, there may be demand for CDM before 2019.

Influences on Federal Cap and Trade Programs  RGGI can serve as a Platform for federal programs  Recent emphasis on auction in federal proposals

1.2. California and Western States

US versus CA: Electricity Consumption per capita (CA Climate Change Portal)

CO 2 Emission per capita by state (CA Climate Change Portal)

AB32 （ California Global Warming Solutions Act ）  1990 emission level by 2020  Details are discretion to CA Air Resource Board  Market-based approach as an option.  Market Advisory Board recommend the mixture of auction and free allocation  Link to EU ETS?

New Movements in Western states  Cap and trade proposals among 6 western states (Arizona, California, New Mexico, Oregon, Utah and Washington ) and 2 Canadian provinces (British Columbia and Manitoba)  15 percent below 2005 levels by 2020  The western six states account for 20% of US GDP.

Chicago Climate Exchange  Only existing market of GHG in US  Voluntary market  Emitters in US, Canada and Mexico  More than 50 members  Phase I( ), Phase II( )  6% reduction in 2010  Offsets and Trade of CER

2.Cap and Trade Proposals in US Congress

Movements in Congress  The number of bills, resolutions, and amendments addressing global climate change and GHG emissions reached 106 in the 109 th Congress  At least, 9 cap and trade proposals in the 110 th Congress  Trend  Targets in longer term  Auction (Influence of RGGI)  Convergence among proposals in 110 th Congress

(at least) 9 Cap and Trade Proposals (as of August 2007)  Sanders/Boxer (S309)  Feinstein/Carper (S317)  Lieberman/McCain (S280)  Kerry/Snowe (S.485)  Alexander/Lieberman (S.1168)  Bingaman/Specter (S.1766)  Waxman (H.R.1590).  Udall/Petri Draft  Lieberman/Warner Draft

Regulated Entities  Absolute Cap (intensity target in earlier B/S )  Scope  Electricity Sector : Feinstein/Carper, Alexander- Lieberman  Economy Wide: Others  Downstream vs. Upstream  Downstream vs Upstream + Downstream (L/M)  Discretion of EPA

Characteristics of Allowance Allocation  Mixture of free allocation and auction.  More emphasis on auction. The share of auction increases over time (B/S &F/C)  Technology Program  Allocation to state governments

Example of Allocation: Bingaman/Specter  53% free to industry (with phase out);  24% auctioned to support R&D, transition assistance, adaptation; (increases to 53%)  9% to states.  14%: set aside allowances  8% for CCS (carbon capture and sequestration)  5% agricultural sequestration  1% early reduction

Usage of the Auction Revenue in Bingaman/Specter  The usage of auction revenue: among 24% :  12% for technology  8% for adaptation  4% for Low-Income Assistance

Impacts on International Markets

Programs for Developing Countries  Fund for low carbon technology deployment in developing countries (Bagman/Specter)  10% of allowances for technology in developing countries (Udall/Petri)  Support for low-carbon and efficiency technologies in developing countries (Sanders/Boxer)  10% auction revenue for international climate change relief measures (Lieberman/Warner)

International Credits/Offsets  CDM: Feinstein/Carper, Old B/S  Projects in Developing Countries: Lieberman/McCain  JI: Feinstein/Carper  Foreign credits: Bingaman/Specter, Lieberman/Warner

Indirect Linking to foreign markets Developing Countries: CDM projects and non-CDM projects US Federal Market RGGI CA & Western 6 States EUETS

US Importer Requirements (Bingaman/Specter)  Bulk, energy-intensive imports from countries w/o comparable policy require permits after 10 years.  Two cases  If a country does not have a comparable policy..  If a country has a comparable policy, then…  In either case, this requirement can increase the demand for foreign credits, CDM  Lieberman/Werner has a similar idea

Two Carbon Tax proposals.  Stark (H.R. 2069) : $3/CO2 ton, rising $3 annually.  Larson (H.R. 3416): $16.5/ CO2 ton, rising 10% plus inflation annually.  Tax applied to fossil fuel imports; fossil fuel exports are exempt.

Contrasts to EU ETS

Price Stability and Cost Containment  Borrowing: Lieberman/McCain, Lieberman/Werner  Safety Valve Price (B/S and U/P) $12 rising annually. (initially $7 in B/S draft)  Banking

Carbon Market Efficiency Board (Lieberman/Warner)  Modeled after FRB to oversea the allowance market  The board can permit more flexible borrowing in emergency to mitigate impacts to economy.

Technology Programs  Mixture with other regulatory approach  Revenue of the auction for technology program  Carbon Capture Sequestration ： B/S  Fund for geological sequestration (S/B)  Zero emission clean coal Generation (F/S)

Other Regulation  Cap and trade proposal with other regulatory measures  Energy Efficiency (S/B, K/S)  RPS （ K/S)  Vehicle Emission Standard （ S/B,K/S ）

Carbon Price and Impacts to Economy Udall/Petri (109 th Congress) EIA Lieberman/ McCain EIA Bingaman/Specter NCEP Emission Cap Based on the average emissions from the previous three years before the bill 2004 level in level in % below 1990 level in level in level by ’ level by ’30 Price ($2005/ CO2 TOE) Reach Safety Valve price $6.76 in 2018 $14 to $31 in $31 to $58 in2030 $5.5in $24 in 2030 GDP-0.16% to -0.21% in % to -0.5% in % in 2030 Electricity Price +5.66% to +6.34% in % in % in % in 2020

3. Concluding Remarks  Despite the deviation from Kyoto Protocol, the state governments are starting cap and trade programs  Discussion on federal level cap and trade programs  Despite the lack of an international agreements, the US markets will be indirectly linked to cap and trade programs in international markets.

Some extras if time left

Programs for Low Income People  Funds and incentives for mitigating effects on poor (L/W, L/M)  Energy Assistance Fund: up to $6 billion per year (auction revenue) to low income households (B/S)

Domestic Offsets  Agricultural and Biological sequestration. (Feinstein/Carpe, Lieberman/McCain, Sanders/Boxer, Kerry/Snowe)  Experience in CCX

Credits for Early Actions  1% allowance allocation from 2012 to 2020 (Bagman/Specter)  Credit for reductions before 2012 (Lieberman/McCain )  Goal to “recognize and reward early reductions” (Kerry- Snowe)  8% of allowances for early action in 2012, phasing to zero in 2020 (Lieberman/Warner)  Credit for reductions from , limit 10% of cap (Feinstein/Carper)  Bonus allowances to first 30 new or modified coal-fired utilities meeting new performance (Alexander/Lieberman)

New Entrants  Pool of allowances for new entrants employing clean and efficient technology (Bingaman/Specter)

Adaptation  Fund to provide adaptation assistance for workers and communities and to help mitigate effects of climate change on fish and wildlife habitats (F/C )  Allowances to mitigate economic costs of the act (L/M )  Allowances to communities and companies that are disproportionately adversely affected by global warming or the transition to a lower carbon economy (S/B )  Funds for adaptation (L/W, K/W)  Climate Adaptation Fund (including wild life conservations) (B/S)