1 Cap and Trade for Regulating Greenhouse Gases Presented by Scott Murtishaw Advisor to President Peevey, CPUC NASUCA Mid-Year Meeting San Francisco June 15, 2010

2 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

3 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

4 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

5 Why not Use a Carbon Tax? Quantity certainty vs price certainty

6 Emission Reduction Uncertainty under a Carbon Tax Tax Rate, $/ton Tons CO 2 Reduced Marg Abatement Cost Reduction Target T1T1

7 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

8 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

9 Williams & Zabel Carbon Price

10 Williams & Zabel Carbon Price (2) Energy SourceCost per kWhGHG Rate, Metric Tons CO 2 per MWh Carbon Fee (per metric ton) to Reach $0.25 New Gas CC$ $350 New Coal, Gasified$ $176 Current Wholesale Prices (existing gas) $ $475

11 Allowance Price Effect on Energy Costs at $10/MTCO 2 Energy TypeUnitCO 2 Cost per Unit % Change (2006 Prices) Natural Gas, ResidentialMMBtu$ % Natural Gas, IndustrialMMBtu$ % GasolineGallon$ % Electricity, Old CoalMWh$ % Electricity, New CoalMWh$ % Electricity, Gas CTMWh$ % Electricity, Gas CCMWh$ %

12 A Brief History of C&T: Acid Rain First significant use was by the U.S. to reduce SO 2 (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)

13 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

14 NOx Emission Trend in NBP States

15 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%)

16 Existing GHG C&T: RGGI 10 northeastern states Scope: Electricity generators only Cap: Maintain avg 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

17 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

18 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

19 Allocation under Waxman- Markey in 2016 Intl Deforestation Reduction5% Electricity Distribution Companies35% NG Distribution Companies9% Low Income & Heating Oil Assistance16% Trade-Vulnerable Industries13% Energy Efficiency & Renewables9% Other13%

20 Contact Information: Scott Murtishaw

21 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

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

23 U.S. Fossil CO 2 Emissions in 2007 by Fuel and Sector

24 Trend in World CO 2 Emissions

25 Share of GHG Emissions by Country

26 EU ETS Allowance Prices