AGEC/FNR 406 LECTURE 21 Atmospheric Concentrations of Carbon Dioxide,

RECAP: Policy Instruments for Pollution Control 1.Taxes Reduce emissions at known cost Level of resulting emissions unknown Generates revenue 2.Tradable Permits Achieve target level of emissions Because mkt determines price, unknown cost Only generates revenue if permits auctioned

The logic of economic incentives, I Point: sources differ. It may be cheaper to reduce emissions from synthetics & coal than from oil & gas.

The logic of economic incentives, II Point: source matters. Marginal abatement costs differ across countries. Cleanup where it is cheapest!

Kyoto Accord Protocol signed December 1997, in Kyoto, Japan Plan to reduce 6 greenhouse gasses (GHG) Binding emissions targets and timetables set Reflects proposals advanced by the United States

Kyoto Accord, cont’d Specific limits vary from country to country Five-year commitment period: Developing countries do not have binding targets

Implementation Countries may select their policy instruments for reducing GHGs. Kyoto Protocol includes “flexibility provisions.” Purpose: Allow countries that have high marginal abatement costs to find cheaper alternatives.

Implementation: Flexibility Provisions Bubble Provision: Groups of countries treated as one country, and aggregate emissions must be controlled Joint Implementation: Allows an Annex I (industrialized) country to pay for emissions reductions in another Annex I country –Permits may or may not need to be traded. Clean Development Mechanism (CDM): Emission reduction activities in Annex II (developing) countries with credits used to offset emissions in Annex I countries

Example: CDM Canadian power utility is purchasing CO 2 offsets from Guatemalan government Idea: cheaper to buy land and reforest it in central America, than to reduce emissions Cost of CO 2 permits? Expected price $67-$218/ton Guatemala selling for $15-$25

Problems 1. Uncertainty regarding impacts of GW 2. Focus on industry (only 1/3 of problem) 3. Poor vs. rich countries 4. Role of “sinks” not well specified 5. Feasibility of trading uncertain 6. Will carbon taxes in some countries lead companies to relocate? 7. How will policies affect economic growth?

Kyoto – current status Ratified by 169 countries as of Feb 2007  US not a signatory (36% of 1990 emissions) Takes effect if nations accounting for 55% of all industrial countries’ 1990 emissions ratify it Critical country: Russia (17% of 1990 emissions)  Russia endorsed treaty on Sept 30, 2004  Now more than 55% of emissions is covered  Emissions trading is permitted under the treaty, and Russia is likely to have “credits” since current emissions are less than 1990 levels. This means there may not be much additional reduction in GGs.

US Carbon Market Chicago Climate Exchange ( –Voluntary participation; legally binding –Units of trade/“ contracts” Carbon Financial Instrument (CFI) equal to 100 metric tons of CO 2 equivalent Gases included: carbon dioxide (CO 2 ),methane (CH 4 ), nitrous oxide (N 2 O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs),sulfur hexafluoride (SF 6 ) –Offsets (from sequestration projects) part of market –Yesterday’s closing price was $4.55/mT Market data:

EU-Emissions Trading Scheme Multi-national trading system –40% of total EU GHG emissions included –>10,000 energy/industrial installations Participation in market is voluntary, but emissions reductions are required No banking and no offsets DEC2008 contracts €21.35EUR=$32.29/mT Market data:

Local government response Regional Greenhouse Gas Initiative (RGGI) –January 2007 –8 northeastern US states –State-level cap and trade program California –12 th largest emitter –Attempt to reduce GHG emissions by 25% by US Cities in all 50 states support protocol

Washington Declaration Non-binding agreement US, Canada + 10 countries Support for cap and trade program –Industrialized countries –Developing countries