1. Econ 100 1 Winter 2012: Professor Bushnell California’s Carbon Market: Choices and Challenges James Bushnell University of California at Davis

2. Econ 100 2 Winter 2012: Professor Bushnell Outline California’s carbon market one year in The economic theory of cap-and-trade –And why it (mostly) doesn’t fit carbon markets Things to look for going forward Key Takeaway: Price Collars are Really Important in Carbon Markets!

3. Econ 100 3 Winter 2012: Professor Bushnell The Carbon Market: One year in

4. Econ 100 4 Winter 2012: Professor Bushnell The Carbon Market: One year in

5. Econ 100 5 Winter 2012: Professor Bushnell The Carbon Market: One year in

6. Econ 100 6 Winter 2012: Professor Bushnell California Allowance Prices

7. Econ 100 7 Winter 2012: Professor Bushnell Theory of Cap and Trade Market based environmental regulation –Regulator sets how much pollution is allowed –The “market” decides who reduces pollution and how they do it. Preferred to taxes in settings where we are more worried about hitting a specific emissions target than the costs of hitting that target.

8. Econ 100 8 Winter 2012: Professor Bushnell Regulator decides how much?

9. Econ 100 9 Winter 2012: Professor Bushnell Regulator decides how much?

10. Econ 100 10 Winter 2012: Professor Bushnell

11. Econ 100 11 Winter 2012: Professor Bushnell Market decides who and how?

12. Econ 100 12 Winter 2012: Professor Bushnell Climate and cap-and trade theory Should not take quantity targets too literally –Local action to reduce global pollutant –All targets to date well short of what is needed Much talk of adding a consistent cost of GHG emissions to business planning and consumer activity –But caps are a bad way to do that Key question: what is the best way to build forward momentum for reducing global GHG? Key Takeaway: Price Collars are Really Important in Carbon Markets!

13. Econ 100 13 Winter 2012: Professor Bushnell Supply of Allowances Allowance Price 0 Offsets Price Containment Reserve $40 $50 $10.5 2380 mmTons 125mmTons Cap (less Reserve)

14. Econ 100 14 Winter 2012: Professor Bushnell Demand for Allowances Allowance Price 0 $40 $50 $10.5 ~2700 mmTons BAU emissions

15. Econ 100 15 Winter 2012: Professor Bushnell Demand for Allowances Allowance Price 0 $40 $50 $10.5 ~2700 mmTons BAU emissions ~ 200 - 400 mmTons Complementary Policies

16. Econ 100 16 Winter 2012: Professor Bushnell Demand for Allowances Allowance Price 0 $40 $50 $10.5 ~2700 mmTons BAU emissions ~200 – 400 mmTons Complementary Policies Electricity, Gasoline, and Natural Gas Demand Response ~ 40-60 mmTons

17. Econ 100 17 Winter 2012: Professor Bushnell Supply and Demand Allowance Price GHG Emissions 0 Offsets Price Containment Reserve $40 $50 $10.5 2380 mmTons 125 mmTons Cap (less Reserve) 125 mmTons $20

18. Econ 100 18 Winter 2012: Professor Bushnell Supply and Demand Allowance Price GHG Emissions 0 Offsets Price Containment Reserve $40 $50 $10.5 2380 mmTons 125 mmTons Cap (less Reserve) 125 mmTons $20

19. Econ 100 19 Winter 2012: Professor Bushnell Possible Distributions of Allowance Price Allowance Price 0 $40 $50 Probability Price = X $10.50

20. Econ 100 20 Winter 2012: Professor Bushnell

21. Econ 100 21 Winter 2012: Professor Bushnell

22. Econ 100 22 Winter 2012: Professor Bushnell 2006-07: EU Carbon price crashes

23. Econ 100 23 Winter 2012: Professor Bushnell California Allowance Prices

24. Econ 100 24 Winter 2012: Professor Bushnell Things to Look for Going Forward End of Phase I (2013 – 2014) –Reporting of electricity imports What happens if there is a positive shock to emissions before 2020? –The importance of transportation –Policy supporting the price-containment reserve What will happen post 2020? –Banking of allowances supports minimum prices –Relationship with rest of US?

25. Econ 100 25 Winter 2012: Professor Bushnell Summary Price Collars are Really Important in Carbon Markets! –A good price-collar makes up for a lot of flaws in any cap and trade market –Stable non-trivial carbon prices best way to steer investment and consumption on to a low carbon trajectory

26. Econ 100 26 Winter 2012: Professor Bushnell Thank You! Special Thanks and Apologies to the websites of Environmental Defense Fund SNL Financial Carbon Policy Initiative