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Cap and trade


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  • 1. Cap and Trade1 Wali Memon Wali Memon
  • 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 2 Wali Memon
  • 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 trading3 Wali Memon
  • 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 dispersed4 Wali Memon
  • 5. Why not Use a Carbon Tax? Quantity certainty vs price certainty5 Wali Memon
  • 6. Emission Reduction Uncertainty under a Carbon Tax Marg Abatement Tax Reduction Cost Rate, Target $/ton T16 Wali Memon Tons CO2 Reduced
  • 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 conditions7 Wali Memon
  • 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 EPA8 Wali Memon
  • 9. Williams & Zabel Carbon Price9 Wali Memon
  • 10. Williams & Zabel Carbon Price (2)Energy Source Cost per kWh GHG Rate, Carbon Fee (per Metric Tons CO2 metric ton) to per MWh Reach $0.25New Gas CC $0.11 0.35 $350New Coal, Gasified $0.10 0.85 $176Current Wholesale $0.06 0.45 $475Prices (existinggas) 10 Wali Memon
  • 11. Allowance Price Effect on Energy Costs at$10/MTCO2 Energy Type Unit CO2 Cost per % Change Unit (2006 Prices) Natural Gas, Residential MMBtu $0.54 3.9% Natural Gas, Industrial MMBtu $0.54 6.9% Gasoline Gallon $0.09 3.3% Electricity, Old Coal MWh $9.50 31.7% Electricity, New Coal MWh $8.50 28.3% Electricity, Gas CT MWh $5.80 5.3% Electricity, Gas CC MWh $3.70 5.3%11 Wali Memon
  • 12. A Brief History of C&T: Acid Rain First significant use was by the U.S. to reduce SO2 (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)12 Wali Memon
  • 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 savings13 Wali Memon
  • 14. NOx Emission Trend in NBP States14 Wali Memon
  • 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%)15 Wali Memon
  • 16. Existing GHG C&T: RGGI 10 northeastern states Scope: Electricity generators only Cap: Maintain avg 2000-2004 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 price16 Wali Memon
  • 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 200817 Wali Memon
  • 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 time18 Wali Memon
  • 19. Allocation under Waxman- Markey in 2016Intl Deforestation Reduction 5%Electricity Distribution Companies 35%NG Distribution Companies 9%Low Income & Heating Oil Assistance 16%Trade-Vulnerable Industries 13%Energy Efficiency & Renewables 9%Other 13%19 Wali Memon
  • 20. 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 Penalties20 Wali Memon
  • 21. GHGs, GWPs, and Share of U.S. Emissions in 200721 Wali Memon
  • 22. U.S. Fossil CO2 Emissions in 2007 by Fuel and Sector22 Wali Memon
  • 23. Trend in World CO2 Emissions23 Wali Memon
  • 24. Share of GHG Emissions by Country24 Wali Memon
  • 25. EU ETS Allowance Prices25 Wali Memon