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An Introduction to  Cap-and-Trade Climate Policy   Holmes Hummel, PhD hummelhh@mindspring.com  November 21, 2007 Using Musical Chairs:  An Illustration of Managed Scarcity
Climate Economics ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],References:  IPCC Fourth Assessment Report, Summary for Policy Makers, 2007.   The Economics of Climate Change, Stern Review Report, 2006.
Climate Policy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cap-and-Trade Climate Policy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],A familiar game can help illustrate the concepts… Got it?
Musical Chairs:  A Helpful Analogy ,[object Object],[object Object],[object Object],[object Object]
Musical chairs ,[object Object],[object Object],2008 All stick figures by Tormod Lund, GraffleTopia.com
Musical chairs ,[object Object],[object Object],2009
Would anyone be willing to  trade  their chair for  $30 ?
Sure!  For that price, I can finance an efficiency upgrade, eliminating my need for a pollution permit.
[object Object],[object Object]
Using Market Incentives ,[object Object],[object Object],2009
Using Market Incentives If I could I build wind farms to replace my coal power plants, then I could  sell  permits… 2009
Using Market Incentives Hey, I made a profit by reducing my fossil fuel use and avoiding carbon emission costs! 2010
Achieving Reduction Targets ,[object Object],[object Object],[object Object],2010
Achieving Reduction Targets ,[object Object],[object Object],[object Object],2050 2040 2030 2020 Wind power Rail Transport Hybrid vehicle Solar power Green buildings Nuclear power 2010 $30 $150 $20 $100 $200 $50
Achieving Reduction Targets Who will be the last greenhouse gas polluters left in the game? 2050
Achieving Reduction Targets ,[object Object],[object Object],[object Object],[object Object],[object Object],2050
Achieving Reduction Targets ,[object Object],2050 Comparison of Two Leading Climate Policy Proposals in the 110 th  Congress (2007) Warner-Lieberman Chart modified for clarity Stabilize at 450-550ppm
Achieving Reduction Targets ,[object Object],[object Object],[object Object],$90 $90 $90 SELL PRICE: 2020
Achieving Reduction Targets $90 $90 $90 How high can  the price go? As high as it takes to motivate one of us to stand up. 2020 SELL PRICE:
The Carbon Market at Work ,[object Object],[object Object],[object Object],$90 $90 $90 SELL PRICE:
Coverage and Distribution ,[object Object],[object Object],[object Object],[object Object]
Coverage ,[object Object],[object Object],Examples of “covered” pollution sources: Oil  Refineries Coal companies Natural Gas companies Power Plants Mining plants Chemical companies Aluminum smelters
[object Object],[object Object],Auctioning Permits vs Allocating for Free Permits auctioned  to “covered” companies Free permits allocated to fossil fuel companies $20 $20 $20 $20 $20 $20 $0 BUY: Reference:  Lawrence Goulder, Congressional Budget Office Conference on Climate Change, 2007.
[object Object],[object Object],Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: * Though portion would change over time, 1/4 are still free in 2050. Auctioned permits  bought by corporations Free permits allocated to corporations 2012
[object Object],[object Object],Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: Auctioned permits  Free permits
Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: Auctioned permits  Free permits Why is this a cause for concern? 2.  Unearned windfall profits:   In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.
Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: SELL: $20 $20 $20 $20 $20 $20 $20 Unearned windfall profits Cost passed to consumers Why is this a cause for concern? 2.  Unearned windfall profits:   In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.
Spending ,[object Object],[object Object],[object Object],[object Object],[object Object],x With hundreds of billions of dollars being raised, expectations are high about who could benefit from climate policy – and how:
Concerns about Equity ,[object Object],[object Object],[object Object],References:  State of Working America, 2006; data from U.S. government agencies (Census, IRS, BLS)
[object Object],[object Object],[object Object],[object Object],Concerns about Equity
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Concerns about Equity
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Additional Questions to Consider
For Further Reference ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],x

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Cap-and-trade through musical chairs: Short intro

  • 1. An Introduction to Cap-and-Trade Climate Policy Holmes Hummel, PhD hummelhh@mindspring.com November 21, 2007 Using Musical Chairs: An Illustration of Managed Scarcity
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7.
  • 8. Would anyone be willing to trade their chair for $30 ?
  • 9. Sure! For that price, I can finance an efficiency upgrade, eliminating my need for a pollution permit.
  • 10.
  • 11.
  • 12. Using Market Incentives If I could I build wind farms to replace my coal power plants, then I could sell permits… 2009
  • 13. Using Market Incentives Hey, I made a profit by reducing my fossil fuel use and avoiding carbon emission costs! 2010
  • 14.
  • 15.
  • 16. Achieving Reduction Targets Who will be the last greenhouse gas polluters left in the game? 2050
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  • 20. Achieving Reduction Targets $90 $90 $90 How high can the price go? As high as it takes to motivate one of us to stand up. 2020 SELL PRICE:
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  • 27. Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: Auctioned permits Free permits Why is this a cause for concern? 2. Unearned windfall profits: In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.
  • 28. Auctioning Permits vs Allocating for Free $0 $0 $0 $0 $20 $20 $0 BUY: SELL: $20 $20 $20 $20 $20 $20 $20 Unearned windfall profits Cost passed to consumers Why is this a cause for concern? 2. Unearned windfall profits: In a carbon market, firms that buy permits in an auction will try to pass costs to customers, and others receiving a permit for free can sell their permits at that same price.
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