Preparing the US for Carbon Trade

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Preparing the US for Carbon Trade

  1. 1. Preparing the US for Carbon Trade Tom Tietenberg
  2. 2. U. S. Greenhouse Gas Programs Using Cap-and-Trade: Existing and Proposed <ul><li>RGGI (Northeastern states) </li></ul><ul><ul><li>Controls CO2 from large electric generators. </li></ul></ul><ul><ul><li>Started 2009 </li></ul></ul><ul><li>California AB-32 </li></ul><ul><ul><li>Cap and Trade to begin in 2012. </li></ul></ul><ul><li>Western Regional Carbon Action Initiative </li></ul><ul><ul><li>To be Initiated on January 1, 2012 </li></ul></ul><ul><li>Midwest Greenhouse Gas Emission Reduction Accord </li></ul><ul><ul><li>Six states still in planning stages </li></ul></ul><ul><li>The Waxman-Markey Bill ( House of Rep) </li></ul><ul><ul><li>Controls multiple greenhouse gases </li></ul></ul><ul><ul><li>Passed the House of Representatives </li></ul></ul><ul><li>The Kerry-Boxer bill (Senate) </li></ul><ul><ul><li>In process </li></ul></ul>
  3. 3. The Political Context in the United States <ul><li>The Political Situation </li></ul><ul><ul><li>Election brought new leadership with a commitment to action on climate change and gave the President’s party a majority in both houses </li></ul></ul><ul><ul><li>Intense Partisanship but is somewhat less a factor for climate change than for other issues such as health care </li></ul></ul><ul><ul><li>Multiple major policy issues on the table (health reform, Afghanistan), which divert attention </li></ul></ul><ul><li>The Opposition </li></ul><ul><ul><li>Southern and midwestern states </li></ul></ul><ul><ul><li>Energy intensive industries </li></ul></ul><ul><li>Opposition Sources of Concern </li></ul><ul><ul><li>Economic Impact </li></ul></ul><ul><ul><li>Climate science skeptics (U. S Chamber of Commerce proposal) </li></ul></ul><ul><ul><li>Opposition to large government </li></ul></ul>
  4. 4. The Situation <ul><li>Two bills-one has passed the House and the other is still being crafted in the Senate. </li></ul><ul><li>Further steps. Senate has to pass its version, then goes to a conference with House to produce a common bill. The common bill must pass both the House and Senate before being presented to the President for his signature. </li></ul><ul><li>Current bills not too different so we can get some sense of their provisions. </li></ul><ul><li>Likely to preempt regional programs. </li></ul><ul><li>For the rest of my time I would like to introduce some of the main features that would affect linkage between US-ETS and EU-ETS. </li></ul>
  5. 5. Offset Provisions <ul><li>The House bill allows up to 1 billion tons of domestic offsets and up to 1.5 billion tons of international offsets – with the sum of the two allowing no more than 2 billion tons annually </li></ul><ul><li>The Senate bill also allows up to 2 billion tons of offsets, but it changes the ratio of international and domestic offsets.  Regulated firms could use 500 million tons of international offsets and 1.5 billion tons of domestic offsets each year, with the limit on international offsets raised to 750 million tons if supplies of domestic offsets are limited. </li></ul><ul><li>For international offsets, beginning in 2018, in both bills 1.25 offset credits would be required to be surrendered for each ton of emissions compliance, but domestic offsets are not discounted. </li></ul>
  6. 6. Emissions Reduction Goals from 2005 (CO 2 -e) <ul><li>Note that these are multi-gas goals, not just CO 2 and the baseline is 2005. </li></ul><ul><li>The only difference is the greater reduction in the earlier years in the Senate bill, which is the most recent, by 2020. </li></ul>Bill 2020 2030 2050 House 17% 42% 83% Senate 20% 42% 83%
  7. 7. Cost and Price Volatility Containment Provisions <ul><li>In both bills the minimum auction price is $10 (in constant 2005 dollars) for auctions occurring in 2012, rising by 5% plus the rate of inflation each year. </li></ul><ul><li>In both bills a reserve of emission allowances will be auctioned at a minimum set price ($28/ton in 2012) that is indexed. </li></ul><ul><li>The reserve will be filled by transferring 1% of allowances established for each year from 2012-2019, 2% of allowances established for each year from 2020-2029, and 3% of allowances established for each year from 2030-2050. </li></ul><ul><li>Following an auction, the reserve will be refilled through the purchase of offset credits . </li></ul>
  8. 8. Banking and Borrowing <ul><li>Both bills permit unlimited banking of allowances for use during future compliance years. </li></ul><ul><li>Establishes a two-year rolling compliance period by allowing covered entities to borrow an unlimited number of allowances from one year into the future. </li></ul><ul><li>Covered entities may also satisfy up to 15% of their compliance obligations by submitting emission allowances with vintage years 2 to 5 years in the future, but must pay an 8% premium (in allowances) to do so. </li></ul>
  9. 9. Leakage Issues <ul><li>House bill controls leakage by offering rebates to eligible, trade vulnerable industries. If the President finds that this proves insufficient to level the playing field, importers of the goods from countries with insufficient greenhouse gas regulation will have to purchase allowances to cover the embedded carbon in their product, adjusted for the rebates that have been received by the domestic competitive industry. </li></ul><ul><li>The Senate bill has a placeholder-‘‘It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.’’ </li></ul>

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