REM 350: Sustainable Energy & Materials Management

REM 350:Sustainable Energy & Materials Management Sustainability Policies Mark Jaccard Energy and Materials Research Group School of Resource and Environmental Management Simon Fraser University Jaccard-Simon Fraser University

Content Rational model of policy making (CBA, MATA) Policies versus actions Sustainability policy evaluation criteria Equi-marginal principle Voluntarism Subsidies – energy efficiency, carbon offsets Conventional regulations Taxation policy – energy, technology, emissions Market-oriented regulations – cap-and-trade, tradable quotas Community-focused sustainability policies

Common objectives for public policy Addressing market failures: • price regulation of natural monopolies • pricing or regulation to address externalities and manage common property resources • providing public goods like national defense, parks, roads, international agreements, judiciary, policing, firefighting, safety standards, disease prevention, lighthouses, macro-economic stability, effective financial markets Pursuing other societal objectives such as civil rights, more equitable distribution of wealth, universal access to health care and education, foreign aid, culture and arts

Rational model of policy making Set objective(s) ↓ Establish options / policies evaluation criteria ↓ Define options / policies ↓ Assess options / policies against criteria ↓ Select preferred option ↓ Monitor and conduct hindsight evaluation Re-assess objective(s)

Options evaluation criteria Pursuit of an objective usually requires that other objectives be considered simultaneously – pursuit of one must not frustrate realization of others. Most objectives can be categorized as financial, social or environmental. One strategy is to measure progress toward these objectives by a single measure: net present value (NPV) in cost-benefit analysis (CBA). This requires estimating monetary values for all pro and con effects. An alternative is to keep each objective distinct, avoid trying to monetize everything, and instead devise a multi-dimensional framework for decision-making – multi-attribute trade-off analysis (MATA)

Actions and policies MATA is a decision-making process that anyone can use. Government can use it to evaluate options for its own major investment or program. But often government is trying to influence the actions of firms and households – hence the actions vs policies distinction. Action – change of technology, behavior or management practice by a firm or household from what it otherwise would have been Policy – effort by government to cause specific actions by firms and households, and perhaps other levels of government To assess policies with a MATA approach, evaluative criteria are required.

Typical policy evaluation criteria Environmental effectiveness – high probability of achieving the environmental objective Economic efficiency – low cost to society relative to other policies (see next slide on “equi-marginal principle”) Political acceptability – policy is perceived as justified and fair by many, and those opposed are (1) small in number and/or (2) compensated and/or (3) counterbalanced by policy supporters Administrative feasibility – policy does not require significant expansion of bureaucracy and is not overly complex (ultimately linked to economic efficiency)

Economic efficiency: the equi-marginal principle Equi-marginal principle – to minimize total costs of achieving an objective, like emissions reduction, policy design should ensure that every household and/or firm faces the same price signal for its last (also called incremental or marginal) unit of emissions abated Proof – if entity A faces higher costs for the last unit of emissions abated than entity B, then if B abates one more unit and A one less, the same total abatement will be achieved at lower cost. Similar adjustments can be made until all entities face the same marginal cost for abatement – achieving the equi-marginal principle and thus minimizing total societal cost.

Generic government policy options Direct action by government (where it controls assets or people) Influence voluntary action of firms and households Subsidies – energy efficiency, carbon offsets Conventional regulations Taxation policy – energy, technology, emissions Market-oriented regulations – cap-and-trade, tradable quotas Community-oriented policies – planning, zoning, development permits, infrastructure

Evaluating policies: the spectrum of “compulsoriness” Less compulsory policies More compulsory policies

Direct action by government Government efforts to change assets and people over which it has direct influence (buildings, equipment, infrastructure, employees). Government spending represents a large portion of the economy Government procurement policies can have impact on environment Examples: Federal green procurement policy Vancouver LEED building policy Government can also fund research and development (R&D)

Direct action by government: evaluation Pro Administratively feasible Politically acceptable – if not requiring big gov’t expenditures Con Government only controls part of economy Could transgress equi-marginal principle False impression that effective action is happening

Voluntary programs Efforts by government to convince firms and households to voluntarily act differently (eg, voluntarily internalize externalities) Information programs focused on private benefits of action • Explain private benefits of environmentally responsible choices (Examples: Energy Star/EnerGuide appliance labels) Moral suasion programs focused on social benefits of action • Convince people to incur extra costs to reduce social impacts (green consumerism, corporate social responsibility) (Examples: ocean-wise fish labels)

Voluntary programs: evaluation Pro Administratively feasible Politically acceptable – if not requiring big gov’t expenditures Con Limited effectiveness Could transgress equi-marginal principle if response uneven False impression that effective action is happening

Subsidies Financial reward for adopting a particular technology, fuel or material. Includes grants, tax credits, rebates, gifts. Examples: Hybrid vehicle subsidy Renewable power production incentive Insulation and home energy efficiency retrofit subsidies Major challenge: subsidies may be captured by firms and households for doing what they were going to do anyway (sometimes referred to as “free-riders”; economists call this “adverse selection”)

* average fridge efficiency * * * * * * * * * * * * * * * * * * * * * * * * * * * * Kwh/m3 * * * * * * * * * * * * 1950s 1960s 1970s 1980s 1990s 2000s Efficiency subsidies and free-riders (“adverse selection”) must accelerate efficiency trend

Free ridership estimates

Subsidies: Evaluation Pro Administratively feasible Politically acceptable – if not requiring big gov’t expenditures Con Can be ineffective, but difficult to know (depends on hard-to-detect free-ridership rates) Can be economically inefficient if government supports losers Government must raise revenue from other sources, which again could be economically inefficient

Carbon offsets: another form of subsidy Definition of offset – a “subsidy,” usually from one private entity to another, to help fund an action that reduces emissions from what they otherwise would be (business as usual) Voluntary offset – individuals and corporations can voluntarily acquire offsets in order to reduce their net emissions Regulated entity offset – a cap and trade system could allow a regulated entity to meet some or all of its emission reductions by acquiring offsets from unregulated entities (Alberta, Canada, CDM of the Kyoto Protocol) Governments require, and offsetter companies promise, that offsets are “verified to be additional and permanent”

Range of carbon offsets • Improve energy efficiency so that less fossil fuels are combusted and less GHG emitted • Subsidize renewable energy to reduce the carbon that otherwise would have been emitted • Changing agricultural practices, such as tillage, manure handling and livestock feed. • Planting trees to increase carbon in biomass on the earth’s surface • Capture or prevent a GHG emission (land fill gases, pipeline methane leaks, carbon capture and storage)

Offsets via the Clean Development Mechanism Warr and Victor, 2008

True offset: burying carbon CO2 emissions photosynthesis atmosphere plants combustion true carbon offsets fossil fuels underground underground carbon storage

Conventional regulations “command and control” Government dictates performance or technology or fuel and generally applies this to all emitters Performance standard: government sets rules on performance (e.g., electricity generator in US: 1,100 lb CO2/MWh) Technology standard: government sets rules on technology (e.g., best available control technology for SO2) Fuel standard: governments sets fuel requirements (e.g., fuel sulphur content regulation)

Efficiency problem: conventional regulations Government specifies a 50% emission reduction at each firm (performance standard) Marginal abatement costs at 50% for Firm B are much higher than those for Firm A The policy violates equi-marginal principle: same emission reduction could have been obtained at a lower total cost. 50% 50%

Conventional regulation: evaluation Pro Administratively feasible Can be environmentally effective Can be politically acceptable – often public prefers regulation if action is unavoidable Con Unless perfectly designed, likely to transgress equi-marginal principle (inefficient) No private incentive for innovation that goes beyond regulation

Taxation policy Tax on technology, energy use, material use (water, plastic bags) or material waste (emissions, effluents, solid waste, toxics) Firms and households can simply pay tax or reduce use of technology, energy, material or output of waste and pay less tax Those who find it too expensive to reduce (high marginal abatement costs) will pay the tax Others will make reductions that cost less than paying the tax Thus, taxation achieves equi-marginal principle and is considered economically efficient. However, tax policies are politically risky, even ones that benefit almost everyone.

Example: tax on emissions Total abatement cost: A Remaining tax payments: B Total cost to firm: A+B

Taxation policy: evaluation Pro Administratively feasible (BC carbon tax) Economically efficient (passes equi-marginal principle) Effective if price set at appropriate level Incentive for further innovation Con Politically difficult (BC carbon tax) Difficult to know where to set price (valuing environmental cost) and effect on emissions (response to price)

Market-oriented regulations Market-oriented regulation – an aggregate requirement on all market participants, which allows for trading in fulfilling the requirement 1. Obligation (or quota) with tradable certificates – an aggregate or sectoral quota in which firms comply by holding certificates that they receive by contributing to it (or purchasing these from others). (eg, renewable portfolio standard, vehicle emission standard, clean electricity policy standard, low carbon fuel standard) 2. Cap with tradable permits (cap-and-trade) – aggregate or sectoral cap on emissions with firms acquiring permits, initially by auction or grandfathered distribution, augmented by trading. (eg, cap-and-trade for NOx, SO2, CO2) Both of these are like a tax in providing a price signal (permit or certificate trading price) for decision-makers.

Example: economic efficiency with emissions pricing (cap-and-trade) Policy 1: Government uses a conventional regulation performance standard that requires each firm to cut emissions by 50%.

Example continued Policy 2: Government uses a cap-and-trade permit system with grandfathered allocation. The cap is set at 50% of original emissions. Firm A will sell permits to buyers who offer more than $50/t Firm F will buy permits if less than $600/t

Emission permit supply curve

Emission permit demand curve

Emission permit trading market 700 permits are traded in the permit market

Cost savings from emissions pricing (cap-and-trade) Significant cost savings relative to command and control policy

Comparing costs of regulation with emissions pricing Tietenberg, T., 1985, “Emission trading, an exercise in reforming pollution policy, RFF Press.

Market-oriented regulations (like cap-and-trade): evaluation Pro Economically efficient (passes equi-marginal principle) Effective if cap equals emissions target and no loopholes Incentive for further innovation Con Administrative complexity (requires permit trading) Uncertainty about cost (trading price uncertainty)

Community-focused sustainability policy Community energy management (CEM) – integration of urban planning with energy system planning and management to reduce energy use and wastes (emissions) for a given level of services Energy policy has traditionally focused on the technology and fuel choices of firms and households. CEM focuses on the choices of municipal governments, utilities and some corporations affecting major infrastructure, long-lived buildings, and urban form. The spatial scale is large (whole cities) and the time-frame long (decades and even centuries).

Energy-related decisions hierarchy

Community energy management: key elements Policy objective: Focus urban development on high density nodes of mixed use to reduce travel, improve economics of public transit, reduce infrastructure costs, improve economics of district heating with cogenerated electricity, reduce space-heating needs Policy tools: land-use zoning, development permitting, property taxes, parking restrictions and fees, infrastructure investments, transit planning and investment, road pricing, siting of public buildings, building codes, retrofit subsidies, utility regulations to foster energy efficiency, local heat and power, and net metering

Community energy management: evaluation Pro Politically feasible depending on specific policy (regulation, tax, zoning, infrastructure) Economically efficient, depending on policy Con Can be administratively complex, but not necessarily Could transgress the equi-marginal principle

REM 350: Sustainable Energy & Materials Management