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What is cap and trade? What do legislative proposals currently in Congress say about it?. Brent Sohngen Department of Agricultural, Environmental & Development Economics Sohngen.1@osu.edu. “Cap-and-Trade” System. Sets a limit on CO2 emissions
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What is cap and trade? What do legislative proposals currently in Congress say about it? Brent Sohngen Department of Agricultural, Environmental & Development Economics Sohngen.1@osu.edu
“Cap-and-Trade” System • Sets a limit on CO2 emissions • Allows large emitters to trade CO2 amongst themselves • Allows additional supply from land based sources… Initial Emission = 3000 t CO2 Total Cap = 2700 t CO2 • Overall cap set • Individual cap set (Firms get permits) • Firms can trade permits depending on their emissions. CO2 CO2 Init Em 1000 t CO2 2000 t CO2 Cap 900 t CO2 1800 t CO2 Emit 700 t CO2 2000 t CO2 Trade sell 200 buy 200
“Cap-and-Trade” System • Sets a limit on CO2 emissions • Allows large emitters to trade CO2 amongst themselves • Allows additional supply from land based sources… Initial Emission = 3000 t CO2 Total Cap = 2700 t CO2 Credits for sale = 200 t CO2 $ CO2 $ CO2 $ CO2 $ Init Em 1000 t CO2 2000 t CO2 Cap 900 t CO2 1800 t CO2 Emit 700 t CO2 2000 t CO2 Trade sell 200 buy 200
Debate on land-based credits • Role of land-based options and importation of credits • Scientific uncertainties have been resolved. • Land-based can provide 30% of carbon abatement • Can reduce costs by 40%. • National land-based program and international component are complements, not substitutes. • National program will be less efficient without an international program.
Cap and Trade Pros and Cons • Pros • A cap actually will limit emissions. • Establishes clear price signal ($/ton CO2). • Imposes stringency of market on abatement decisions (investments will flow to “best” alternatives). • Reduces costs.** • Cons • Creates a difficult negotiation over “rights” for permits • Auction or free allocation? • Who gets free permits? • Can be very stringent • May be too costly if it turns out that abatement costs are high.
Climate Policy Update • United Nations Process Continues…. • In the Kyoto Protocol commitment period now (2008-12) • Markets active in Europe & Australia • International trading through Clean Development Mech. • Continuing negotiation over successor treaty • Still much debate about what will emerge from Copenhagen… • US is working hard to reduce expectations…. • US Policy is very active • Regional initiatives (CA, RGGI) • Supreme Court decision (Massachusetts vs. US EPA) and EPA response • Energy legislation • We have moved from 95-0 on Byrd-Hagel in 1997 to Waxman-Markey (h.r. 2454) passing the House last spring.
Key issues in Waxman-Markey (HR 2454) • Carbon Cap and Trade System 2020 17% 2030 42% 2050 80% • Permit Allocation • Designed to limit electricity price increases • Offsets • Up to 2 billion t CO2, with 1 billion t from outside the US • Renewable Portfolio Standards • 20% of electricity from renewables by 2020
Senate Action: Kerry-Boxer • Introduced recently for discussion this fall • Not clear if the “stars” will align, but renewed hope after Kerry-Graham Op-Ed in the NY Times this past Sunday • Nuclear • Clean coal • Border tax adjustments**
Summary • Cap and Trade works by limiting overall emission (e.g., putting a cap in place) • Reduces costs relative to other methods of achieving the same goal. • Land based offsets are likely to be part of the system in the US, both domestic and international. • Scale differs between House and Senate so far. • Policy is moving forward with or without federal legislation. • Important future questions about the role of nuclear, coal, renewables, and border tax adjustments.