what is cap and trade? what do legislative proposals currently in congress say about it? brent...
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What is cap and trade? What do legislative proposals
currently in Congress say about it?
Brent SohngenDepartment of Agricultural, Environmental &
Development EconomicsSohngen.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…
COCO22COCO22
• Overall cap set• Individual cap set (Firms
get permits)• Firms can trade permits
depending on their emissions.Init Em 1000 t CO2 2000 t CO2
Initial Emission = 3000 t CO2
Total Cap = 2700 t CO2
Cap 900 t CO21800 t CO2
Emit 700 t CO2 2000 t CO2
Trade sell 200 buy 200
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COCO22
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“Cap-and-Trade” System
Credits for sale = 200 t CO2
COCO22COCO22
Init Em 1000 t CO2 2000 t CO2
Initial Emission = 3000 t CO2
Total Cap = 2700 t CO2
Cap 900 t CO21800 t CO2
Emit 700 t CO2 2000 t CO2
Trade sell 200 buy 200
• Sets a limit on CO2 emissions• Allows large emitters to trade CO2 amongst themselves• Allows additional supply from land based sources…
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 System2020 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.
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