How to Fix Climate Policy - PowerPoint Presentation

Slide1

How to Fix Climate Policy and Why It Would Help Electricity Markets

EEM 13, 30 May 2013Conference on the European Energy Market Peter Cramton, Axel Ockenfels, Steven Stoft For details see: priceCarbon.infoSlide2

Carbon Pricing Is the Key A uniform carbon price is efficient. So,  It can fix the waste in renewable electricity. A uniform carbon price is a focal point of global agreement. So,  It can fix global abatement policy.

1Slide3

Electricity and carbon2Slide4

Electricity and CarbonWe work hard to make fossil electricity efficient:  We use the cheapest MWh available.  We set one price with no subsidies.But the cost of CO2 has been omitted. So,  We should include emission costs, and  Set one carbon price with no subsidies.3Slide5

Actual Carbon PolicyUses a low and unpredictable carbon price.Mostly, we subsidize renewable MW-hoursBut such subsidies are wasteful because:A renewable MWh ≠ X tons of CO2 abatement.Renewable subsidies do not help Gas vs. Coal.Favoritism has become rampant (e.g. solar is preferred to biomass).Under a cap, subsidies don’t reduce emissions.

4Slide6

Subsidies Harm the Climate2006 – 2010 cost of carbon abatement = $692/ton on 17 GW of German solar. —MIT, CEEPR WP 2013-005Under the EU ETS cap, those 17 GW do not reduce CO2 emissions at all (emissions = cap).Solar subsidies could buy actual abatement of perhaps 10 times the fictitious solar abatement."Dear Daniel, sorry, but the Renewable Energy Law [EEG] won't do anything for the climate anyway.“ —internal Green Party email, 20085Slide7

How should carbon pricing work?A feed-in subsidy is meant to Reduce Risk.That’s good.The point of cap-and-trade is to shift risk from climate policy onto business. (That’s bad for investment)The electricity market needsA low-risk carbon priceNot a feed-in subsidyNot a high-risk, market-based tax (EU ETS)6Slide8

What should we do?We could …Stabilize the ETS priceBut, at what level?  We need a stable global carbon price, P*Then we could use P*as a benchmark for stabilizing the ETS price. Or to set a tax rate for CO2 emissions from generation.

7Slide9

How pricing electricity-carbon worksP* raises the cost of fossil fuel.This raises the price of electricityThat subsidizes renewables — efficiently.The revenues could pay for the grid, orbe refunded per-capitaor per-household.refunded on a per-MWh basis (but this blocks the demand-side signal)8Slide10

What would we gain?More efficiency (cost savings) than the EU’s “third package” can deliver.Greatly increased carbon abatement because the ETS price would not collapse.Increased long-run public acceptance of climate policy.9Slide11

Climate and carbon10Slide12

The Global Carbon Pricing ProjectWe are proposing a Global Carbon Price Commitment.The Statement about this can be found at:priceCarbon.infoAlso an explanatory note by Cramton, Ockenfels and Stoft.Policy experiments are underway at: Cologne Laboratory of Economic Research11Slide13

Statement on a Global Carbon-Price Commitment12(Abbreviated version)We propose that countries commit to a common global carbon-price path. This will …Accommodate each country’s combination of cap-and-trade, fossil-fuel taxes, and use of carbon-pricing revenues.Reward poor, low-emission countries for their compliance.Slide14

To Fix Global Climate PolicyJust understand two points: A common commitment is required to modify self interests. Only price can serve as a basis for a common commitment.13Slide15

Why a Common Commitment?Climate14Slide16

A Problem of the CommonsEmissions affect everyone because the atmosphere is a shared commons.So, if a small country abates emissions, it will get only a small fraction (say 3%) of the benefit.Without a treaty it will abate too little (unless it’s very altruistic).This is the problem of the (atmospheric) commons.15Slide17

There are two “Possible” SolutionsCountries could act with great altruismWe could change their self interestSome countries act somewhat altruistically.That’s helpful.Most act mainly out of self interest.Consider the history of the 20th century.Why bet on altruism? There’s an alternative.16Slide18

Climate Is a “Public Goods” ProblemA problem of the commons is just a public goods problem.The public good is “emissions abatement.”There are many public goods problems:Highways ― ParksToxic cleanup ― National defense17Slide19

Solution: Vote for a Common CommitmentFor a national public goods problems: VoteWe don’t ask for voluntary contributions at the gas pump to build highways.We vote for a gas tax—a common commitmentWhy?If you contribute voluntarily, you act alone.When you vote for a tax, If you must contribute, then everyone must.18Slide20

What Changes Your Self Interest?Being able to vote for a common commitment changes your self interest.Because people are willing to help others if others help them.A common commitment says “I will if you will,” not, “I will even if you won’t.” 19Slide21

This Is Not a Minor PointIf climate were not a problem of the commons, each country would control its own climate.The US and China could not harm other nations.Each would be highly motivated to save itself.Free riding on the global commons is the essence of the climate problem.20Slide22

The Only Solution Is a Common CommitmentVoluntary contributions won’t work.That’s what we do with no treaty at all.They depend on altruism.Countries are less altruistic than people.Changing national self interest is the only path to success.That requires a common commitment.21Slide23

Use Price (not Quantity)for a Common CommitmentClimate 2B22Slide24

Why Use “Price” not “Quantity”? (for a Common Commitment)Roadmap:What is a price commitment?Why not use a common quantity commitment?Why a common Price is easy.How to make it strong.23Slide25

1. What Is a “Price Commitment”?Pricing = Cap-&-Trade OR Fossil-fuel taxesOr a combination (or a few other possibilities).It’s really a revenue commitment.Suppose the global price = $30/tonne.And a country emits 1 Gt /year.Then it must collect $30 billion/year in carbon revenue with caps or taxes.What is cap-&-trade revenue? The value of retired permits.24Slide26

2. Why Not Use a Common Quantity?It just doesn’t work.Kyoto tried to find a formula for two years (1995-’97). They gave up.Stiglitz shows it is much harder globally.Official US policy: “it is hard to imagine.” The US & EU favor individual pledges.Almost everyone agrees: It’s impossible.25Slide27

3. Why a common Price is easy?Because “Cappers” and “Taxers” agree.A key purpose of cap-and-trade is a uniform global price, because it’s efficient.A key goal of a global carbon tax is the same.Almost everyone agrees: the right formula is:PCountry = PGlobal26Slide28

4. A Strong Price CommitmentUsing “price” instead of “quantity” reduces three barriers to a strong commitment:Quantity risk (being tested in the lab)The capping biasThe lack of a standard for quantity-fairness27Slide29

What’s Quantity Risk?Imagine two parallel worlds:Cap and Trade & Carbon TaxIn both worlds:Country X will emit 1Gt/year more CO2 in 10 years than expected at the time of commitment.Under a carbon tax, X taxes 1Gt more carbon but keeps the tax revenues.Under cap-and-trade, X pays “taxes” on 1Gt more to other countries (to buy permits).28Slide30

The Capping BiasSuppose India caps its emissions 10 years from now at 1% less than business as usual.That cap will be lower on a per-capita basis than US emissions in 1900.Indians will ask “why should the US be allowed to emit more just because they emitted more in the past?”There no bias with a common price.29Slide31

Fairness: Quantity versus PriceThere is no fairness standard for quantity commitments, hence the disagreements.But a price commitment provides a fairness focal point: Choose the fairness standard to maximize global abatement.30Slide32

Just an ExampleThe following mechanism is just one example of how to choose a fairness standard to maximize the global carbon price, P*.31Slide33

How to Agree on Fairness“Differentiated responsibilities” are addressed by the Green Fund.Rich, high-emission countries payPoor, low-emission countries are paidPayment into Green Fund = G × XE × P*G = Generosity parameterXE = eXcess Emissions (above global per-capita avg.)P* = global carbon price32Slide34

The G – P* LinkageIf G is very high, rich countries will want P* low to reduce Green-Fund payments: G × XE × P*If G is very low poor countries will want P* low to reduce the burden of a P* carbon tax.Some moderate G will maximize the P* that (for example) the US and India will both accept.Choose G to maximize the P* accepted by the right-size coalition.33Slide35

Who will set G?Countries with emissions near the global average will pay little and receive little from the Green Fund.They will want a G that maximizes global cooperation on climate policy.Their median choice will be a good estimate of the G that maximizes P*.This G must treat rich and poor countries fairly.34Slide36

Why everyone is safe and can agreeIf a “bad” G is chosen, any country that dislikes it can protect itself by naming a low Pi.No country commits to a P* > their Pi .35Slide37

SummaryClimate is a public good implies:Rely on altruism (nice but weak), ORChange self interest (the right choice)That requires a common commitment.A common quantity commitment has failed.So commit to a global common price path.A uniform price implies uniform effort, butUse the Green-Fund to help poor countries.

36