Common Tragedies

Thoughts on Environmental Economics

We’re there for you, John

Posted by Daniel Hall on November 16, 2007

John Whitehead wishes he could have been at the 2007 CBO Director’s Conference on Climate Change today. So do I. I would have hit him up for a signed shirt. Instead, I’ll demonstrate my fan-dom by providing him (and you) a run-down of my quick-hit impressions — more highlights than summaries — of today’s panelists and their presentations:

— Larry Goulder: Free allocation to firms in a cap-and-trade system will generally result in large rents (read: windfall profits) for these firms. Auctioning is better. However, 100% auctioning can cause big equity losses in a few specific industries, particularly coal and natural gas. Losses to shareholders in these industries are likely to be large but widely dispersed and hence shallow. Losses to workers will be smaller in aggregate, but highly concentrated and hence deep. A small amount of free allocation, perhaps 10%, can preserve profits. The upshot: auction most allowances, but consider giving a few away.

–Dallas Burtraw: The electricity sector is big and diverse. First, because of the heterogeneous nature of the generation mix at the firm level, some firms will do better under climate policy — firms with existing low-carbon assets (nuclear, hydro, wind, etc.) will make money because of higher electricity prices. If allowances are given away freely all firms will profit. If all allowances are auctioned, it is about 50/50 — slightly more than half of firms lose, the rest win. This applies to deregulated regions where prices are set by the marginal generator. Which leads us to the second point: electricity prices for consumers in deregulated regions will rise under climate policy regardless of how allowances are distributed. In regulated regions, however, the cost-of-service rules that are used to price electricity imply that if allowances are auctioned then price increases will be passed onto consumers, whereas if allowances are given away free the consumers effectively receive the allocation in the form of unchanged electricity prices. One option for limiting retail price increases in both regulated and deregulated regions is to allocate some allowances to load-serving entities, which are still regulated and would pass these savings on to consumers. This involves program efficiency costs, however, because it doesn’t encourage the optimal level of conservation.

— Gib Metcalf: Carbon pricing is regressive — the poor spend a higher portion of their income on energy than do the rich. This regressivity can be offset, and even reversed, by using auction (or tax) revenues to fund an expansion of the EITC along with rebates to Social Security recipients.

— Dick Goettle: Recycling the revenue from allowance auctions into reductions on capital or labor can improve the efficiency of the system. Deciding which taxes to reduce, however, depends on whether you are concerned about consumption of goods services, or what he referred to as “full consumption” of goods, services, and leisure.* He also made a claim about the regressivity of climate change impacts in the U.S. that is being discussed in Rich’s post.

— Paco de la Chesnaye: Coverage is a big consideration when thinking about the stringency of a target. A system which mandates 50% reductions in the 80% of covered (current) national emissions is nominally equivalent to a system which requires 40% reductions among 100% of covered emissions. We should not forget, however, efficiency losses from incomplete coverage, dynamic effects like leakage, or the rules about international offsets (depending on whether you view these as a good idea or not).

— Howard Gruenspecht: The shifts in energy technologies that the models suggest are needed are very large. Climate policy will lead to more capacity additions in the next 30 years despite reduced demand because of faster retirement of existing coal units. The models mostly assume the price will make this happen automatically. We do need to remember, other factors — NIMBY / BANANA (build absolutely nothing anywhere near anyone), nuclear siting and waste storage rules, etc.

— Jake Jacoby: When considering atmospheric stabilization of GHGs, it is the long term and the entire world that matters, not exactly what the U.S. does now. (See the 7th slide in his presentation [pdf].) Thus, the U.S. should be thinking about what kind of program it can implement that will give it credibility on the world stage and gradually bring developing countries along. Further, a delay in developing country participation, even out to mid-century, is not that big of a deal as long as they adopt targets of similar stringency beyond that point. The upshot? Get a program up and running here that is robust and flexible, and don’t argue too much about the target, except to the degree that it enhances international credibility.

— John Weyant: How useful are models for understanding the potential impacts of climate policy? He provides a a handy summary to which conclusions from models he thinks are robust and which are questionable in the final slide of his presentation [pdf]. Most interesting? He is not convinced that carbon capture and storage will play as big a role as the models suggests, or that ‘other renewables’, particularly advanced solar, will not play a much larger role than most currently suspect.

I’ve tried to make this a quick rundown. If readers have further questions I’ll try to respond in the comments over the next few days.

*I have to confess that I did not grasp everything Dick said. He was a little rushed for time trying to get through quite a few charts and tables.

One Response to “We’re there for you, John”

  1. Nick said

    Excellent summary. Thanks.

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