Putting a Price on Carbon and Investing in

Putting a Price on Carbon and Investing in Equitable Solutions Workshop presented by Lisa Abbott and Holmes Hummel At the Empower Kentucky Summit Hosted by Kentuckians For The Commonwealth October 1, 2016

Our goal for this session Learn about choices Kentuckians (and all of us) face as we take steps to: – put a price on global warming pollution and – ensure that polluters pay – to invest in a just transition to a clean energy economy

What’s the case for a price on carbon?

Climate Science • Climate change is driven by greenhouse gases accumulating in the atmosphere as a result of human activities. • The U. S. is responsible for about 30% of the total accumulation since the Industrial Revolution – three times China and India combined. • Climate change impacts are dangerous, and the Nobel Prize-winning IPCC scientists say 1/3 of all species are at risk. • Burning fossil fuels – coal, oil, and gas – is the biggest driver of climate change, and it accounts for 85% of U. S. energy use. • Most people in the U. S. believe something should be done to stop global warming – but what, and how? References: IPCC Fifth Assessment Report, Summary for Policy Makers. Navigating by the Numbers, World Resources Institute. National opinion poll by Krosnik, Kopp, and Aldhous.

Climate Economics • Today, consumers (and industries we support) dump an unlimited amount of greenhouse gases into the atmosphere for free. • As a result, fossil fuel prices do not reflect their full cost. • Life on Earth pays the ultimate price: more severe droughts, floods, fires and storms along with collapsing ecosystems and extinction. • For this reason, some economists have called climate change “the greatest market failure in history. ” References: IPCC Fifth Assessment Report, Summary for Policy Makers. The Economics of Climate Change, Stern Review Report, 2006.

When we put a price on global warming pollution, we can invest in solutions. • Capture the value of carbon emissions for public purposes and invest the resource in an equitable transition to a clean energy economy. • GHG pollution should not result in windfall profits for corporations. • The money generated by placing a price on carbon will be substantial, amounting to tens to hundreds of billions of dollars a year. • This resource should be used to invest in the public good by ensuring an inclusive and fair transition to a high-road green economy, which advances the needs of workers, consumers, families, and diverse urban and rural communities while protecting the planet.

GOVERNMENT VIEW: SOCIAL COST OF CARBON The U. S. federal government applies the values below to every regulation affecting GHG emissions. Figures are declared to be underestimates. central figures

CORPORATE VIEW: SHADOW COST OF CARBON 400+ companies report using an internal price on carbon Source: CDP

Principles 1. Protect people and the planet: limit carbon emissions 2. Maximize the gain: build an inclusive economy 3. Minimize the pain: Assist low and moderate income families 4. Shore up resilience to climate impacts 5. Ease the transition: Address impacts to workers and communities 6. Put a price on global warming pollution and invest in solutions

WHAT GOES INTO A PRICING POLICY? What has value? How is its price determined? Who has to pay for it? Where do the revenues go? How are the proceeds spent or invested?

What are policy options for putting a price on pollution?

Climate Policy Options Policy makers have 3 main options for putting a cost on greenhouse gases: (1) a carbon tax or “pollution fee” (2) creating a market for carbon emissions (3) regulations to reduce pollution The cost of producing fossil fueled power would rise under either policy. Worldwide, there appears to be limited appetite for a carbon tax. But there also reservations about the market-based alternative – a carbon cap-and-trade program. How would it work? This presentation fields many questions raised by those who are curious and concerned.

Two market-based options Cap and Trade Carbon Tax • Sets a limit (cap) on tons of CO 2 from all power plants in the system. • Sets a price on each ton of CO 2 from power plants. • Creates permission to pollute 1 ton of CO 2: an allowance. • Power plants calculate their pollution and acquire that # of allowances. • The market to buy & sell allowances makes pollution reductions valuable. • Power plants calculate their pollution and pay the tax. • The tax on polluting energy sources sends a signal to consumers & energy markets.

How are they different? Cap and Trade Carbon Tax • Emissions reductions fixed. • Cost of pollution is fixed. • Cost of pollution varies. • Emissions reductions vary. • Lets polluters choose “least cost” path to compliance. • Amount of tax is constrained by politics. • If the value of allowances is too low, it may be cost effective to keep polluting in some places. • If tax is too low, it may be cost effective to keep polluting in many places.

Big Issues with Cap and Trade • Equity How are allowances distributed? – Given away for free to power plants based on their historic generation? – Auctioned? – Set aside some to give for free to others (affordable housing groups, counties, EE/RE developers? ) • Hotspots & Leakage – Will utilities keep some plants burning longer or more if buying allowances is cheapest option? – Will utilities reduce CO 2 in ways that are “in” the cap, but increase C 02 pollution “beyond” the cap? • Wealth transfer – Wider trading market => cheaper allowances, but benefits go elsewhere

A third policy option: Regulation 1. Could require each plant to meet a CO 2 limit, without trading. (Run less, retire, or capture CO 2) 2. Could require oldest, least efficient plants to retire by specific date. Either would achieve pollution reductions. Cost of compliance is likely higher than other options.

Understanding cap and trade

Musical Chairs: A Helpful Analogy Each chair represents the “right to pollute”: one metric ton of carbon dioxide (1 mt. CO 2) – or a quantity of another one of the 6 types of greenhouse gases that would be equivalent (1 mt. CO 2 e) If you have a permit, you can have a chair. Clean Energy Works

2022 Musical chairs At the start of the game, everyone has a seat – because there are no limits on carbon emissions. Stick figures by Tormod Lund, Graffle. Topia. com Clean Energy Works

2023 Musical chairs In the first year, a cap is imposed by limiting the amount of permits, making players compete for the available permits. In our analogy, one player ends up without a chair… Clean Energy Works

Would anyone be willing to trade their chair for $30? Clean Energy Works

Sure, for that price, I can finance an efficiency upgrade that will eliminate my need for a pollution permit.

So, the market price for the “right to pollute” in the first year is $30 for one ton of carbon dioxide… Clean Energy Works

WHAT GOES INTO A PRICING POLICY? What has value? How is its price determined? Who has to pay for it? Where do the revenues go? How are the proceeds spent or invested?

Two existing models for reinvesting carbon revenue in energy transformation

Two approaches New England States: RGGI California • Nine states capped greenhouse gas emissions. • Largest economy in US capped its emissions. • Allowances are auctioned. • Carbon pollution allowance prices are minimal ($1 -5). • Carbon pollution allowances are more than $10/ton. • Generates billions of dollars • Reinvests in mass-transit, energy efficiency, renewable energy, • Each state reinvests in energy efficiency, renewable energy, ratepayer support. • Investments prioritize low income and affected communities.

HOW ALLOWANCES ARE DISTRIBUTED AFFECTS PROCEEDS Example: Proceeds from RGGI Auction of CO 2 Allowances, $1. 4 B CO 2 Allowance prices between 2008 and 2015 ranged from $1. 81 to $5. 41 per ton. Source: Investment of RGGI Proceeds Through 2013

INVESTMENTS VARY BY STATE Connecticut Delaware Maryland Massachusetts New York Rhode Island Source: Investment of RGGI Proceeds Through 2013 Maine New Hampshire Vermont

INVESTMENT ALLOCATIONS AFFECT IMPACT Energy Efficiency accounted for: • 4/5 of Lifetime Bill Savings • 3/4 of Lifetime Carbon Savings • 1/3 of Participating Households • 99% of Participating Businesses • 100% of Workers Trained Direct Bill Assistance accounted for: • 2/3 of Participating Households • <5% of Lifetime Bill Savings Source: Investment of RGGI Proceeds Through 2013 RGGI Investments by Category Cumulative-to-Date (2008 -2013)

EXAMPLE: PLAN FOR ALLOWANCE AUCTION PROCEEDS IN CA Disadvantaged Communities given priority or emphasis Specifically for Low-Income Source: California Cap and Trade Expenditure Plan, 2014 -2015

How would cap and trade work in the Clean Power Plan in states without a viable implementation plan? What are the default terms of the Federal Implementation Plan, which is provided to states as Model Trading Rule?

CLEAN POWER PLAN’S “MODEL RULE” DEFAULT SETTINGS What has value? Permission to pollute 1 ton of CO 2 e How is its price determined? Cap-and-trade Who has to pay for it? Polluters receive free allowances; trade if needed Where do the revenues go? Proceeds go to polluters with spare credits How are the proceeds spent or invested? No public funds to invest.

Implications for Kentucky and the Empower Kentucky Plan Findings from modeling commissioned by Kentuckians For The Commonwealth

Context: Kentucky is a border state in multiple power regions A map of interregional planning areas shows multiple regions with interests in Kentucky. Source: PJM

Context: Kentucky power is cheap for its regions Eastern Kentucky sells power into the PJM Region Kentucky power companies routinely sell at the low end of the range. Prevailing market stresses in the east make Kentucky a low cost provider, an advantage that appears more dramatic in this map of prices during a heat wave.

KY’s CO 2 cap under the Clean Power Plan • In 2012, KY emitted more than 90 million tons of CO 2. It’s now in the low 80’s as coal plants retire. • KY’s CO 2 cap under the Clean Power Plan starts at 71 million tons of CO in 2022. Lowers to 63 million tons by 2030. • The least cost path to compliance involves states banding together to combine their caps and trade across the borders. • Under a “business as usual” scenario during the CPP compliance period (2022 -2030), polluters in KY are expected to: (1) emit 69 million more tons of CO 2 over the state’s cap (2) buy cheap allowances from power companies in other states where polluters clean up or shut down.

What we are learning • If KY gives initial allowances to polluters for free (rather than auction): – No price on carbon. – No value to ratepayers or revenue to invest in a just energy transition. • Weak CPP targets means the cost to trade for allowances from other states is near $0 – Minimal penalty for excess emissions in KY

Implications of (almost) free allowances • As KY ramps up energy efficiency and renewable energy here at home, our utilities could just sell their cheap coal power to other states. • Our utilities could still comply with CPP by buying almost free allowances for their excess pollution. • In that case, increasing EE & RE alone won’t reduce emissions here at home by much because… • KY would likely become a “designated smoking area” as other states clean up pollution but keep buying coal power from KY − unless we impose additional policies & organize.

What are our options? • Establish a state-based carbon tax or • Auction KY’s initial allowances – Could generate tens of millions for just transition. – No certainty how much emissions in KY would fall. • Require 1. 3 GW additional coal plants to retire by 2030. – Certainty of emissions reductions in KY – Does not generate revenue to reinvest in energy transition. • Don’t join regional trading pools – Make power plants in KY trade only among themselves – Don’t give KY polluters the option to buy out-of-state, almost-free allowances.

Take-aways • CPP’s cap and trade by itself is not enough to reduce pollution in KY or drive just transition – Free distribution of pollution allowances yields no revenue – The targets in the CPP are too weak, so trades are cheap – Weak carbon pollution prices won’t drive reductions in KY • Organizing is needed to win stronger state and federal policies and advance equitable solutions that protect our health and climate.

Appendix: Additional Considerations

Benefits & problems with Cap and Trade • Benefits – Total emissions are capped – Flexibility – Lets market figure out least costs ways to reduce emissions – Can reduce compliance costs to utilities & ratepayers – Grid reliability – Revenue generation • Problems – Does not result in pollution reduction in all locations, as long as overall cap is met – Leakage – Wealth redistribution – Can incentivize false solutions – The market trumps equity – Possible windfall profits to utilities – High costs of verifying – Beware of gaming, corruption

Some ways to address / reduce problems with trading • Don’t allow it. Or…. • Cap and Invest: Auction allowances and use revenue for investments in worker transition, low-income EE/RE, and/or direct return of $ to rate-payers. • Adopt additional state policies that incentivize and require in-state EE/RE development and prioritize pollution reduction, jobs and energy savings in affected communities. • Make sure state and PSC consider costs of all co-pollutants (CO 2, SOX, NOX) when evaluating utilities’ plans to invest in gas vs. EE/RE. • Reduce “leakage” by including new gas in the state’s mass-based CO 2 cap. • Don’t allow false solutions to generate ERC’s or qualify for allowances. • Other

Some ways to address hotspots • Auction allowances to polluters; don’t give them away. • Require some level of emissions reductions before a power plant can engage in trading. • Reinvest $ in EE/RE in priority communities • Monitor pollution over timeframe, and make adjustments if EJ communities are adversely affected

Is there a better way/hybrid? • In a few places (Sweden) there is a cap and tax approach, where a tax is imposed AND emissions targets or caps are set. • With each compliance period, if the cap has not been met, the tax is adjusted up. • KFTC’s allies in CA and Washington state are working over next year(s) to develop alternative model, and we’re invited to learn along with them.