What is cap and trade What do legislative

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 CO 2 emissions • Allows large emitters to trade CO 2 amongst themselves • Allows additional supply from land based sources… Initial Emission Total Cap CO 2 = 3000 t CO 2 = 2700 t CO 2 Init Em 1000 t CO 2 2000 t CO 2 Cap 900 t CO 21800 t CO 2 Emit 700 t CO 2 2000 t CO 2 Trade sell 200 buy 200 • Overall cap set • Individual cap set (Firms get permits) • Firms can trade permits depending on their emissions.

“Cap-and-Trade” System • Sets a limit on CO 2 emissions • Allows large emitters to trade CO 2 amongst themselves • Allows additional supply from land based sources… Initial Emission Total Cap CO 2 = 3000 t CO 2 = 2700 t CO 2 Credits for sale CO 2 $ = 200 t CO 2 $ $ CO 2 Init Em 1000 t CO 2 2000 t CO 2 Cap 900 t CO 21800 t CO 2 Emit 700 t CO 2 2000 t CO 2 Trade sell 200 buy 200 $ 3

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 CO 2). – 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 2030 2050 17% 42% 80% • Permit Allocation – Designed to limit electricity price increases • Offsets – Up to 2 billion t CO 2, 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.