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The Materiality of Climate Policy

for the PNW

Prepared For:

Northwest Power Conservation Council

Setting the Stage - Materiality

Many Ways to Look at Climate Change IssueFor Power Planning Purposes, We’d Like to

Know: What Will CO2 Cost in the Future?

Without a Crystal Ball, No Clear AnswerWhat We Can Assess: Is Climate Policy Likely

to be Material for PNW Stakeholders?If Material, Makes Sense For States to be

Positioned For Those Impacts

Presentation Overview

Setting the StageCurrent Policy TrendsShould We Extrapolate?Assessing the Likelihood of MaterialityConclusions

Climate change is the most pressing future issue facing the business community.

-- World Economic ForumDavos, Switzerland

January 2000

Climate Change Policy Trends

Policy - A Fast Moving Issue’88: IPCC Formed’92: Framework Convention Signed’94: Conventions Entered Into Force’95: IPCC’s “Human Fingerprint” Report’96: Oregon’s CO2 Standard’97: Kyoto Protocol Signed’01: IPCC’s Third Assessment Report’05: EU Emissions Trading System

Policy – The Several Levels International

The Kyoto Protocol EU and other trading systems

National President’s 18% intensity target Voluntary industry programs

Regional, State, and Local Oregon and other CO2 siting standards California’s technology forcing legislation Multiple regional initiatives

Policy Trends – International UN Framework Convention in Force

Commits Parties to avoiding dangerous human interference

Kyoto Protocol Signed in 1997 Covers CO2, CH4, N2O, HFCs, PFCs,

OECD and EIT Countries: 5.2% reduction from 1990 levels

Major focus on flexibility mechanisms Ratification Still Uncertain

Policy Trends – Canada

New PM Martin Supports KyotoCanada Grappling With 200 MMT ShortfallLarge Emitters Facing 55 MMT commitmentIndustry’s Liability Potentially Limited

15% intensity reduction, $15 liability cap

Domestic Emissions Trading in 2008?Strong Public Support for Kyoto Protocol

Policy Trends – JapanCommitted to Kyoto ProtocolTrying to Find a Scenario That Works

Nukes, renewables, emissions tradingExploring Range of Voluntary MeasuresPreparing Industry for Aggressive Measures

Coal tax: Y230 in 2003 to Y700 in 2007Japan Is In a Tough Situation

Limited domestic options, economic stagnation

Policy Trends – EuropeStrongly Supports KyotoNow Strongly Supports Market MechanismsEmissions Trading System – Similar to SO2

Cap and Trade System Will Launch Jan-2005 Covering 12,000 installations, ~ 50% emissions Expanding in coverage over time

Estimates of Future Allowance Prices Vary From 5 Euros to 40 Euros

Policy Trends – United States

At National Level, Policy is StuckContinued Antagonism Toward the ScienceSkepticism Toward International Cooperation Exclusive Focus on Domestic Costs

Can issue pass a zero cost test?

Bottom Line: Current 18% Intensity Reduction Target Not a Material Threat to Power Sector

Policy Trends – Regional to Local 50% of States Have or Developing Climate Strategies Several Have Specific GHG Rules and Regulations

NH: 4P Legislation – CO2 to 1990 by 2010 MA: Largest 6 plants must reduce by 10% CA: Maximum feasible reductions in vehicle emissions OR and WA: CO2 standards for new power plants New England Governors and Eastern Canadian Premiers -

1990 by 2010, 10% below by 2020. NE Governors – Regional cap and trade by 2005? Alberta: 50% mitigation requirement for new coal plant

Extrapolating From Current

Trends

What’s “Success”?

Avoiding Dangerous Human InterferenceAt Some Point Requires Stabilization of

Atmospheric Concentrations of CO2

To Stabilize Today, Would Require a 70% Reduction in Global Emissions Kyoto actually doesn’t even stop emissions growth

“Success” Therefore a Huge Challenge Would revolutionize world’s energy system

Trend Scenario 1 – Policy Collapse

A Fact That Serious Climate Change Policy Faces Huge Political and Economic Challenges

Could These Challenges Lead to Collapse of International and Domestic Policy Momentum? Absent a scientific reversal, hard to see Broad public support for action on this issue

The Odds: LowNote: Scenario Subject to Sudden Reversal!

Trend Scenario 2 – Stay the CourseClimate Policy Unable to Overcome

Challenges, and Will Likely Not “Succeed.” But Issue is Here to Stay

Numerous policies and measures will be pursuedCould Affect Power Sector in Material Ways

Range of Cost Estimates: $5-30/ton CO2

The Odds: HighNote: Scenario Subject to Sudden Reversal!

Trend Scenario 3 – Deal With It

Combination of Factors Generates Political Will to Seriously Tackle Climate Change Through aggressive emissions reduction measures Through aggressive technology development Through aggressive reliance on GHG markets

Would Affect Power Sector in Material Ways Stanford Modeling Forum: $75-100/ton CO2

The Odds: Modest (But Better Than Collapse?)

Potential “Scenario Tippers” Continued Scientific Findings International Cooperation Takes Hold Again

U.S. historically at forefront of environmental cooperation Fear of Sudden Climate Change Takes Hold

Recent Pentagon study a good case example, in which climate change assessed a major national security threat as early as 2020

Weather, Hydro, Other Impacts Become Clear Public Sees Link, Wants Action Against Emitters Insurance, Financial Industries Revolt

Conclusions: The Likelihood of

Materiality For the PNW

Assessing Materiality: Scenario 1

Under Policy Collapse Scenario, Policy Impacts Unlikely to be Material Fundamental scientific reversals? Political inability to grapple with the problem?

Note: Doesn’t Mean Climate Change Itself Not Material to PNW!

The Odds: Low (simply not politically viable)Warning: Subject to Disruptive Change

Policy Could Easily be Material for PNW Energy Under a “Stay the Course” Scenario Facility siting rules Technology incentives Renewables standards Offset requirements on operating plants

The Odds: High (action, but not success)Warning: Subject to Disruptive Change

The Full Speed Ahead Scenario Very Material Restrictions on facility siting, operations Radical change in new plant economics vs.

alternatives Rising gas prices create problems for gas base Intensive R&D approach to energy sector

Would Ultimately Revolutionize Energy SectorThe Odds: Modest (big political barriers)

PNW Decision MakingA Significant Issue Simply For Hydro PlanningMaterial Impacts Over Time Very Likely

Assessing specific PNW materiality requires analysis

Policy Impacts Could Occur DisruptivelyRatepayer Impacts Potentially SignificantStates Can’t Stop Climate Change or Force

International Cooperation, But Can Position Stakeholders

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