NATS 1242: Climate ChangeNATS 1242: Climate ChangeJ. C. Wilson, Economics and Strategies of J. C. Wilson, Economics and Strategies of

MitigationMitigation

ReferencesReferencesBarker T., and co authors, 2007: Technical Summary. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz, O. R. Davidson, P. R. Bosch, R. Dave, L. A. Meyer (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

Policy Options for Reducing CO2 Emissions, CONGRESSIONAL BUDGET OFFICE, FEBRUARY 2008, Congress of the United States.

ReferencesReferenceshttp://www.princeton.edu/~cmi/resources/stabwedge.htm

Stabilization Wedges: Solving the Climate Problem for the next 50 Years with Current Technologies"

S. Pacala and R. Socolow, Science, August 13, 2004

Solving the Climate Problem: Technologies for CurbiSolving the Climate Problem: Technologies for Curbing CO2 Emissions"ng CO2 Emissions"

R. Socolow, R. Hotinski, J. Greenblatt, S. Pacala, R. Socolow, R. Hotinski, J. Greenblatt, S. Pacala, Environment, 2004Environment, 2004

CMI Wedge Game Jan 2007.pdf (on Blackboard)CMI Wedge Game Jan 2007.pdf (on Blackboard)

MitigationMitigation

What are characteristics of current GHG emissions? How do we determine how much GHG to emit? What must be considered when choosing mitigation

strategies? What sectors will be involved? What strategies will be employed? AT what cost will mitigation proceed?

Mitigation Mitigation

What are characteristics of current GHG emissions?

How do we determine how much GHG to emit? What must be considered when choosing mitigation

strategies? What sectors will be involved? What strategies will be employed? AT what cost will mitigation proceed?

GHG EmissionsGHG Emissions

GHG Emissions Grow With Wealth: GHG Emissions Grow With Wealth: ppp is purchasing power parity per personppp is purchasing power parity per person

Worlds Largest (and smallest) EmittersWorlds Largest (and smallest) Emitters

MitigationMitigation

What are characteristics of current GHG emissions?

How do we determine how much GHG to emit?

What must be considered when choosing mitigation strategies?

What sectors will be involved? What strategies will be employed? AT what cost will mitigation proceed?

Find the Acceptable GHG Find the Acceptable GHG ConcentrationsConcentrations

Consider acceptable impacts and relate Consider acceptable impacts and relate those to the temperatures that correspond those to the temperatures that correspond to those impactsto those impacts

Choose the appropriate steady-state GHG Choose the appropriate steady-state GHG concentration to achieve those concentration to achieve those temperaturestemperatures

Consider the pathway to get there (GHG Consider the pathway to get there (GHG lifetimes are long - the lower your target, lifetimes are long - the lower your target, the sooner you must try to achieve it.)the sooner you must try to achieve it.)

Relation between GHG Concentrations Relation between GHG Concentrations and Temperatureand Temperature

(The temperature rise after the climate has stabilized)

This is CO2 Equivalent

Emissions Path Determined by the Emissions Path Determined by the target CO2 and lifetime of GHGstarget CO2 and lifetime of GHGs

Note that to reach this goal,Emissions must peak soon

Emissions Pathways Determined by the Emissions Pathways Determined by the CO2 Target and lifetime of GHGsCO2 Target and lifetime of GHGs

Relation between GHG Concentrations, Relation between GHG Concentrations, Equilibrium Temperature and GHG Equilibrium Temperature and GHG

Cuts (Table WG3-TS2)Cuts (Table WG3-TS2)Group CO2 Eq, ppm

Temperature Increase over pre-industrial

Peak EmissionYear

Cut in Emissions by 2050, percent. Cut from 2000

SummarySummary

To stay in I or II, we have to begin To stay in I or II, we have to begin decreasing CO2 emissions soon (2015 or decreasing CO2 emissions soon (2015 or 2020)2020)

To stay in I or II, we have to cut emissions To stay in I or II, we have to cut emissions severely by 2050 (cuts of 67% or 45% wrt severely by 2050 (cuts of 67% or 45% wrt 2000)2000)

To stay in I or II, we have to trend toward To stay in I or II, we have to trend toward zero (or negative) emissions by the end of zero (or negative) emissions by the end of the centurythe century

MitigationMitigation

What are characteristics of current GHG emissions? How do we determine how much GHG to emit?

What must be considered when choosing mitigation strategies?

What sectors will be involved?

What strategies will be employed? AT what cost will mitigation proceed?

To Consider:To Consider: Many people want greater material wealth

than they currently have Economic development is needed to meet

these needs and accommodate population growth

Sustainable development protects the environment so that economic needs can be met in the future as well.

To Consider:To Consider: Sustainable development involves a

comprehensive and integrated approach to economic, social and environmental processes.

Decisions concerning climate change have large implications for local, national, inter-regional, and inter-generational fairness.

To Consider:To Consider: Anthropogenic climate change makes

sustainable development more difficult. More GHG, More difficulty Properly designed climate change

responses can be an integral part of sustainable development and the two can be mutually reinforcing.

To Consider:To Consider: Mitigation of climate change can conserve

or enhance natural capital (ecosystems, the environment as sources and sinks for economic activities)

In turn, sustainable development paths can reduce vulnerability to climate change and reduce GHG emissions

Economic IdeasEconomic Ideas

We need to avoid emissions of GHGsWe need to avoid emissions of GHGsCurrent global emission rates are about Current global emission rates are about

30 gtCO2/year (1 gt = 1 gigatonne = 30 gtCO2/year (1 gt = 1 gigatonne = 1,000,000,000 tonne, 1 tonne = 1000 kg)1,000,000,000 tonne, 1 tonne = 1000 kg)

Mitigation Potential is the amount of Mitigation Potential is the amount of emissions reduction that can be achieved emissions reduction that can be achieved at a given price (assume that we must pay at a given price (assume that we must pay to avoid emissions)to avoid emissions)

Carbon PriceCarbon Price

If emissions of CO2 are to be reduced, If emissions of CO2 are to be reduced, emitters must be charged a price for the emitters must be charged a price for the emissions that reflects the harm that the emissions that reflects the harm that the emissions causeemissions causeGovernments can agree to charge a tax on Governments can agree to charge a tax on

carbon emissionscarbon emissionsGovernments can sell permits that allow firms Governments can sell permits that allow firms

to emit carbonto emit carbonThe amount of tax or the cost of the permits The amount of tax or the cost of the permits

reflect the Carbon Pricereflect the Carbon Price

Consider a Carbon TaxConsider a Carbon Tax 1 US Gallon of gas results in 19.4 lbs of CO2 1 US Gallon of gas results in 19.4 lbs of CO2

emissionemission 1 tonne =2,200 lbs1 tonne =2,200 lbs Burning 113 gallons of gas emits 1 tonne of CO2Burning 113 gallons of gas emits 1 tonne of CO2

2,200/19.4 = 1132,200/19.4 = 113 $ 20 per tonne is only $20/112 gallons or 17 $ 20 per tonne is only $20/112 gallons or 17

cents per galloncents per gallon So a 17 cent per gallon carbon tax on gas So a 17 cent per gallon carbon tax on gas

results in a Carbon Price of $20 per tonne.results in a Carbon Price of $20 per tonne. So a 85 cent per gallon carbon tax on gas So a 85 cent per gallon carbon tax on gas

results in a Carbon Price of $100 per tonne results in a Carbon Price of $100 per tonne

Economic IdeasEconomic IdeasWhat is the Impact on GHG emissions What is the Impact on GHG emissions

of various Carbon Prices?of various Carbon Prices? It is easy to avoid the first few gts of emissions It is easy to avoid the first few gts of emissions

Eg: Look around the economy, find the gas leaks and Eg: Look around the economy, find the gas leaks and fix them.fix them.

It is harder to avoid the next few gts of emissionsIt is harder to avoid the next few gts of emissions Maybe you have to buy a more efficient engineMaybe you have to buy a more efficient engine

It is really hard to avoid the last few gts of It is really hard to avoid the last few gts of emissionsemissions You may need to develop a new technologyYou may need to develop a new technology

Economic Ideas: Mitigation Economic Ideas: Mitigation PotentialPotential

So the carbon price goes up as the amount of mitigation So the carbon price goes up as the amount of mitigation (avoided emissions) goes up. For example one (avoided emissions) goes up. For example one projection for 2030 is:projection for 2030 is:

Carbon PriceCarbon Price

(US$/tCO2-eq)

Mitigation PotentialMitigation Potential

(GtCO2-eq/year)

00 5-75-7

2020 7-137-13

5050 16-3116-31

How can there be 5-7 GTCO2/year How can there be 5-7 GTCO2/year mitigation potential for a Carbon mitigation potential for a Carbon

Price of $0.00Price of $0.00

0%0%

1.1. Because the Power Because the Power Company will reduce Company will reduce profits to save the planetprofits to save the planet

2.2. Because there are Because there are efficiencies in the efficiencies in the economy that we have not economy that we have not exploited because of exploited because of barriers that can be taken barriers that can be taken down at zero carbon pricedown at zero carbon price

Market PotentialMarket PotentialDefine: The amount of GHG emission Define: The amount of GHG emission

reduction that will occur at a given carbon price reduction that will occur at a given carbon price as private citizens and companies make normal as private citizens and companies make normal economic choiceseconomic choices

Market potential reflects the amount of GHG Market potential reflects the amount of GHG emission reduction that is economically driven emission reduction that is economically driven when a cost is put on carbon emissions and the when a cost is put on carbon emissions and the economic decision maker can profit from economic decision maker can profit from energy conservation or fuel switching or other energy conservation or fuel switching or other decisions to reduce emissions decisions to reduce emissions

Market PotentialMarket Potential

Susceptible to barriers in the economy that Susceptible to barriers in the economy that impede investment in increased efficiencyimpede investment in increased efficiencyExample:Example:

In cases where Renters pay utilities, they may In cases where Renters pay utilities, they may have less incentive to make capital investment in have less incentive to make capital investment in energy savings in the residential or commercial energy savings in the residential or commercial space that they are renting because they may not space that they are renting because they may not be there long enough for energy savings to pay be there long enough for energy savings to pay back their investmentback their investment

Economic PotentialEconomic Potential

The amount of GHG emissions that will be The amount of GHG emissions that will be avoided at a given carbon price when avoided at a given carbon price when social costs and benefits are taken into social costs and benefits are taken into account. account.

Government participation is required in Government participation is required in order for the social costs and benefits to order for the social costs and benefits to be taken into account be taken into account

Example of Role of ExternalitiesExample of Role of Externalities

1.1. If an Energy Providing Company has to pay a If an Energy Providing Company has to pay a Carbon Tax or Purchase a Permit to emit, they will Carbon Tax or Purchase a Permit to emit, they will switch to renewable sources to reduce the Tax Paid switch to renewable sources to reduce the Tax Paid or Amount of Permits purchased if the renewable or Amount of Permits purchased if the renewable sources are cheaper than the fossil fuel sources + sources are cheaper than the fossil fuel sources + Carbon price. They have reached the Market Carbon price. They have reached the Market PotentialPotential

2.2. If a social health benefit from reduced air pollution If a social health benefit from reduced air pollution occurs, the Energy Providing Company does not occurs, the Energy Providing Company does not profit from that benefit and does not invest to profit from that benefit and does not invest to achieve it. So they do not go beyond the Market achieve it. So they do not go beyond the Market Potential.Potential.

Example of Role of ExternalitiesExample of Role of Externalities

3.3. So, the government may subsidize the shift So, the government may subsidize the shift because the public benefits to health of because the public benefits to health of reducing the social costs of air pollution reducing the social costs of air pollution (illness and death) justify the investment of (illness and death) justify the investment of Tax money. Thus you reach the Economic Tax money. Thus you reach the Economic Potential.Potential.

4.4. These potentials give us an idea of what it These potentials give us an idea of what it will cost to reduce emissions and how much will cost to reduce emissions and how much reduction it is reasonable to expect for what reduction it is reasonable to expect for what carbon price.carbon price.

Which of the following is Which of the following is inappropriate for Government…..inappropriate for Government…..

0%

0%

0%

0% 1.1. Investing in research and development that will Investing in research and development that will benefit all citizensbenefit all citizens

2.2. Telling companies what technology to use to Telling companies what technology to use to reduce CO2 emissionsreduce CO2 emissions

3.3. Forcing entities to account for all the costs of a Forcing entities to account for all the costs of a transactiontransaction

4.4. Investing to improve the general welfare of citizensInvesting to improve the general welfare of citizens

The World is hugely diverse. What does fair The World is hugely diverse. What does fair mean in this world?mean in this world?

NY Times, 2 March 2008, Thirsting for Energy in India’s Boomtowns and Beyond

MitigationMitigation

What are characteristics of current GHG emissions? How do we determine how much GHG to emit? What must be considered when choosing mitigation

strategies?

What sectors will be involved?

What strategies will be employed? AT what cost will mitigation proceed?

What Sectors Will be Involved?What Sectors Will be Involved?

Energy supplyTransport and its infrastructureResidential and commercial buildings IndustryAgricultureForestryWaste management

All Sectors. No one sector can carry the burden of carbon emission reduction.

Next 30 YearsNext 30 Years Use known or nearly-known technologies to Use known or nearly-known technologies to

achieve nearly flat emissionsachieve nearly flat emissions For Example: Use the strategy and calculations of For Example: Use the strategy and calculations of

the Carbon Mitigation Initiative (CMI): the Carbon Mitigation Initiative (CMI): http://www.princeton.edu/~cmi/resources/stabwedge.htmhttp://www.princeton.edu/~cmi/resources/stabwedge.htm

Princeton Environmental Institute Princeton Environmental Institute British PetroleumBritish Petroleum FordFord

Strategy of CMI: Start where you are, end up Strategy of CMI: Start where you are, end up where you need to be. Make steps along the way.where you need to be. Make steps along the way.

Next 30 Next 30 YearsYears

25.6

51.3

Weight of CO2 is in red

Emissions

Stabilization is the CMI GoalStabilization is the CMI Goal

25.6 Tons of CO2

51.3 Tons of CO2

Avoids 3.6 billion tons of CO2 per year by 2055

CMI says we need 7 wedgesCMI says we need 7 wedges

CMI Wedges start at zero reductions 3 CMI Wedges start at zero reductions 3 years ago and expand to 3.67 billion tons years ago and expand to 3.67 billion tons of CO2 by 2055.of CO2 by 2055.

CMI says we need 7 wedges to stabilize CMI says we need 7 wedges to stabilize emissions (each wedge is 1/7 th of the emissions (each wedge is 1/7 th of the solution)solution)

CMI has identified 15 wedges that can be CMI has identified 15 wedges that can be usedused

Each Strategy Able Start Contributing Each Strategy Able Start Contributing Now and to Subtract 3.67B Tons of Now and to Subtract 3.67B Tons of

COCO22 Emissions by 2055 Emissions by 2055Efficiency & Conservation Increased transport efficiency Reducing miles traveled Increased heating efficiency Increased efficiency of

electricity productionFossil-Fuel-Based Strategies Fuel switching (coal to gas) Fossil-based electricity with

carbon capture & storage (CCS)

Coal synfuels with CCS Fossil-based hydrogen fuel

with CCS

Nuclear Energy Nuclear electricityRenewables and Biostorage Wind-generated electricity Solar electricity Wind-generated hydrogen fuel Biofuels Forest storage Soil storage

EfficiencyEfficiency

Transport EfficiencyTransport EfficiencyCar gas mileage doubles from now to Car gas mileage doubles from now to

2005 (from 30 to 60 miles/gallon)2005 (from 30 to 60 miles/gallon)Hybrids (45 mpg today)Hybrids (45 mpg today)Diesels (50 mpg today – see 18diesel.htm on Diesels (50 mpg today – see 18diesel.htm on

blackboard>course materials>Climate: blackboard>course materials>Climate: Articles and additional reading)Articles and additional reading)

Light strong materials (use that crude oil to Light strong materials (use that crude oil to make composites) make composites)

Reduce Miles TraveledReduce Miles Traveled

Cut miles per car in half by 2055: (from Cut miles per car in half by 2055: (from 10,000 miles/year to 5,000 miles per year)10,000 miles/year to 5,000 miles per year)Urban planningUrban planningMass transitMass transit telecommutingtelecommuting

Building Efficiency: 25% saving in COBuilding Efficiency: 25% saving in CO22

Emissions for Existing and NewEmissions for Existing and NewThe largest savings in the buildings sector:

space heating and coolingwater heating lighting and electric appliances

Savings from strategies to reduce energy use like wall and roof

insulationrenewable energy strategies, like solar water

heating and passive solar design.

Fossil Fuel Electricity Production Fossil Fuel Electricity Production with Doubled Efficiencywith Doubled Efficiency

Generation: Better turbines; and high-temperature fuel cells Combining fuel cells and turbines

Use: even distribution of electricity demand cogeneration (the co-production of electricity and

useful heat) polygeneration (the co-production of chemicals and

electricity). 2nd Law says we always have waste heat when we

convert fuel to work – here we use waste heat. Coal plants responsible for 25% of today’s CO2

emissions

Carbon Capture and Storage (CCS)Carbon Capture and Storage (CCS)

High pressure oil and gas have been stored High pressure oil and gas have been stored deep in the earth for millions of yearsdeep in the earth for millions of years

We are trying to store CO2 in the earth – To We are trying to store CO2 in the earth – To work, it must stay there for hundreds of yearswork, it must stay there for hundreds of years

The US has sufficient coal reserves to meet our The US has sufficient coal reserves to meet our energy needs for centuries. CSS will permit energy needs for centuries. CSS will permit those reserves to be usedthose reserves to be used

For every pound of coal we burn, we will have For every pound of coal we burn, we will have to bury 3.7 lbs of CO2.to bury 3.7 lbs of CO2.

Carbon Capture and Storage (CCS)Carbon Capture and Storage (CCS)

Today, 5 million tons of COToday, 5 million tons of CO22 per year is extracted from per year is extracted from

wells in western Colorado, piped 800 km to western wells in western Colorado, piped 800 km to western Texas and used in Enhanced Oil Recovery (EOR). In Texas and used in Enhanced Oil Recovery (EOR). In EOR, COEOR, CO22 is pumped down a well in super-critical form is pumped down a well in super-critical form

and pushes the oil up another well.and pushes the oil up another well. In Carbon Storage, the COIn Carbon Storage, the CO22 would come from would come from

combustion and would be left an oil or gas well or combustion and would be left an oil or gas well or saline aquifer. (there are plenty of sites)saline aquifer. (there are plenty of sites)

Do not yet know about leakage (storage is forever)Do not yet know about leakage (storage is forever) Need to store 100 times the amount we are using in Need to store 100 times the amount we are using in

EOR. 3 pilot projects operating. Need about 3500.EOR. 3 pilot projects operating. Need about 3500.

Advanced Technology Paths to Global ClimateStability: Energy for a Greenhouse Planet

Martin I. Hoffert,1, Science, 298,981 (1 Nov 2002)

Carbon Capture and StorageCarbon Capture and Storage

Capture of carbon can occur prior to Capture of carbon can occur prior to combustion or after combustion:combustion or after combustion:

After Combustion, chemically absorb or After Combustion, chemically absorb or adsorb the CO2 and stick it into the adsorb the CO2 and stick it into the groundground

These technologies have been in use for These technologies have been in use for other applications and at smaller scalesother applications and at smaller scales

Carbon Capture and Storage Carbon Capture and Storage (CCS) and Syngas(CCS) and Syngas

Prior to combustion: Syngas generation: Prior to combustion: Syngas generation:

Steam + coal -> CO + HSteam + coal -> CO + H2 2

The CO can be converted to COThe CO can be converted to CO22

and then captured and stored. and then captured and stored. The H is fuel and is burned.The H is fuel and is burned.

The Coal is C. It provides the The Coal is C. It provides the energy. The H comes from waterenergy. The H comes from water

Synfuels are liquidsSynfuels are liquids

Liquid fuels can be made from Syngas.Liquid fuels can be made from Syngas. In WWII lots of synfuels were made.In WWII lots of synfuels were made.Coal to Liquid vehicle fuels still contain Coal to Liquid vehicle fuels still contain

carbon and burning them will release carbon and burning them will release carbon. However, synfuels can replace carbon. However, synfuels can replace petroleumpetroleum

Small ReminderSmall Reminder

Carbon dioxide (CO2) is bigger and Carbon dioxide (CO2) is bigger and heavier than C. heavier than C.

We will have systems for storage that are We will have systems for storage that are larger than our present systems for larger than our present systems for extraction. You take one ton of coal out extraction. You take one ton of coal out and you have to put 3.67 tones back.and you have to put 3.67 tones back.

Fossil Fuel SwitchingFossil Fuel Switching

Burning Natural Gas to make electricity Burning Natural Gas to make electricity produces ½ the CO2 that burning coal does for produces ½ the CO2 that burning coal does for the same amount of energythe same amount of energy

Gas plants are more efficientGas plants are more efficient Gas has H in it (lower Carbon content per unit energy)Gas has H in it (lower Carbon content per unit energy)

So burn natural gas in 1400 large plants So burn natural gas in 1400 large plants (replacing 1400 coal plants) for one wedge. (replacing 1400 coal plants) for one wedge.

Need 10x as many Liquefied Natural Gas (LGN) Need 10x as many Liquefied Natural Gas (LGN) tankers as we have nowtankers as we have now

Fossil Electricity StrategyFossil Electricity Strategy

Burn coal or Natural GasBurn coal or Natural GasCapture CO2Capture CO2Sequester CO2Sequester CO2Need 800 Large (1 Gwatt) coal plants or Need 800 Large (1 Gwatt) coal plants or

1600 Large Natural Gas Plants 1600 Large Natural Gas Plants

Nuclear ElectricityNuclear Electricity

Uranium resource availability has been studied and will support the 30 year time frame

Plant location and waste management need to be addressed

Security (nuclear non-proliferation) issues need to be addressed. Reactors using uranium produce plutonium. Plutonium is a fuel and a bomb making material.

Nuclear FuelNuclear Fuel

235235U is an isotope used for fuel in fission U is an isotope used for fuel in fission reactors. This isotope makes up only reactors. This isotope makes up only about 0.72% of naturally occurring about 0.72% of naturally occurring uranium. It is enriched to between 2% and uranium. It is enriched to between 2% and 3% in fuel.3% in fuel.

There may be sufficient There may be sufficient 235235U to operate a U to operate a greatly expanded nuclear energy program greatly expanded nuclear energy program for several decades or longer.for several decades or longer.

Nuclear FuelNuclear Fuel

Care must be exercised in operating the Care must be exercised in operating the current generation of reactors. They all current generation of reactors. They all have coolant that extracts the heat of the have coolant that extracts the heat of the reaction which is then used to generate reaction which is then used to generate steam and electricity. Failures of this steam and electricity. Failures of this cooling system caused Chernobyl and cooling system caused Chernobyl and Three Mile Island accidents.Three Mile Island accidents.

Intrinsically safe reactor designs may also Intrinsically safe reactor designs may also exist.exist.

ForestsForestsPlants take in CO2 as they grow and give off Plants take in CO2 as they grow and give off

CO2 when they decayCO2 when they decayCutting down forests releases CO2Cutting down forests releases CO2Planting a forest causes a one-time withdrawal Planting a forest causes a one-time withdrawal

of CO2 from the atmosphere as the trees grow of CO2 from the atmosphere as the trees grow etc.etc.

Maintaining the Forest provides a source of Maintaining the Forest provides a source of fiber and fuel that does not add CO2 to the air – fiber and fuel that does not add CO2 to the air – New trees take in CO2 released by decaying or New trees take in CO2 released by decaying or burned treesburned trees

After 2040After 2040

Additional cuts in emissions are needed to take Additional cuts in emissions are needed to take the anthropogenic emissions to zerothe anthropogenic emissions to zero

Many believe that this will require new Many believe that this will require new technologiestechnologies

Following slides contain figures from:Following slides contain figures from:

Advanced Technology Paths to Global ClimateStability: Energy for a Greenhouse PlanetMartin I. Hoffert,1, Science, 298,981 (1 Nov 2002) (on Blackboard)

Power Relay Satellite and Lunar Power Relay Satellite and Lunar PowerPower

Solar Power Solar Power Satellite:Satellite:

Imagine 660 Imagine 660 of these the of these the size of size of Manhattan.Manhattan.

Receiver is Receiver is 130 sq km on 130 sq km on earthearth

Geoengineering:Geoengineering:

Control of Control of Incoming Solar Incoming Solar Power from Power from Space with a Space with a 2000 km 2000 km diameter Parasoldiameter Parasolor Particles in or Particles in the stratosphere the stratosphere

RenewablesRenewables

Cost for Next 30 yearsCost for Next 30 years

Impact on GrowthImpact on Growth

1

1.5

2

2.5

3

3.5

0 10 20 30 40 50

Year from Inception

Gro

wth

Fa

cto

r

Growth: 3%

Growth 3%-0.12%

Your SalaryYour Salary

Start at $100,000. Get raises = rate of Start at $100,000. Get raises = rate of real economic growth (3%/year for last 30 real economic growth (3%/year for last 30 yrs or 2.88% in mitigated case.)yrs or 2.88% in mitigated case.)

After 40 yrs, your salary is $317k or $302kAfter 40 yrs, your salary is $317k or $302kOver your career you lost ~$210k to Over your career you lost ~$210k to

mitigation.mitigation.

How Do We Get It Done? (All CBO How Do We Get It Done? (All CBO Report)Report)

How much Carbon Price is needed?How much Carbon Price is needed?What policies are used to apply the price?What policies are used to apply the price?Objectives of Policy:Objectives of Policy:

Efficiently Reduce Emissions of GHGsEfficiently Reduce Emissions of GHGsLow Administrative CostsLow Administrative CostsCompatible and Consistent Incentives Compatible and Consistent Incentives

Developing with International Partners Developing with International Partners

What Carbon Prices are likely to make a What Carbon Prices are likely to make a difference? (IPCC AR4,WG3, TS) –Varies difference? (IPCC AR4,WG3, TS) –Varies

by sector and countryby sector and country(Need 25 GtCO2 by 2055 and 55 GTCO2 by (Need 25 GtCO2 by 2055 and 55 GTCO2 by

2100)2100)

REDUCTIONS

Prices across the bottom for each sector – in US$/GtCO2

Policy Alternatives: Carbon TaxPolicy Alternatives: Carbon Tax

Government collects a tax for emitted carbon Government collects a tax for emitted carbon or for carbon in fuels.or for carbon in fuels.Gives an incentive to avoid emission of carbon Gives an incentive to avoid emission of carbon

when cost of avoidance is less than the tax. when cost of avoidance is less than the tax. (otherwise what happens?)(otherwise what happens?)

Does not control the amount of carbon emitted Does not control the amount of carbon emitted (what does policy-maker do if too much is emitted (what does policy-maker do if too much is emitted in a given year?)in a given year?)

Does set an upper limit on the cost of reducing Does set an upper limit on the cost of reducing emissions (by what mechanism?)emissions (by what mechanism?)

Easy to administerEasy to administer

Policy Alternatives: Cap and TradePolicy Alternatives: Cap and Trade

Gov’t establishes an acceptable emission Gov’t establishes an acceptable emission rate (emissions per time). Gov’t issues or rate (emissions per time). Gov’t issues or sells permits to emitters (up to that rate or sells permits to emitters (up to that rate or amount of emissions). Permit holders can amount of emissions). Permit holders can buy or sell permits on a market.buy or sell permits on a market.

Amount of emissions fixed, but costs vary Amount of emissions fixed, but costs vary with market conditions. (What happens in with market conditions. (What happens in a cold winter?)a cold winter?)

Policy Alternatives: Command and Policy Alternatives: Command and ControlControl

Gov’t establishes an acceptable emissions Gov’t establishes an acceptable emissions for each enterprise and Gov’t criminalizes for each enterprise and Gov’t criminalizes emissions in excess or limitsemissions in excess or limits

OrOrGov’t specifies technology to be used Gov’t specifies technology to be used

(Best Available Technology)(Best Available Technology)

Cap and Trade and Tax make use Cap and Trade and Tax make use of Marketsof Markets

The emitter decides what strategy or The emitter decides what strategy or technology makes most sense and makes technology makes most sense and makes use of markets in crafting a solution. use of markets in crafting a solution. Solutions compete in the market.Solutions compete in the market.

Incentive based measures are more Incentive based measures are more economical because they provide flexibility economical because they provide flexibility about where and how emissions about where and how emissions reductions occur.reductions occur.

Command and Control is not competitiveCommand and Control is not competitive

Economic Efficiency: Best to WorstEconomic Efficiency: Best to Worst

TaxTaxCap and TradeCap and TradeCommand and ControlCommand and ControlThere is no market mechanism for There is no market mechanism for

determining how much COdetermining how much CO22 there should there should be in the atmosphere. But there are be in the atmosphere. But there are market mechanisms for minimizing the market mechanisms for minimizing the amount of COamount of CO22 emitted. This is what emitted. This is what markets do best.markets do best.

But Taxes and Sales of Permits But Taxes and Sales of Permits Cost the EconomyCost the Economy

You can recycle the tax or permit fees by You can recycle the tax or permit fees by using the money to reduce other taxes using the money to reduce other taxes (payroll taxes or income taxes). This (payroll taxes or income taxes). This would be a ‘revenue neutral’ scheme and would be a ‘revenue neutral’ scheme and would not grow government.would not grow government.

You can use part of the money you collect You can use part of the money you collect in carbon tax or permit fees to support in carbon tax or permit fees to support research and development or to assist research and development or to assist developing countriesdeveloping countries

Problems with Cap and TradeProblems with Cap and Trade

Rigid caps are not flexibleRigid caps are not flexiblePrice Volatility can make Cap and Trade very Price Volatility can make Cap and Trade very

expensiveexpensive The nature of the problem – emissions over decades The nature of the problem – emissions over decades

lead to slow build-up of GHG – should allow for a flexible lead to slow build-up of GHG – should allow for a flexible response. Do less one year and more another – it response. Do less one year and more another – it averages out. Suited for taxes – if the world emits too averages out. Suited for taxes – if the world emits too much one year, raise the tax in future yearsmuch one year, raise the tax in future years

Rigid caps send prices very high when demand goes Rigid caps send prices very high when demand goes very high. So the cost of meeting the cap gets very high. So the cost of meeting the cap gets excessive. But the requirement to meet the cap on a excessive. But the requirement to meet the cap on a year-to-year basis is not rigid.year-to-year basis is not rigid.

A more Flexible Cap and TradeA more Flexible Cap and Trade

Mechanisms to make cap and trade more Mechanisms to make cap and trade more flexible get it closer to a carbon tax in flexible get it closer to a carbon tax in efficiency. efficiency. Set a maximum price for permits (“safety Set a maximum price for permits (“safety

Valve”) Valve”) Allow “banking” of emissionsAllow “banking” of emissions

CBO says that a flexible Cap And Trade is CBO says that a flexible Cap And Trade is nearly as efficient as a carbon tax.nearly as efficient as a carbon tax.

When is it appropriate for When is it appropriate for government to interfere in the government to interfere in the

market?market?

In the case of market failuresIn the case of market failuresExternalitiesExternalities

Costs are external to the transaction and are borne Costs are external to the transaction and are borne by one or another party or non-partiesby one or another party or non-parties

Benefits of a transaction are external to the Benefits of a transaction are external to the transaction and are not captured by the partiestransaction and are not captured by the parties

R & DR & D

ProductProduct

Why Can the US Gov’t Interfere?Why Can the US Gov’t Interfere?

We the people of the United States, in order We the people of the United States, in order to form a more perfect union, establish to form a more perfect union, establish justice, insure domestic tranquility, provide justice, insure domestic tranquility, provide for the common defense, promote the for the common defense, promote the general welfare, and secure the blessings general welfare, and secure the blessings of liberty to ourselves and our posterity, do of liberty to ourselves and our posterity, do ordain and establish this Constitution for ordain and establish this Constitution for the United States of America.the United States of America.

Isn’t the idea of an “externality” Isn’t the idea of an “externality” political?political?

Economists from across the American Economists from across the American political spectrum (Democrat, Republican, political spectrum (Democrat, Republican, Libertarian) generally understand the need Libertarian) generally understand the need of government to address externalities.of government to address externalities.

CBO Analysis:CBO Analysis:Assume we know that the present value of Assume we know that the present value of

the benefit of reducing emissions is $15/ton the benefit of reducing emissions is $15/ton of COof CO22..We add up costs to be incurred in the futureWe add up costs to be incurred in the future

Restore shorelines, build dikes, irrigate drought-Restore shorelines, build dikes, irrigate drought-prone farmland, treat diseases…prone farmland, treat diseases…

Discount the costs at 3%/year (for economic Discount the costs at 3%/year (for economic growth). That gives today’s costs (present growth). That gives today’s costs (present value).value).

(NOTE: If the Tax is $15/ton, then the (NOTE: If the Tax is $15/ton, then the system is efficient because the Tax sets the system is efficient because the Tax sets the cost that will be expended.)cost that will be expended.)

CBO AnalysisCBO Analysis

If the present value of the benefits is If the present value of the benefits is known and the tax or permit prices are set known and the tax or permit prices are set equal to those values, then the carbon tax equal to those values, then the carbon tax and the cap and trade provide the same and the cap and trade provide the same benefits.benefits.

Of course, unknowns prevail. In this Of course, unknowns prevail. In this situation, CBO prefers the tax.situation, CBO prefers the tax.