Integrating Economic Instruments in AB 32 Implementation …

Integrating Economic Instruments in AB 32 Implementation

                  Lawrence H. Goulder
                   Stanford University



                       11 July 2008




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  Why Employ Market-Based (Or "Economic")
              Instruments?


Market-based instruments:
  cap and trade, emissions fees, subsidies to R&D

Touted virtue:
  help engage lowest-cost abatement activities

       · Cap and trade, in particular, has potential attraction of
         achieving given abatement target at lower cost than is possible
         under conventional regulation alone.

       · Cap and trade also has the virtue of establishing an
         unambiguous cap on total emissions

                                                                           2
             Cap and Trade's Role under the AB 32
                      Draft Scoping Plan

                                                                                 2020 Reductions
           Recommended Reduction Strategy                     Sector
                                                                                   (MMTCO2E)

Non-Market-Based Regulation

        California Light-Duty Vehicle GHG Standards
                                                          Transportation              31.7
        (Pavley Rules)
        Energy Efficiency Standards (on buildings
                                                      Electricity, Commercial,
        and appliances), Increased Combined Heat                                      26.4
                                                             Residential
        and Power, Solar Water Heating
                                                                                               133.8
        Renewables Portfolio Standard (increase to
                                                             Electricity              21.2
        33%)
        Low Carbon Fuel Standard                          Transportation              16.5
        Other Measures                                        various                 38.0


Cap and Trade                                                                         35.2

Total                                                                                 169.0

                                            28% reduction from projected
                                            BAU emissions of 596 MMTCO2E                       3
    Cap and Trade Supplements (rather than
      displaces) Conventional Regulation

Transportation, Electricity, Residential/Commercial, and Industrial
   Sectors:
        Projected business-as-usual emissions     512
        Projected emissions with recommended
                  non-market measures             400
        Projected emissions with cap and trade
                  as well                         365


How? Allowance prices rise enough to bring about the extra
  needed reductions.

(Why not just tighten conventional regulations instead?)


                                                                      4
Auction vs. Free Allocation
Under Cap and Trade


   Auctioning allows flexibility:
      revenues can be used for ...
       · compensation to groups (firms or households) with disproportionate adverse
          impacts
       · promoting technological innovation (directly or through tax credits)
       · financing reductions in existing distortionary taxes (income taxes, sales taxes,
          etc.)

   Auctioning has potential to be more cost-effective:
       · it is more cost-effective than free allocation to the extent that third option is
          exploited

   Substantial revenues are involved:
       · Under 100% auctioning, $15/tonCO2 allowance price yields $5.5 billion in
          2020
            -- could be 4-6% of 2020 State budget.
                                                                                             5
   What About Other Market-Based Policies?

Tax-Credits for GHG-Reducing Activities?
   · only item listed is credit for solar roofs


Emissions Fees?
   · some discussion but no numbers in Draft Scoping Plan
   · consistent with cap and trade?


Tax-Credits or Subsidies for R&D?
   · not much discussion in Draft Scoping Plan (except in context of use
     of allowance revenues)




                                                                       6
                              Conclusions

I like the Draft Scoping Plan.

    · Thoughtful, balanced, and clear presentation of the issues


    · Effort to keep costs down: significant role for market-based
      approach (cap and trade)
        · contributes to about 21% of the needed reductions
        · applies broadly (to industrial, commercial/residential, industrial and
          transportation sectors)



Many important details (e.g., allocation method, initial cap level in
  2012) still need to be worked out.



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