January 23, 2009 Holmes Hummel, PhD hummel@stanfordalumni

January 23, 2009

Holmes Hummel, PhD

[email protected]

www.holmeshummel.net/ClimatePolicyDesign

Complementary Policies

for Climate Change:

Basis, Design, Strategy

1

mailto:[email protected]

http://www.holmeshummel.net/ClimatePolicyDesign

• Seeking a Price Response in Failed Markets

• Making the Case for Complementary Policies

• Considering a Federal Climate Action Plan

• Annex: Smart Grid (EISA Title XIII)


2

U.S. Approach: Cap-and-TradeDeclining Cap

Covered Entities 3

Polluters Compete for Scarce Permits

4

Carbon Price Established by Market Activity

So, is it more profitable to:

buy a permit, OR reduce my own

emissions?

Profit opportunities are a main driver for innovation and investment,

and the climate challenge needs both.

5

Carbon Price Established by Market Activity

Would anyone accept $40 for your permit?

$40

6

Carbon Costs Passed to Consumers

$40$40 $40 $40 $40

35¢per gallon

2.5 ¢per kWh

0.6 ¢per therm People

Respond…?7

http://images.google.com/imgres?imgurl=http://ladpw.org/epd/hhw/resources/illustrations/_pc/fertilizer.bmp&imgrefurl=http://ladpw.org/epd/hhw/resources/illustration.cfm&h=438&w=374&sz=21&hl=en&start=17&usg=__EysFyRiSif3nagUCH0zYIcBlZVY=&tbnid=SmvsfxKrzDB5jM:&tbnh=127&tbnw=108&prev=/images%3Fq%3Dfertilizer%26gbv%3D2%26ndsp%3D20%26hl%3Den%26sa%3DN

2000 21002050

Achieving Reduction TargetsTo stabilize global warming, most uses of coal, oil, and gas will have to move to a different game: the clean energy economy.

5000

4000

3000

2000

1000

6000

7000

$100

$80

$60

$40

$20

$120

$150

An

nu

al U

.S.

Em

issi

on

s (M

tCO

2)C

arbo

n P

rice ($/MtC

O2)

$??

$??

$??

$??

$250

$200

$150

$100

$50

$300

$350

8

What price trajectorywould be sufficient to drive

people away from fossil fuels?

Modeling results are highly uncertain

Moving to Clean Energy

Players seek better options as costs rise.

Cap-and-trade lets players choose at what price they leave the game

– and how they want to make that change.

$30$150$20

$100

$200$50

2050204020302020

Wind power

Rail Transport

Green buildings

Nuclear power

2010

Solar power

Hybrid vehicle

9

Achieving Reduction Targets

Who will be the last greenhouse gas polluters

left in the game?

2050

Unlike the familiar game of Musical Chairs, the last players still vying for pollution permits are not exactly winners…

10

Achieving Reduction Targets

The last ones remaining in the game are those who:

A) can afford to pay the most, or

B) have the least flexibility to change games.

The underlying assumption is that the most valuable uses of fossil fuels must be the ones for which people are willing to pay the most.

To stabilize global warming, most uses of coal, oil, and gas will have to move to a different game: the clean energy economy.

2050

11

Market Conditions

• Many small buyers and sellers

• Perfect freedom of entry and exit from the industry.

• Homogeneous products are supplied to the markets that are perfect substitutes.

• Perfect knowledge

• Low transaction costs

• No externalities arising from production and/or consumption which lie outside the market

Perfect Competition

SELLERS

BUYERS

Market Conditions







Perfect Competition

Market Conditions

Perfect Competition







$3.99

$3.99

$3.20

http://images.google.com/imgres?imgurl=http://www.winstonmotorsports.com/images/bigstockphoto_Speedometer_At___Mph_291241.jpg&imgrefurl=http://www.winstonmotorsports.com/welcome.html&usg=__ZiVLVmn6MD_iiRibIUPRmEBJmRE=&h=463&w=600&sz=107&hl=en&start=8&um=1&tbnid=BswiYTO7usis3M:&tbnh=104&tbnw=135&prev=/images%3Fq%3DSPEEDOMETER%26um%3D1%26hl%3Den%26rls%3Dcom.microsoft:*%26sa%3DN

Market Conditions

Energy Sector

• Few sellers, many buyers






$3.99

$3.99

$3.20


Market Conditions

Energy Sector



• High capital requirements and regulatory barriers to entry




$3.99

$3.99

$3.20


Market Conditions

Energy Sector




• Lack of transparency



$?? $/Btu?


Market Conditions

Energy Sector





• Persistent transaction costs


$??

$/Btu?


Market Conditions

Energy Sector






• Many, Very Large Externalities – climate change is just one…

$??

$/Btu?







24

25

#1 Complementary Policies Reduce the Cost of Price-Based Policies

26


-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230

1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6

Mid-range case, McKinsey 2007

Abatement costs <$50/ton

PotentialGigatons/yearIN 2030

COST($/tonCO2)

27


-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230

Residential electronics

Residential buildings - Lighting

Fuel economy packages – Cars

Cellulosic

biofuels

Industry – Combined heat and power

Conservation tillage

Fuel economy packages – Light trucks

Coal mining – Methane mgmt

Industrial process improve-ments

Commercial buildings – New shell improvements


Commercial electronics


PotentialGigatons/yearIN 2030

A price on carbon will not address all the non-price barriers to reducing GHGs –

or the price insensitive reasons people consume fossil fuels.

1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.61.21.2 1.41.4

COST($/tonCO2)

28


Natural gas and petroleum systems mgmt

Afforestation of pastureland

Reforestation

Winter cover crops

New coal

power plants

with CCS

for EOR

Biomass power – Cofiring

Industry – CCS new builds on carbon-intensive processes

Shift dispatch of existing plants from coal to natural gas

Car hybridi-zation

Commercial electronics

Residential electronics

Residential buildings - Lighting

Fuel economy packages – Cars

Cellulosic

biofuels

Industry – Combined heat and power

Conservation tillage

Fuel economy packages – Light trucks

Coal mining – Methane mgmt

Industrial process improve-ments

Commercial buildings – New shell improvements

-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230



PotentialPotential

Gigatons/yearGigatons/year

IN 2030IN 2030

1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6

COST($/tonCO2)

29


-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230


1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6

Natural gas and petroleum systems mgmt

Afforestation of pastureland

Reforestation

Winter cover crops

New coal

power plants

with CCS

for EOR

Biomass power – Cofiring

Industry – CCS new builds on carbon-intensive processes


Car hybridi-zation

Potential

Gigatons/year

IN 2030


$40$40 / tonCO2

Reduction Reduction Target: Target:

1 GtCO2e1 GtCO2e

Reduction Reduction Target: Target:

1 GtCO2e1 GtCO2e

COST($/tonCO2)

30


$10 Billion

-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230


1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6

Potential

Gigatons/year

IN 2030


Reduction Target:

1 GtCO2e

$40$40 / tonCO2

Residential

buildings -Lighting

Fuel economy

packages – Cars

Fuel economy

packages –

Light trucks

COST($/tonCO2)

New coal

power plants

with CCS

for EOR


New coal

power plants

with CCS

for EOR


31

-110

1.01.0 1.21.2

-50

0.20.2 0.40.4 0.80.80

-40

0.60.6-20-10

10

4050

7080

100

20

-100

-70-80

30

60

90

-120

-30

-60

-90

-230


1.41.4 1.81.8 2.02.0 2.22.2 2.42.4 2.62.6 2.82.8 3.03.0 3.23.21.61.6

Potential

Gigatons/year

IN 2030

Mid-range case, McKinsey 2007Residential

buildings -Lighting

Fuel economy

packages – Cars

Fuel economy

packages –

Light trucks

New coal

power plants

with CCS

for EOR

COST($/tonCO2)


#2 People May Reject a Carbon Price Signal Before They Reject Fossil Fuels


Nuclear NuclearCoalPower

CoalPower

Natural GasPower

Natural GasPower

Carbon Price: $0/tCO2 $20/tCO2

Market Price

Market PriceSets Price

Sets Price

Pro

fit Pro

fit

Pro

fit

Pro

fit

Dis

pat

ch P

rice

per

MW

h

Dis

pat

ch P

rice

per

MW

h

Pro

fit Pro

fit

Nuclear NuclearCoalPower

CoalPower

Natural GasPower

Natural GasPower

Carbon Price: $0/tCO2 $20/tCO2

Market Price

Market PriceSets Price

Sets Price

Pro

fit Pro

fit

Pro

fit

Pro

fit

Dis

pat

ch P

rice

per

MW

h

Dis

pat

ch P

rice

per

MW

h


Pro

fit

Pro

fit

Gasoline Consumption

Price of Gasoline


~$150/tCO2

World Resources Institute; 2003 data

#3 Stabilization Requires Reducing Emissions Outside a Managed Cap of Measurable Sources

OFFSETS

CAP




• Annex: Smart Grid (EISA Annex XIII)


38

Market Conditions

Perfect Competition







Energy Sector







39

Market Conditions

Energy Sector








Price-Based Policies

40

Market Conditions

Energy Sector






• Many, Very Large Externalities – climate change is just one… Price-Based Policies

41

1. Curing market failures

2. Coping with market failures

3. Covering emissions by sector


OFFSETS INSIDE U.S.

CAPCAP

Designing Complementary PoliciesU

.S. G

HG

Em

issionsU

.S.

Sou

rces

End-Use

42

An “economy-wide” cap-and-trade policy does not distinguish between sectors


TransportationTransportation

U.S

. GH

G E

missions

U.S

. S

ourc

es

End-Use

43

Designing Complementary Policies

DistanceMode

Fuel SourceFuel Economy

California’s Strategy to Reduce Emissions to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004

Vehicle GHGStandards



Low Carbon Fuel Standard



Low Carbon Fuel Standard Transportation

& Other Vehicle Measures


Electric Power SectorElectric Power Sector

U.S

. GH

G E

missions

U.S

. S

ourc

es

End-Use

47


TransportationTransportation





Efficiency Standards& Incentive Programs






Renewable PortfolioStandard:33% by 2020


Million Solar Roofs







U.S

. GH

G E

missions

U.S

. S

ourc

es

End-Use

51


Industrial Industrial GasesGases

uCalifornia’s Strategy to Reduce Emissions

to 1990 by 2020 = 174 MMTCO2E below baseline = 10% below 2002-2004

Million Solar Roofs

F-Gases &Refrigerants








Million Solar Roofs







SustainableForests



Million Solar Roofs







SustainableForests

Other



Million Solar Roofs







SustainableForests

Cap-And-TradeMarket Response


OFFSETS INSIDE U.S.

U.S

. GH

G E

missions

U.S

. S

ourc

es

End-Use

56

CAPCAP


Most of the Industrial GHG Emissions Covered by a Cap-and-Trade Policy are in 5 Sub-Sectors

Energy Intensive Industries

Capped

Most of the Industrial GHG Emissions Covered by a Cap-and-Trade Policy are in 5 Sub-Sectors

ISO 50001: Int’l Energy Management Std.

Capped

Complementary Policies for EE & RE

• National Action Plan for Energy Efficiency recommendations

• Renewable Portfolio Standard; Renewable Fuel Standard

• Generation performance standards; Low Carbon Fuel Standard

• Requiring efficiency to be an alternative in power plant EIS studies

• Remove barriers to grid access (“Free the Grid” report)

• Green power purchases and marketing

• Combined heat and power (CHP) standards, incentives, and/or barrier removal

• Public Benefits Charge – and all that it could fund59

Policy Horizon

On the Books:

1. EPAct 2005

2. EISA 2007

3. Existing executive authorities across all departments

Looking ahead:

1. New Energy for America

2. SAFETEA-LU (Transportation Reauthorization)

3. Cap-and-Trade legislation

4. Mass vs. EPA regulations60






61

Supplemental questions on Smart Grid

1. What does Smart Grid do?

2. What characterizes a Smart Grid?

3. What does Smart Grid deliver?

… as specified in the Energy Independence and Security Act of 2007

62

What does a Smart Grid do?(EISA Title XIII)

1. Dynamic optimization of grid operations and resources, with full cyber-security.

2. Development and incorporation of demand response, demand-side resources, and energy-efficiency resources.

3. Provision to consumers of timely information and control options.

63

What characterizes a Smart Grid?(EISA TitleXIII)

1. Increased use of digital information and controls technology to improve reliability, security, and efficiency of the electric grid.

2. Deployment and integration of distributed generation (e.g. renewable resources)

3. Deployment and integration of advanced electricity storage and peak-shaving technologies, including plug-in electric and hybrid electric vehicles, and thermal-storage air conditioning.

4. Deployment of `smart' technologies (real-time, automated, interactive technologies that optimize the physical operation of appliances and consumer devices) for metering, communications concerning grid operations and status, and distribution automation.

5. Integration of `smart' appliances and consumer devices.

6. Development of standards for communication and interoperability of appliances and equipment connected to the grid, including grid infrastructure.

7. Identification and lowering of unreasonable or unnecessary barriers to adoption of smart grid technologies, practices, and services.

64

What does a Smart Grid deliver?(EISA Title XIII)

1. The ability to measure or monitor electricity use as a function of time of day, power quality characteristics such as voltage level, current, cycles per second, or source or type of generation and to store, synthesize or report that information by digital means.

2. The ability to sense and localize disruptions or changes in power flows on the grid and communicate such information instantaneously and automatically for purposes of enabling automatic protective responses to sustain reliability and security of grid operations.

3. The ability to detect, prevent, communicate with regard to, respond to, or recover from system security threats, including cyber-security threats and terrorism, using digital information, media, and devices.

4. The ability of any appliance or machine to respond to such signals, measurements, or communications automatically or in a manner programmed by its owner or operator without independent human intervention.

5. The ability to use digital information to operate functionalities on the electric utility grid that were previously electro-mechanical or manual.

6. The ability to use digital controls to manage and modify electricity demand, enable congestion management, assist in voltage control, provide operating reserves, and provide frequency regulation.

65

January 23, 2009

Holmes Hummel, PhD

[email protected]

www.holmeshummel.net/ClimatePolicyDesign


for Climate Change:

Basis, Design, Strategy

66

January 23, 2009 Holmes Hummel, PhD hummel@stanfordalumni

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