Regional carbon dioxide permit trading in the United States: Coalition choices for Pennsylvania

Penn State Environmental Law Review

Volumn 14, Issue 2, 2006, Pages 203-229

  Rose, Adam ^a   Peterson, Thomas D ^a   Zhang, Zhong Xiang ^b  

^a PENNSYLVANIA STATE UNIVERSITY   (United States)

^b East West Center   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

CARBON DIOXIDE; EMISSIONS TRADING; GREENHOUSE GAS; TRADE-ENVIRONMENT RELATIONS;

NORTH AMERICA; PENNSYLVANIA; UNITED STATES;

EID: 30744465177     PISSN: 15463427     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (54)

1. The NEB/ECP agreement requires five-year scientific updates to clarify longterm targets and timetables. While specific years have not been specified for compliance, some environmental groups haves suggested a default of 2050 as the third time period of the agreement.
2. Webcast Briefing: Regional Greenhouse Gas Initiative (RGGI) (March 18, 2005).
3. West Coast Climate Initiative, http://www.ef.org (last visited Mar. 1, 2006).
4. In addition, all eighteen Western States recently agreed to a regional goal of 30,000 megawatts of renewable power generation by 2015. Western Governors Clean and Diversified Energy Initiative, http:// www.westgov.org (last visited Mar. 1, 2006).
5. The Western Regional Air Partnership is a program of the Western Governor's Association, www.westair.org.
6. Actions by the two states are likely to begin once each has completed a comprehensive state GHG plan, now underway. See www.azclimatechange.us and www.nmclimatechange.us.
7. Actions between Arizona and Sonora are likely to begin following the completion of statewide climate plans in each, now underway.
8. Growth rates for coastal states of the northeast and west coast average about 33 percent for the period 1990-2020. For example, while Arizona has an estimated emissions growth rate of 147 percent in this same period and New Mexico's rate is estimated at 64 percent. (data and discussion available at www.azclimatechange.us/ewebeditpro/items/ O40F7959.pdf).
9. Recently, governor-appointed climate change advisory groups charged with developing statewide GHG plans in Arizona and New Mexico have tentatively agreed to explore regional and or national cap and trade approaches in the future, along with numerous other mitigation policies in all sectors (see www.azclimatechange.us and www.nmclimatechange.us).
10. Note that permit allocations maybe assigned first to either state governments or individual emitters. If assigned to states, a government agency may be the official trading entity on behalf of emitters within its jurisdiction, or the agency may just in turn distribute the permits directly to emitters. Monopsony power might arise in either instance. Even if permits are assigned directly or indirectly to emitters, states are the negotiating parties in RGGI, in part on behalf of the emitters within their borders. States with a large number of permit buyers can wield additional influence on the baseline permit allocation to their constituents or with respect to the permit price. All of these outcomes will be beneficial for the states likely to be large permit buyers and a departure from the competitive outcome. Thus, the results below represent an approximation of some of the possibilities of executing market power of various types.
11. One embassy representative of a European nation reacted to the barriers of including individual or a group of U.S. states in the Kyoto agreement as "ninety percent political, and ten percent legal."
12. Adam Rose & Brandt Stevens, An Economic Analysis of Flexible Permit Trading in the Kyoto Protocol, 1 Int'l Envtl. Agreements: Pol., L. & Econ. 219 (2001).
13. ZhongXiang Zhang, The Design and Implementation of an International Greenhouse Gas Emissions Trading Scheme, 18 Env't & Plan.: Gov't & Pol'y 321 (2000).
14. Andreas Loeschel & ZhongXiang Zhang, The Economic and Environmental Implications of the U.S. Repudiation of the Kyoto Protocol and the Subsequent Deals in Bonn and Marrakech, 138 Weltwirtschaftliches Archiv 711 (2002).
15. Adam Rose & ZhongXiang Zhang, Interregional Burden-Sharing of Greenhouse Gas Mitigation in the United States, 9 Mitigation & Adaptation Strategies For Global Change 477 (2004).
16. For a discussion of examples of these actions, see Thomas D. Peterson, The Evolution of State Climate Change Policy in the United States: Lessons Learned and New Directions, 14 Widener L.J. 81 (2004).
17. For a summary of nearly 200 local government initiatives, see Carolyn Kousky & Stephen H. Schneider, Global Climate Policy: Will Cities Lead the Way? 3 Climate Pol'y 359 (2003).
18. NYSERDA launched the New York Greenhouse Gas Task Force for Governor Pataki in 2001 and formed a stakeholder process that delivered recommendations to the Governor in 2003.
19. ICF Consulting's Integrated Planning Model (IPM) of the electricity sector was deployed to examine several cap and trade scenarios in New York and the surrounding region. Result suggested significant potential for electric power imports in response to constraints on New York power generators.
20. IPM was used to develop a reference case for the state and region and evaluation of six cap and trade scenarios.
21. Webcast Briefing: Regional Greenhouse Gas Initiative (RGGI) (March 18, 2005).
22. See, e.g., Adam Rose & ZhongXiang Zhang, Interregional Burden-Sharing of Greenhouse Gas Mitigation in the United States, 9 Mitigation & Adaptation Strategies For Global Change 477 (2004).
23. See, e.g., Thomas H. Tientenberg, Resources for the Future, Emissions Trading: An Exercise In Reforming Pollution Policy (1985). Emission permit trading, or the "property rights" approach to environmental remediation stems from the Coase Theorem, which provides the rationale for permit trading: that externalities (such as pollution) can be efficiently eliminated (or a target reduction achieved) if enforceable property rights (emissions permits) can be assigned, regardless of the initial distribution of property rights or the final distribution of outcomes.
24. See ZhongXiang Zhang, The Design and Implementation of an International Greenhouse Gas Emissions Trading Scheme, 18 Env't & Plan.: Gov't & Pol'y 321 (2000);
25. Andreas Loeschel & ZhongXiang Zhang, The Economic and Environmental Implications of the U.S. Repudiation of the Kyoto Protocol and the Subsequent Deals in Bonn and Marrakech, 138 Weltwirtschaftliches Archiv 711 (2002);
26. Adam Rose & ZhongXiang Zhang, Interregional Burden-Sharing of Greenhouse Gas Mitigation in the United States, 9 Mitigation & Adaptation Strategies For Global Change 477 (2004).
27. For a generalized optimization approach to the problem, see also Brandt Stevens & Adam Rose, A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility, 44 J. Envtl. Econ. & Mgmt. 45 (2002).
28. William D. Nordhaus, Managing The Global Commons (1994). The shape of the cost function for mitigating carbon emissions has been studied extensively. For example, Nordhaus found that the logarithmic functional form provided the best fit for the estimates of the marginal costs of mitigating a specific amount of carbon emissions among a number of economic modeling studies that he surveyed (a type of meta-analysis).
29. Id. Nordhaus used an analytical model to further derive a logarithmic relationship between the marginal costs and the percentage reduction.
30. i i = 1, ..., n.
31. Anthony Brooke, David Kendrick, & Alexander Meeraus, Gams: A User's Guide (Scientific Press 1996) (1992).
32. The final draft model rule for RGGI establishes the following GHG reduction target: "RGGI will stabilize emissions from the power sector at approximately current levels from the start of the program in 2009 through the beginning of 2015. From 2015 through 2018 emission will decline achieving a 10% reduction in 2018. In addition, some of the program reductions will be achieved outside the electricity sector through emmisions offset project." Text of the draft rule is available at www.rggi.org/modelrule.htm.
33. 2 Emissions, 15 Resource & Energy Econ. 117 (1993);
34. Adam Rose & Brandt Stevens, A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility, 44 J. Envtl. Econ. & Mgmt. 45 (2002).
35. i is in the denominator the overall function is essentially an exponential one, which exhibits the desired diminishing returns feature.
36. 2. Adam Rose & Gbadebo Oladosu, Greenhouse Gas Reduction in the U.S.: Identifying Winners and Losers in an Expanded Permit Trading System, 23 Energy J. 1 (2002).
37. Unfortunately, data are inadequate to specify regional distinctions in sequestration costs at this time. Likely regional differences in these costs could significantly affect the results presented here, though not in the near term, such as the Kyoto compliance period (2009-12), since it takes some time (to allow for tree growth) for this option to take hold. (The term, "mitigation," is sometimes used to cover the broader set of tactics, including sequestration, while abatement is sometimes used to cover the more narrow set. We use the terms as synonyms with the clear understanding that we have not included carbon sequestration.) We have omitted the benefits of GHG mitigation as well, which are also likely to have significant differential impacts across regions. See, e.g., Barry D. Solomon & Russell Lee, Emissions Trading Systems and Environmental Justice, 42 Env't. 32 (2000).
38. Benefit estimates are especially tenuous, and we have sought to illustrate major issues and the usefulness of our methodology with as strong a data underpinning as possible. The reader is referred to Rose and Stevens for insight into the difference that the inclusion of benefits makes in permit trading systems in the international domain. See Adam Rose & Brandt Stevens, An Economic Analysis of Flexible Permit Trading in the Kyoto Protocol, 1 Int'l Envtl. Agreements: Pol., L. & Econ. 219 (2001);
39. Brandt Stevens & Adam Rose, A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility, 44 J. Envtl. Econ. & Mgmt. 45 (2002). Of course, actual policy design must include some assessment of benefits.
40. Webcast Briefing: Regional Greenhouse Gas Initiative (RGGI) (March 18, 2005).
41. 6 from electricity transmission, and expanding beyond current RGGI borders through participation in the Clean Development Mechanism (CDM) and including the European Union (EU), Future offsets include such GHGs as HFC-23 and coal mine methane (if Pennsylvania participates), as well as additional mitigation strategies such as soil sequestration. In addition, the geographic expansion has been referred to as "any location in the U.S. with an adequate carbon constraint." Id. Various studies have shown that making permit trading as comprehensive and flexible as possible can significantly lower mitigation costs (e.g., by as much as 75 percent over non-tradeable quotas on a single GHG). Of course, there are extensive design and implementation issues that must be addressed, e.g., the "trading ratio" between the various GHGs. Also, to be considered is the cost of managing and enforcing such broad agreements. Considerable economies of scale and scope do exists, but the best approach may be a sequential evolutionary one that capitalizes on successful experience, while maintaining partner cohesion and opportunities to fully engage the stakeholder process. See, e.g., Nathan Collamer & Adam Z. Rose, The Changing Role of Transaction Costs in the Evolution of Joint Implementation, 9 Int'l Envtl. Affairs 274 (1997).
42. Other ways of expanding a trading program refer to its time horizon. Currently the plan is for a three-year compliance period in RGGI, so there is some implicit banking and borrowing of permits. Otherwise, banking over longer periods is allowed and early credit action is as well. These considerations add some flexibility in timing mitigation, though this opportunity has not been found to yield cost-savings anywhere near as large as those noted in the previous paragraph. Brandt Stevens & Adam Rose, A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility, 44 J. Envtl. Econ. & Mgmt. 45 (2002). Moreover, it may make enforcement more difficult.
43. The emissions projections in this paper are near the upper bound of the range of projections by several other sources.
44. At the time of this writing, a bill, with considerable support, is before the Maryland Legislature requiring that this state join the RGGI coalition.
45. Pennsylvania's decision to buy fewer permits despite having forced their price down is consistent with behavior in a monopsony market. As in a monopoly market, power is exercised by restricting the market size.
46. The EU cap is approximately equal to its Kyoto commitment of an 8 percent reduction below 1990 levels. We did not have data for the current definition of the EU, so we were forced to use the definition of OECD Europe in its place. This approximation led to using a cap for the EU in our simulations of 7.8 percent, rather than 8 percent, below 1990 levels.
47. A. Denny Ellerman, et. al., Market For Clean Air: The U.S. Acid Rain Program (2000).
48. ZhongXiang Zhang, Greenhouse Gas Emissions Trading and the World Trading Systems, 32 J. World Trade 219 (1998);
49. Adam Rose & Brandt Stevens, An Economic Analysis of Flexible Permit Trading in the Kyoto Protocol, 1 Int'l Envtl. Agreements: Pol., L. & Econ. 219 (2001). Note that the estimates of the gains from trade in this paper are lower bounds on the potential, because they implicitly call for trading by state entities. If trading is allowed by individual emitters, costs are not averaged within a state, and more gains can be obtained by taking advantage of greater differentials between high cost and low cost trading partners.
50. The problem is compounded by the lack of a consensus definition of the concept. See Adam Rose, et. al., International Equity and Differentiation in Global Warming Policy, 12 Envtl. & Resource Econ. 25 (1998);
51. Adam Rose & ZhongXiang Zhang, Interregional Burden-Sharing of Greenhouse Gas Mitigation in the United States, 9 Mitigation & Adaptation Strategies For Global Change 477 (2004).
52. Note that we have not addressed the issue of carbon leakage within and across trading regions. This refers to the shift of firms, as well as associated emissions, out of a geographic area because an environmental policy has increased the costs of doing business there, or to an increase in imports. This is a major possibility in the Northeast, especially with respect to competitive electricity markets. It is a major motivation for expanding the geographic coverage of the trading area.
53. See Adam Rose, et al., International Equity and Differentiation in Global Warming Policy, 12 Envtl. & Resource Econ. 25 (1998);
54. Adam Rose & ZhongXiang Zhang, Interregional Burden-Sharing of Greenhouse Gas Mitigation in the United States, 9 Mitigation & Adaptation Strategies For Global Change 477 (2004).