Richard Cowart, Emissions Trading in the US and EU

thank you I’m thrilled to be here a couple of quick points by way of introduction my colleague mike hogan is is also here from the european climate foundation and part of my growing enthusiasm for working in europe has to do with the opportunity of working closely with european climate foundation so we’re going to be even though I’m I haven’t historically based in the United States and have done some international work fair international work in China and Brazil Mike Mike what I’m looking forward to is learning a lot from you all about opportunities to manage carbon more effectively in Europe and I’m going to go back here just to the title to tell you what let’s see if it works nope goes forward well could see what their reunion the title of this talk is about carbon revenue recycling to lower costs and accelerate emission reduction and that’s it that’s a big mouthful so I’m really going to be talking about a story from the United States really about the opportunity to link the newly emerging carbon markets worldwide with as a revenue stream for investments in low-carbon solutions to our problems and so that’s why we’re using the term carbon revenue recycling because carbon revenues are going to be a huge new flow of capital in many economies and we have this opportunity to marry this flow of capital to the solutions that actually accelerate the point of creating carbon markets in the first place that’s that’s the simple message and my message to you is that even though politically that seems like it might be a hard thing to do we have to look for ways to accomplish it if we want to accomplish the goals that carbon cap and trade and carbon markets are set up for in the first place so that’s about rap and about I should I should know to regulatory assistance project with which I work is a nonprofit that it’s not a consulting firm it’s more like a think tank and we advise governments that’s all we do we’re a nonprofit that is supported by foundations and some international agencies like the World Bank and Asian Development Bank things like that and also by the US Department of Energy and EPA lately I’ve begun all my talks about climate change by talking about China it’s hard not to as I said we’ve been working in China for the past seven years and I just I can’t I take this picture of these wonderful children in Yunnan Province and I use it as my screensaver these days actually because it just reminds me that any solutions that we’re trying to design for North America or for Europe have to be taken with the fact in mind that there I said two billion villagers if you count India China and the rest of the developing world it’s a larger number children like these whose families are consuming far less energy than we are emitting far less carbon than we are per capita and our are going to affect every decision that we make in two ways first is their impact on global emissions is growing and is over the next coming coming generations going to be enormous and secondly their demand for fossil fuels and energy energy and resources generally is going to be affecting the prices of everything that we lie everything that we think about when we try to come up with solutions for our own energy problems so we need to come up with solutions that accept and acknowledge and work with that reality this this chart i also use in presentations in the united states because americans tend to believe that it’s all the Chinese it’s it’s all the

fault of those Chinese and they need to be reminded that on an historic basis on a cumulative basis emissions from the United States which are represented by that tall plume of smoke this is humility the mission since 1950 dwarfs in fact emissions from China and India and this is a sort of a graphic acknowledgement of what Chinese and Indian officials tell us all the time which is you know you you can’t expect through climate policy to [ __ ] the economic development of the folks who are over here historically have emitted so much less than you you have to come up with a better solution than that I think europeans have a better understanding of this than americans so here’s the theme of my talk today i’ve been engaged in carbon cap and trade design in throughout the united states for the past five years in pretty much every venue in the united states where this has come up and in most of them and this is also true historically in the in europe the beginning the sort of the discussion begins with an economist or an economic approach any way in which people sort of optimistically believe that if we can just create a price on carbon then that carbon price will work its way through the economy and we will achieve our goals and my sad message to you today is first i’ll give you the same message send messages no that’s not going to work it won’t we will not be able to achieve our goals you know in any politically realistic world that we live in through a carbon price alone and the good news however is that we have other tools in our toolbox besides carbon prices and we got to get those tools out and you know get them out and use them and that’s this this point here that we need a portfolio based policy menu in addition to a carbon cap and a carbon price in order to get what we need public policies do exist e here stands for energy efficiency codes re s stands for a renewable electricity standard or renewable portfolio standard for electricity and we know that we can use those tools to accomplish our greenhouse gas objectives third point is that just auctioning allowances it’s not enough auctioning allowances is a good step and in the next phase of the EU to yes of course you’re going to be auctioning allowances and you can be happy that you’ve taken that step but just by itself it is not going to do what needs to be done how you invest the auction proceeds is actually far more powerful than the price of carbon itself and I’m going to talk about that in detail and of course the last point is that Congress and EU governments need to act on that now I’m going to concentrate my this talk is about the power sector and I apologize for the relatively limited scope but it’s enough just to take one sector and work it and then you sort of get the lessons from one sector in and in most economies the power sector is one of the largest single sources female scale submissions and so it’s important to do that so this is a really logical question you know when that I use in talking to The Economist’s who start off saying oh rich we’re going to have a carbon price of the market will solve our problems go away and so my response to that is to say well okay let’s think about it really logical e where are the sector reductions going to come from and if you think about it there’s three places are going to come from they’re going to come from consumers are going to consume less so we’ll have fewer emissions you take the existing fleet of power plants and change what runs on a daily basis that’s called read dispatch for we can make sure that we build new generation that is low emitting which means by the way that we have to retire the existing generation that’s high many so it wouldn’t be enough just to add new generation and keep the old stuff running if we’re going to reduce emissions overall and then we have to ask these practical political quick first of all there’s a practical physical question how many tons of carbon are we actually going to avoid and some of our preferred solutions don’t avoid very many tons that’s a sad

fact in California they’re going to put note they’re going to they have this goal of putting solar panels on lots of rooftops we ask you li asks have if you ask yourself in a engineering way how many times a carbon is that going to avoid and how much does it cost per ton it’s a really expensive program on a per ton basis wind power sometimes has the same problem you can spend a lot to build wind turbines and not avoid very many tons so you really are left with a head-scratching exercise now I’m going to deal with our I just said there’s three possibilities reduce consumption read this patch or change what the new stuff that gets built question will a carbon price through an auction through the EU TS or a u.s. model will it accomplish those three goals here’s the problems just raising prices to consumers will not reduce very much carbon I use this cartoon from you know there’s a lot of cartoons like this in the United States where the customer is saying I’m mad I hate the fact that the price of gas is going up but he’s still fueling up his SUV and the price elasticity of demand for electricity is even smaller than the price elasticity of demand for gasoline and it is very hard to get significant reductions in electric consumption by raising electric rates whether by carbon prices or any other technique now second this is a harder let this is the harder one well well the reply might be but if we have a carbon pricing we inject a carbon price into the wholesale power markets in the liberalised market such as you have and such as we have in about half of the United States we can in essence put a carbon tax on generators and won’t that change the dispatch that is changed what power plants get turned on on a daily basis and the sad answer is in most power systems that the change in dispatch is very small now this is a complicated chart in a way but I just want to show you how it would work in most power systems in most power systems and this would this is true for a competitive liberalised market the plants that are dispatched to dispatch in order of their marginal costs it is the cost to turn the plan on for the next hour is what determines what’s going to run if you think about it the low emitting resources which in most systems are hydro nuclear wind similarly most renewables those low emitting resources have low marginal costs they’re already running whenever they can run they run and on this term green bubbles down here his chart represents a model of the Upper Midwest United States 400 and something different power plants really modeled by the folks who really run them okay this was done by the electric power research institute in the US and those level meeting plants are already running the next plants that run in in the Upper Midwest of the u.s. different from here are these these purple in Greenland trivalent blue ones those tend to be the fossil plants coal and fuel oil and they run because they have low marginal costs coal is cheap gas is expensive so your turn on your coal plants before you turn on your guest plants pretty obvious as demand grows here in 20,000 megawatts up to 120 thousand megawatts plant after plant if the plant gets turned on then finally you start turning are some natural gas plants to balance the system and so the question would be how high does the carbon price have to be before you turn off a coal plant turn on a gas plant or turn off a nuclear plant what you wouldn’t want to turn those let’s say turn a lot of it they turn off the coke win the the point is if you raise the price of fossil fuels represented by raising the price from here to here through a carbon tax you don’t change the dispatch very much at all on this system every calculated that you could double the price of electricity at wholesale and reduce emissions only four percent the reason is that up here way up here at the very end at the very margin some plant will switch some plant with them it’s slightly more efficient will replace a plant that’s less efficient but you’ve raised you’ve

doubled the price of electricity to your consumers and you’ve only reduced emissions four percent that’s the challenge that you face when you have an existing fleet of power plants and this is true throughout Europe as well as in the u.s. so but things are even worse from a consumer point of view and I want to talk about the impact on consumers when this happens when you raise the clearing price of power in a wholesale power market every megawatt hour sold pace is going to receive that higher price which means consumers in this instance go back the consumers are going to pay this increased price on every megawatt hour sold which means that these low emitting plants down their enemies both lamps are going to receive higher income in those hours as the price went up okay so you raise the price of that every generator receives you’ve only changed the missions a little bit and consumers have paid a lot more and gotten very little in the biggest power pool in the United States serves the middle atlantic states and out to the midwest called pjm calculated that a 20 or 25 dollar a ton carbon charged with actually cost even though the price of carbon was only twenty or twenty-five dollars people would say oh well we can live with that the cost to consumers would be 852 a thousand dollars for every ton that was actually reduced as a result of that carbon church there’s no politician in America that would vote for that system if they knew what they were doing and they will wake up to it at some point so that’s a really challenging situation for anybody who’s relying on a carbon price to change the dispatch of the powers of the power grid I’m going to skip through this one but this one this chart here just shows you the same thing happening where you raise the price of the clearing price of power in the market and you end up just increasing the prices page of all generators in the US or in any system that’s got a large nuclear fleet the nuclear generators just walk away with buckets of money because the clearing price went up their costs didn’t go up at all all right well how about we r hope that if we impose a carbon charge that we’re going to get new generators will be built and they’ll be cleaner than the existing fleet or cleaner than what we would have built anyway and here it’s there’s a little more hope that carbon charges would actually cause you to build cleaner plants rather than the dirtiest possible plants but it’s a pretty expensive proposition and there are a lot cheaper ways to get those cleaner plants to be built a renewable portfolio standard or renewable electricity standard is actually a really smart public policy because it just mandates that these facilities be built this generation happen and they’re essentially shoved in at the bottom of the bid stack instead of trying to ask the question how high must we raise prices in order to get a wind developer to build a wind farm in the market right relying purely on the market how high must we raise prices for any other form of renewables it’s a pretty high clearing price before a developer is going to say oh I’m going to rely on that clearing price and that’s going to motivate me the renewable electricity standard production tax credits for renewable generation other forms of proactive government policies to promote renewables allows you to get what you’re paying for just the renewables without having to pay extra incentives to everybody else in the wholesale market in California they did this analysis recently and concluded that this was what they call the market-based supply curve of selected low-carbon resources they figured out that a bit more wind in California beyond what they were getting from there their renewable standard he would they would have to raise they would have to have a carbon price of one hundred and fifty dollars a ton that’s what this shortly here is shown that’s absent that really high carbon price you don’t have enough market pull to pull wind into the market okay now that’s all the bad news the bad news is that a carbon price alone isn’t going to get you what you need so we’d better have some other

tools in our toolbox and that’s interesting the the good news you’ve probably all I gotcha desk for show of hands how many of you have seen it this McKinsey curve or something like it few of you exchange yeah I figure everybody’s seen this curve right okay so you know what it stands for it stands for what it’s a very commonsensical thing in a way we know there’s a lot of untapped energy efficiency out there it’s a big reservoir and we got to figure out a way to go and get it if we want to reduce carbon at low costs how can we do that I took a slightly different approach to this but just to hammer this point home I asked the following question how much carbon would we save in the state of Ohio in the US Ohio’s a Midwestern state with a large coal fleet if we raised rates based this charts three percent you can do it at any rate increase you want if you raised rates three percent how many tons of carbon would you save and there is some price elasticity of demand consumers who buy lasts if you raise rates a little bit and so that’s represented by this wedge here over to the over 20 year period up to 20 26 we could lower we could avoid this many tons in this case it was 1500 million tons um it wasn’t very many wasn’t a bit pretty good fraction of total emissions and then we asked the different question what if we raised rates three percent but we took the three percent and we went out and bought energy efficiency with the money we deployed programs to buy energy efficiency the way we know how to do it actually through hundreds of utility programs in the US energy efficiency costs about 3 cents us per kilowatt hour save a kilowatt hour for three sets so if you take the you take the revenue and you buy efficiency well it turns out that this is how many times you would save this entire wedge both wedges together if you actually in strategically invest the revenue and it turns out depending on the time period you want to choose if you’re saving seven to 10 to 12 times more carbon per consumer dollars spent if you if you buy efficiency now sometimes when I make statements like that and say well let’s just go buy a lot of efficiency people say yo that’s great for the low-hanging fruit but after you’ve gotten rid of the low-hanging fruit efficiencies really expensive isn’t it well it turns out that there are economies of scale in the purchase of energy efficiency just as there are in many other things and that you can with well design programs actually see the cost of efficiency cost of acquired efficiency going down as the depth of your programs increases and the this is a curve showing data points over a number of years from a number of us programs basically showing you if you were to fit a line to this curve you can see this as we spend a greater and greater fraction of annual sales on efficiency the actual cost of efficiency per megawatt-hour is going down so at some point of course it will go back up again and it’ll still be cheaper than supply but this is good news to demonstrate that we are in most places in the United States we’re over here into this lower Ridge okay so now I’m going to tie carbon revenue and efficiency together the main this is my main point about revenue recycling our goal in this is this is actually a success story I want to tell you a good story we came up with the idea in the design of the Regional Greenhouse Gas Initiative to to do what I was just describing here which is use the revenue from customers to buy efficiency and realizing that there was a new stream of revenue is coming from the new carbon programs the best result is to strategically invest the revenue in a program of efficiency measures you can also spend some of the money on other initiatives like carbon capture and

storage renewable energy rd for advanced technologies there’s other good things you can do with the money but a significant fraction can be spent on efficiency right now and that will accelerate progress in reducing greenhouse gas emissions the success story comes from the Regional Greenhouse Gas Initiative which is a ten state region in the northeastern United States it’s a modest program but it illustrates the point the program was launched by the governors of those states to redo submissions by ten percent by 2018 and you know this is a small part of the United States in a way but it’s not it’s non-trivial I just looked at the numbers like the population numbers to give you an idea how bigger these places it’s the equivalent of what I got here Belgium Sweden Austria Denmark Switzerland and Ireland all put together so it’s in a big enough region to have lots of lessons we have recently held the fourth auction of carbon allowances in bemidji region and we are devoting a very large fraction of those revenues from the auction to energy efficiency throughout all ten states now how did how do we get people to do this we did this by modeling the results we ran we showed the governor’s that if we would reinvest the carbon revenues and energy efficiency carbon credit prices would drop because it’d be less demand for carbon because demand is down the need for new fossil capacity this was a very conservative study it showed capacity dropping thirty-three percent it’s actually going to be bigger than that customer bills actually go down I mean governor’s could not believe that we were selling them a carbon program that was going to impose a new cap and trade regime and they and the result at the end of the day would be that average customer bills in the region would actually be lower after the program than before and across all classes industrial commercial and residential and we were convinced that if we were even more aggressive we could save even more when we started talking about this I will confess people sort of thought we were the nuts air regulators had never heard of anything like this selling the allowances and investing the money and energy efficiency and you hadn’t hadn’t been done there are folks in the Treasuries we’re thinking well why would we want to do that if we’re going to sell allowances why don’t we put the money in the Treasury we had to convince people that it was a lot smarter to invest the money in efficiency and somewhat amazingly these decisions had to be taken in every individual state so ten governor’s ten energy regulators ten legislators had to be involved and separately in all ten states they decided to do it ninety percent of allowances across the region are going to be auctioned and about eighty percent of the proceeds are going to be devoted to a customer benefit principally through energy efficiency so we’ve got roughly seventy percent of the revenues going now to energy efficiency which is enabling us to double or triple spending on efficiency throughout that ten state region I put this book the Vermont was the first state to enact legislation to do this and I just put the language on here to give you an idea of what the Vermont legislature came to understand that they’re focusing on maximum long-term benefit to consumers especially benefits from accelerated and sustained investments in efficiency they mandated that our energy regulator devote one hundred percent of the carbon revenues to investments in efficiency and we wanted to keep the money out of the Treasury so we accomplished this by allocating the allowances to a trustee who could then sell them and invest the proceeds now I’m going to close by mentioning US federal legislation because this idea has now been taken to Congress and there really are two points in the federal legislation the first is that as I mentioned earlier we are not going to accomplish our carbon goals just by having a price on carbon and you need to put a suite of policies

I called portfolio up policies energy efficiency performance standards energy efficiency obligations such as some European countries have renewable portfolio standards etc second you need to auction allowances which a lesson we learned by the way by looking at the early phases of the EU TS and concluding that we had a chance to learn from your experience and and begin with an auction and second and third to devote the revenues to Andrew sufficiency the fourth measure here about a performance basis is a little more fancier version of the same thing I was asked to give you sum up some news about what’s happening in the US Congress right now i’ll close with that the leading bill in Congress right now is called aces the American clean energy and security act of 2009 has a long name and the bill is even longer it’s 900 pages long last time I looked at it it’s an amazing piece of legislation it’s like it gives you headaches just to think about some of this stuff but that positive version is I mean the positive news is we have a new Congress we have a president who really believes that we should solve this problem and we have a bill that’s actually worth passing and I’m I’m increasingly optimistic about its prospects it is an economy-wide cap-and-trade the last version i saw this is in negotiation right now in fact there’s going to be a new negotiated release this afternoon which i think will be full weekend these numbers of it but the goal in the committee draft was seventeen percent reduction by 2020 eighty-three percent 2015 a renewable portfolio standard of twenty percent better appliance and lighting standards and so forth now will it pass I think that with compromises some of which will come out today passages likely this year it’s hard to speak for the Senate the US Senate if you just look at a map of the US Senate and count Republican senators and coal state senators and you realize it’s a long road to go to get passage through the Senate but it is possible next year and what happens in Copenhagen might create some incentives for the US Senate to pass it if a deal comes out of Copenhagen with China and India playing a positive role it will make it increasingly hard for the US Senate to say no here’s the really positive news from my point of view allocations for efficiency allocations of allowance value for efficiency are included in this bill in a very significant way among all allowances around ten percent of allowance values is being given to states and cities to run efficiency programs now we’re expecting the allowance market to be at least 100 billion dollars a year so every percentage is at least a billion dollars a year so significant money here power sector allowances are given directly to local distribution companies they’re not going to go to the Treasury they’re going to go to the ldcs so we’re going to have entities out in the world in every state with allowances just sell and so state policy state regulation state laws can ensure that when those allowances are sold the money could be put into low-carbon investments including the efficiency guess allowances are given to guests local distribution companies and there’s a federal mandate that at least a third of the money is spent on energy efficiency and then there are some really subtle points about how you how you work with these formulas over time to make sure efficiency continues to be promoted now that experience of taking an idea from one place seeing how persuasive it can be in 10 different legislators taking it to Congress and seeing how persuasive it can be in a pretty difficult environment in US Congress makes me think that there should be potential for a similar approach in various places in Europe so can we allocate a sizeable pool of carbon allowance value somehow through appropriate mechanisms that might vary from members date to member state I

don’t know of course but it seems like an idea worth pursuing and an alternative would be to use this as something that illustrates the point you find other financing mechanisms there’s no magic to this particular financing mechanism there’s no single right way to do it focusing on whole buildings is I’m convinced an important part of the program it is we should not be taking the building stock of of Ireland or Belgium or wherever and saying well we’re going to have a program that comes in and deals with the electricity and then we’re going to have a program that comes to deals with the gas in a different program that comes in deals with the oil heat the infrastructure of the nation is largely bound up in its buildings and we should be thinking about improving that infrastructure for the long term for the good of the economy of the nation and the people who use the buildings so that’s it and I’m leaving I’m ending with questions do you think this can be done could it be done in Ireland and what steps would be needed to to find what steps would be needed to launch a program that would really significantly improve the building stock of this nation thank you