Local Solutions to Global Problems: Climate Change Policies and Regulatory Jurisdiction

1 Nordhaus (2007) discusses many of the advantages of taxing carbon emissions rather than setting quantity limits through something like a cap-and-trade policy.

2 Dating back to Weitzman (1974), there is a rich literature in environmental economics on the proper use of “price” tools such as emissions taxes vs. “quantity” tools such as command and control regulations or emissions caps. The general idea is that taxes help to limit uncertainty over the costs of compliance while quantity regulations help to limit the uncertainty over how much pollution results.

3 There are cases where a firm’s incentives may not be strictly aligned with minimizing its compliance costs. For example, a regulated utility may prefer options that can be added to its rate base (see Fowlie 2006).

4 Note that here we are drawing a distinction between mandates or standards imposed on consumers that implicitly subsidize producers using clean technologies, from mandates imposed directly on producers (i.e., the users of dirty technologies), which we discussed in the previous sub-section.

5 For ease, we use biofuels as an example of a transportation fuel that generates lower carbon emissions than petroleum products. However, questions have recently been raised about whether using ethanol in fact leads to lower carbon emissions (Searchinger et al. 2008).

6 See Holland, Knittel and Hughes (2007) for a detailed examination of this point.

7 This phenomenon is sometimes referred to as demand-side leakage, which we discuss in more detail in the next section. It is worth noting that the lowering of natural gas prices has also been cited as a benefit of aggressive adoption of renewables (see Wiser, Bolinger and St. Clair 2005).

8 For example, homeowners may build just outside a local area to avoid zoning restrictions, or consumers may purchase on the Internet in order to avoid local sales taxes.

9 Ironically, policy makers are often attracted to consumer-based regulations either because much of the production takes place outside of their jurisdiction or because they fear that regulating only producers within their jurisdiction will lead to leakage.

10 The result that reshuffling will have no effect on market equilibrium assumes that there are no transaction costs associated with re-matching buyers and sellers.

11 Specifically, the law requires that power plants that LSEs invest in, build, or buy power from under long-term contract must meet a standard that limits their emissions to be no greater than those from a current combined-cycle natural gas plant.

12 RPS policies in fourteen states do require some portion of the RPS to be met with a specific technology, but these amounts are small relative to the total RPS requirement.

13 The original subsidy was adopted by the California Public Utilities Commission. In 2006, Senate Bill 1 extended the program to most municipal utilities.

14 See Borenstein (2008). At the residential level, these costs are further subsidized by the practice of “net-metering,” whereby generation from residential power sources can be used to offset not just the cost of utility electricity generation, but also the sunk costs of the network infrastructure, such as transmission wires and other utility operations.

15 The accounting of production is complicated somewhat by the fact that there is coal capacity owned by (or contracted to) California LSEs that is located outside of California but connected in such a way that, electrically, it is treated as within California. In 2004, over twenty-nine TWh of electricity generation was attributed to plants that fall in this category (McCann et al., 2006).

16 The BPW (2007) analysis excludes purchases from the Bonneville Power Administration, the largest source of federally-owned hydro power, and assumes that emissions from all sources within California will be counted. This could reflect regulatory constraints on reselling this power out of California to avoid AB 32 or it could reflect transmission constraints that limit imports to their 2004 levels.

17 For example, power purchases could be tied to a historic reference year, rather than actual current purchases. Thus a firm that bought power from a coal plant in 2000, for example, would be responsible for the future emissions from that same plant, whether or not it continues to buy power from it. For more discussion, see Bushnell (2008).

18 Growth in carbon emissions between 1990 and 2004 varied considerably from state to state. States in the Pacific Northwest showed the highest proportional increases, because a high fraction of their capacity installed by 1990 was hydro or nuclear plants, which are zero carbon sources. However, in terms of raw tonnage of carbon emissions, Arizona stands out as the state with the largest increase since 1990 (and is therefore the farthest away from a target of reducing to 1990 levels). Arizona’s generation accounts for roughly half of the forty-two MMT increase in carbon emissions among the five states since 1990.

19 The California Energy Commission’s Scenario 5A, “High Energy Efficiency and Renewables in CA only,” which includes such aggressive scenarios, predicts 2020 carbon emissions to be close to 1990 carbon levels (CEC, 2007b, p.130).

20 Calculation based on state RPS targets and a demand growth rate of 1.98%.

21 Six national cap and trade bills are currently under consideration in the U.S. Congress. On average, these bills target 1990 emissions levels in 2020. See Larsen (2007) for a comparative analysis.