# Presentation: 741827

## Looking Out for Energy Related Multiple Pollutant Legislation

- Dallas Burtraw*       Resources for the Future*
- NEMS/AEO Conference March 18, 2003

- Background materials at http://www.rff.org/multipollutant

## Allocation Schedules under Multipollutant Proposals

- Multiple Pollutant Legislation

**Notes:**
This table lists allocations by year. Emissions will differ due to the role for banking. Although the point of multiple pollution legislation is to look at synergies in compliance and planning, I am going to look at pollutants separately.

## Efficient Emission Levels for SO2 and NOx

- PM-health modeled only; no ozone benefits
- Examine SO2 and NOx emission fees
- No CO2 or mercury requirements
- Results for 2010
- Title IV SO2, SIP Call NOx baseline
- Pope et al. (1995) for sulfates
- Nitrates as ordinary PM10
- VSL=$2.25 million (Mrozek and Taylor, 2001)

**Scenario and Key Assumptions**

- Multiple Pollutant Legislation

## Marginal Benefits and Costs: SO2

- Multiple Pollutant Legislation

## Marginal Benefits and Costs: NOX

- Multiple Pollutant Legislation

## Value of SO2 Emission Reductions by State

- Value of SO2 Emission Reductions by State

- Multiple Pollutant Legislation

**Notes:**
Benefits per Ton SO2 by Emission Source

## How SO2 Reductions Are Achieved at ‘Efficient Levels’ 

- Multiple Pollutant Legislation

**Notes:**
Note fuel switching at scrubbed plants.

## Coal Demand by Sulfur Content

- Multiple Pollutant Legislation

**Notes:**
Not substitution to western coal, which is reversed when scrubbers are installed, but finally one has to switch further to low sulfur coal with scrubbers. Total tonnage remains fairly constant. The CSI levels correspond to about $2,000 permit fee, when mercury is modeled separately.

## NOX & SO2 Electricity Sector Emissions in 2020

- Source: Banzhaf, Burtraw and Palmer, 2002. *Public Utilities Fortnightly*

- Multiple Pollutant Legislation

**Notes:**
This does not account for enforcement / implementation of the CAA. This only displays legislative initiatives against BAU absent the CAA.

## Main Points on Criteria Pollutants

- SO2 and NOx caps for all of the proposals appear justified... there is room for more SO2 reductions; NOx reductions about right.
- Efficient SO2 fee ($4,700 - $1,800 per ton) would yield  0.9 – 3.1 million tons.
- Efficient NOX fee ($1,200 - $700 per ton)  would yield 1.0 – 2.8 million tons.
- Evidence supporting regional caps.
- Ancillary CO2 reductions.

- Multiple Pollutant Legislation

## Mercury

**Target**:
- 	What does benefit literature say?
- 	MACT~7.4 tons/yr to Ancillary~28 tons/yr
- 		(current levels in coal burned: ~75 tons/yr)
**Timetable:**
- 	Help states
**Design:**
- 	Trading enables tougher goals. Perhaps with...
- 		**- **Maximum _emission rate_ constraint
- 			(not minimum emission rate reduction), and
- 		**- **State opt out of trading for local protection

- Multiple Pollutant Legislation

**Notes:**
One-third (37%) of US emissions from utilities.
About two-thirds of deposition in US from US sources.

## Architecture for Carbon

*Principles:*
- The fundamental divide*:* voluntary or binding
- More important to start early than to start large
- More important to end economy-wide than to start there
- Compensation through allocation
- Efficiency is essential if constraints tighten

- Multiple Pollutant Legislation

## 1. Binding Policy

- A cap provides environmental integrity.
- Voluntary programs have limited possibility in a competitive economy.
- Sequestration out-of-system has to be limited or carefully prescribed. Otherwise, in-system investments are undermined.

- Multiple Pollutant Legislation

## 2. Start Early Rather Than Start Big

- Signal to R&D, investment communities, households
- Reward, not punish, early reductions
- Banking builds *buy-in* to program for firms
- Develop institutions
*Time to plan* for stricter policy serves as compensation
- Harvest low hanging fruit
- Starting modestly allows for learning about science, costs, economic trade-offs

- Multiple Pollutant Legislation

## Carbon Schedules in Electricity Sector

- Multiple Pollutant Legislation

**Notes:**
Note price along horizontal axis. Years in these simulations are 2008, 2010, 2015, 2020.

## Carbon Cap Schedules in Electricity Sector

- All allowances are auctioned. SO2 and NO2 caps from S.556, no mercury caps are modeled. SV=Safety Valve, with annual increase.

- Multiple Pollutant Legislation

## Carbon Schedules in Electricity Sector

- All allowances are auctioned. SO2 and NO2 caps from S.556, no mercury caps are modeled. SV=Safety Valve, with annual increase.

- Multiple Pollutant Legislation

## Carbon Targets and Schedules

- In all runs, allowances are auctioned. SO2 and NO2 caps from S.556, no mercury caps are modeled.

- Multiple Pollutant Legislation

## 3. Open Architecture: Economy-wide

- Ultimately we must do economy-wide; plan for the transition
- Capture least cost reductions across sectors

- Multiple Pollutant Legislation

## 4. Compensation through Allocation

- Free distribution of allowances with grandfathering can (over) compensate firms
- Free distribution through output-based allocation undermines asset values and harms many firms
- Auction revenues can compensate households/taxpayers; fund incentives for IGCC, etc.
- A hybrid approach can achieve important compensation goals for affected groups
- But interest group claims for allowances dilute opportunity for tax reductions

- Multiple Pollutant Legislation

## Effects on Coal Demand Of Adding  Carbon to CSI

*Mercury constraints not modeled; would strengthen result**.*

- NATIONAL

- NORTHERN APPALACHIAN

- CSI maintains total coal demand (tons), but causes shifts among supply regions
- Adding carbon reduces aggregate demand but lessens regional shift

- Multiple Pollutant Legislation

## Three Allocation Schemes 

- (Au) 	  Auction (Safety Valve)
- (GF)	  Grandfathering
- (OBA) Output Based Allocation (updating)

- Multiple Pollutant Legislation

## Change in Asset Values and Compensation(1997 $/MW in 2001; 35 million mtc carbon)

- Multiple Pollutant Legislation

## Illustrative Effects on Three Firms

- Non

- -

- emitting

- Coal

- Gas & Oil

- Capacity Mix

- Multiple Pollutant Legislation

**Notes:**
This slide tells the story for three large US utilities (names withheld here and conveniently forgotten by this 40+ year old researcher..).

These firms differ in terms of the composition of their generating capital stock

Firm A has just under 50% non-emitting more than 25% oil and gas and under 25% coal.  This firm experiences increases in asset value under GF and AU

However, firm B which has no non-emitting resources  and a huge proportion of coal suffers a loss in assets value under all three approaches

Firm C, which is composed mostly of gas and oil loses only slightly under the Auction and loses more under the GPS

The GPS is clearly the worst deal for all three firms.

## 5. Efficiency is essential if constraints have to tighten because costs grow large

- Multiple Pollutant Legislation

**Notes:**
Explain axes and lines on graph and dotted vertical lines.

Over wide range of possible reduction targets, auction is half as costly ....
For some levels of reduction 1/3 as costly as other two...

## Why Allocation Matters to the Cost of Reducing Carbon Emissions

- There are actually *two* reasons an auction (safety valve) is dramatically more efficient from social perspective:

- Market Imperfections(discussed below)
- Tax/Regulatory Interaction Effects ...if revenues are linked to reducing       distortionary taxes!

- Multiple Pollutant Legislation

## Inefficiency from

- Multiple Pollutant Legislation

**Notes:**
Illustration of baseline (absent carbon policy) in 2012.

## Determining Electricity Price

- Total Cost ($):  	capital + FOM + fuel + VOM + poll.allowances [Au]
- Variable Cost Ordering ($/MWh):   	fuel + VOM + poll.allowances - subsidy [OBA]
- Price ($/MWh):
- 	   ***Regulated Price ******=****** ***Average Cost = (Total Cost **÷** Production)
- 		    **=>**   Price [Au] **>** Price [GF, OBA]
***	******   ******Competitive Price *****=**  Variable Cost*** ***
- 	 	    **=>**Price [Au, GF] **>** Price [OBA]

- Multiple Pollutant Legislation

## Price Effects Vary (35 million mtC)

- Multiple Pollutant Legislation

**Notes:**
Graphs shows percent change in national annual average price of electricity (for all regions and customer classes) and natural gas

## Social Cost under Limited & Nationwide Restructuring (1997 $ in 2012; required reductions vary to achieve same target)

- 0

- 20

- 40

- 60

- 80

- 100

**LR**

**NR**

**Average Social Cost **

**(1997 $/mtC)**

**AU**

**GF**

**OBA**

- Multiple Pollutant Legislation

## Annual Asset Value of Emission Allowances

- Multiple Pollutant Legislation

## Key Ingredients to Multipollutant Policy

**SO****2 ****and NO****X**** caps **are justified on benefit-cost.
**Mercury trading,** with constraints, can lower costs; benefits not well quantified.
- Architecture is very important for **carbon** policy.
- Start soon rather than start large.
- Auction is **less costly** to society, and** **preserves **asset values** better than output-based allocation.
- The auction institution is** expandable** beyond electricity.
- A hybrid allocation approach to balance **compensation **and **efficiency**.

- Multiple Pollutant Legislation