Climate Policy

Comparing greenhouse gases for policy purposes

In order to derive optimal policies for greenhouse gas emissions control, the discounted marginal damages of emissions from different gases must be compared.^The greenhouse warming potential (GWP) index, which is most often used to compare greenhouse gases, is not based on such a damage comparison.^This essay presents assumptions under which ratios of gas-specific discounted marginal damages reduce to ratios of discounted marginal contributions to radiative forcing, where the discount rate is the difference between the discount rate relevant to climate-related damages and the rate of growth of marginal climate-related damages over time.^If there are important gas-specific costs or benefits not tied to radiative forcing, however, such as direct effects of carbon dioxide on plant growth, there is in general no shortcut around explicit comparison of discounted net marginal damages.

© 1995 by the IAEE

Computable General Equilibrium Models for the Analysis of Energy and Climate Policies

This paper is a simple, rigorous, practically-oriented exposition of computable general equilibrium (CGE) modeling. The general algebraic framework of a CGE model is developed from microeconomic fundamentals, and employed to illustrate (i) how a model may be calibrated using the economic data in a social accounting matrix, (ii) how the resulting system of numerical equations may be solved for the equilibrium values of economic variables, and (iii) how perturbing this equilibrium by introducing tax or subsidy distortions facilitates analysis of policies' economy-wide impacts.

Contribution of Anaerobic Digesters to Emissions Mitigation and Electricity Generation Under US Climate Policy

Livestock husbandry in the U.S. significantly contributes to many environmental problems, including the release of methane, a potent greenhouse gas (GHG). Anaerobic digesters (ADs) break down organic wastes using bacteria that produce methane, which can be collected and combusted to generate electricity. ADs also reduce odors and pathogens that are common with manure storage and the digestedmanure can be used as a fertilizer. There are relatively few ADs in the U.S., mainly due to their high capital costs. We use the MIT Emissions Prediction and Policy Analysis (EPPA) model to test the effects of a representative U.S. climate stabilization policy on the adoption of ADs which sell electricity and generate methane mitigation credits. Under such policy, ADs become competitive at producing electricity in 2025, when they receive methane reduction credits and electricity from fossil fuels becomes more expensive.We find that ADs have the potential to generate 5.5% of U.S. electricity.

© American Chemical Society

Contribution of anaerobic digesters to emissions mitigation under US climate policy

Livestock husbandry in the U.S. significantly contributes to many environmental problems, including the release of methane, a potent greenhouse gas (GHG). Anaerobic digesters (ADs) break down organic wastes using bacteria that produce methane, which can be collected and combusted to generate electricity. ADs also reduce odors and pathogens that are common with manure storage and the digested manure can be used as a fertilizer. There are relatively few ADs in the U.S., mainly due to their high capital costs. We use the MIT Emissions Prediction and Policy Analysis (EPPA) model to test the effects of a representative U.S. climate stabilization policy on the adoption of ADs which sell electricity and generate methane mitigation credits. Under such policy, ADs become competitive at producing electricity in 2025, when they receive methane reduction credits and electricity from fossil fuels becomes more expensive. We find that ADs have the potential to generate 5.5% of U.S. electricity.

Copyright © 2011 American Chemical Society

Cross-Border Trading and Borrowing in the EU ETS

This paper exploits a little used data resource within the central registry of the European Unions Emissions Trading System (EU ETS) to analyze cross border trading and inter-year borrowing during the first trading period (2005- 2007). Cross-border flows were small in the aggregate but remarkably frequent in matching allowance deficits and surpluses at the installation level throughout the EU. These data also indicate that a novel feature of the EU ETSthe ability to borrow allowances from the forward allocation to satisfy current compliance requirementswas also used. These data provide evidence that the precondition of efficient abatement in a cap-and-trade systemwidespread use of trading opportunitieswas present in the first period of the EU ETS.

© 2009 International Association for Energy Econmics

Designing a US Market for CO2

In this paper we focus on one component of the cap-and-trade system: the markets that arise for trading allowances after they have been allocated or auctioned. The efficient functioning of the market is key to the success of cap-and-trade as a system. We review the performance of the EU CO2 market and the U.S. SO2 market and examine how the flexibility afforded by banking and borrowing, and the limitations on banking and borrowing, have impacted the evolution of price in both markets. While both markets have generally functioned well, certain episodes illustrate the importance of designing the rules to encourage liquidity in the market.

Designing a U.S. Market for CO2

The United States may soon have a market for carbon. If so, that market will grow out of a cap-and-trade system like the EU's Emissions Trading System for CO2 or the U.S. Acid Rain Program for SO2. This article reviews the historical performance of these two markets, with particular focus on how the flexibility afforded by, as well as restrictions on, the "banking" and borrowing of allowances has affected the evolution of prices. While both markets have generally functioned well, four episodes are used to illustrate the importance of designing the rules to encourage such flexibility. The 2005 opening of the EU CO2 market was marked by a surprisingly high price, one that resulted from a delay in institutions with long positions in allowances ("longs") bringing supply to the market. The 2007 close of the first phase produced a sharp divergence between the spot price at the end of 2007 and the futures price for 2008, reflecting the restriction against carrying over (or "banking") allowances from one phase to the next. The U.S. SO2 market's transition to a tighter system in 2000 avoided such a divergence by allowing unlimited banking of allowances into the second phase. In 2005-2006, the U.S. SO2 market experienced a surprising price spike attributable to a combination of changing fundamentals and institutional features (notably, the tax treatment of "longs") that undermined the flexibility of the bank.

Copyright © 2009 Morgan Stanley

Designing tradable permits system to control SO2 emissions in China: Principles and practices

This paper discusses the problems of implementing a cap-and-trade system for controlling [SO.sub.2] emissions in China. It describes the evolution of current air emissions policy for [SO.sub.2] emissions and focuses on two critical aspects for establishing a tradable permits system in China: the transition from (nontradable) facility-specific permits to tradable (emission) permits and the integration of tradable permits with the pre-existing pollution levy system. A major theme throughout the paper is that the requirements for establishing an effective tradable permits system do not differ greatly from those for an equally effective tax or command-and-control regime. Although each instrument has distinctive features, the differences among them are mainly ones of form. All require that the same fundamental problems be solved: How to allocate the cost burden of reducing emissions, what specific requirements to place on emitting sources, and how to ensure compliance.

Copyright IAEE

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