Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6RECAP: Policy Instruments for Pollution ControlThe logic of economic incentives, IThe logic of economic incentives, IISlide 10Kyoto Accord, cont’dImplementationImplementation: Flexibility ProvisionsSlide 14Slide 15Slide 16US Carbon MarketEU-Emissions Trading SchemeSlide 19Slide 20AGEC/FNR 406 LECTURE 21 Atmospheric Concentrations of Carbon Dioxide, 1000-19982502702903103303503701000 1200 1400 1600 1800 2000Compiled by Worldwatch InstituteP a rt s P e r M illio n B y V o lu m e -World Carbon Emissions from Fossil FuelBurning, 1900-9801,0002,0003,0004,0005,0006,0007,0001880 1900 1920 1940 1960 1980 2000 2020Compiled by Worldwatch InstituteMillio n To n s sCarbon Emissions per Capita, Top TenEmitting Nations, 19960123456U.S. Canada Germany Russia U.K. J apan S. Korea Italy China IndiaCompiled by Worldwatch InstituteTo n s C a rb o n p e r P e rs o n -Carbon Emissions from Fossil FuelBurning by Economic Region, 1950-980500100015002000250030001950 1960 1970 1980 1990 2000Compiled by Worldwatch InstituteM illio n To n s -Industrial Former Eastern Bloc DevelopingRECAP: Policy Instruments for Pollution Control1. Taxes•Reduce emissions at known cost•Level of resulting emissions unknown•Generates revenue 2. Tradable Permits•Achieve target level of emissions•Because mkt determines price, unknown cost•Only generates revenue if permits auctionedThe logic of economic incentives, I0510152025303540Synthetics Coal Oil GasCarbon/joulePoint: sources differ. It may be cheaper to reduce emissions from synthetics & coal than from oil & gas.The logic of economic incentives, II0102030405060708090EU Japan USA India ChinaMACPoint: source matters. Marginal abatement costs differ across countries. Cleanup where it is cheapest!Kyoto Accord•Protocol signed December 1997, in Kyoto, Japan•Plan to reduce 6 greenhouse gasses (GHG)•Binding emissions targets and timetables set•Reflects proposals advanced by the United StatesKyoto Accord, cont’d•Specific limits vary from country to country•Five-year commitment period: 2008-2012•Developing countries do not have binding targetsImplementation•Countries may select their policy instruments for reducing GHGs.•Kyoto Protocol includes “flexibility provisions.”•Purpose: Allow countries that have high marginal abatement costs to find cheaper alternatives.Implementation: Flexibility Provisions•Bubble Provision: Groups of countries treated as one country, and aggregate emissions must be controlled •Joint Implementation: Allows an Annex I (industrialized) country to pay for emissions reductions in another Annex I country –Permits may or may not need to be traded.•Clean Development Mechanism (CDM): Emission reduction activities in Annex II (developing) countries with credits used to offset emissions in Annex I countriesExample: CDM•Canadian power utility is purchasing CO2 offsets from Guatemalan government•Idea: cheaper to buy land and reforest it in central America, than to reduce emissions •Cost of CO2 permits?•Expected price $67-$218/ton•Guatemala selling for $15-$25Problems1. Uncertainty regarding impacts of GW2. Focus on industry (only 1/3 of problem)3. Poor vs. rich countries4. Role of “sinks” not well specified5. Feasibility of trading uncertain6. Will carbon taxes in some countries lead companies to relocate?7. How will policies affect economic growth?Kyoto – current status•Ratified by 169 countries as of Feb 2007US not a signatory (36% of 1990 emissions)•Takes effect if nations accounting for 55% of all industrial countries’ 1990 emissions ratify it•Critical country: Russia (17% of 1990 emissions)Russia endorsed treaty on Sept 30, 2004Now more than 55% of emissions is coveredEmissions trading is permitted under the treaty, and Russia is likely to have “credits” since current emissions are less than 1990 levels. This means there may not be much additional reduction in GGs.US Carbon Market•Chicago Climate Exchange (http://theccx.com/)–Voluntary participation; legally binding–Units of trade/“ contracts”•Carbon Financial Instrument (CFI) equal to 100 metric tons of CO2 equivalent•Gases included: carbon dioxide (CO2) ,methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs),sulfur hexafluoride (SF6) –Offsets (from sequestration projects) part of market –Yesterday’s closing price was $4.55/mT Market data: http://theccx.com/market/data/summary.jsfEU-Emissions Trading Scheme•Multi-national trading system–40% of total EU GHG emissions included–>10,000 energy/industrial installations•Participation in market is voluntary, but emissions reductions are required•No banking and no offsets•DEC2008 contracts €21.35EUR=$32.29/mT Market data: http://www.europeanclimateexchange.com/Local government response•Regional Greenhouse Gas Initiative (RGGI)–January 2007 –8 northeastern US states –State-level cap and trade program•California–12th largest emitter–Attempt to reduce GHG emissions by 25% by 2020•369 US Cities in all 50 states support protocolWashington Declaration•Non-binding agreement•US, Canada + 10 countries•Support for cap and trade program–Industrialized countries–Developing