Small Changes, But an Important Signal in New Power Plant GHG Proposal

Update: I’ve revised my understanding of EPA’s proposal and this post is no longer correct. See the update here.

EPA released a major and long-awaited proposed regulation today, but the most important news might be something it didn’t do, and how that affects the next major step in regulating carbon under the Clean Air Act.

Today’s release is a revised proposal for performance standards applying to new fossil-fuel power plants (new source performance standards, or NSPS). As widely expected, the proposal includes separate standards for coal and gas plants – 1100 lbs of CO2 per megawatt-hour for the former, and 800 1000 lbs/mWh for most some of the latter. This division into two standards is the biggest change from the proposal the agency released last year, which would have set a single standard of 1000 lbs/mWh for both.

This is not a big change, at least for purposes of this rule. It superficially appears to give coal a bit more leeway, but new coal is still extremely unlikely to be able to meet the standard without carbon capture and storage technology—which EPA and others are  aggressively promoting when they talk about the rule, though it is not yet commercially available. EPA administrator Gina McCarthy called the new proposal “flexible” in a speech this morning because of its separate standards for coal and gas, but that’s not really flexibility. Each new plant, whether coal or gas, still has to meet the applicable standard. This isn’t due to any conservatism or lack of creativity on EPA’s part, however—the Clean Air Act requires each new source to meet the standard. In other words, NSPS can’t really be flexible (though existing source standards, or ESPS, probably can—more on that below).

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New Issue of Resources Magazine

Resources 184

Image: Resources for the Future

The newest issue of Resources magazine looks at the need for collaboration to solve complex environmental challenges. Highlights include an interview with RFF Resident Scholar Len Shabman on developing a “payment for environmental services” program, lessons learned from climate policies in California and Sweden, and more, including:

Regulating Emissions from Bioenergy: What Life-Cycle Assessments Tell Us
Roger Sedjo
As the US Environmental Protection Agency considers whether to apply emissions standards to wood biomass fuel, new research suggests that this renewable energy source will actually generate net emissions reductions over the course of its lifetime.

Evaluating New Approaches to Increase Funding for State Parks
Margaret A. Walls
Financially struggling state park systems are in need of fresh sources of funding, whether from user fees, privatization, dedicated public funds, or voluntary contributions. Determining the right approach requires careful consideration of the advantages and disadvantages of each option.

The Endangered Species Act at 40: New Tools for Conservation
Lynn Scarlett, Rebecca Epanchin-Niell, and Matthew McKinney
After four decades of implementing the Endangered Species Act, the challenge now is to engage private landowners, encourage large-scale conservation, increase collaborative management, and incorporate new sources of funding.

Designing a Fair Carbon Tax
Daniel F. Morris and Clayton Munnings
The past 20 years of economic research suggests that the negative effects of carbon taxes on low-income groups are not as extensive as some believe.

To view all articles from this issue of Resources, visit our website or download the Resources app for iPad, iPhone, or Android.

Good News for Gas from New Fugitive Methane Numbers

Is the shale gas boom good or bad for climate? It largely depends on methane.

Methane, the primary constituent of natural gas, is a double-edged sword in climate terms. It burns much cleaner than coal—about half of the CO2 emissions and far less of most other pollutants for the same energy output. But released directly into the atmosphere it’s a much more potent GHG than CO2, at least over the short term. This leads to a pretty simple prescription: burn all the methane you pull out of the ground. But it is probably impossible to prevent all leaks, so the advantage of natural gas over coal, and its prospects as a “bridge” fuel, depend on exactly how much “fugitive” methane emissions occur. Estimating real world emissions is very hard, and has been surrounded by controversy. At something a bit over 3% emissions of total methane production, natural gas no longer beats coal in GHG terms (though this, too, is controversial, and depends on assumptions and policy goals).

EPA’s “bottom-up” estimates of fugitive methane emissions are pretty low—less than 2% of gas produced for all stages of gas production, processing and distribution, though these numbers are much lower than EPA’s previous estimates. Other “top-down” studies have found much greater emissions, as high as 6-12% in a Utah field. All of these studies have come under considerable criticism, with the result that fugitive methane emissions are widely regarded as the most important unanswered question on the environmental impact of the gas boom. A new study, funded in part by the Environmental Defense Fund and long-awaited by researchers, aims to fill part of that that gap. Results released this week look at gas production by measuring methane emissions from almost 200 natural gas production “sites” including production wells, newly drilled wells, and related facilities. Results for other parts of the gas lifecyle will be released later.

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RFF on the Issues

Affordability of Flood Insurance

This year, the Biggert-Waters Act of 2012 will remove the subsidies from many home flood insurance policies to reflect “the full ‘risk-based’ rate,” triggering significant rate increases for many homeowners. This has caused business groups, politicians, and others to call for a delay of “some of the largest increases until the 2015 fiscal year.”

In a new RFF issue brief, RFF Fellow Carolyn Kousky and co-author Howard Kunreuther of the University of Pennsylvania’s Wharton Risk Management and Decision Processes Center write that the National Flood Insurance Program (NFIP) “must address affordability, but that this should not be done through discounted premiums.” They propose a new approach: creating a voucher program coupled with financing risk reduction measures through low-interest loans. “By requiring hazard mitigation,” they write, “future disaster losses would be reduced for both the NFIP and for the low- and moderate-income families.”

Carbon Tax Referendum

Prime Minister-elect of Australia and Leader of the Liberal Party Tony Abbott said that the parliamentary election in his country was a “referendum on the carbon tax.” In the United States, however, perception is split. Rep. Earl Blumenauer (D-OR) was quoted saying that he  doesn’t think it’s “an international referendum on a carbon tax,” while Rep. Corey Gardner (R-CO) said “I think it’s very much a warning.” And Sen. Sheldon Whitehouse (D-RI) feels that “ultimately a [US] fee on carbon pollution is inevitable.”

Although political debates will continue, RFF’s Raymond Kopp, senior fellow and director of RFF’s Center for Climate and Electricity Policy, believes that “it’s time to end the discussion of the impact a carbon tax would have on US economic growth . . . it has no substantial impact.” He cites new analysis by RFF researchers showing that a “broad-based, revenue-neutral tax on carbon dioxide emissions would have imperceptible effects on macroeconomic growth as measured by GDP.” Read the full report here or watch a video discussion of the findings here.

How Much Do Weather-related Disasters Cost?

Climate scientists predict many weather-related extreme events may be changing in frequency or intensity as the climate warms, or their location, timing, and duration may be changing.  The public also perceives a trend toward more extreme events which they pin on climate change: a 2012 poll of U.S. residents by researchers at Yale found that, by a margin of 2:1, people believe that the weather is getting worse, and a large majority believes climate change contributed to the severity of several recent natural disasters.

How costly are natural disasters?  And how worse are they getting?  It may seem like a simple task to add up the costs of a disaster event, but it is quite challenging in practice.  How the spatial and temporal boundaries are drawn can make a difference.  It is easy to double-count losses when funds are being transferred across many different groups.  And while some categories of damage are easy to observe and measure, others are difficult, such as loss of family heirlooms or the economic value of pain and suffering.  There are only a few reliable and comprehensive databases of disaster costs and they all likely underestimate the hypothetical true costs by failing to include hard-to-measure losses.

To obtain an estimate of the average worldwide costs of weather related extreme events—those most likely impacted by climate change—I collected yearly estimates of the total costs of weather-related disaster events globally between 2000 and 2012 from the four main institutions engaged in this exercise: Swiss Re, Munich Re, the Centre for Research on the Epidemiology of Disaster (EM-DAT database), and Aon Benfield.  These institutions pull together data from various sources to generate estimates of the direct costs of disasters globally.  They all have slightly different criteria for what counts as a “disaster” and use slightly different sources.  Their estimates for the global costs of weather-related natural disasters are shown in Figure 1. Across these four sources, the average annual cost worldwide for weather-related disasters over this time period ranges from over $94 billion (EM-DAT) to over $130 billion (Aon Benfield).

Disastercosts

I would like to thank Steve Bowen at Aon Benfield, Bridget Carle at Swiss Re America, and Angelika Wirtz at Munich Reinsurance Company for supplying the data.

I would like to thank Steve Bowen at Aon Benfield, Bridget Carle at Swiss Re America, and Angelika Wirtz at Munich Reinsurance Company for supplying the data.

A big question is whether disaster costs are increasing.  The short answer is yes (fatalities, on the other hand, have been trending down).  The question of why is more complicated.  Many studies have been undertaken to tease apart different drivers of the observed upward trend in inflation-adjusted disaster costs.  In these analyses, researchers standardize disaster losses by measures of wealth and population.  If the trend disappears for these standardized measures, it suggests the higher costs are due to more wealth locating in risky areas. The conclusion from all these papers is that the majority of the upward trend in losses observed to date is from more people and capital locating in hazardous locations, but even after correcting for this, there may be a small upward trend for certain regions and hazards, such that climate signals are beginning to be seen in historical loss data (for example, large thunderstorms in the Eastern US).  Of course, projections going forward are quite different than observing historical losses, which is what is done here.

What does the time trend look like for the four data sources in Figure 1? As a simple way to explore this, Figure 2 shows a fitted plot for each data series over the period 2000 to 2012.  The upward sloping lines suggest a trend toward higher losses.  Consistent with other findings that much of the trend can be explained by higher wealth, however, when these damage series are simply regressed on a time trend, it explains more of the variation of damages, as opposed to damages per unit wealth (using global GDP data from the World Bank).

FittedTimeTrend

Figure note: Fractional polynomial fit to each series.

Figure note: Fractional polynomial fit to each series.

There are many opportunities for cost-effective investments in hazard mitigation, and as the climate changes the risk profile of many weather-related events, we may see more such actions being taken.  While it is easy to think of risk mitigation and adaptation to changing risks as one-off investments, such as installing hurricane shutters, or discrete policy changes, such as upgrading building codes, this fails to account for how deeply communities may be adapted to the current risks they face.  Changing institutions, such as emergency response frameworks or water rights, which may be designed for a certain climate, is long-term process.  And widespread adoption of even cost-effective, one-off measures can be a challenge, as up-front costs can be substantial and there is an on-going debate about who should bear these costs.

For more information, see:

Kousky, C. (2012). “Informing Climate Change Adaptation: A Review of the Economic Costs ofNatural Disasters, their Determinants, and Risk Reduction Options.” RFF Discussion Paper 12-28. Resources for the Future. Washington, DC, July.

Remembering Ronald Coase’s Contributions

This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.

On September 2nd, Ronald Coase, professor emeritus of economics at the University of Chicago Law School, Nobel laureate, and principal creator of the academic field of law and economics, passed away at the age of 102.  Numerous, lengthy obituaries have appeared in the national and international press.  And in an effective essay posted at the Energy Economics Exchange web site, Severin Borenstein, professor of economics at the University of California, Berkeley, wrote about the effect that Coase’s thinking had decades ago on his own intellectual development (while lamenting that the Wall Street Journal in its own tribute to Coase had twisted the implications of his work to fit the Journal’s view of the world).

The passing of Professor Coase brings to mind an essay I wrote for this blog in July of 2012, in which I recalled that a group of economists and legal scholars had gathered in December, 2010, at the University of Chicago to celebrate two notable events.  One was the fiftieth anniversary of the publication of Ronald Coase’s “The Problem of Social Cost” (Coase 1960).  The other was Professor Coase’s 100th birthday.  The conference resulted in a special issue of The Journal of Law and Economics.

Robert Hahn (of the University of Oxford) and I were privileged to participate in the conference (a video of our presentation is available here).  We recognized that the fiftieth anniversary of the publication of Coase’s landmark study provided an opportunity for us to examine one of that study’s key implications, which is of great importance not only for economics but for public policy as well, in particular, for environmental policy.

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RFF on the Issues

The Social Cost of Carbon

A federal Working Group recently estimated the “social cost of carbon” at around $43 per ton—some two-thirds above an estimate of two years ago. That such a number could serve as the basis for a carbon tax or increased regulations has stirred political apprehensions.  But, as RFF’s Joel Darmstadter and Alan Krupnick note, the Working Group analysis has also resonated positively.

In a separate post on RFF’s blog Common Resources, Darmstadter and Krupnick discuss what some have judged as a rejection of the Working Group’s effort by MIT’s Robert Pindyck. They write that “a closer parsing of his statements suggests that his point is to stop overselling the precision of [the models] while pressing ahead with a [social cost of carbon] to get the process started.”

Sweden and California as Climate Leaders

Last week, President Obama met with the Swedish Prime Minister to discuss partnering on clean energy issues. He called the nation “an extraordinary leader” in tackling climate change, noting “we can learn from it.”

In the United States, California has played a leading role in developing programs to combat climate change, and RFF’s Dallas Burtraw and colleagues have worked closely with the Golden State to help its leaders implement smart policies. Recently, RFF co-hosted a conference with the Swedish Mistra Indigo program and the ClimateWorks Foundation in San Francisco to analyze the success that California and Sweden have had in forging new ground toward mitigating climate change. Read a summary of the conference, including perspectives from the 19 expert panelists, here: What is the Value of Being First? Perspectives from the California and Sweden Experiences.

Economic Growth and Carbon Taxes

I believe it’s time to end the discussion of the impact a carbon tax would have on US economic growth. To me the question is settled – it has no substantive impact. A new study by scholars at RFF shows that a substantial, broad-based, revenue-neutral tax on carbon dioxide emissions would have imperceptible effects on macroeconomic growth as measured by GDP. This is the same result as that reported by scholars at MIT in 2012 using an entirely different model of the US economy, and the same result reported earlier this year by scholars at the Brookings Institution using yet another model of the US economy.

The RFF study considers a $30/ton tax on CO2 emissions imposed in 2015 and remaining at $30 through 2050. The tax raises $2.25 trillion over a 10-year budget window. The funds from the CO2 tax are used in a revenue neutral manner in four different analyses to finance tax rate reductions on; 1) capital, 2) labor, and 3) consumption. In the fourth analysis the carbon tax revenues are redistributed back to households. In all four analyses federal spending remains unchanged.

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Estimating The Social Cost Of Carbon: Robert Pindyck’s Critique

The US government’s new consensus estimate of the social cost of carbon (SCC)—around $43 per ton of CO2 from a 2020 baseline—has met with some approval in academic and other circles (as we discussed yesterday).  But some of the harshest criticisms, at least insofar as the blogosphere would interpret them, have come from MIT economist Robert Pindyck (short article and working paper). Pindyck’s critiques are important, though we do not agree with all the conclusions he draws from them—conclusions that have been misinterpreted by those opposed to climate policy based on the SCC.

Climate policy critics focus, not surprisingly, on the blunt title and first two words of the abstract of Pindyck’s working paper: Climate Change Policy, What Do the Models Tell Us….”Very little”. The models Pindyck references are integrated assessment models (IAMs), like Bill Nordhaus’ DICE model, on which the SCC is partly based. These models integrate a huge amount of information and science to estimate how much a change in CO2 emissions will affect global warming and the damages it causes. But Pindyck argues IAMs “have crucial flaws that make them close to useless as tools for policy analysis…[they] create a perception of knowledge and precision, but that perception is illusory and misleading.” This statement has been taken to imply that one should throw out the SCC estimates, as well as the models upon which they are based.

Critics, however, ignore Pindyck’s conclusion: “My criticism…of IAMs should not be taken to imply that because we know so little, nothing should be done about climate change right now. . . Quite the contrary.” In our belief, he then ends up basically (we hedge here because he says “some have argued” rather than “I argue”) endorsing the SCC estimate on precautionary grounds, imposing a carbon tax of that amount and revising this later as we learn more. Hardly a condemnation of the SCC! Indeed, a closer parsing of his statements suggests that his point is to stop overselling the precision of IAMs while pressing ahead with a SCC to get the process started. Beyond these broad points, is Pindyck providing something new here and, in particular, is he overselling the overselling of IAMs? Read More

Economics and Politics in California: Cap-and-Trade Allowance Allocation and Trade Exposure

This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.

In my previous essay at this blog – The Importance of Getting it Right in California – I wrote about the precedents and lessons that  California’s Global Warming Solutions Act (AB 32) and its greenhouse gas (GHG) cap-and-trade system will have for other jurisdictions around the world, including other states, provinces, countries, and regions.  This is particularly important, given the failure of the U.S. Senate in 2009 to pass companion legislation to the Waxman-Markey bill, passed by the U.S. House of Representatives, highlighting the absence of a national, economy-wide carbon pricing policy.

In my previous essay, I focused on three pending design issues in the emerging rules for the AB-32 cap-and-trade system:  (1) the GHG allowance reserve; (2) the role of offsets; and (3) proposals for allowance holding limits.  I drew upon a presentation I made on “Offsets, Holding Limits, and Market Liquidity (and Other Factors Affecting Market Performance)” at the 2013 Summer Issues Seminar of the California Council for Environmental and Economic Balance.

At the same conference, I made another presentation, which was on “Allowance Value Distribution and Trade Exposure,” a topic that is of great importance both economically and politically, not only in the context of the design of California’s AB-32 cap-and-trade system, but for the design of any cap-and-trade instrument in any jurisdiction.  It is to that topic that I turn today.  (For a much more detailed discussion, please see a white paper I wrote with Dr. Todd Schatzki of Analysis Group, “Using the Value of Allowances from California’s GHG Cap-and-Trade System,” August, 2012).

Why Does Anyone Care About the Allowance Value Distribution?

A cap-and-trade policy creates a valuable new commodity – emissions allowances.  In a well-functioning emissions trading market, the financial value of these allowances (per ton of emissions, for example) is approximately equivalent to their opportunity cost, which is the marginal cost of emissions reductions.  This is because of the existence of the overall cap, which – if binding – fosters scarcity of available allowances, and hence generates their economic value.

It should not be surprising, then, that the initial allocation of these allowances can have important consequences both for environmental and for economic outcomes.

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