Research Results Archive

  • An Analysis of Costs and Health Co-Benefits for a U.S. Power Plant Carbon Standard

    Jonathan J. Buonocore, Kathleen F. Lambert, Dallas Burtraw, Samantha Sekar,
    Charles T. Driscoll

    Reducing carbon dioxide (CO2) emissions from power plants can have important “co-benefits for public health by reducing emissions of air pollutants. Here, we examine the costs and health co-benefits, in monetary terms, for a policy that resembles the U.S. Environmental Protectio Agency’s Clean Power Plan. We then examine the spatial distribution of the co-benefit and costs, and the implications of a range of cost assumptions in the implementation year of 2020. Nationwide, the total health co-benefits were $29 billion 2010 USD (95% CI: $2.3 t $68 billion), and net co-benefits under our central cost case were $12 billion (95% CI: -$15 billion to $51 billion). Net co-benefits for this case in the implementation year were positive in 10 of the 14 regions studied. The results for our central case suggest that all but one regio should experience positive net benefits within 5 years after implementation.

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  • The Initial Incidence of a Carbon Tax across Income Groups.

    Williams, R., J. Carbonne, H. Gordon, D. Burtraw and R. Morgenstern.

    Carbon taxes efficiently reduce greenhouse gas emissions but are criticized as regressive. This paper links dynamic overlapping-generation and microsimulation models of the United States to estimate the initial incidence. We find that while carbon taxes are regressive, the incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump-sum rebates are less efficient but much more progressive, benefiting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, more progressive than a capital tax swap and more efficient than a rebate

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  • Beyond IPCC: Research for Paris 2015 and Beyond

    Sterner, T.

    The Climate conference in Paris December 2015 is described as “last chance” or “5 to twelve” but in the climate arena there is a risk that we have over-utilized the doomsday vocabulary already in the run-up to Copenhagen, 2009 the better part of a decade ago. For those who have worked on climate issues for several decades it poses a special challenge to calibrate language.Words like “immediate” need careful explanation. Think of a super tanker with so much inertia that it takes a full hour to stop in an emergency—and in our case it is not an hour but decades—damage is probably quite gradual and yet there is literally no time to delay.Activists feel that we have to use every opportunity to further climate change policy because not much has been achieved to date and December 2015 does represent a special opportunity but clearly it is an illusion that any one particular meeting will cut the Gordian knot and result in a full international treaty with appropriate policies for all the countries of the world. The UNFCCC has yearly conferences of the parties (COP) but the expectations have not been this high since Copenhagen which was later described as a big failure. Politicians are keen to avoid a repeat and so expectations have been lowered. We are no longer seeking a grand agreement but a set of “Intended, Nationally Determined Contributions”, INDCs. Both the qualifiers “intended” and “nationally determined” raise issues related to the design of a treaty intended to provide a global public good.Normally we need to make sure that commitments are verifiable, controllable, add up to a sufficient aggregate goal and that there are incentives to deliver on the commitment. The Kyoto Protocol has been severely criticized—not least in the USA. American observers have pointed at the asymmetry created by requiring virtually nothing of large and growing emitters such as China. This interpretation of the Rio principle of “common but differentiated responsibilities” has effectively made it impossible to pass any effective

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  • Global wood-based energy usage, associated greenhouse gas emissions, and policy options to mitigate emissions

    Sekar, S., Siikamäki, J.,

    Forests continue to provide a key source of energy throughout the world. Many developing countries, especially those with lowest incomes, rely on wood energy for cooking, heating, and power. Several developed countries increasingly use wood for renewable energy. When sustainably managed, forests can help address both energy demand and greenhouse gas (GHG) mitigation. Our broad purpose with this study is twofold; first, formulate a more comprehensive understanding of wood energy usage and its GHG emissions, and second, consider wood energy as part of the broader energy and climate policy portfolio around the world, including developing and developed countries. Our geographic scope is global, but we generate our estimates at the country-level. We first explain alternative sources of wood energy and technologies to utilize them. We then use data primarily from FAO and International Energy Agency to estimate current and future uses of wood energy around the world. Thereafter, we discuss wood energy GHG accounting, and use recent emissions intensity estimates1 to assess past, current, and future emissions from wood energy. Next, we examine options for mitigating emissions from wood energy, including technological improvements, substitution of wood for fossil fuels, and improving forest management. Then, we study wood energy in the national, regional, and international climate policy agreements, including past CDM/JI projects associated with wood fuels. Finally, we synthesize our findings and discuss the potential of wood energy to support wider energy and climate policy goals. We find considerable heterogeneity in the role of wood energy in the broader energy portfolio. Asia and Africa are the world’s largest producers of wood fuel, and some countries depend on wood for over 80% of residential energy use. In high-income countries, wood energy is commonly produced relatively efficiently, thus, less GHG intensively. In Asia, total wood fuel usage is declining, whereas Africa continues an increasing trend. Globally, GHG emissions from wood fuel are about 2% of all emissions. In some countries, especially in East Africa, wood fuel emissions constitute a large share of emissions. Our results show where total and per-capita emissions are concentrated and where the greatest potential for emissions mitigation exists. Our key contribution is to comprehensively and globally assess wood fuel in the context of broader energy portfolio and climate policy. We provide novel estimates of past and future emissions associated with wood energy, including their geographic variation. Our findings help inform forest, energy, and climate policies throughout the world. Our focus on GHG emissions is particularly relevant prior to the Paris COP in December. Our assessments of developing countries are pertinent, as increased developing country participation is high on the agenda in international climate policy. Improving sustainability of wood energy provides developing countries options to address emissions; international climate policy offers developed countries instruments to support such efforts. Finally, more sustainable use of forests for energy has important implications on their capacity to support other benefits to people, including wood and non-wood ecosystem services

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  • Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing Mechanisms

    Neuhoff K, Acworth W, Barrett J, Owen A, Fischer C, Munnings C, Ismer R, Kim Y G, Pauliuk S, Wood R, Sartor O, Sterner T, Xiliang Z, Zetterberg  L, Roth S

    Climate protection is a global challenge that all countries have a common but differentiated responsibility to address. However, not all governments are willing to commit to targets of equal stringency. Moreover, countries may have different views on the choice of policy mix. Some countries may put a stronger emphasis on the carbon price and see a higher carbon price in the policy mix whereas other countries may make more use of other regulatory instruments. Carbon prices may thus continue to differ over longer time horizons. Without additional measures, this difference in the carbon price risks a shift in production of carbon intensive materials to regions with lower carbon prices, so called carbon leakage.

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  • Are renewable energy subsidies in need of reform?

    Fischer, C., M. Greaker and K.E. Rosendahl

    A chapter in a forthcoming MIT Press book volume on energy subsidies, edited by Jon Strand. Drafted and accepted

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  • Options for avoiding carbon leakage

    Fischer, C.

    Contribution to the book Towards a Workable and Effective Climate Regime . Scott Barrett, Carlo Carraro, Jaime de Melo, Editors.

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  • Carbon Pricing: Transaction Costs of Emissions Trading vs. Carbon Taxes

    Coria, J. and Jūratė Jaraitė

    Working Papers in Economics no 609, Department of Economics, University of Gothenburg.

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  • Climate and the Nuclear Future

    Chakravorty, U., C. Fischer and M.-H. Hubert

    Working paper

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  • The Net Emissions Effects of Fuel Taxes

    Carbone, J., C. Fischer and T. Sterner

    Mistra Indigo Paper

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  • Flexibility and Stringency for Greenhouse Gas Regulations

    Burtraw, D., Woerman, M. and A. Krupnick

    Published in Environment and Resource Economics, online: DOI 10.1007/s10640-015-9951-8; Washington DC: Resources for the Future Discussion Paper 13-24.

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  • An Analysis of Costs and Co-benefits for a U.S. Power Plant Carbon Standard

    Buonocore, J, Lambert, K., Burtraw, D., Sekar, S., Driscoll, C.

    Submitted to Environmental Science and Technology.

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  • Overlapping Strategies for Reducing Carbon Emissions from the Personal Transportation Sector

    Anderson, S., C. Fischer and A. Egorenkov

    RFF working paper

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  • Discussion Paper: Architecture of the EU Emissions Trading System in Phase 3 and the Distribution of Allowance Asset Values

    Åsa Löfgren, Dallas Burtraw, Markus Wråke, and Anna Malinovskaya

    Recent changes to the EU Emissions Trading System introduce structural changes regarding the initial distribution of emissions allowances, which are worth tens of billions of euros. A key change is the expanding role for auctions, which account for about half of the allowance allocation now and will be a growing share going forward. The use of revenue from auctions is a decision left to EU Member States and appears increasingly important. Well over half of auction revenue to date has been directed to energ and climate related purposes. Further, we do not find evidence that Member States have used state aid to electricity-intensive firms to strategically support domestic industry. The trading system is evolving in a way that is likely to improve its performance, but there remain important questions related the future pric of allowances and the distribution and use of asset value created under the trading system.

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  • Push renewables to spur carbon pricing

    Gernot Wagner, Tomas Kåberger, Susanna Olai, Michael Oppenheimer, Katherine Rittenhouse & Thomas Sterner

    Make wind and solar power even cheaper by opening up access to the electricity grid and ending fossil-fuel subsidiesPutting a price on carbon dioxide and other greenhouse gases to curb emissions must be the centrepiece of any comprehensive climate-change policy. We know it works: pricing carbon creates broad incentives to cut emissions. Yet the current price of carbon remains much too low relative to the hidden environmental, health and societal costs of burning a tonne of coal or a barrel of oil. The global average price is below zero, once half a trillion dollars of fossil-fuel subsidies are factored in.

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  • Discounting and Relative Consumption

    Johansson-Stenman, O., and Sterner, T

    We analyze optimal social discount rates when people derive utility from relative consumption, i.e. their own consumption level relative to the consumption level of others. We compare the social , private , and conventional Ramsey rates. Assuming a positive growth rate, we find that (1) the social discount rate exceeds the private discount rate if the importance of relative consumption increases with consumption, and that (2) the social discount rate is lower than the Ramsey rate given quasi-concavity in own and others’ consumption and risk aversion with respect to others’ consumption. Numerical calculations demonstrate that the latter difference may be substantial and have important implications for long run environmental issues such as global warming.

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  • Discussion Paper: Price and Quantity "Collars" for Stabilizing Emissions Allowance Prices

    Charles A. Holt, William Shobe 

    This paper reports the results of a laboratory experiment with financially motivated participants that is used to compare alternative proposals for managing the time path of emissions allowance prices in the face of random firm-specific and market-level structural shocks. In this setting, market performance measures such as social surplus are enhanced by the use of a price collar (auction reserve price and soft price cap). Comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances. In fact, in some specifications, the quantity collar performed worse than no stabilization policy at all. The experiment implemented a specific set of structural elements, and extrapolation to other settings should be done with caution. Nevertheless, an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important (although perhaps not exclusive) role to play in constructing an effective market stability reserve policy.

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  • Discussion Paper: Comparing Policies to Confront Permit Over-allocation

    Harrison Fell

    Instability in cap-and-trade markets, particularly with respect to permit price collapses has been an area of concern for regulators. To that end, several policies, including hybrid price-quantity mechanisms and the newly introduced "market stability reserve" (MSR) systems have been introduced and even implemented in some cases. I develop a stochastic dynamic model of a cap-and-trade system, parameterized to values relevant to the European Union's Emission Trading System (EU ETS) to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over-allocations of permits. Results suggest adaptive-allocation mechanisms such as a price collar or MSR can reduce permit over-allocations and permit price volatility in a more cost-e ective manner than simply reducing scheduled permit allocations. However, it is also found that the performance of these adaptive allocation policies, and in particular the MSR, are greatly a ected by assumed discount rates and policy parameters.

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  • Discussion Paper: What Ails the European Union’s Emissions Trading System

    Stephen W. Salant

    In theory, how a fixed number of storable pollution permits are allocated in a cap and-trade program should not affect intertemporal prices unless participants fail to receive permit endowments before they plan to use them. "Backloading" can create ineciency; "frontloading" cannot. The European Union's Emissions Trading System, however, is regarded as a counterexample where frontloading itself is creating inefficiency. This view underlies current policy proposals to backload permits or to create a Market Stability Reserve. The goal of these policies is to shrink the current inventory of permits carried by the private sector without tightening the cap. We question the most prominent theory of why frontloading has been excessive by comparing its implications to a theory that attributes recent movements in the spot price of permits to ongoing regulatory risk of a price collapse much like what occurred in the 1970's in anticipation of the devaluation of the Mexican peso or the sale of massive government gold stockpiles. Correct diagnosis should precede treatment advice: if frontloading is excessive, inefficiency can be eliminated by suitable backloading of permits; if regulatory risk is excessive, however, backloading either directly or with a market stability reserve is unlikely to reduce inefficiency.

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  • Climate Policy Options and Consequences in the International Spotlight

    Dallas Burtraw, Carolyn Fischer, Peringe Grennfelt, Åsa Löfgren, Thomas Sterner, Markus Wråke and Lars Zetterberg

    This report aims to help decision makers in industry and the electricity sector better understand the implications of current climate policies in the European Union, the United States, and around the world. Regardless of specific domestic approaches, or the outcomes of global negotiations, policies and actions to mitigate climate change will directly affect energy-intensive industries and the electricity sector around the world.With this in mind, researchers in the Mistra Indigo program have during the last years tackled important questions about the globalization of carbon markets, carbon pricing to encourage long-term investments in low-carbon technologies, the distributional effects of climate policies at various levels, and the interactions between climate regulations and markets.As the Mistra Indigo program is now moving towards the end, we have summed up some of our most important results regarding the subject in this report.  Read the reportPDF (pdf, 3.1 MB)

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  • European Climate Platform: 10th Anniversary

    The ECP organisation

    10 years of dialogue and research on international climate policies

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  • Refunded Emission Payments and Diffusion of NOx Abatement Technologies in Sweden

    Bonilla, J., J. Coria, K. Mohlin and T. Sterner

    Published in Ecological Economics , 116: 132-145. Doi 10.1016/j.ecolecon.2015.03.030.   

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  • Will Shale Gas Reduce Carbon Emissions from China?

    Chakravorty, U., C. Fischer and M.-H. Hubert

    Working paper, January 2015

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  • US Power Plant Carbon Standards and Clean Air And Health Co-Benefits

    Driscoll, C., J. Buonocore, J. Levy, K. Lambert, D. Burtraw, S. Reid, H. Fakhraei, J. Schwartz

    Carbon dioxide emissions standards for US power plants will influence the fuels and technologies used to generate electricity, alter emissions of pollutants such as sulphur dioxide and nitrogen oxide, and influence ambient air quality and public health. We present an analysis of how three alternative scenarios for US power plant carbon standards could change fine particulate matter and ozone concentrations in ambient air, and the resulting public health co-benefits. The results underscore that carbon standards to curb global climate change can also provide immediate local and regional health co-benefits, but the magnitude depends on the design of the standards. A stringent but flexible policy that counts demand-side energy efficiency towards compliance yields the greatest health benefits of the three scenarios analysed.Nature Climate Change  5, 535–540 (2015) doi:10.1038/nclimate2598http://www.nature.com/nclimate/journal/v5/n6/full/nclimate2598.htmlexternal link

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  • A Proximate Mirror: Greenhouse Gas Rules and Strategic Behavior under the US Clean Air Act

    Dallas Burtraw, Karen L. Palmer, Sophie Pan, Anthony Paul

    The development of climate policy in the United States mirrors international developments, with efforts to initiate a coordinated approach giving way to jurisdictions separately taking actions. The centerpiece of US policy is regulation in the electricity sector that identifies a carbon emissions rate standard (intensity standard) for each state but leaves to states the design of policies, including potentially the use of technology policies, emissions rate averaging, or cap and trade. Differences in policies among states within the same power market could promote predatory behavior resulting in a geographic shift in generation and investment in new resources. This paper examines the coordination problem using a detailed partial equilibrium model of operations and investment. We demonstrate that leading jurisdictions have available a rich set of design options that can protect them against strategic predation and, in fact, give them opportunities to proactively advance climate goals, to the economic detriment of laggards.

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  • Discussion Paper: A Microsimulation Model of the Distributional Impacts of Climate Policies

    Hal G. Gordon, Dallas Burtraw, and Roberton C. Williams III

    When a new tax on greenhouse gas emissions is imposed, a new price is introduced through a cap-and-trade program, or prices are affected by the introduction of regulation, the economic welfare of households is affected through changes in product prices, tax obligations, and changes in income. The measure of the distribution of the changes in economic welfare on households is the incidence. Measures of incidence are always important to policymakers because of their implications for equity across income, geography, age, or other characteristics. The policy we focus on in this paper is a tax on carbon emissions, but the methods and model we describe are applicable to other policies. Some taxes are designed, with varying levels of success, so that their incidence falls on those who gain from the use of the government revenue (e.g., gasoline taxes that pay for highway improvements), while others are designed to limit incidence on the poor (e.g., sales taxes that omit clothing and food). Pigouvian taxes on activities with a negative externality are often designed without the tax incidence in mind. For example, cigarette taxes have successfully reduced smoking, but their incidence has largely fallen on the poor

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  • Second-best Analysis of European Electricity Policy under Carbon Pricing

    Huebler, M., C. Fischer and O. Schenker

    Manuscript, ZEW. Zetterberg, L. (2012). Linking the Emission Trading Systems in the European Union and California. IVL report B 2061external link, opens in new window

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  • The Green Paradox: a Brief Introduction to Climate Policy and Intertemporal Emissions Leakage

    Jensen S., K Mohlin, K Pittel and T Sterner

    Accepted in Review of Environmental Economics and Policy .

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  • Mixing it Up: Power Sector Energy and Regional and Regulatory Climate Policies in the Presence of a Carbon Tax

    Dallas Burtraw and Karen Palmer

    A carbon tax will interact with other policies that are intended to reduce
    carbon dioxide emissions and encourage clean sources of energy and energy
    efficiency. This paper examines these policy interactions. A well-designed
    carbon tax can be an efficient instrument for reducing emissions, yet whether it
    will be implemented in an efficient manner is uncertain. A legislatively
    determined tax may not fully reflect up-to-date scientific and economic
    information. Behavioral and institutional factors suggest that a tax may not
    have its fully intended effect. These considerations suggest that climate policy
    should and will continue to be a complex mix of regulaions at various levels of
    government, even with a carbon price. Nonetheless, the possibility of unintended
    interactions among policies remains. The role for policies to encourage
    renewables and energy efficiency depends on the stringency of the carbon tax and
    presence of externalities related to technological learning and the energy
    efficiency gap.

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  • A balance of 'bottom-up' and 'top-down' in linking climate policies

    Green, J., T Sterner and G Wagner

    Top-down climate negotiations embodied by the Kyoto Protocol have all but stalled, chiefly because of disagreements over targets and objections to financial transfers. To avoid those problems, many have shifted their focus to linkage of bottom-up climate policies such as regional carbon markets. This approach is appealing, but we identify four obstacles to successful linkage: different levels of ambition; competing domestic policy objectives; objections to financial transfers; and the difficulty of close regulatory coordination. Even with a more decentralized approach, overcoming the 'global warming gridlock' of the intergovernmental negotiations will require close international coordination. We demonstrate how a balance of bottom-up and top-down elements can create a path toward an effective global climate architecture

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  • Discussion Paper: The Initial Incidence of a Carbon Tax across US States

    Roberton C. Williams III, Hal Gordon, Dallas Burtraw, Jared C. Carbone& Richard D. Morgenstern

    Carbon taxes introduce potentially uneven cost burdens across the population. The distribution of these costs is especially important in affecting political outcomes. This paper links dynamic overlapping-generations and microsimulation models of the United States to estimate the initial incidence of a carbon tax across states. Geographic differences in incidence are driven primarily by differences in sources of income. Differing patterns of energy use also matter but are relatively less important. The use of the carbon tax revenue plays an important role, particularly in determining how different income sources are affected, as: (1) using carbon tax revenue to cut capital taxes disproportionately benefits states with large shares of capital income; (2) returning the revenue via lump-sum transfers favors relatively low-income states; and (3) returning the revenue via cuts in labor taxes provides a relatively even distribution of cost across states. In general, geographic differences in incidence are substantially smaller than the differences across income groups.

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  • Discussion Paper: The Initial Incidence of a Carbon Tax across Income Groups

    Roberton C. Williams III, Hal Gordon, Dallas Burtraw, Jared C. Carbone & Richard D. Morgenstern

    Carbon taxes efficiently reduce greenhouse gas emissions but are criticized as regressive. This paper links dynamic overlapping-generation and microsimulation models of the United States to estimate the initial incidence. We find that while carbon taxes are regressive, the incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump-sum rebates are less efficient but much more progressive, benefiting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, more progressive than a capital tax swap and more efficient than a rebate.

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  • Benchmarking in the European Union Emissions Trading System: Abatement incentives

    Lars Zetterberg

    This paper investigates abatement incentives for allowance allocation based on output and sector specific benchmarks, here called output based allocation or benchmarking. Special attention is given to updated allocation and we assume that allowances can be traded with other sectors (open cap). We confirm earlier studies that output based allocation based on ex-ante data provide the same abatement incentives as auction or grandfathering and also confirm that output based allocation with updated output and ex-ante benchmarks provides as high abatement incentives as auction, but constitutes a production subsidy. However, we also find that benchmarking with updated output and updated benchmarks reduces abatement incentives somewhat, but less so than updated grandfathering. An allocation rule where the sector cap is prescribed ex-ante, for instance based on historic emissions, and distributed to installations in proportion to their updated production preserves full abatement incentives and avoids some of the costs associated with the determination of benchmarks. However, this rule also constitutes a production subsidy, which decreases with industry concentration. If a sector is split into smaller groups each with one benchmark per sub-sector, benchmarking evolves toward grandfathering. Since benchmarking is conditioned on production, this allocation method protects production from leakage, i.e. migrating to areas where firms face no emissions cost. This may actually be the most compelling reason for choosing benchmarking.

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  • Discussion Paper: The Costs and Consequences of Clean Air Act Regulation of CO2 from Power Plants

    Dallas Burtraw, Joshua Linn, Karen Palmer & Anthony Paul

    US climate policy is unfolding under the Clean Air Act. Mobile source and construction permitting regulations are in place. Most important, the US Environmental Protection Agency (EPA) and the states will determine the form and stringency of the regulations for existing power plants. It is widely believed that flexible approaches could be suggested in EPA guidelines or proposed by states. Various approaches would create an implicit price on emitting greenhouse gases and create valuable assets that would be distributed differently among electricity producers, consumers, and the government. We compare a tradable performance standard with three variations on cap-and-trade policies that would distribute the asset value in different ways. Keeping the value within the electricity sector by distributing it to fossil-fueled producers or consumers or spending on energy efficiency has smaller effects on average electricity prices than a revenue-raising policy. These approaches impose greater social cost, but comparable net benefits in the sector.

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  • Discussion Paper: Economic Ideas for a Complex Climate Policy Regime

    Dallas Burtraw and Matt Woerman

    The parsimony of economic theory provides general insights into an otherwise complex world. However, the most straightforward organizing principles from theory have not often taken hold in environmental policy or in the decentralized climate policy regime that is unfolding. One reason is inadequate recognition of a variety of institutions. This paper addresses three ways the standard model may inadequately anticipate the role of institutions in the actual implementation of climate policy, with a US focus: multilayered authority across jurisdictions, the impressionistic rather than deterministic influence of prices through subsidiary jurisdictions, and the complementary role of prices and regulation in this context. The economic approach is built on the premise that incentives affect behavior. We suggest an important pathway of influence for economic theory is to infuse incentive-based thinking into the conventional regulatory framework. In a complex policy regime, incentives can be shaped by shadow prices as well as market prices.

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  • Why the EU ETS needs reforming: an empirical analysis of the impact on company investments

    Åsa Löfgrena, Markus Wråke, Tomas Hagberg & Susanna Roth

    The European Union's Emissions Trading Scheme (EU ETS) is so far the largest emissions trading system in the world. A rigorous ex post  empirical analysis of the scheme is presented. The effect of the scheme on firms' investment decisions in carbon-reducing technologies is analysed by using detailed firm-level data from Swedish industry. Based on difference-in-difference estimation as well as a before–after difference estimation, the results reveal that the EU ETS has not had a significant effect on firms’ decisions to invest in carbon-mitigating technologies. However, although the EU ETS appears to have no direct effect on investments, it is too early to dismiss the system. Consideration is given to how the EU ETS can realize its potential to become an effective tool in the EU climate and energy policy portfolio. Policy relevance A thorough analysis and discussion considers the ability of the EU ETS to create strong incentives for investment in carbon-reducing measures. The empirical results (using detailed firm-level data from Swedish industry) add to earlier findings in the literature showing the limitations of the EU ETS to influence investments and innovation. This is a critical and pressing issue for policy makers. With even modest reforms such as the back-loading of allowances meeting strong resistance from some Member States, the future of the EU ETS is rightly put in question. A key question is whether the EU ETS can and should be reformed in a way so that it can have a real impact on investments, or whether other policy instruments should take an increasing role for long-term transformation of the energy system.

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  • Working Paper: Environmental and Technology Policy Options in the Electricity Sector

    Carolyn Fischer, Richard G. Newell & Louis Preonas

    Myriad policy measures aim to reduce greenhouse gas emissions from the electricity sector, promote generation from renewable sources, and encourage energy conservation. To what extent do innovation and energy efficiency (EE) market failures justify additional interventions when a carbon price is in place? We extend the model of Fischer and Newell (2008) with advanced and conventional renewable energy technologies and short and long-run EE investments. We incorporate both knowledge spillovers and imperfections in the demand for energy efficiency. We conclude that some technology policies, particularly correcting R&D market failures, can be useful complements to emissions pricing, but ambitious renewable targets or subsidies seem unlikely to enhance welfare when placed alongside sufficient emissions pricing. The desirability of stringent EE policies is highly sensitive to the degree of undervaluation of EE by consumers, which also has implications for policies that tend to lower electricity prices Even with multiple market failures, emissions pricing remains the single most cost-effective option for reducing emissions.

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  • Discussion Paper: Technology Flexibility and Stringency for Greenhouse Gas Regulations

    Dallas Burtraw and Matt Woerman

    The Clean Air Act provides the primary regulatory framework for climate policy in the United States. Tradable performance standards (averaging) emerge as the likely tool to achieve flexibility in the regulation of existing stationary sources. This paper examines the relationship between flexibility and stringency. The metric to compare the stringency of policies is ambiguous. The relevant section of the act is traditionally technology based, suggesting an emissions rate focus. However, a specific emissions rate improvement averaged over a larger set of generators reduces the actual emissions change. A marginal abatement cost criterion to compare policy designs suggests cost-effectiveness across sources. This criterion can quadruple the emissions reductions that are achieved, with net social benefits exceeding $25 billion in 2020, with a 1.3 percent electricity price increase. Under the act, multiple stringency criteria are relevant. EPA should evaluate state implementation plans according to a portfolio of attributes, including effectiveness and cost.

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  • Discussion Paper: State and Fuel-Specific Benchmarks for  Greenhouse Gas Performance Standards

    Dallas Burtraw and Matt Woerman

    The next major aspect of US climate policy will likely be the regulation of existing power plants, and tradable performance standards could form the basis of this framework. Under this framework, emitting sources have a compliance obligation, identified as a benchmark emissions rate, and there is a market where sources can trade emissions based on an emissions rate under/over their benchmark. We examine different approaches to setting benchmark rates across geography and fuel type in a program that enables national trading. We show that, for a given national emissions target, differentiating benchmark rates affects the program’s cost-effectiveness. However, these differences also affect the regional distribution of the program’s electricity price effects and may reduce the variation in these effects. We observe a "knee in the curve," where modest differentiation in benchmark rates could address some distributional concerns at low cost, but substantial differentiation raises the program’s cost precipitously.

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  • Report: Utvecklingen av EU:s system för handel med utsläppsrätter och den framtida internationella utsläppsmarknaden

    Lars Zetterberg, Svante Mandell, Susanna Roth, Andrei Marcu, Clayton Munnings

    EU:s klimat och energipaket innebär att utsläppen av växthusgaser inom EU ska minska med 20 % från år 1990 till år 2020. Vidare ska, inom EU:s system för handel med utsläppsrätter (EU ETS), utsläppen minska med 21 % mellan år 2005 och 2020, medan utsläppen i den icke handlande sektorn (IHS) ska minska med 10 % under samma period (EU-kommissionen, 2013). Den större bördan i EU ETS motiveras av att åtgärdskostnaderna är lägre där och att det därför är mer kostnadseffektivt att minska utsläppen mer i EU ETS. I EU:s färdplan till 2050 anges en intention att minska utsläppen med 80 % - 95 % till 2050 (EU-kommissionen, 2011b). Utsläppsmålet för EU ETS till år 2020 säkerställs genom att utsläppstaket minskar med 1,74 % per år. Den reduktionsfaktorn gäller även bortom 2020 och kommer att leda till en total minskning med ca 70 % till år 2050. Men eftersom det inte räcker för att uppfylla ambitionen till 2050 behöver ambitionsnivån höjas i EU ETS. Det finns i och för sig en flexibilitet i hur framtida reduktionsmål fördelas mellan ETS och IHS. Men eftersom åtgärdskostnaderna tycks vara billigare i ETS än i IHS är det sannolikt att man, på samma sätt som idag ökar bördan relativt sett mer i ETS än i IHS. EU-kommissionen presenterade 2012 en rapport, The State of the European Carbon Market in 2012, om hur EU:s handelssystem för utsläppsrätter fungerar och kan utvecklas på längre sikt (EU-kommissionen, 2012a). I rapporten konstateras att det finns ett stort överskott av utsläppsrätter vilket riskerar att allvarligt underminera handelssystemets funktion. Rapporten beskriver vidare sex strukturella åtgärder som kommissionen anser kan förbättra den nuvarande situationen inom EU ETS och det nu rådande och växande utbudsöverskottet. Med utgångspunkt i kommissionens rapport har vi analyserat förslagen utifrån ett nationalekonomiskt perspektiv. Vårt fokus har varit på EU ETS och hur dess funktion och effektivitet påverkas av förslagen. Vidare har vi försökt att måla upp ett antal scenarier för hur den internationella utsläppsmarknaden utvecklas i framtiden med utblick mot 2050, och vad det innebär för Sveriges förutsättningar att köpa utsläppsrätter på den internationella marknaden.

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  • Working Paper: The Effect of EU-ETS on Swedish Industry’s Investment in Carbon Mitigating Technologies

    Åsa Löfgren, Markus Wråke, Tomas Hagberg, Susanna Roth

    The European Union’s Emissions Trading Scheme (EU-ETS) is so far the largest emissions trading system in the world. It covers about 12000 installations, representing approximately 45% of EU emissions of CO2, with the objective to establish a carbon price creating incentives for cost efficient reductions of emitted green house gases. In this article we perform an expost analysis where we use detailed firm level data to analyse the effect of the EU ETS on firms’ investment decisions in carbon reducing technologies. In addition we draw on the existing literature and control for firm specific characteristics that has previously been shown to be determinants of firms’ investment in clean technology.

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  • Policy Paper 6: EU ETS reform – Assessing the Market Stability Reserve

    Lars Zetterberg, Daniel Engström Stenson, Susanna Roth

    In light of the current state of European emissions trading, with a surplus of more than 2 billion allowance and a low price (around €6) , the European Commission has proposed using a Market Stability Reserve (MSR) to restore the function of the European Emissions Trading Scheme (EU ETS). The objective of the MSR is to regulate the surplus of allowances so that it falls within an ‘optimal’ band. This is achieved by adjusting annual auction volumes in a rule-based manner. The European Commission’s proposal builds on two triggering thresholds, which are based on the quantity of allowances in circulation. The first threshold is triggered when the quantity of allowances is higher than 833 million tons, then 12% of the allowances are removed from auctions and placed in the MSR. If the quantity of allowances is less than 400 million tons, 100 million tons are taken from the MSR and added to the auction of that current year.The objective of this policy paper is to analyze how the MSR affects the function and efficiency of the EU ETS. The paper builds on previous analyses from other observers, as well as additional analysis made by our team.We conclude that making a significant volume of planned allowance allocations unavailable for buyers is generally positive. Yet our preferred choice, and in our view the most effective way to reset the market, would be to permanently remove a number of allowances from the market.If a temporary removal of allowances is preferred, the proposed MSR has some merits. It is likely to reduce the rapidly growing surplus, and it is designed in a way that keeps the removed allowances out of the market for enough time to have a real impact on price. Yet for a number of reasons, we are less certain that the MSR as proposed by the Commission constitute the best option for strengthening the functioning of the EU ETS because:
    1. The MSR does not come into effect until 2021 and hence does little to improve the current oversupply of allowances. Therefore we suggest that the MSR enter into force in 2017 or 2018. In addition, it is crucial that the 900 million backloaded allowances are not injected into the market in 2019, but rather moved to the MSR.
    2. There are legitimate concerns regarding the impacts on price volatility, where some analyses show a risk of higher volatility.
    3. The discussion on the exact number of allowances needed for hedging obscures the fact that the overarching aim of the EU ETS is to reduce emissions in a cost efficient manner.
    4. The MSR is also adding yet another layer of complexity to an already complex system. This raises questions pertaining to the transparency and predictability of the system.
    5. Discussions about the surplus and the MSR often focus on impacts on price. If the ambition is to secure a certain price level, we note that the MSR is indirect, blunt, and uncertain. In this respect, the idea of a price collar would be a relevant alternative to investigate further.
    6. There is little insight into how the MSR might affect possible future linkages between the EU ETS and other markets and should therefore be evaluated further.

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  • Policy Paper 5: Europe’s choice – Facts and function of the EU emissions trading system

    Lars Zetterberg, Dallas Burtraw, Daniel Engström Stensson, Charlotte Paulie, Susanna Roth


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  • Policy Paper 4: A Price Floor Solution to the Allowance Surplus in the EU ETS

    Dallas Burtraw, Åsa Löfgren and Lars Zetterberg

    Since 2008 there has been a rapid buildup of surplus emissions allowances in the EU ETS. The European Commission has presented six structural options to addressthe oversupply of allowances on a long-term basis.

    One option would introduce price management  mechanisms, which could allow for the use of a price floor. A price floor has been  mischaracterized as a tax, an instrument that has historically faced political opposition, and the commission states that an explicit carbon price objective would alter the nature of the EU ETS being a quantity-based market instrument.
    However, a price floor is structurally different from a tax in multiple ways, and its merits are well documented in the academic literature. This rule-based approach could reinforce the market-based philosophy and investment climate of the ETS.

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  • Policy Paper 2: The Value of Being First -San Francisco Workshop summed up in Proceedings Paper

    Dallas Burtraw, Daniel F. Morris, Lars Zetterberg

    California and Sweden are in a small group of front runner countries and states on issues of climate policy. In May 2013, Resources for the Futureexternal link, opens in new window, the Mistra Indigo program, and the ClimateWorks Foundationexternal link held a special conference to deconstruct the experiences of California and Sweden in forging new ground toward climate change mitigation and climate policy decisions. At the workshop, leaders from the public, private, and research communities as well as from nongovernmental organizations addressed pathways for climate progress in the current political landscape, issues of industry and state competitiveness, and opportunities for climate gains through action in the transportation arena.Read the full summary of workshop proceedings hereexternal link and complete speaker bios hereexternal link.

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  • Working paper: Diffusion of NOx abatement technologies in Sweden

    Jorge Bonilla, University of Gothenburg and Universidad de los Andes, Jessica Coria, University of Gothenburg, Kristina Mohlin, University of Gothenburg,Thomas Sterner, University of Gothenburg

    This paper studies how different NOx abatement technologies have diffused under the Swedish system of refunded emissions charges and analyzes the determinants of the time to adoption. The policy, under which the charge revenues are refunded back to the regulated firms in proportion to energy output, was explicitly designed to affect investment in NOx-reducing technologies. The results indicate that paying a higher net NOx charge increases the likelihood of adoption, but only for end-of-pipe post-combustion technologies. We also find some indication that market power considerations in the heat and power industry reduce the incentives to abate emissions through investment in postcombustion technologies. Adoption of post-combustion technologies and the efficiency improving technology of flue gas condensation is also more likely in the heat and power and waste incineration sectors, which is possibly explained by a large degree of public ownership in these sectors.

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  • Working paper: On Refunding of Emission Taxes and Technology Diffusion

    Jessica Coria, University of Gothenburg and Kristina Mohlin, University of Gothenburg

    We analyze diffusion of an abatement technology under a standard emission tax compared to an emission tax which is refunded in proportion to output market share. The results indicate that refunding can speed up diffusion if firms do not strategically influence the size of the refund. If they do, it is ambiguous whether diffusion is slower or faster than under a non-refunded emission tax. Moreover, it is ambiguous whether refunding continues over time to provide larger incentives for technological upgrading than a non-refunded emission tax, since the effects of refunding dissipate as the overall industry becomes cleaner.

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  • Policy Paper 3: Defying Conventional Wisdom - Distributional Impacts of Fuel Taxes

    Daniel F. Morris and Thomas Sterner

    Fuel taxes for transportation represent one of the most potent and readily available policies to address increasing global greenhouse gas emissions. Yet, they are pilloried by politicians because of their supposedly regressive impacts to the poorest populations.Research from both OECD and non-OECD countries, however, suggests such arguments are disingenuous and that fuel taxes are often neutral or even progressive in their impacts. Transport fuel taxes function like luxury goods in many countries, particularly low income countries, so tax burdens fall on wealthier individuals rather than poorer ones.This paper summarizes the findings of a recent book with more than twenty empirical case studies of the effects of fuel taxes for different nations. According to the studies, fuel taxes are strongly progressive throughout Africa and the big Asian countries. In middle income countries in Latin America and in Europe they are often neutral. Tax regressivity in the United States can be corrected with effective revenue use.

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  • Working paper: Environmental Macroeconomics: Environmental Policy, Business cycles, and Directed Technical Change

    Carolyn Fischer and Garth Heutel

    Environmental economics has traditionally fallen in the domain of microeconomics, but recently approaches from macroeconomics have been applied to studying environmental policy. We focus on two macroeconomic tools and their application to environmental economics. First, real business cycle models can incorporate pollution and pollution policy and be used to answer several questions. How can environmental policy adjust to business cycles? How do different types of policies fare in a context with business cycles?Second, endogenous technological growth is an important component of environmental policy. Several studies ask how policy can be designed to both tackle emissions directly and influence the adoption of clean technologies. We focus on these two aspects of environmental macroeconomics but emphasize that there are many other potential applications.

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  • Report: Linking by degrees - Incremental Alignment of Cap-and-Trade Market

    Dallas Burtraw, Karen Palmer, Clayton Munnings, Paige Weber, Matt Woerman

    National and subnational economies have started implementing carbon pricing systems unilaterally, from the bottom up. Therefore, the potential linking of individual cap-and-trade programs to capture efficiency gains and other benefits is of keen interest. This paper introduces a two-tiered framework to guide policymakers, with an interest in North American policy outcomes. One tier discusses program elements that need to be aligned before trading of allowances across programs can occur. The second identifies benefits of incremental alignment of program elements even prior to trading between programs—which we call "linking by degrees." We apply this framework to California’s cap-and-trade program and the Regional Greenhouse Gas Initiative. These programs are already linking through cooperation and sharing of information. Many aspects of the program designs are ready for the exchange of allowances within a common market; however, the difference in allowance prices remains an issue to be considered before formal linking could occur.

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  • Report: Environment and Technology Policy Options in the Electricity Sector: Interactions and Outcomes

    Carolyn Fischer, RFF, R. Newell and L. Preonas

    Myriad policy measures aim to reduce greenhouse gas emissions from the electricity sector, promote generation from renewable sources, and encourage energy conservation. Do these measures work together or at cross purposes? A critical issue is the extent to which innovation and energy efficiency market failures justify additional interventions when a carbon price is in place. To assess the performance of overlapping policies, we extend the two-stage model of Fischer and Newell (2008) to include advanced and conventional renewable energy technologies and both short and long-run investments in energy efficiency improvements. We incorporate both knowledge spillovers and imperfections in the demand for energy efficiency. We conclude that some technology policies can be useful complements to emissions pricing, but ambitious renewable portfolio standards or production subsidies seem unlikely to enhance welfare. Correcting R&D market failures has a larger potential for reducing the costs of achieving significant emissions reductions. The desirability of stringent energy efficiency policies is highly sensitive to the degree of undervaluation, which also has implications for the cost-effectiveness of policies (like renewable energy subsidies) that keep electricity prices low. Even with multiple market failures, emissions pricing remains the single most cost-effective option for meeting emissions reduction goals. In sum, technology policies are very poor substitutes, and when they overreach, they can be poor complements too.

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  • Policy Paper 1: U.S. Status on Climate Change Mitigation

    Dallas Burtraw and Matt Woerman

    In 2009, President Obama pledged that, by 2020, the United States would achieve reductions in greenhouse gas emissions of 17 percent from 2005 levels. With the failure of Congress to adopt comprehensive climate legislation in 2010, the feasibility of the pledge was put in doubt. However, we find that the United States is near to reaching this goal; currently the country is on course to achieve reductions of 16.3 percent from 2005 levels in 2020. Three factors contribute to this outcome: greenhouse gas regulations under the Clean Air Act, secular trends including changes in relative fuel prices and energy efficiency, and subnational efforts. Perhaps even more surprising, domestic emissions are probably less than would have occurred if the Waxman—Markey cap-and-trade proposal had become law in 2010. However, at this point the United States is expected to fail to meet its financing commitments under the Copenhagen Accord for 2020.

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  • Report: Linking the Emissions Trading Systems in EU and California

    Lars Zettterberg

    The EU vision of creating a transatlantic carbon market took an important step forward when commissioner on Climate Action, Connie Hedegaard, met with California´s governor Jerry Brown in 2011 and confirmed plans to link the EU emission trading system (EU ETS) with California´s emerging carbon market.  The objective of this paper is to investigate the prospects of linking the EU ETS with the California ETS with regard to relevant design features of the two systems. 

    We find that linking the EU ETS with the California scheme is not likely, at least not in the short term. Since the high level meeting between Hedegaard and Brown, California has moved its attention away from the EU and has announced plans to link with Quebec. In addition, a major obstacle to linking the EU ETS with the California scheme concerns the use of off-sets. California allows the use of forest credits and does not acknowledge off-sets from the Clean Development Mechanism, (CDM). In contrast, EU relies on CDM credits, and doesn't recognize forest credits. Both parties signal concerns that linking will lead to losing control of allowance price.

    Paradoxically, the difference in abatement costs, reflected in allowance price, is an important economic motive for linking two emission trading systems, but may also constitute a significant political barrier. There is however, some common ground that could facilitate future linking. Both parties are positive to creating a larger carbon market through off-set markets and linking. Both parties appear to have compatible levels of ambition with comparably stringent caps on emissions. California will adopt a price ceiling, which could be an obstacle since the EU directive only allows linkage with systems that have absolute caps on emissions. But the California price cap is limited in volume and would probably from an EU perspective not create an insurmountable problem. Regarding allocation, while free allocation is the main method to distribute allowances initially, both systems aim at using auction in the long-term.

    Finally, both systems provide mechanisms for overview and adjustment of the rules, which could help the calibration of critical features like off-sets, price management mechanisms and legislative differences. With political will, the current barriers to linking the EU ETS and the emerging California scheme could probably be solved.

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Updated: 2012-01-31

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