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01/27/2013

Comments

Ellen Gleason

While reading this article, the authors cited certain arguments of opponents of the RGGI that were so frustrating and seemingly unconnected from reality or hard facts that the piece was hard to read. Initially, I was blindsided by the idea that cap and trade legislation was no longer necessary due to "growing investments in energy efficiency and renewable electricity". Wouldn't the general consensus be that these investments in environmentally-friendly practice were due to the presence of cap-and-trade policies? From an economics standpoint, these changes in energy efficiency stem from the very policies opponents of the RGGI are trying to stop. To argue that cap-and-trade is no longer necessary due to the very investments that the policy has made profitable seems tantamount to shooting oneself in the foot.

I thought that the authors' most convincing arguments was their discussion of the economic benefits connected to the RGGI. The fact that the policy program saved consumers $1.1 billion over ten years, while also generating $1.6 billion in economic growth by new consumption in local economies, is a huge argument in favor of continuing cap-and-trade policies. With such positive benefits, and with what seems like few negative associations, we should not only keep the RGGI on the path to reducing emissions, but continue to fight for more cap-and-trade policies throughout the U.S.

Doug Poetzsch

This articles is explaining that in the cap proposals for emissions under the RGGI, three out of four of them propose raising the emissions cap above current levels. The main reason for raising the cap is that cleaner burning natural gas is eliminating the use of dirtier coal and oil and thus has eliminated the need for the program. Others argue that since market forces have delivered emissions reductions cheaper and faster than anticipated, the states should lock in progress with a binding cap to ensure that emission levels do not regress.

In terms of the framework to examine policies in our class, cleaner natural gas can be though of as a shift down in of the marginal abatement costs. This should mean that the intersection between marginal abatement costs and marginal damages should now intersect at a point where less emissions are produced. It should now be more efficient to pollute less than to pollute more.

Theoretically, states should lower the emissions cap and promote less emissions because that is a more efficient outcome than leaving the cap at its current level or raising it. I hope that policymakers understand this simple framework we developed in class and take it into consideration. I believe that they do, but policy makers are likely trying to find the best combination of environmental and economic policies. Since successful economic policies are more likely to get leaders elected, they are likely biased towards them and I surmise this is the reason they are suggesting raising the emissions cap rather than lowering it.

Matthew Thomas Howell

The article discusses a number of positive effects that the RGGI has created. The first one that stood out to me was the fact that emissions actually dropped 23% in the first 3 years that this policy was implemented. This is a significant reduction, and possibly portrays that the policy does actually work to get producers to think about and invest into 'green' clean energy processes for the future. The second fact that caught my attention was the $952 million in revenue that the auction and selling of permits created for the clean energy programs. Finally, the article mentions that these permits are tradable which relates directly to the recent class discussions of attaining the lowest marginal abatement curve. Trading allows the market to move toward a more efficient operating point.

These benefits are consistent with only one of the 4 proposed policies however. As the other comments suggest, raising the cap seems counterintuitive. The policy has worked remarkably well and appears ahead of schedule, so why should the cap move upward? The original policy proposal was to lower the cap over time, and I still believe the cap should be lowered. Although cleaner natural gas is being used, emissions are still harmful even if not from the dirtiest of sources.

Daniel Molon

The Regional Greenhouse Gas Initiative (R.G.G.I.) was implemented in nine Northeast and Mid-Atlantic States in order to reduce greenhouse gas emissions, through tradeable permits. The states involved have been discussing resetting the emissions cap, but of the four proposals, one has the cap remaining at the current level and then decreasing in the future, while the other three have it increasing. Opponents of the R.G.G.I. argue that increased energy efficiency has eliminated the need for the program. This technological improvement does not prove that this initiative is unnecessary; it actually proves that when given a market restriction, businesses will innovate in a way to allow themselves to run in a more productive way within that limit. The cap even brings down energy prices and saves consumers’ money through the auctioning of emission allowances. So, the R.G.G.I. improves businesses’ productivity by requiring them to become more efficient and produce fewer emissions, and it reduces energy costs for consumers. Even though there appears to be only benefits to this program, states want to increase the emissions cap, and New Jersey even left the program.
With President Obama’s reaffirmation to addressing climate change and greenhouse gas emission, this program could serve as a viable template to introduce to other regions of the country. It would be better for a this sort of program to remain in regional form, as opposed to a nationwide one, because, as we discussed in class, this could lead to the problem of pollution becoming centralized in an area where it could spread, like Ohio pollution travelling to the more heavily populated areas of New York. This program would also be better-equipped if the Environmental Protection Agency were the one in charge of deciding what the pollution cap was for each region, as opposed to the governors of each state.

Haley Miller

It appears from the initial result of the cap and trade program that it was very effective by reducing pollution and raising money. However it would be interesting to see the financial effects on the industries and companies affected by the cap and trade program. The benefits of the cap and trade program are that the amount of emissions is cut to the optimal pollution level but the price level is dependent on the marginal abatement costs.

It seems counter-intuitive that the lower emissions due to the success of the program and lower cost of natural gas would encourage lawmakers to allow more emissions. This will reduce the cost of "dirty" emissions and thus make it more favorable again. The technology developed under more expensive emission regulations will improve the efficiency and cleanliness of energy and will be beneficial to society in the long run.

Julia Murray

Like many others have previously commented, the argument that lower-cost natural gas has eliminated the need for the program and that we should therefore reset the cap to allow higher levels of pollution does not make any sense, but environmentally and economically. If the cap is reset to allow more pollution, then it will cost less to pollute. Unless it costs less to use the lower-cost natural gas, then companies will pollute more. And, as the author points out, lower-cost natural gas decreases the MAC of carbon emissions, the efficient policy response is to reduce emissions, and not enact a policy that could possibly raise them. Even though we have invested in lower-cost natural gas, the problem of carbon emissions is not irrelevant, and it is important for policy-makers to not only focus on alternatives to carbon, but also continuing to control the carbon emissions that still persist.

Ellison Johnstone

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Ellison Johnstone

This article explains how a system of permits was set up eight years ago in the Northeast in order to cap emissions of carbon dioxide from electric power plants in the region. The group of governors that set up the program believed that it would provide incentives for plant operators to pollute less. As we have discussed extensively in class, this is exactly what happens in such a system, as tradable permits are a form of reducing pollution by providing economic incentives. For firms, it is beneficial to buy permits up until the point where their marginal abatement cost is equal to the cost of another permit. In terms of the benefits of tradable permits for the environment, the system guarantees pollution at a certain level, obviously set by the availability of permits. With this system, in the first three years, pollution declined by a substantial 23%. Additionally, permit auctions raised almost $1 billion, which is useful as it can be invested in further helping to reduce pollution.

Ellison Johnstone

The success of this program is being threatened, however, as the emissions cap is being reset at what could possibly be a higher level. As the author of this article points out, this seems to be a step backwards for the environment. With a cap-and-trade system, it is possible to slowly continue reducing emissions by shrinking the number of permits available over time. Increasing the emissions allowed, by presumably increasing the number of permits, is nonsensical in terms of pollution reduction. A permit system may have the goal of reducing pollution in the most cost-effective manner, but the goal is still to reduce pollution. The argument that the program is no longer needed due to factors such as investment in energy efficiency and cheap natural gas also seems invalid to me. These factors would help further reduce the success of the program by lowering the abatement costs to firms. To use such factors as an excuse to end the initiative would simply make it cheaper for electric power plants to go back to the higher polluting practices they employed before the program began.

Jspencer

Echoing what many of my peers have said, the current cap-and-trade system seems to be effectively reducing CO2 emissions so far. The goal of this system is to reduce greenhouse gas emissions, and an increase in the emission “cap” or ceiling would completely undermine this goal. It seems completely asinine that this is even being considered. It seems almost everyone in the blog is in agreement about this article, so I won’t beat the dead horse: the current cap-and-trade policy has been an effective form of government intervention in reducing greenhouse gas emissions, and increasing this cap would increase greenhouse gas emissions.

Opponents of the RGGI argue that “clean” natural gas has eliminated the need for the cap-and-trade system by phasing out dirtier oil and coal. I am very skeptical of this claim: while natural gas may be “cleaner” than coal and oil, in the sense that natural gas production releases less CO2, methane pollution associated with natural gas production is completely unregulated. Pound for pound, methane is 25X MORE harmful to the atmosphere than CO2. That is, methane traps in 25X more heat per unit mass than carbon dioxide. If the goal of the cap-and-trade system is to reduce climate change caused by greenhouse gas emissions, then methane emissions must be regulated. This is especially crucial when you consider the recent boom in natural gas discoveries/production in the Northeast. I believe that RGGI must create a supplemental cap-and-trade market for methane in order to account for this externality. Even if the current “cap” level for CO2 remains, it seems to me that the shift from oil/coal energy production to natural gas is a mere transfer from one externality (CO2) to another (methane). From a market standpoint, this shift appears to be nothing more than a shift from a market where externalities are quantified and producers’ charged to a market where externalities are unquantified and producers are allowed to pollute without paying for the damage to society (MSC≠MSB).

Cort Hammond

While the RGGI is an amazingly well implemented program that can serve as a case study to model future greenhouse gas reduction policies, the resistance to the program makes sense. The fact of the matter is: this regional system is somewhat unfair. Since climate change is, by definition, a global problem, a regional program is not an efficient solution. Understandably, companies in one of the 9 participating states feel (and rightly so) that they are being forced to compete unfairly since they are charged for emissions, when companies in neighboring states are not. Basically, there is a free rider problem; since greenhouse gases have only global effects, the whole world benefits from the reductions, but only companies in these states pay. The result is push-back and pseudo-logical arguments from companies in regulated states that hope to persuade the public into diminishing the emissions standards (and lowering total abatement costs).

The next logical step, as many have pointed out, is to instate a national cap and trade program that operates on the same principle. While this would go some of the way towards making emissions trading fair, this solution still falls well short of the optimal solution. In this case, the push-back would be even greater as companies argue that the cap and trade system is preventing fair competition of US firms with international firms. As with the 9-state RGGI, a national greenhouse gas initiative would still allow companies in other nations to free-ride on localized abatement efforts.

It is for this reason, that a stricter Kyoto protocol is absolutely necessary (a global market for emissions is a must). Without global participation in greenhouse gas trading, there will be too many interest groups who argue that they are being unfairly treated (and in a way they are).

There is no question that this tax is efficient even at the regional scale (especially when revenue from auctions is reinvested in clean tech). However, since the individual makes selfish decisions, in order for these decisions to benefit society, incentives have to be uniform enough to prevent individuals from making decisions that return us to a state where negative externalities are ignored.

Scott Diamond

Shattuck and Sosland address the success of the Regional Greenhouse Gas Initiative, which is credited as the first market-based regulatory program in the US intended to reduce CO2 emissions. The marketable permit system raised $952 million, the majority of which have been reinvested in sustainable energy programs. According to the RGGI website, these sustainable energy programs have directly benefited 2.9 million households and 7,400 businesses by reducing their energy bills. Additionally, they estimate that they will save current customers $1.3 billion in lifetime energy bill savings. Most importantly, average annual emissions have been reduced by 23% in only three years. In short, the program successfully reduced emissions while being exceptionally profitable.
Member states are now planning to reset the cap, making an increase in the emissions cap appear imminent. Opponents of RGGI claim that the system is no longer necessary because of the transition to natural gas in energy production, which produces less carbon emissions. So long as we are deriving power from a source that emits carbon, I see no reason why such a cap should be increased. If it’s not broke, why fix it? Such a cap, even if it is a slight financial burden to firms, ensures that emissions remain at an appropriate level. RGGI claims that it can reduce CO2 emissions by another 10% by 2018, so why stand in the way of that by increasing the cap?

Maggie Antonsen

I would be interested in finding out the incentives behind the three proposals that support raising the cap on carbon emissions. As many people have already pointed out in their comments, this seems counterintuitive. Since its creation, the Regional Greenhouse Gas Initiative has successfully lowered average annual emissions, as well as raised money from the auction of permits that has been invested in clean energy programs. According to a Boston Globe article, the expanding clean energy sector resulting from the R.G.G.I. has created over 71,000 jobs at over 5,000 companies. The three proposals that support raising the cap on carbon emissions beg the question of what motivates these suggestions: Are political or economic incentives fueling these proposals? If the motivation is political then the reasoning for raising a cap on emissions is clear. However, I found what Haley wrote to be interesting and pertain well to this question of economic incentives: “However it would be interesting to see the financial effects on the industries and companies affected by the cap and trade program. The benefits of the cap and trade program are that the amount of emissions is cut to the optimal pollution level but the price level is dependent on the marginal abatement costs.” What if the higher cap was proposed because the previous level was no longer economically optimal. I am not sure what might make the marginal abatement cost curve shift or what could change social and private costs and benefits, but it seems like a possibility. In class, Professor Casey told us a story about elementary schools who raise money to purchase and retire a pollution permit. Graphically speaking, I would think this would raise the cost of each permit and cause us to stray from equilibrium. I’m not sure if this is correct and I know purchasing one permit would not significantly effect equilibrium price, it does suggest that there may be other things that could cause the optimal level to be different or less efficient.

Nathan Plein

The aspect of this article that struck me the most was how it highlighted many of the success of a cap and trade program. Over the first three years average annual emissions decreased by 23%, while the auctions for these permits raised over $952 million. As we can see this program has had the desired effects of raising revenue and cutting emissions. It also briefly alluded to the fact that much of the money raised by this system has been invested in clean energy programs. I believe the incentive that a cap and trade system creates to research and develop clean and efficient energy is one of the strongest arguments for implementing a system like this. When a cap and trade system is implemented companies that have low abatement costs and the ability to produce using cleaner energy have a competitive advantage because they don't have to pay for permits. This incentives the firms that have the high abatement cost to invest in cleaner technology to lower their abatement costs and become more competitive. Eventually, the hope is that over time this research and development will pay off and we will be able to switch completely over to clean energy sources and not have to depend on coal and oil. While this is still a long ways away I think that a system such as this is a step in the right direction.

Marissa Gubler

A permit system involving cap and trade is a good incentive for producers to reduce their carbon dioxide emissions. Those manufacturers whose marginal abatement costs for reducing CO2 emissions are less than the price of permits will sell their permits. And those whose marginal abatement costs for reducing CO2 emissions are more than the price of permits will buy permits. Those who have low marginal abatement costs will reduce their CO2 emissions and will likely try to develop new technologies or methods for reducing even more carbon emissions so that they can sell more permits. It is best for the cap in a cap and trade system to be gradually lowered to allow a smaller total of emissions from a given region. In this way, firms are continuously motivated to reduce their emissions and find innovations for providing cleaner energy. It is not wise for the government to raise the cap as that is undoing the work of the former cap and trade system. An increase in emissions will result in more damage to humans, animals, and the environment. thus it makes no sense to raise the cap and allow firms to pollute even more than they already are. Some government officials feel that the cap and trade system is not necessary as some firms have switched over from coal to natural gas and natural gas emits less carbon dioxide than coal. However, those officials who feel this way need to consider the other damages that natural gas entails, in particular its extraction through hydrofracking. In hydrofracking, the water table becomes polluted and freshwater sources are lost and other dire consequences result. The costs and benefits of coal and natural gas need to considered. The best thing to do in this situation is to keep the cap and trade system and gradually lower the cap by reducing the number of permits available over time. The government could make the permits expire after each year of the program and then issue a smaller number of permits each subsequent year.

Jack Apgar

I agree with everyone above that for a cap and trade system (or any attempt to reduce emissions for that matter) to be effective, it needs to broaden its scope to include the rest of the US, developed countries, etc. That's therefore what I find so fascinating about the RGGI. These states and the constituents of the politicians in those states are internalizing these costs while other states continue to free ride. Because the cap and trade system affects energy, the internalization raises prices to some degree for all business. Right now are they trying to persuade others to join them through moral suasion? Will this continue to survive politically? While the program does raise revenue, again, it increases prices for everything else in the state. Very interesting to see if more states join or continue to free ride

David Fishman

The inception of R.G.G.I. 8 years ago has undoubtedly demonstrated the effectiveness and efficiencies that can be derived from actionable pollution permits. The program has raised $952 mm in revenue, which Scott pointed out, that has been reinvested in sustainable energy programs. Moreover, average annual emissions decreased by 23 percent after three years. Considering that the emissions reduced are direct contributors to the Climate Change issue, there is abundant evidence that this sort of program works. From a simply theoretical standpoint, these marketable permits heighten efficiency by equating firms’ marginal abatement costs across the industry, through intercompany transactions. Additionally, the cap created from the emissions permits incentivizes firms to invest in technology and various cost-cutting measures to increase efficiency without generating more pollution, a dual win for the environment and the consumer (relatively speaking).

Another benefit that does not receive as much attention as it should is the revenue generated from the auction of these permits. Rather than just distributing permits, which creates a valuable asset on the firm’s balance sheet, these auctions raise revenue for the government. The value of this sort of Pigouvian Revenue is clear. While better equating Marginal Private Costs with Marginal Social Costs, the government is increasing its net revenues. These revenues can be reinvested in sustainable energy (as they are currently), used to pay off debt, used to offset tax cuts in a revenue neutral approach, etc. The important take-away is that during the contemporary political scene where ballooning deficits coupled with sovereign austerity measures are a heated point of contention, the R.G.G.I. system, and other economic incentives like it, can be part of a feasible austerity program that has the dual mandate of social efficiency along with deficit reduction…ostensibly, a rather marketable platform.

Avery Gant

I believe that the article is interesting in that it shows some evidence that a cap-and-trade system can be a successful short term solution for greenhouse emissions. A problem that I find with the article is that it does not mention the costs associated with a cap-and trade system. A cap and trade system should work to lower pollution; but this does not always occur at the lowest price and is economically inefficient. The prices have probably been fairly severe, likely resulting in the firms demanding that the cap be raised. Since 3/4 proposed changes raise the cap, this seems to be the likely case.

I somewhat agree with Jack regarding what he said about some states taking a somewhat of a free ride in reducing emissions. Some states may be better served with other solutions such as offering economic incentives to firms that produce at a lower level of emissions. These solutions are superior to cap and trade methods in that they are able to minimize costs in addition to reducing emissions. If some states were to take these methods it could be superior than the cap and trade methods found in these few northern states, and could potentially give them an economic advantage over northern firms.

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