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US Cap-and-Trade:
Compliance Options
Designing an effective USclimate change policy regime.
By Kjell Olav Kristiansen
A
s this article goes to print, Members of Congress and position of energy efficiency as an emissions abatement
their staff are busy at work on yet another bill to cap option.Duetotheshort-terminelasticityofelectricitydemand,
emissions of greenhouse gases (GHGs) in the United this will not happen overnight. Sustained price increases of
States. The prospects of an economy wide cap-and-trade power will eventually lead to the more efficient use of energy
programme appear strengthened by the arrival of a through more efficient appliances, buildings and so on.
adminstration receptive to climate change action and However, as the global economy recovers, we will re-enter a
favouring a cap-and-trade mechanism. Yet, at what time, and phaseofincreasingdemandforenergywhichmayoffsetgains
in what condition, a cap-and-trade bill will pass Congress made from energy efficiency improvements.
remains unclear, especially given current economic conditions Recognising the limitations of fuel switching and energy
and priorities. efficiency, the most important role of a carbon price is to
If endorsed, an economy wide cap-and-trade programme in change investor behaviour. As the energy industry makes
the US could generate amarketthree timesthe size of the EU’s decisions about how to replace ageing plants and meet
Emissions Trading Scheme (ETS). When directly or indirectly growing demand for energy, the carbon cost will tip choices
linked to EU and Kyoto markets, a US programme would lead towards cleaner technologies.
to a further globalisation of carbon markets through price In designing an effective climate change policy, lawmakers
interdependencies and capital flows in support of emission need to be particularly cognisant of the framework required
reduction projects. to create sustainable changes to the power supply
infrastructure. The design of a cap-and-trade programme
Power Sector – The Key to Success must include the appropriate incentives and send a reliable
The power sector plays a crucial role in achieving GHG price signal to create long-term behavioural changes.
reduction targets. Not only does power generation constitute Lawmakers and regulators need to recognise that change
oneofthelargestsourcesoftheseemissions.Moreimportantly, may not come about solely through a price on carbon. The
the sector is an indispensable supplier of emission reduction power industry being heavily regulated requires a finely-
options.Unlikemostotheremittingsectors,thepowerindustry tuned regulatory framework and incentive mechanisms that
already has a range of technologies work in a complementary way towards
available that, if widely adopted, could
Sustained price increases of
environmental targets. Complications
eliminate the carbon footprint of
electricity consumption over the course
power will eventually lead to
associated with expanding the
transmission infrastructure should
of a few decades.
the more efficient use of
serve as one example of the challenges
A price on carbon raises the cost of energy through more efficient facing the development of the power
generation depending on the carbon
appliances, buildings ...
generation industry.
intensityofpowerplants.Thisaffectsthe Renewable Portfolio Standards (RPS)
power sector in two main ways: It changes the way power will havebeenportrayedasanexampleofsupplementaryclimate
begeneratedanditleadstolowerelectricitydemand.Themost change policy instruments that will move the power sector in
immediate response is a changed dispatch of existing anenvironmentallyfriendlydirection.RPSplaceanobligation
generationassetsbecauselowemissionplantsbecomerelatively on utilities to source a certain minimum percentage of their
morecompetitive.Thisleadstofuelswitchingwhichmeansthat power acquisitions from renewable energy sources, thus
existingnaturalgasplantswillrunmoreattheexpenseofcoal providing an additional incentive for investors to choose low
and fuel oil utilisation. While potential reductions from fuel carbon options. From a pure climate change and economic
switching in the US are not insignificant, this option alone will perspective, RPS can distort the allocating efficiency of cap-
not move the country that far in achieving long-term targets and-trade as the true cost of abatement options is not fully
suggested by lawmakers. Regardless, the role of fuel switching reflected in the carbon price. Opponents of the RPS portray
flexibilityshouldnotbeunderestimatedasadriverofshort-term renewable standards as a way for governments to ‘pick
volatilityincarbonprices. winners’ and argue that these policies lead to a higher
As generation costs increase, demand for electricity will penetration of renewables than would happen under a pure
decrease. The efficient pass-through of carbon costs from cap-and-trade programme.
producer to consumer is important in order to equalise the Ultimately,thejustificationforRPSneedstobeviewedinthe
100 worldPower2009
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