Microeconomics Cap and Trade

Section-A, Group 5 Team Members: Jithin Varghese (CMM Rishikesh Mandavkar (GLM065) Shantanu Bhardwaj (CMM029) Shikha Atreja (CM003)

Page |1 Uma Saraswathy N (GLM059) I. Introduction Cap and trade is one of the most efficient ways to regulate carbon dioxide and other emissions. It begins by setting a cap on the allowable emissions. The cap is a limit on the amount of pollution that companies are allowed to release per year. Some companies that will have not enough allowances to cover their emissions will either make reductions in the amount of emissions release or buy another firms spare credits for some amount. Cap limit should be feasible and it should decrease emissions over time. If the cap limit is set too high, an excess of emissions will enter the atmosphere and scheme will not have the intended effect. Also, the governing body will have to release additional credits to stabilize the price. On the other hand, if the cap is set too low then allowances are scarce and thus overpriced. Credits are distributed on the basis of existing pollution that the countries create. The price of allowances is thus a function of demand and supply. The buying and purchasing of allowances provide incentives to make emissions reductions more economical. Some companies will find it easy to reduce their emissions and then sell their surplus allowances as credits while others who are not able to make direct reductions may buy these spare credits to offset their emissions. Credits can be traded in a carbon market as well as through emissions credits certified by UN. Thus an economic market where trading of carbon credit takes place gets created. Moreover the countries who are now buying credits will also start investing in the greener technology in the long term so as to reduce their carbon emissions. II. Regional Green-House Gas Initiative: RGGI is a cap-and-trade program covers a single sectorelectricity generationin 10 northeastern and Mid-Atlantic States. The program aims to achieve a 10 percent reduction in emissions from power plants by 2018. The programs most notable aspect is that states unanimously chose auctioning to distribute the vast majority of emission allowances. RGGI is a cap-and-trade system for CO2 emissions from power plants in the member states. Emission permit auctioning began in September 2008, and the first three-year compliance period began on January 1, 2009.Proceeds are used to promote energy conservation and renewable energy. The system affects fossil fuel power plants with 25 MW or greater generating capacity.

Page |2 Aims: a. Initiate a shift in the Northeasts electricity supply toward more efficient generation and a cleaner, less carbon-intensive fuel mix; b. Achieve this through an auction system in which emissions permits (called "allowances") are limited in number and generators are required to purchase enough allowances to cover their CO2 emissions during quarterly auctions or in the secondary market; Counter any resulting rate increases (which are predicted to be small) through investment of the allowance auction proceeds in programs to deploy energy efficiency and renewable energy technology;

RGGI has multiple benefits for the environment, consumers, and economy: 1. Reduces carbon emissions: The cap on emissions of CO2 from power plants in the RGGI region will be 10 percent lower by 2018 than at the start of the RGGI program in 2009. 2. Supports a green economy: RGGI participating states invest nearly eighty percent of proceeds received from selling the allowances in strategy energy programs, fifty two percent in improving energy efficiency and eleven percent in accelerating the deployment of renewable energy technologies. 3. Achievable Targets: RGGIs phased approach, with initially modest emission reductions, will provide clear market signals and regulatory certainty without resulting in dramatic electricity price impacts. 4. Economical for households: RGGI Technology investments help households to enhance their control over the energy usage, typically reducing bills by fifteen to thirty percent. 5. Benefits for economy: RGGI Technology investments drive demand for renewable products and services. The demand for workforce increases thus creating more jobs in the economy. Data from renewable energy policy project shows that for every one US dollar invested in renewable energy systems, six new jobs are created.

Page |3 6. Generates business opportunities: RGGI Technology creates business opportunities in the energy sector. It also helps emerging technologies to achieve economies of scale thus accelerating the overall growth in the energy sector. Loopholes of Cap and Trade: 1. Emissions banking: A country that emits less than it's supposed to can 'carry forward' the surplus to the subsequent period. This will ultimately neutralise the benefit gained. 2. Counting carbon sinks: The inclusion of carbon sinks (natural entities such as forests and soil which can absorb carbon dioxide) in emissions accounting will give opportunity for industries to emit more gases. 3. High transaction costs due to the organisation, the implementation and the monitoring of a cap-and-trade system (Stephan and Ahlheim 1996). 4. Price Impact on Consumers: Failure to implement greener technologies in the state will lead to purchases of carbon credits. This in turn will make electricity expensive for the people of that state. 5. Most developed countries were reluctant to make the deep and early cuts of greenhouse gases needed to mitigate global-warming effects. This in turn will impose huge performance pressure on the countries which are members. Suggestions to reduce CO2 emissions Caps but no trading: Caps can be introduced on the emission levels of the various companies in a country. The caps will be decided after negotiations with the governing bodies. However, trading of carbon credits will not be allowed. Technological Improvements: Industries should undergo systemic improvements and eventually mechanized instead of focusing on trading. Voluntary Goals and Incentives: Government can encourage private sector entities to adopt their own GHG goals. Tax Concessions: The companies which perform better in reducing the emissions should be given tax concession to encourage them further.

Page |4 References: www.rggi.org www.wavesofthefuture.net www.ucsusa.org www.unfccc.int http://www.youtube.com/watch?v=oqJO8HwxTkg http://www.youtube.com/watch?v=pA6FSy6EKrM http://www.twnside.org.sg/title/kyt-cn.htm http://www.americanprogress.org/issues/2008/01/capandtrade101.html http://www.sustainablebusiness.com/index.cfm/go/news.display/id/16848 http://www.rggi.org/docs/program_summary_10_07.pdf http://rggi.org/docs/Investment_of_RGGI_Allowance_Proceeds.pdf http://www.ucsusa.org/global_warming/solutions/big_picture_solutions/regional-capand-trade.html#RGGI http://rggi.org/docs/Investment_of_RGGI_Allowance_Proceeds.pdf