Emission Control – Effect on Society

Effects on Society from cap-and-trade approach

One very useful resource that I found online is a discussion paper “A U.S. cap and trade system to address global climate change” written by Robert Stavins from Harvard University. In his paper, he discussed about the effects of cap-and-trade approach on the industry, society, government revenues etc. A policy analysis model crated by Palsev.S from MIT serves as the basis of the discussion. Overall, I rate this source as highly credible.

Scientists have already created a number of models to estimate the cost of cost-effective emission reduction policies to achieve various national GHG emission targets over the past few years. One notable model is developed by the Emission Prediction and policy analysis (EPPA) model of the Massachusetts Institute of Technology’s Joint Program on the Science and Policy of Global Change. The model uses three illustrative trajectories for Carbon dioxide emission targets over the next few decades. The lower limit proposed by the U.S. Climate Action Partnership, involves reducing carbon dioxide emissions from their 2008 level to 50% below their 1990 level and is defined over the period 2012 to 2050. The upper trajectory, which is consistent with the recommandations of the National Commision on Energy Policy, involves stabilizing carbon dioxide emssions at their 2008 level over the period 2012 to 2050. The two trajectories are then compared with the business as usual (BAU) trajectory without any climate legislation.

The results revealed that it is cost effective for the firms to reduce CO2 emissions well below the cap in the early years and save allowances to be used in the later years. In addition, the results ensured that the implementation of the cap-and-trade system would achieve dramatic emissions reductions. The market prices of the allowances also increase over the years, rising from $18 per ton of CO2 in 2015 to $70 per ton in 2050 for the lower trajectory, and from $41 per ton in 2015 to $161 per ton in 2050 for the upper trajectory. The gradually increasing CO2 allowance prices that characterize both cap trajectories lead not only to small reductions in electricity production, but also to dramatic changes in the mix of the fuel use to generate electricity. Even under less aggressive policy, conventional coal power plants will drop sharply. Under more aggressive policy, they would disappear completely by 2040, and will be replaced by new power plants using renewable energy sources. However, power generation from natural gas plants will increase in the short term with the price of CO2, but when CO2 prices rise and other renewalbe energy technologies become more popular at the end of the modeling period, the power generation from natural gas will also decline.

In addition, the potential auction revenue from the less aggressive policy would bring in $119 billion a year in 2015, and increase to $473 billion by 2050, and the more aggressive policy would bring in $269 billion in 2015 to $404 billion in 2050. On the other hand, taxes would be reduced by $1490 per family in 2015, rising to $4770 in 2050 under the less aggressive policy, and from $3360 in 2015 to $4060 in 2050 under a more aggressive policy.

Regardless of what market-based climate policy is adopted, most of the cost of emissions reduction will be borne by eventual consumers, who will face higher prices for products and services, such as electricity and fuel. Workers and investors in the energy sectors and carbon-intensive industries will also experience lower wages, job losses, and reduced stock values. However, such impacts are temporary and after the policy takes effect, workers and investors who enter the industry would no longer experience such negative impacts. The cost impact can also be asymmetrical because lower income households usually spend a larger portion of their income on electricity and other energy-related products and services than do wealthier households. Lower income households will experience greater expenditure due to increased fuel price and other energy-intensive goods and services. However, this effect may be counterbalanced by the fact that the adverse impacts on investment returns will fall most heavily on high income households.

In the industry sector, the cap will raise the cost of fossil fuel use and electric power generation. Due to the different nature of industries, cap-and-trade will produce winners and losers in the economic sector. The greenest companies in the top 15 lists, according to the Newsweek, are financial services, information technology and telecommunication that typically do not consume a lot of energy. And the majority of those from the opposite end are material production, utility, food and beverage companies and energy companies that are highly carbon-intensive.

Not surprisingly, electricity generation by burning fossil fuel accounted for 34% of total GHG emission and thus the energy sector will be hit severely will be electric utility companies, car industry, and manufacturing. Coal production will be the most affected because coal is the most carbon-intensive fuel. In comparison, petroleum will be less affected partly because the demand for petroleum products is inelastic in the short term. This will incentivize electric power generators and high-energy consumers to switch to the fuel with less amount of carbon content in it. On the other hand, information technology and financial services, being on the opposite end of emission spectrum will greatly benefit by trading excess allowances.


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