Kenneth C. Johnson
408-244-4721
kjinnovation@earthlink.net
Docket Unit, MS 4
Re: Docket No. 04-CCAC-1
1516
Re: Climate policy options
To the Climate Change Advisory Committee:
The climate policy options that have been considered in your prior meetings [1] appear to be focused overwhelmingly on cap-based policies, especially cap-and-trade, to the exclusion of other options. I am writing this letter to point out a fundamental deficiency of cap-and-trade that you should clearly recognize, and to encourage you to also consider other regulatory options. In particular, I request that the Committee give consideration to a type of vehicle feebate that would focus regulatory incentives on low-emission technology rather than downweighting, and which would therefore be more politically acceptable and more economically efficient than conventional vehicle feebates.
Cap-and-trade policies such as the NCEP initiative, which Mr. Cavanagh characterized as “an interesting political compromise”, and “obviously not … a tremendously ambitious effort” (Jan., 2005 meeting transcript), are inadequate to the task of climate stabilization because of a fundamental incompatibility that exists between the policy objective of cap-and-trade and that of environmental policy. Cap-and-trade operates primarily to minimize compliance costs, a function that it performs admirably as evidenced by the U. S. Acid Rain program: When the 1990 Clean Air Act Amendments were passed it was expected that aggregate annual compliance costs would be as high as 5.9 billion dollars, but actual costs have turned out to be closer to 1 billion dollars [2]. However, the objective of environmental policy is to minimize emissions (SO2 emissions, in the case of Acid Rain). Environmental policy must operate within limits of cost acceptability, but within that constraint the policy objective is (or should be) to minimize emissions, and not to minimize costs. If 5.9 billion dollars is within the limits of cost acceptability (as it evidently is, considering the expectation that existed at the outset of the Acid Rain program), and if health and environmental benefits would justify an expenditure of 5.9 billion dollars, then an effective environmental policy would motivate industry to make at least that level of investment in SO2 emissions abatement. The acid rain problem has not yet been solved [3], and the benefits of acid rain mitigation are estimated by OMB to exceed costs by 40-to-1 [4]; so a substantial increase in abatement expenditure would certainly be justified. But due to its focus on cost minimization rather than emissions minimization, the level of expenditure motivated by the Acid Rain program’s cap-and-trade system has not only been insufficient to fully achieve the policy’s environmental objective, but is also far below the limit of cost acceptability determined by political and economic constraints.
An alternative regulatory approach that would be
compatible
with environmental policy objectives is represented by the Swedish
Nitrogen
Oxide program, which uses a feebate-type
system to
incentivize maximum feasible reduction of NOx
emissions from large power plants, within the limitation of a cost
constraint
defined by a mandated emissions price [5].
Feebate-type
regulatory
instruments also have significant potential for reducing greenhouse gas
emissions, especially in the automotive sector. Several proposals for
vehicle feebates have recently been
advanced (e.g., in
A vehicle feebate can, however, be constructed to focus incentives more exclusively on technology. There is a clear economic rationale for favoring technology over downweighting: Vehicle weight generally correlates with economic value, as evidenced by the higher retail prices of heavier vehicles, so there would generally be a positive economic cost associated with downweighting. Technology costs, by contrast, are typically negative, taking into account fuel savings. (For example CARB conservatively estimates the net present value of hybrid technology to be in the range of $400 to $2500 per vehicle [11].) Thus, the emissions reduction level that is achievable within limits of cost acceptability would generally be higher with a technology-focused policy.
Several policy options for
technology-focused vehicle feebates are
detailed in a
draft report that I am preparing for the
First, the feebate induces manufacturers to compete on the basis of emissions per vehicle-ton rather than emissions per vehicle, so that a consumer will not be compelled to choose a vehicle of lighter weight but will be motivated to choose a low-emission vehicle within the consumer’s preferred weight class. By neutralizing the downweighting incentive, it becomes possible to significantly increase the emissions price within limitations of cost acceptability, which greatly increases manufacturers’ marginal economic incentives to implement low-emission automotive technologies.
The second difference relates to how the feebate incentives are marginally affected by the introduction of a new low-emission technology into the vehicle market. If a highly competitive technology such as plug-in hybrids enters the market, the new vehicles’ rebates will be financed by increased fees, or reduced rebates, on other vehicles. Under a conventional feebate, the other vehicles’ resulting incremental cost per vehicle would be the same for all vehicles; but under a weight-based feebate the incremental cost would be weight-proportionate (e.g., a 5000-lb vehicle’s cost increment would be twice that of a 2500-lb vehicle). It makes sense that the incremental cost should be weight-proportionate, since vehicle emissions are roughly weight-proportionate, and application of a particular low-emission technology to larger vehicles will typically result in a correspondingly greater reduction in per-vehicle emissions (and greater fuel savings).
I request that technology-focused vehicle feebates be considered by the Climate Change Advisory Committee, and I recommend that an analysis of feebate options be coordinated with Canada’s National Round Table on the Environment and the Economy [13] (which is tasked with developing feebate options under Canada’s 2005 Budget Plan) and with other countries and states that may be considering similar options.
Sincerely,
Kenneth C. Johnson
References:
1. http://www.energy.ca.gov/global_climate_change/04-CCAC-1_advisory_committee/documents/index.html
2. http://www.rff.org/Documents/RFF-DP-03-15.pdf
3. http://cta.policy.net/relatives/18480.pdf
4. http://www.whitehouse.gov/omb/inforeg/2003_cost-ben_final_rpt.pdf
(See pages 88-89.)
5. http://www.acidrain.org/pages/publications/acidnews/2000/AN2-00.pdf
6. http://www.epa.gov/airmarkt/arp/nox/scrfinal.pdf
(See Chapter 6.)
7. http://www.redefiningprogress.org/publications/pdf/etr_business.pdf
8. http://www.energy.ca.gov/fuels/petroleum_dependence/documents/2003-10-28_600-03-005A3.PDF
9. http://www.fin.gc.ca/budget05/pdf/bp2005e.pdf
10. Feb. 24 Edmonton Journal
11. http://www.arb.ca.gov/regact/grnhsgas/addendum.pdf
(See Table 5.3-8.)
12. http://ssrn.com/abstract=665844
(copy attached)
13. http://www.nrtee-trnee.ca/eng/index_e.htm