 You've seen that most of us have experienced the energy crisis and the climate change crisis. And it's the University of Michigan, the school public policy is once and is working to be more completely working and studying, researching and changing policy so that Michigan will have a big role in the future of energy and climate change. But one way to do that is go back to some of our roots. So we're really pleased to welcome Dallas Bertrall. Dallas was a public policy master student in the mid-80s and went on to get a PhD in economics. And he's probably certainly one of the handful of leaders in the energy and economic section. There are very few and this is one of the reasons why this is such an important initiative. Dallas will speak for about 45 minutes and then we'll have comments from Barry Raebe and Meredith Folly. Let me just say there are handouts with full bios. Barry is not really here. He's been on sabbatical at the University of Virginia where they are writing the ultimate book on climate change and policy. Basically he's flying back out tonight. So we're looking forward to when Barry comes back. Barry had been dean of the school of natural resources here and has won numerous prizes for his books in research and policy. Meredith Folly is an assistant professor in the school of public policy. She's heading into that elite group. Her advisor, Severin Bornstein, certainly is part of that group. And she really does give us an energy and policy, a large footprint here at the University of Michigan. So Dallas will please start the process. Okay, well, thank you. First of all, thank you very much for having me today. I've had a chance to think a lot about stories from when I was here 20 years ago and I could go on and on with them, but that'd be more interesting to me than to you. I just want to say that it's really thrilling to be here and it gives you a chance to sort of reflect back on where a lot of you are now in terms of thinking, well, what might I be doing in the future and how will my career, my studies at Graduate School at University of Michigan help me. And I'll tell you that on an almost daily basis, I still organize my world view around metaphors and theories that I was exposed to in the public policy school here and in the economics department at Michigan. So this is going to be, this is the richest time of your life in terms of putting, casting the foundation for that you're going to build on in the future. I can't get much closer, but maybe they can, they can up the mic. Can you hear me better? Is this better? Okay. Okay, so let me get right to the heart of my comments today about domestic climate policy. As you know, climate change is an international global issue. It's not just a domestic issue. This map shows that the U.S. and China are the two leading countries in terms of overall emissions. And there's heterogeneity around the globe matters hugely in terms of the shaping of international affairs. The Ford School has some strengths with respect to think about international relations, and we can't go anywhere unless we think about climate change as an international problem, but I'm not going to do that today until we open it back up quite for questions at the end because there certainly are issues about how the shape of domestic policy affects our ability to engage with the international community. But I want to talk about domestic policy because 2009 is the year for domestic policy in the U.S. to take shape. Domestically, there are been a number of proposals, of legislative proposals, of what we might do, and this picture illustrates four of them under a cap-and-trade type of approach. Now that one of the issues you might think as an initial point of departure is, well, why do cap-and-trade versus attacks or versus prescriptive regulations? And I'm not going to linger too long on that now either except that cap-and-trade for the time being is the leading idea, and so that's where most of the legislative proposals are. And this picture is showing the timeframe for emission targets under four leading proposals compared to business as usual, which is the orange, the proposal that has most attention is the Lieberman-Warner proposal, and it sort of shows a straight line there down through 2030 and actually targets out to 2050. One of the things about this, about the Lieberman-Warner proposal, which last year was the leading proposal in the Senate, the optics on it were really horrible, I think, from an outsider's perspective. And one of the reasons it takes me back to something Professor Michael Cohen used to teach here at the Public Policy School, that when a solution comes along, a lot of problems get attached to it. And that was at least the optics on Lieberman-Warner proposal in terms of dealing with the number of problems that were going to be solved and the way that allowance value that's created, I'll talk about that in a minute, was going to be distributed, had the real smell of a heavy earmarking approach in which there was major division of wealth and assignment of that wealth to allegedly special interests, very valid interests I would think, but nonetheless I had the perception of being special interests. And that was one of the things that sort of pulled Lieberman-Warner under last year, although I certainly didn't have a real chance of passing anyway. But when we think about the shape of domestic climate policy going forward, I think this is a real critical question, especially in the context of cap and trade, how complicated or simple is the policy design going to be. So my roadmap for my talk is to go through these design elements for emissions trading. And what strikes me about this is that I looked at the curriculum now and thinking back what the curriculum was here 20 years ago, and there were pretty much classes on each of these kind of topics in each of these areas. So we're going to go through them. The point of compliance, monitoring, enforcement, cost management issues, competitiveness issues, and then the question of federalism, and then the issue that I think is by far the first among equals here is the allocation question. But first, what is cap and trade? You can see I've conflated here to what is cap and trade and how does it work. I think everybody here knows this, but to make sure that we're all using the same vocabulary. There's establishing an emissions cap that limits emissions, provides market value uncertainty, and allows trading without government approval. So there's a limited supply of allowances, and there's a demand for allowances that creates their economic value and creates economic incentives to reduce emissions. And trading is intended to minimize the costs through compliance flexibility and creates incentives to reduce costs going forward. The key thing about this is really it's focused on outcomes, not on actions. That's the distinction that makes it both controversial and innovative from an economic perspective. Now we think, and certainly in the Ford School, and I think it's certainly in Washington, D.C., we take allowance trading as being a pretty reasonable policy approach, but that was not always so. So after the 1990 Clean Air Act amendments passed, Title IV put in place the SO2 trading program. It was very controversial, and you saw things like this on the AP Wire story. What's next? The LA Police Department trying to buy civil rights credits in Wisconsin? Or, you know, why applaud a deal that lets companies buy pollution rights? So in fact, that is what allowance trading does. It allows for the purchase of indulgences. And all I can say about that is that it beats the alternative, because previously, under the Clean Air Act, or under almost every type of environmental regulation, these indulgences were given away for free. So what cap and trade does is it puts a scarcity value on those indulgences and then creates incentives that help reinforce the program goals. Oh yeah, Tom the Dancing Bug got into the action also with tales of market-driven crimes. Okay, but why is CO2 different than the experience with the SO2 program? And this picture to me is the one thing I want to leave with you in your mind when this talk is over. So what this shows is, this cartoon I should say, shows along the horizontal axis the percent of emissions going from 100% originally all the way over to zero if you were going to phase out some kind of emissions entirely. And this red line going up represents a marginal cost schedule, just a schedule of actions if they were ordered in a cost-effective way that we would pursue in order to try to achieve emission reductions. To illustrate a point, I've chosen a target of about 25% emission reductions here and at that point, the point on this marginal cost schedule is going to determine the cost of incremental action. And so since it's the incremental action of a decision-maker who might decide to do a little bit more to squeeze out emission reductions or maybe emit a little bit more, that becomes the value that's assumed by allowance prices in the market and so that's indicated by the price of allowances here. So the sum or the integral under this curve or the sum of all these incremental actions represents the resource costs incurred in achieving these emission reductions. And the price of emission allowances is this point here and in this picture I'd suggest that 75% of the emissions would still be allowed to occur. So the value of emission allowances that are created by introducing this new intangible property right into the economy is the area of this rectangle. In the actual geometry, we'll tell you that the area of that rectangle is about more than six times the area of that triangle. So the value of emission allowances in this picture are more than six times the area of the resource costs actually incurred to squeeze out emission reductions. In the Lieberman-Warner bill going forward, in 2015 the area of that rectangle is 10 times the amount of the resource costs going to achieve emission reductions. The big ball game really is that for equity and efficiency outcomes is the allocation of this emission allowance value. And it leads many observers to ask, well, why not just use prescriptive regulation? And a lot of economists have studied this. A prescriptive regulation has been very effective in many cases to control or reduce emissions that are limited or obvious ways to do so and where the reduction costs are reasonable. It establishes what needed to be done and how and when for each source to do it. But there's two key challenges associated with it in applying it to climate change. One is that it requires tremendous information in order to achieve a cost-effective schedule, what we would call technical efficiency, in order to, I mean, the differences in costs will be easily in order of magnitude among emitting sources in the economy. So the regulator needs to know what is the cost for each source in order to be able to achieve emission reductions and replicating that kind of technical efficiency is very challenging. It requires huge information for a very ubiquitous pollutant throughout our economy and globally. And second, there's the issue of allocational efficiency, which really just means how do we allocate resources in the economy even if you've achieved technical efficiency. And so this picture is just to illustrate what that means. The usual damage function approach in thinking about benefit cost analysis is you think about emissions and what the dispersion is, what their impact is, physical impact, and then what is the monetary damage of that. And then you might say, well, there's an externality that's estimated associated with that monetary damage. And you might achieve a cost-effective, a technically efficient command and control regulation or prescriptive regulation that sets targets for individual facilities just so that marginal benefits equals marginal costs. But you're still enough with the problem that there are residual emissions and those residual emissions are going unpriced in the economy. So this is the question of allocation of resources throughout the economy. Is the right amount of electricity getting consumed? Is the right amount of gasoline being used? What are their relative prices when the residual emissions are going unpriced? And the virtue of a cap and trade program or a tax is it puts a price on these residual emissions also and offers tremendous efficiency gains. So those are the two reasons why that many simulation and empirical studies have suggested that there's huge cost savings associated with incentive-based approaches to environmental regulation. So that takes us back to trying to figure out how we're going to do it for climate policy. So the first design element I want to talk about is the point of compliance. The crucial architecture for CO2 is to recognize that the point of compliance is not necessarily the point of allocation. So what this picture is showing you is that there is fuel extraction and there's a fuel cycle going throughout the economy through fuel processing, the way the fuels get used, and the combustion of fuels all the way down to their end use. The crucial architecture is that you do not have to allocate to where the point of compliance is going to be. Those are two separate questions because the incidents or the distributional burden of costs differ. It's not necessarily the owner of a power plant who's going to bear the cost of climate policy. It might be the consumer who's using power. So you can make these decisions in order to achieve efficiency in distributional goals and also to design an administratively efficient program. An upstream approach all the way up here, which focused on refineries and fuel depots, would involve about 2,000 compliant entities in the U.S. economy. Whereas a midstream approach, say point of combustion in industry and power plants, would more than double that number. Some people would estimate it would take it up to about 10,000. Or if we did final point of combustion throughout the economy, then you would all have swipe cards at the gas pump and you'd be involved with hundreds of millions of combustion sources. So there's administrative simplicity in having an upstream approach. The second design element is enforcement. And here I just draw on the lessons from the SO2 trading program. Brian McLean at the EPA frequently uses these points to summarize the success of that program. For enforcement, we need accountability, meaning measurement with government verification. We need a data system with infrastructure. And if you think back, it's just 20 years since the PCs became widely available and that was commensurate with the introduction of the SO2 trading program and really facilitated the ability to have a trading program that engaged public trust. And a big part of that public trust, why we overcame those quotes and concerns that were in the LA Times, was that all this data is publicly available. That's valuable not only for the NGOs and the interest groups who want to make sure that potentially certain neighborhoods and disadvantaged communities are being not unfairly harmed, but it's also valuable for the creation of a new environmental market because players in that market need to know that their emission reductions are real and have real value and that the other parties in that market are doing what they say that they're going to do. So this kind of enforcement and monitoring activity is really important to the creation of a market. And it needs to be simple in design and operation. I'm going to keep coming back to this point. I feel it's critical to the success of the SO2 program and it's critical because we're talking about creating a market for an environmental asset, a market that doesn't previously exist and with recent activities in financial markets, you can see that the seeds of mistrust are sown for whether or not this kind of a market can really function in a transparent way. Okay, so now I want to move on to thinking about cost management and why we are concerned about cost management is that there's going to be a lot of costs. So there's really two elements to it. One of it is how are we going to constrain overall costs and second, how are we going to constrain cost variability? So think about these two things separately because sometimes people's blood pressures go up when they're talking about one and the person they're talking to is talking about the other. There's really relatively little value or virtue to wild price variability in a commodity market in general. Some variability is helpful, excessive volatility undermines investment, undermines innovation. The other issue though is whether we're concerned that costs could run far away greater than Congress or the public really is willing to take on initially. Advocates of climate policy are going to say that the cost shouldn't be an issue and most economists are going to say costs are a central issue and in any case costs are going to be significant, substantial. This estimate shows potential range of allowance values from 2015, these are the costs per metric ton of CO2. From my money, these are the EPA's cost estimates. I think the EIA's NEMS model has been the most reliable and this is at least the most open and most transparent and they tend to fall towards the lower end of this range but it hinges on three critical things that enter in terms of how we're going to manage costs. The first one is technology and these models estimate that there would be a 50% increase in costs compared to what you were just looking at or more if these things happened, if biomass technologies did not enter hugely, if there was a lot of new sighting of a nuclear and there wasn't widespread introduction of carbon capture and storage technology by 2030. Well, note that I did say that all three of these things have to fail because some of these models are suggesting usually we'll choose nuclear for example, have massive introductions in nuclear, others might have massive introduction of biomass or CCS or they'll combine a couple of these. So really you get a huge run up in costs of 50% or more if all three of these things were to fail. Efficiency is a huge topic and I'm not going to talk about it right now but I welcome it if there's time for questions afterwards. It's generally not modeled explicitly. The second cost management issue has to do with offsets. Another very controversial topic and if offsets are excluded from a program then that's going to cause cost increase by 50% or more. Now what are offsets? I'm guessing that most people know at that term but offsets imply truly the purchase of indulgences in that either domestic or internationally a compliance party rather than reduce their own emissions or surrender their own allowances for the emissions they occur they could purchase offsets essentially paying some party domestically or internationally to achieve emission reductions because the heterogeneity in costs globally are enormous. There's enormous cost savings if you can credibly achieve emission reductions offshore that would dramatically drive down costs for U.S. and allow us to overall achieve greater ever greater climate goals. But it's very controversial as this cartoon illustrates they're sort of it's you know widely suggested that by some parties that these things aren't real that they're not real or they cause more harm than they do good. I'm not an expert on this issue but the people that I think are most seriously engaged take offsets seriously and think that there are serious emission reductions that are achieved with offsets but that doesn't remove the controversy associated with them. But it's also important that there's another reason to allow for offsets in the design of domestic policy and that is they are on ramp for developing nations they're creating an entrepreneurial class in developing countries that are become the advocates for environmental programs and environmental markets in those countries. Okay, and third here I've kind of listed this that the third big issue associated with contrailing costs is the introduction of banking or not and if there's no banking inter-temporal that is win flexibility. Trading allows for where flexibility and win flexibility is when emission reductions are going to occur and if you don't allow for banking that suggests that you could ever run up a 50% or more in those kind of cost numbers I showed you initially. So there are other elements of cost management that kind of deal with the temporal and volatility and I've thrown them on this slide. Borrowing is the idea that you could actually you get an allocation maybe there's a, you have an assignment of allowances many years into the future but you need more now and either as the system or individual parties might borrow from their future year allocation in order to use them now. I'm beyond skeptical of this. I think it introduces a severe moral hazard that can really undermine the solvency of the program in the long run but still it's talked about seriously and the reason why it's talked about seriously is that most non-economists if you will will say we'll draw a straight line as Lieberman Warner draws a straight line emission path reduction and that varies greatly from the cost effective path. The cost effective path would be a slow stop reverse path in order to achieve even the same cumulative emission reductions over a 30 or 50 year horizon. So you look at the straight line emission reduction paths and say well this is so cost ineffective that we have to have wind flexibility and borrowing or banking gets folded into that depending on how that path gets drawn but I'd like to say you know anything that can be achieved with borrowing can be achieved with banking if you front load the allocations and create a program that is going to be solvent for the long term. In any case borrowing seems very problematic to me and I wouldn't think it would be a good idea. The other issues have to do with a safety valve and a symmetric safety valve and the safety valve is simply like a way to put additional allowances into the market if price exceeds some anticipated level beyond what was politically acceptable initially. I'm going to skip over a couple slides about this. Let me just show you why we might be concerned about price volatility. This is the EU emissions trading system just through the end of 2000 or just through 2007 when the price collapsed in the blue represents the price collapse in phase one of the EU ETS. Phase two is still is the red line which is that phase two in the EU goes from 2008 through 2012. What we've seen which doesn't show on here what we've seen in the last six months is a price collapse there from about 32 euros per ton CO2 down to eight. So I was once giving a talk at University of York and then I was in the audience listening to other talks at this conference and this plant manager came up and facilities manager came up and he said he was really mad in a colorful British way he was throwing a lot of language out there about how when the allowance prices had been high in mid-2005 he had gone to the university president and convinced them to do a major swap out on all their boilers on campus at great expense. And then this was in 2007 when this conference was happening and that price had gone down to zero. With colorful language he was saying you made me look stupid and I'll tell you in the design of environmental policy it's not productive to make people look stupid. The biggest problem in emissions markets has been not the spike or unexpected price spikes with the exception of reclaim which Meredith Valley is studying but I think the more common problem has been an unexpected price collapse and the criticisms of let me just go through this next thing I don't waste time on it and talk about it. So what might we expect in uncharted cost territory? Well potentials price spikes have motivated the discussion and this picture is showing how a policy might end to drive emissions down below business as usual but the most important experience we have so far has been the SO2 trading program which was aimed at a 50% reduction quite a dramatic reduction and pretty quickly in overall level of emissions. And it produced a good example of an unexpected price fall because the program worked just the way even better than most economists hoped it would. The band there that I show represents the EPAs at the time widely accused overly optimistic price trajectory that would be achieved under an efficient emissions trading program and for a variety of reasons including the introduction of low sulfur fuels and dynamic markets in the railroads and deregulation, et cetera we actually saw it was a price path that was this blue line down below this tremendous collapse in prices and that should be a good thing except that Congress went to the store to buy some emission reductions and it didn't get what it paid for really it got all the emission reductions it wanted but it turned out the price was much cheaper and it didn't really balance if you think that at the margin they were balancing marginal benefits and the cost turned out to be at the margin one quarter of what they thought they were going to be that suggests that they might have bought more than they have but our feet got stuck in cement in the 1990 Clean Air Act amendments it hasn't been revisited and it won't change until the introduction of the Care Rule and the Clean Air Interstate Rule in 2010 so that means for two decades we were in a period where we rapidly learned by 1992 or so that marginal benefits were in order of magnitude greater than marginal costs than the S or 2 reductions and yet there's still been no change in that regulation that suggests to me that if there's going to be a safety valve you need a symmetric safety valve that one that operates much like a price caller and the two main criticisms from the environmental community on a safety valve it's really been a term that's kind of the well has been poisoned on this environmental advocates are really livid about the introduction of safety valve and it's one of the issues that industry is most adamant about it's one of the main dividing points in the national debate and the environmental advocates feel that the introduction of the safety valve leads to additional emissions because if the safety valve is ever triggered that it will lead to additional allowances being put out there and also as my example about University of York illustrates it undermines incentives for investment because you're censoring that tail of the distribution that's going to be where you might expect the greatest return to innovation and low emitting investment so the introduction of a price caller would be a symmetric instrument that would put a band on the price path for emission allowances and this is sort of recently emerged as maybe a consensus kind of compromise that might allow for price for cost management within a cap and trade program okay let's get this and talk briefly about competitiveness now this is a real showstopper this is the most incendiary issue right now in Washington DC and there are two kinds of effects to be aware of one of them has to do with just domestic economic dislocation and that's what we expect to happen we expect to see carbon intensive industries see a fall off in their economic activity and we might be concerned about the transition such as that happens with minimum disruption to the economy and minimum harm to locally affected communities and workers that's a very legitimate role for public policy but it's the kind of effect that we want to see after all that's what the program is all about the second kind of competitiveness issue is international leakage and this is unintentional and it's a huge concern it's a huge concern but it's not necessarily a problem the issue is that if you look in there's two or three major modeling efforts that have looked at this and you can indeed identify specific sectors or if you look with a finer resolution specific facilities in these sectors which are going to be very severely affected by 40% up to 40% or more leakage that means that there's going to be a contraction of economic activity on shore and a substitute for that offshore of that same activity making goods and services that are going to come back into the U.S. economy so this unfair exposure to import and export competition is something that can really derail climate policy unless a solution emerges for this but I would emphasize that it's a huge problem it's a huge concern it's not necessarily a huge problem because even though some facilities may see 40% leakage overall it's really a relatively small portion and modeling suggests that if you were to compensate or essentially if you could find a way to exclude those facilities that are going to be harmed in a way that serves no environmental purpose that would only take about 3% to 4% of the allowance pie overall so it doesn't seem like that insurmountable of a problem when if people are willing if the legislators are willing to search for a solution then the other fixes have been suggested most widely discussed are border tax adjustments and that would suggest that there would be essentially a tariff the simplest way to think about this would be on imported goods for example bicycles coming in from offshore well they would slap a tariff on that associated with embodied CO2 emissions in the manufacturing of that bicycle equivalent to what it takes to make a bicycle onshore there's a variety of problems with I mean I'm no lawyer but squinting your eyes and looking at the legal literature it seems to me that it's the best 50-50 that it could survive WTO and just a way to illustrate this is that if there's any free allowances given away onshore in the US which is not necessarily a good idea in my mind but if there are any free allowances given away then you clearly have an unfair trade advantage for onshore activities and you couldn't charge for at the border for tariff or things that were being brought in so this is the kind of problem that could lead to unraveling of a border tax adjustment. The other approach that's newly emerging and I think very promising is rebates to domestic industries and so here there would be something analogous to the State Department's finding of progress around human rights but in this case it would be that there would be an agency charged with making a determination of unfair exposure to international competition and then industries or specific facilities would qualify as long as they maintained economic activity as long as they had it in production in that industry and then they would receive an allocation maybe benchmark to 90% of best practice so they still had an incentive to try to reduce their own emissions but they would basically be getting a free allocation so the cost burden associated with the program would be would not be laid on those industries and would recover some level playing field for domestic and international industries. So there's solutions to this I think that are going to emerge. That I want to talk about is federalism but in the interest of time I'm only going to talk about it briefly but fortunately you have Barry Rabe here who can tell us quite a bit about federalism he's probably one of I think the national leading scholar on this topic. I want to just this is the point that I think among many issues associated with federalism that emerge to economic analysis of the problem. The main advantage of the federal cap is the introduction of a single price is how we achieve the efficiencies under a national market. But the consequence is that there is effective preemption because an emissions cap is an emissions floor. People don't usually think about it that way but an emissions cap specifies the minimum national emissions that are allowed to occur and any actions to achieve emission reductions beyond that level in California just make it easier for Arizona to increase its emissions under a national cap because it just helps to lower the allowance prices and makes more allowances available for them. This quote here from Joe Nation and Roger Nolan at Stanford about the California problem illustrates the point that a more strident California cap which California is moving towards implementing a cap and trade program perhaps but under a national cap it would lead to zero environmental benefit. And so this is the dilemma there might be some reasons you want this but my concern is that removing I think climate change is a social movement and if you look at social movements from a historic perspective they have a life cycle and it's sort of based on what we're learning about the science and how the public is still learning about climate change and how much they're willing and what they want to do about it and how we're going to adapt to it because it's inevitable it's early in the life cycle to remove the opportunity for local activities in my mind and it's a two-edged sword to do so so to take you way back if you think about something like the Sherman Antitrust Act at that time there were 17 states that had antitrust laws in place when the Sherman Antitrust Act passed and it swept off the books the ability of states to enforce antitrust proceedings and then what happened is that at the national level ostensibly in the interest of addressing antitrust for 20 years the country went into an unprecedented period of building of trusts and it wasn't for 20 years until Teddy Roosevelt came on and finally enforced it but during that time it was very good for national growth it was very good for Sears Robux it was very bad for local hardware stores probably for all of us in this room on net it was probably good to see that period of economic growth it certainly was a two-edged sword in terms of thinking that national legislation preempting state legislation is something that the states should want to see so this is I'm concerned about it and the biggest problem is that the price signal by itself may not be sufficient to achieve local innovation and what I'm concerned about that is you got to ask yourself what is it that state and local governments do I see that there's a unit here in the Ford School on the activities of state and local governments well they did make land use decisions facility and transmission siding transportation networks they align streets to make sure that they've got maximum solar exposure and depending on your latitude and the kind of vegetation you have and whether the eaves have proper overhang to allow maximum solar gain in the winter and shade in the summer covenants about clotheslines whether clotheslines are going to be banned or not externally landscaping to buffer against exposure to northern winds etc. they are essentially state and local governments give the infrastructure that our children and our grandchildren are going to inherit for the rest of the century and that infrastructure is fundamental to the kind of greenhouse gas emissions that are associated with activity in our economy and so I think that the level of innovation that we need at the local level is something we haven't really seen yet and it needs to emerge there's some remedies to this and I'm just going to draw your attention to the last point I think some focus on the ability to allow states to meet or exceed I think it's most important to provide an incentive to meet or exceed and an example along that line would be to apportion some allowance value to the states based on their meeting and annual rate of progress commensurate with the national annual rate of progress this is a familiar concept in the Clean Air Act in which if a region is a non-attainment of federal ambient air quality standards it needs to make 3% or annual rate of progress in closing the gap towards that goal otherwise there's sanctions that are laid upon local governments metropolitan areas with holding of highway funds etc so you can imagine a similar model that would recover for state and local governments an incentive for them to innovate and thinking about how land use is going to be different in the future okay but now in the 10 minutes I have left I want to talk about what I think is the most important issue which is the design element of allocation keep in mind that rectangle and that triangle that I showed you at the beginning and the issue is how are we going to assign that rectangle in this new federally enforced market of a new intangible property right and there's several possible claims for that revenue some are some people argue for program reinforcing goals investing in research and development there's a crushing need for R&D in order to introduce new technologies many argue for compensation reducing pre-existing taxes is one point of that and the public finance literature suggests there's a huge bounce back in terms of reducing the overall cost of the economy if you use that revenue to reduce pre-existing labor or capital income it could reduce the overall cost of the economy by 70% or more some people suggest there would actually be a win-win if Dale Jorgensen believes that if money was used to reduce pre-existing capital gains taxes but in any case their public finance economists generally argue there would be huge efficiency gains using it to that purpose then many have argued for free allocation to themselves to firms or to consumers and the other idea that is in getting a lot of attention it's a real dark horse in Washington legislative debates right now would be per capita dividends drawing if you will off the notion that this is after all a common pool resource that's how we would define the atmosphere and so individuals are stakeholders in it and it's not like establishing a new entitlement but rather recognizing a franchise that individuals have in the atmosphere so who here saw the Simpsons movie anybody? Okay and do you remember why Homer goes to Alaska? Remember that Homer goes to Alaska? The EPA EPA is chasing him out of wherever it is they live but then if you have young kids probably most of you would have seen the Simpsons movie Homer goes to a lot he doesn't know where to go he's trying to get away from the EPA that's another story but he's trying to find where to go and it occurs to him Alaska because of the permanent fund in Alaska since the early 70's oil and gas revenues go into a fund that is distributed on an annual basis to every adult which varies year to year because of the oil and gas revenues but about $1,000 or $1,300 per capita goes back to people and citizens of Alaska so that's why Homer Simpson goes to Alaska and that's the idea that's being brought into the national debate that rectangle could be divided up and given back on a per capita basis to households. Well I just want to give you a picture of really what we're talking about and what I try to introduce a little hyperbole here that can motivate us the creation of this market is no one's contested me on this yet and I've said this point to a lot of lawyers and elsewhere it's the largest distribution of federally enforced property rights since the 19th century in the great American West so this is really a new institution of enormous importance that really is going to shape to some degree distribution of wealth into the future because that rectangle is going to get given out every year and at the high end it could be when the program is at maximum cost it's going to be $450 billion a year that could be distributed way more than anything we saw in the SO2 or NOx that exist today. Okay well there's a political economy with this how we're going to determine where these allowance, how this allowance value is distributed and one of the issues is the distribution of coal-fired power plants in the electricity sector and I also, so that my discussions are kind to me I've got to put a little praise back on them but you've got here in Meredith one of the best young scholars in the country on what's going on in the electricity industry and anything she tells you I would believe and electricity is a special case because although electricity is responsible for only about 40% of our CO2 emissions now it's expected to be responsible for two-thirds to three-quarters of the emission reductions that we get over the first two to three decades of a climate trading program so it's where most of the action is going to be and most of that action is going to be at coal-fired power plants and this map is distributing the distribution of coal-fired power plants across the country and I remember fondly in my class with Edie Goldberg right that's Goldberg thank you I remember her citing to us from Schultz's book on the public use of private interest the axiom that government should do no harm or you might say the government should do no concentrated harm anyway to borrow from Ansel Olsen kind of thinking that this really focuses the mind in the electricity power sector where there's going to be potentially a large loss in asset value at some of these existing facilities so they say they're at the front of the line for their share of that allowance value but these are regulated markets and firms in general can be compensated in two ways one it would be through maybe through free allocation of allowances and the second is going to be through the change in product prices so they're going to be passing on some of those costs downstream even though they may have a compliance obligation themselves and how those costs are recovered through the change in electricity prices in turn depends on whether they are in regulated or competitive regions of the country in the electricity sector and roughly speaking the country is divided sort of half and half and there's a continuum there it's not strictly black and white there's different degrees of market based pricing in different regions of the country but it's useful to think of it as roughly 50-50 so under cost of service regulation the regulator is supposed to be awake and protecting the interests of shareholders to recover prudently incurred investment costs so that means the electricity prices are going to be adjusted to reflect allowance costs at least in the long run in the short run the industry I find that when I talk to people in regulated regions of the country they're apoplectic about this but really they're only worried about the first three years or so because they just they're not sure that regulators will really do it but once regulators figure it out they're pretty convinced that they'll survive and then there's the competitive regions of the country where there is no regulator to protect firms and where the market will determine electricity prices and costs will to some varying extent get passed through on electricity prices so it's really competitive regions of the country that might draw our mind which is just really half of the industry on that map before let me go through these next two slides very quickly and skip these and show you this analysis which draws off some research we did so what I've right here in this colorful little picture is some power plants and some of those are coal-fired power plants and there's wind turbines over on the right and there's natural gas and nuclear and along the horizontal axis there is a change in the market value of individual assets including all those coal-fired power plants I showed you on that first map and then we ask the question what happens to the market value of these assets with the introduction of climate policy well we find that losing facilities would lose about 35% in value this is using highly parameterized national market simulation model that has dispatch over three seasons of the year and four times a day and then also plans 25 years into the future for investment and retirement of generation capacity and then does a discounted cash flow analysis to solve back to say well what is going to happen to the market value and this is sort of like the day that this legislation passes the losing facilities are going to lose about a lose of value that's equal to about I mean to say 35% of that rectangle and winning facilities though because there's some facilities are actually going to gain value because electricity prices are going to go up so if you happen to be the owner of a nuclear power plant the value of that asset is going to go up enormously and it's going to gain those facilities gain about 29% of that rectangle that we were looking at before I've been in a room where somebody started talking about a coal fire power plant in western New York and how it was going to get so devastated and how they had to have free allowances this was in the northeast regional greenhouse gas initiative and the fact is that power plants don't have standing the communities around a power plant might have standing but a power plant isn't an entity a power plant is owned by shareholders and shareholders own a portfolio of facilities some of those facilities gain value and some of those facilities lose value and so if we look at the industry level the industry only sees a 6% loss in market value but if you and then if you organize this at the firm level you see that there are firms that gain value on net and firms that lose value on net and so the losing firms are in the competitive regions of the country lose about 11% when measured as a portion of that rectangle that I showed you so suggesting really that only a small portion this is just and I'm sorry I took you down the wrong path for a second there this is just 40% of that rectangle so I'm just looking at the allocation that might be reserved for the electricity sector and then asking how much of that would you actually have to give away to shareholders the owner of firms in order to preserve the market value of incumbent assets and it begs the question about whether or not actually we're the public policy goal in the first place I mean because investors are presumed in competitive markets these are competitive regions of the country that they are taking on some risk but and making their own decisions about investments but in any case it's a very small portion of what the actual allowance value is okay so then I want to now kind of move into a little bit more regional distribution question and this picture is showing well what happens regionally to electricity consumers because well there is some harm to producers we find that there's eight times greater harm to consumers because the vast majority of the changing costs get passed through to electricity consumers to households and this is showing the dark blue was showing electricity price in the baseline and then this increment is what happens with the introduction of climate policy and similarly this line is a national average electricity price before climate policy and then it rises by this much and then the browns represent the CO2 emission rate in different regions of the country and how it's going to fall so there's a lot of information on this slide but the main observation that I want to make is that in those regions of the country where the greatest change in electricity prices are going to occur like in the Midwest and Appalachia they start out with electricity prices that are on average below the national average and they end up with electricity prices that are below the national average if it were to go the other way it would be harder to think about how political compromise might be achieved but this is good news but two weeks ago I made this point to Senator Thune from North Dakota or South Dakota anyway and he said unless that happens to be your state so people are going to argue to keep electricity prices down wherever they happen to live but from a national interest perspective the regional impact in the electricity sector isn't that great isn't that discomforting I should say but the major issue that has emerged and represented Dingle from here in Michigan has been the proponent of this along with Boucher from Virginia and this isn't you know, Dingle is a very very powerful person in Washington and when he decides to try to make a deal he can make a deal and it's my, I've never met with him but Phil Sharp, the president of RFF knows him very well and spent many hours talking to him about climate policy and he's really convinced that Dingle has bought into the fact that this is a serious problem and he's taking it on as a serious concern which should be good news because he is one of the few people in Congress that can actually solve something as complicated as climate policy and the other thing that's out there is an idea that you take all that allowance value that rectangle that's just a part that pertains to the electricity sector and instead of giving it back to generators you give it back to consumers by giving it to local distribution companies local distribution companies are regulated virtually 100% of the country and the Congress could charge them to act as trustees on behalf of customers and so when you see an increase in the wholesale power price then there's all this allowance value that's turned over to the retail distribution company to offset the increase in wholesale power price and leaving electricity consumers pretty much even dramatically even it would eliminate more than 90% of the change in the retail electricity price so this just sounds like a great idea to these guys Dingle and Boucher and to the NRDC National Resources Defense Council and others who are trying to broker some common ground in the electricity sector so we took a look at what this is this shows under an auction what the change in electricity price is going to be so that's zero as if there was no change in electricity price and the dark blue is regulated regions of the country and the yellow is competitive regions of the country I'll aim to wrap it and under an auction there's sort of a symmetric increase that hinges primarily on where coal fire generation rests this has the efficiency advantages and it's the lowest social cost so they're looking at this free allocation to generators which is the idea of giving it away to emitters this introduces sort of an asymmetric problem in that in regulated regions of the country regulators are going to take that allowance value and turn it over and give it to consumers but in competitive regions of the country that the generators are going to get this allowance value but you'd expect them to still turn around and charge customers for it it's like if you were going to buy a house you would never stop to occur to you because you bought it themselves in the market previously and so that's the way theory would lead you to think marginal cost would be determined in the power sector so there's introduces this asymmetry in prices in the electricity sector with compensation to regulated regions but not to competitive regions so this free allocation to electricity consumers recovers a kind of symmetry around but roughly around zero so really softens the blow in the electricity sector but the big disadvantage is that it reconstitutes a subsidy to electricity consumption so this drives up allowance prices 12 to 15% compared to what they would be otherwise because it sensors any kind of behavior by households or firms in terms of there would be price driven and if you happen to drive a car or use natural gas to run an industrial facility or heat your home then you should be concerned about this okay so I'm just going to take two more minutes and focus on a distributional question on households and then close so I'm going to pound through a couple of these slides here the effect on households we've looked at this let me first show you what the average per capita carbon footprint is by region and ask you to judge for yourself whether you think this is a solvable problem from a public policy perspective I've organized around here 11 regions of the country and this shows what their carbon footprint is from electricity generation in that region gasoline use fuels for home heating and then indirect consumption that's solved using input output matrix to try to associate back to household consumption patterns what is the embodied carbon in that behavior so it doesn't look all that bad the actual emissions per capita in the US if you want a factory to take home with you is around 20, 20.2 metric tons requested for removing government, primarily from removing government level of activities I want to show you this picture which is the last kind of graph I'm going to deluge you with this is showing income distribution by decile so there's 10 income groups going across the country on the national average across the country and the dark blue represents how much you pay a tax or introduce an emissions cap and firms are buying allowances and those allowance costs are passed on to households it's like accounting for the program as though I would call it cap and disappear it's as though the area under that rectangle we were talking about hasn't yet been accounted for and then after if we use this cap and dividend approach the Homer Simpson approach and return all that money to households then this is the net effect going across income decile and you see it's up into the sixth income decile before there are any positive costs incurred on households in the country and this is promising from the standpoint that there should be some kind of solution that should be achieved if you recognize the value of allowances and how they could be distributed this chart with the same picture is showing where the break-even point is in these different 11 regions in other words what percentile is where the break-even household is and while the national average is past 50th percent at 50.4% actually the Ohio Valley region and the mid-Atlantic are those that suffer the most and there it's down around 30% so 30% of the households would be strictly better off under this kind of climate policy which would be very progressive climate policy and national average would be about 50% of households could strictly benefit under climate policy suggesting that it could be a politically popular policy but it has inefficiencies associated with this because for reasons I hinted at before about what public finance has to teach us and this is the approach that public finance would recommend much more efficient would reduce overall social costs and severely regressive so here paying attention just to the light blue we see that there's a really regressive policy where the change in consumer surplus as a portion of their income hits the lowest income households the hardest and only the top two income desais benefit okay so in closing I've talked about this set of design elements for emissions trading point of compliance monitoring enforcement the cost management issues and competitiveness federalism working out the issues between the federal government and the states and then the big one of allocation and if and I think the information we have to work with recognize that these property rights to CO2 convey tremendous value there's lots of options that have significant efficiency and distributional implications and it's not just the issue of achieving a political compromise in 2009 or 2010 that matters because if it turns out that we learn more about the climate and then we have to go back to the American public and ask them to do more in the future then the way we've shaped climate policy now will matter tremendously for our ability to do so whether there's confidence in the kind of new market that's created or whether it's viewed as a wall street debacle will be a deciding factor in terms of whether we'll be able to potentially go further with climate policy or whether the program will even survive as costs potentially get more expensive so those are my observations thank you while our panelists are moving to the hot seats so as I mentioned before we'll ask Meredith and Barry probably in that order to comment their point of view this is such a as Barry mentioned to me earlier this is so dynamic and an area of study that almost everything Dallas said today is already out of date because so but probably about as close as we can get so thank you very much Dallas Meredith you want to start start by thanking Dallas for being here I if Dallas especially these days if he's not being quoted by the Washington Post he's testifying for the representatives or he's advising some federal or state government advisory board so we really thank him for taking time out of his busy schedule to talk to us about what's a pretty dynamic policy issue so you covered a lot of material in a short period of time it was impressive I wanted to go back to a couple of points you touched upon and maybe post some questions and perhaps you could revisit them time permitting so the first is the allocation issue which as you mentioned it really is a huge it's a very contentious the major issue is really where the winners and losers are going to be decided and as you laid out very nicely a lot of economists really favor auctioning over grandfathering main reasons being that you can use those revenues to offset distortionary taxes elsewhere in the economy or you can use them to help compensate consumers who may be really impacted by energy price increases Obama is currently supporting 100% auctioning he's already spending the auction revenues in 2012 and going forward but some policy fund that's our but betting against him and I think I might be with them I'd be really interested in what you had to say I think when you think about when economists explain why they like cap and trade programs they tell a beautiful story about efficient market efficiently coordinating abatement decisions so as to minimize the cost of achieving that cap on emissions others would argue that really important reason as to why emissions trading programs have become the favorite approach to regulating point source emissions from industrial sources is because you can so easily as you mentioned compensate industry stakeholders for the cost they may or may not incur and I think if you if the climate action partnership seems like they might be a force to be reckoned with you would know much better than I but they have said we will not tolerate 100% auctioning they're talking I think they realize and Dallas has done some tremendous work and some of his colleagues in terms of demonstrating that 100% auction or 100% grandfathering would amount to windfall profits just dramatic over compensation I think industry realizes that that's not going to fly but they are arguing for a transition period or some percentage auctioning going forward I'd be really interested in what you thought there's sort of two extremes the 100% auctioning the 100% grandfathering I bet we'd fall somewhere in between those two what would be really interested in your thoughts one other point I wanted to raise or issue I wanted to ask you about is you focused really on cap and trade and that's a emphasis well placed that is sort of the centerpiece of climate policy but right now there's a symphony or someone would say cacophony of climate change policies being discussed and implemented renewable portfolio standards and the cafe re-overhauling the cafe and fuel efficiency standards etc etc a lot of these are being sold as a response to climate change and a way to internalize the environmental externality let's say we get a cap and trade program that we agree is sufficiently stringent such that we've internalized that externality is there still a role for some of these other policies and I think many would argue that there are other market failures to worry about behavioral cognitive failures or principal aging problems or the problems with capturing the returns to R and D but I'd be interested if you see a role for some of these other policies if we get to a point where we pass a federal climate change policy I'll turn it over to Barry Is this on? I would just join Carl and Meredith in welcoming Dallas Back to Campus and really very much appreciate his thoughtful contributions to this issue as reflected in his comments I wanted to just touch upon a few of the political challenges that I think are ahead in moving forward any version of a cap and trade bill certainly in the current Congress and certainly in this year one is the challenge of moving forward a policy approach or tool that has enormous appeal from an intellectual standpoint about which there's now a fairly substantial literature that talks about the merits of cap and trade but when one looks at surveys of American opinion the jury is really out and the citizenry may indeed be confused as to what is involved there have been a series of surveys and I've been involved in a few of these in the last year that suggest when you ask a cross sample of Americans about climate change the findings are fairly consistent effect Yale released another one just yesterday Americans generally think climate change is a serious problem they do not rank it as a top priority so that raises questions of willingness to pay and change behaviors I think Dallas put into the regulatory area are those that win pretty overwhelming support in all regions of the country renewable portfolio standards which are now in place in 28 states vehicle efficiency mandate supported actually overwhelmingly even in Michigan by the citizenry all the sorts of things that the policy analysis community says is not the way to go about doing policy is what the citizenry seems to want and like at least as reflected we move down to this sort of bottom menu of policies where the response is either negative or mixed the very bottom are carbon taxes and you talked a little bit about this anytime you invoke the term taxation or taxation of fossil fuels you see pretty substantial opposition but when you turn to cap and trade and we found this in survey work that we did late last year and some of this was supported actually through earlier support grants from close up here at the Ford School it's really a spread of opinion support of there's one opposed and for every two who have some view there are others who seem to be confused and don't really know what it is and so one of the questions then becomes does it really matter do American citizens as they're about to embark on this perhaps massive engagement on climate policy need to understand the policy or to support it or to know how it works even before they get to that first electricity bill or that first sign that there is something like cap and trade program operating affecting their lives and I say this not just from the general questions of deliberation and how one conducts oneself in a democracy but I think this also poses challenges for the formation of legislation possibly the danger and challenges that Congress will face to basically go to the Lieberman Warner route given that mixed response and confusion to basically try to buy off opposition groups through subsidies, incentives and all the rest the very real possibility that the day after legislation is enacted you immediately begin to raise questions about holding the coalition together and being able to implement there's just a huge body of literature in the political science field that talks about major policy reforms that are enacted without much public awareness and public engagement and how they kind of fall apart relatively shortly thereafter so I think there's this enormous challenge not just how you bring the public along but how you begin to engage there should be fairly significant shifts and changes with that a word about Congress and here it's interesting to note that on the one hand climate change is not a new issue for Congress between 1975 and the end of the last Congress the 110th Congress there have been over 420 hearings on climate change it's not necessarily a body of work that reflects careful deliberation but there's been a lot of conversation about climate change some of it dealing with cap and trade and I would argue that some of the more sensitive areas that you touch upon certainly the federalism pieces as well as issues of revenue distribution really had not been touched upon at all in Congressional hearings instead I think what we began to see in the 110th Congress and I think some of this was triggered by the very way in which the Lieberman-Warner process was put together was what I would call where's mine whereby each state looks at the details and put stone numbers together and figures out how to maximize rent or minimize downside of any kind of a system I especially thought of this earlier this week when I saw the exchange on the editorial page of the Wall Street Journal the Bertrand colleagues versus the editorial team on the Wall Street Journal to think about how the distributional effects are already beginning to be framed on a state by state basis estimates of the cost and I very much like the way in which you respond to that interpretation but I think the sluice gates are about to open on this issue and sadly we've not had that conversation how do you begin to take a policy arena that for 10 years now has been dominated by this sort of patchwork quilt of state activities and some of these are the ones that Meredith has talked about and then talk about those distributional consequences when Congress has never really shown much appetite certainly in the U.S. Senate given distribution of power there for dealing with some of these challenges and some of these kinds of issues final point in observation is you invoke the name of Senator Warner as Carl mentioned I've been hanging out in Virginia a lot this year I had the chance to interview John Warner in the very last weeks of his 30-year career in the United States Senate he feels passionately about this issue I think you can think of him as sort of an octogenarian equivalent to John Dingelow though he's no longer in office and wants to stay active on the issue and I had the chance to ask him among other things amongst the range of issues with which he's dealt with in 30 years in the Senate foreign policy, homeland security, he's been involved in all of these things how he would sort of rate this in terms of complexity and he described it as off the charts in terms of technical complexity political complexity congressional coalitions and you almost sort of sensed a sigh of relief that he was not going to have to deal with how on earth to put bills through and move this forward the other component that I talked about is what I would call the governance challenge the day after a bill is passed put the cleanest bill through the congressional process that you can and get it to the president's desk with whatever compromises that you have to reach on allocation and all of these provisions and I think there are going to be loads of compromises the day after that that goes to the environmental protection agency and the reality is most of the climate legislation we're seeing is very very long in terms of the important technical provisions it says virtually nothing in terms of governance usually there is a paragraph or a page at most that begins with a sentence that says the environmental protection agency shall and then some phrase like in collaboration with the Department of Agriculture the Department of Energy the Department of Homeland Security the Department of Defense basically any unit of the federal government that has some skin in the game and some gains and losses to register an incredibly complex collaborative enterprise that in some respects makes the reorganization of the Homeland Security arena into a department look easy I think this is an incredibly exciting challenge and opportunity but yet when we look at those instances where in Europe in the northeastern United States where we've gone in the direction of carbon cap and trade what has been underestimated in all of those contexts is just how complex the governance details are I say that not to throw cold water on cap and trade but to suggest that this is a really an interesting moment for Congress not just to think about how the deals are going to be cut but what are the organizational kinds of issues that are involved I think it's terrific that we're talking about a 35% budgetary increase for the environmental protection agency an agency is smaller now than it was created on a part-time reorganization by Richard Nixon back in 1970 it has been decimated it has been demoralized many of the best people have left and you're not going to remove any statutory authority from it and yet probably the most complicated bill imaginable on its shoulders along with the Department of Energy which has its own issues and all of these other components we've heard discussion of a czar and the creation of a climate czar Carol Browner interestingly one other president went that route and it was Gerald Ford Gerald Ford fired his first Federal Energy Administrator John Sawhill because he was candid about the need to increase energy prices to deal with energy issues he dumped him and created a position of energy czar which had some overarching activities and ever since that time I would argue every president and every administration has struggled with the issue of how you begin to fit some of these pieces together and so when you impose the climate component and all of these provisions on that somewhat broken apparatus again even before we get to the Federalism issues it's a huge challenge it's a dawning challenge and a terrific opportunity sometimes I tend to think we should call this the MPP Employment Act because it's really going to require the greatest brightest minds of this generation to make this work and I think it can but again very very little attention has been paid to this side of the equation which I think just only ups the challenge facing this arena so those are just three quick thoughts and reactions to a very very thoughtful talk and thank you again Bill I think we really wanted to have some questions but I'll just respond to the question now it's on okay so Meredith is right about the transition period so here's how I read the game currently what the Obama budget did was it put about $640 billion between now and 2020 in the pay for work program and rebates for payroll tax $400 per person or $800 for a family that get phased out at around $70 or $90,000 per year of income and that is a very progressive, has a very progressive effect that accounts for about $640 billion and then he also says that there's going to be 15% of allowance value will go to research and development well if we think that there might be up to $1 trillion between 2012 and 2020 that suggests something close to another $150 billion that leaves some a lot of unaccounted for money of a couple hundred billion dollars and I think right now this is just my read of the tea leaves I think the rhetoric is he supports 100% auction and he's going to keep saying that he supports 100% auction but the markers that he's put down is that $640 billion should go to consumer relief and this other chunk should go to research and development and the other maybe $200 billion that are sitting there are funds that are available to buy votes if you will now I just want to say one other thing I just want to say this about that one other thing about free allocation to firms I mean I said that facilities don't have standing shareholders have standing now I'm a shareholder and just to get a little edgy here I want to point out that I don't hold a very narrow portfolio I own a diverse portfolio of the American economy and anybody here if you're old enough to have retirement funds yet it's very rare it's only when I'm talking to industry folks that they contradict me and say no no I happen to own a lot of stock in my own company but otherwise they they don't and so it's really in the broad interest of American shareholders to have as efficient of a policy as possible and when you give allowances away to shareholders the allowance value goes overseas anyway because 10.3% of American equity is foreign held so that right there that's money that's not available to compensate shareholders on shore and my interest is not seeing any particular industry get free allocation I think it's compensation to management not compensation to shareholders but as you know the big players in Washington in terms of lobbying etc is management and under our increasing amount of heat now so maybe the nature of the game will change but I really think that it's there's an interesting issue in the wedge between shareholder interest and management issues on this point but Meredith is very perceptive I think that is probably how it's going to get played out and just to both Meredith and Barry talked about the perhaps inadequacy of a price signal to get the kind of responses all the way through the economy yet inefficient to have all these other kinds of redundant policies you know maybe do we still need renewable portfolio standards do we still need many many other things at the state and federal level if there is a price signal and I think that as Barry points out all the public survey information suggests that the public is only willing to support a price up to a certain level but they might be willing to support climate policy past that and many have observed that Americans like their taxes hidden but that's not good public policy and so that's what I think leads Barry to say well you know the coalition could fall apart when the costs really start to become known that's why I think you know I heard from these cap and dividend folks for five years or longer and just their emails were annoying me but I now have sort of changed my tune a little bit because I see the power of that letter that might come or probably be an electronic benefits transfer of some kind that says this check for $450 for the last six months on a six month basis represents your family's contributions to our national efforts to reduce greenhouse gas emissions and I think that could you know then you people start going to the gas pump and they think I'm making money you know here at least for middle income voters it has a powerful rhetorical message that might be politically reinforcing at least that's what the advocates of the cap and dividend approach say and finally I will just say in terms of the federal is an issue Barry I'm sure it doesn't escape you that if we were doing a tax instead of a cap it would totally reverse this problem of removing the incentive and ability for states to meet or exceed because if there was a federal tax and just a price path then it would open the door for innovations at all levels throughout the government and any additional measure that any of you did reconstitute real emission reductions in addition to that which would be achieved by the tax and the price signal do we have time for questions still yes we have speaking of incentives we do have refreshments waiting for us so when we're done but I think it would be good to hear some questions from the group please keep them short so that we can get a few questions in but I certainly don't want to discourage questions in fact you can't eat unless you ask a question so I have a question I guess this is about domestic policies but I'm wondering what kind of if the U.S. is looking to a particular example say in western Europe or anywhere like our success stories in different sectors for comparison and whether areas like so my loose understanding like you see a lot of big pills in western Europe where they kind of overcome some of the problems they've been working on it for longer but I wondered if you guys had a sense of why it might work in some ways and why it wouldn't like is the U.S. is it such a wildly complex challenge mainly because it's like the way our institutions are set up is it the infrastructure that's on the ground is it the who the winners and losers are here as opposed to say and I don't know but say Germany or some other hypothetical case like is there any one particular thing that makes our case more challenging than others we can't use them as an example or are we using them as examples instead of what do you want well the only there's two there's two now mandatory emission reduction programs in the world although others are about to emerge and that is the EU ETS and the northeast states which started in January of this year with a modest program in the electricity sector for 10 states in the United States and I would say especially phase one of the EU ETS was not the kind of model that I would want to replicate in the U.S. it was very flawed but and and the Reggie folks the regional greenhouse gas initiative in the northeast states really learned from it it's a much better program design in a lot of ways but all these programs are really drawing on the experience of the SO2 trading program which by and large is viewed as having been a tremendous success the difference here is that CO2 is ubiquitous it's not just in one sector of the economy it's throughout the whole economy so it has you know much greater efficiency and distributional consequences and challenges and the SO2 program had it's you know had a couple flaws also one is as a point I tried to make is that our feet were stuck in cement the program was not really able to adjust and secondly all of the emission allowance value was given away for free and I think that that would that worked in an industry that at the time in 1990 was a hundred percent regulated on a national basis so that firms could not charge consumers for something that they themselves received for free but now we've moved away from that in the electricity industry and in other industries it's not true at all so that makes it much more complicated on the national stage do you guys want to add more yeah so I don't know that there's any specific examples out there in terms of overall program design I think many people in Washington I even think in Europe are kind of sitting people in Europe are sitting back and watching now and in Washington they sort of feel that this is the chance for the US to leapfrog and perhaps put together domestic program that's that's has a stronger design for the long run than what the EU has put together so far that doesn't mean that the EU commitment hasn't been there their commitment has really been there but they're dealing with 25 member states and 20 different languages it's a remarkable accomplishment what Europe has done so far I think one of the very mentioned the sort of widespread lack of complete acceptance of climate change and global warming as a key driver I mean sometimes government interventions in the environment work best after rivers burn and people die of smog as in Los Angeles is this something that we have to wait till the climate change is really felt and observed better very maybe you guys have something to say about that but this is a huge philosophical conundrum because we for the most part we that is our living generation will not see the benefits of our actions so we will be incurring some costs or making some sacrifice in order to change the kind of world that we leave for future generations and that's a pretty unprecedented as a collective problem there is a fairly large literature that argues that in the environmental arena usually there has to be some environmental cataclysm not unique to environmental policy but perhaps especially salient and some have argued that one of the reasons we've begun to see governments mobilize more is that that are more localized is the ability in some regions or sections to personalize climate change one of the things that struck us when we did the national survey is that attitudes aren't that different between say people in Mississippi California, Pennsylvania, Michigan but they come to very different understandings of what the drivers are they tend to be more localized effects in Mississippi overwhelming if you ask people why they believe climate change is occurring it's hurricanes having had that experience other places it's coastal flooding issues or temperature shifts now making that direct correlation to climate change is a stretch but that's the perception and part of the fragility of the belief system is that it does vary so much I think part of the problem is that it's a complex problem with the ozone layer you could point to a hole that was clearly directly related to this problem where I know in the scientific community some people feel queasy when you hear media I was just saying that it's because it's such a complex problem having that we have no ozone hole that we can confidently associate with this problem and so because it's hard to convey to a public that the complexity of the problem Is there any American thinking for example that analogous problem public health movement in London and Paris in the 1800s 1800s London finally got a lot of nostalgic sewers in that era the level of public education of course is very different people didn't believe the germ theory of disease it wasn't there, people got sick if you look at the Broad Street pump story that was purely phonological but yet there was this movement and somehow people were able to convince people to leave for sewers the smell had made the driver eventually became a very large scale public welfare there's an analogous set of arguments that bear on the views to some of these other changes Canary in the cage with the public health you will feel sick it's going to hurt you whereas as Dallas pointed out many of the benefits from current investments are going to accrue to future generations you will feel maybe if you catch the germs that we don't know if they exist to hear the same sort of thing as this long term I'm looking for a sort of marketable model that you can look back and have some precedence and say well at least it would happen then it's for one model Okay, yes Tom, why don't you take the next the last The EU ETS system in phase one where essentially there were too many permits allocated and the price crashed eventually and I just wonder what your assessment is of how much of that was due to knowing malfeasance on the part of slippery utilities who overstated costs or governments who were trying to claim an unfair share of permits for themselves and how much of it was just real ignorance That's a great question Tom There were two major design flaws one was too many allowances were given away which would seem to be fatal enough if there was an overallocation to start with and the second was that on December 31st or there about on 2007 the value of any remaining permits immediately went to zero because they weren't bankable so then you knew that on the last day there was either going to be a shortage or an excess and the price was either going to go to zero infinity which suggests that something weird was going to happen if you solve backwards to what's going to happen in the market dynamics over time I think though what happened was an interesting game in which the allocations were decided at the national level on the national level they went to industry and industry had to report in a political process had to buy for an allocation and then that worked its way up to the aggregation at the EU level and so it was that kind of strange incentives there that led to overallocation but I think the EU bureaucrats tried their hardest I don't think that they were corrupt I think that they were dealing with I'm told that ten of the member states that were finally in by the end of 2007 had no electronic accounting for environmental measures before this program started that everything was on paper and it was in different languages so really phase one was an accomplishment from the standpoint that it got everybody into a system of compliance and monitoring phase two is much more exciting but the problem that's happening there is a little bit like the problem that's happening here in that allowance prices have collapsed because Deutsche Bank reports it's because these firms are struggling for liquidity and they were given a large free allocation and they've turned around sold them for anything that they're worth so you can now pick up a bargain basement deal on EU allowances and they are bankable through 2020 at least some people have suggested it's a great bargain out there if you're a bargain shopper they've fallen by 75% in price I have heard and you may correct me that it was seen as a learning phase from the beginning to work the case out and figure out how this was going to work last question any points about governance and about the lessons made or lessons learned potentially from the SO2 people in that experiment but that whole process and you talked about sort of what we being stuck in the cement in 1992 we learned a lot of lessons really quickly but not being able to change that for like two decades and that sort of correlates to that back and forth to what Dr. Ray we were saying about the governance issues and I guess it's sort of a looming question but like do we have the structures or what do we need to do legislatively or organizationally in terms of governance to sort of be where we need to be to solve this incredibly complex problem like are there one or two things that come to mind or is I realize it's sort of a big question but I think you guys sort of didn't think of it like what sort of things maybe one or two do you see that could be tweaked or completely thrown out well the only just to try to get some juices flowing maybe Meredith and Barry can add some substance but I would say the one thing that's encouraging is that I believe that if there's a cap or a tax in place that we will have very credible enforcement I mean we can account for 85% of the CO2 emissions in the country just 2,000 sources that are readily measured and if there is a good accounting system you have agents monitoring agents kind of a problem making investments to make sure that there's strict enforcement of what emissions are at other facilities so that their own investments are worth something so we made some progress from our experience based on the governance as far as that goes I think the bigger governance problem has to do with what goes on in national and state capitals and how we make political decisions and I would agree with that I do think there are some lessons from real world experience the less realities of the last decade is we did not come up with this seamless international system but you have a lot of real world experimentation rather than just sort of guesswork and you can look at what was done well and what was not well whether you're comparing individual states or for that member member states of the European Union that went in very very different directions I would argue and this picks up I think on your earlier point I think the Reggie folks really did learn specific lessons from the EU experience to contain things like having the energy ministries and the environment ministries really talking with one another over a four-year period a long, long painstaking process to begin to put some of those pieces in place and you can begin to look at some of those trade-offs I would one last point and maybe this over goes back to the very first question about lessons from the European Union I think the ETS is obviously a significant player but I think in much too much popular discourse there's this presumption that the EU you have individual member states with very different track records and very different trajectories and I'd be curious how my colleagues might respond I would argue that for the relatively small subset of EU member states that have been successful they haven't collapsed their economies they've achieved some degree of emissions reduction and seem to be on a path to do so they are players in ETS but they've also taken unilateral steps and often that doesn't involve regulation through some aggressive tax mechanism you mentioned tax and dividend one of the things you see in a lot of European settings is what we might call tax and cap where the tax went into place first and it's a form of carbon tax and then it gets maneuvered in various ways and send that very, very early pricing signal and of course that's something on the carbon tax side of the idea ledger that could be put in place immediately if there was political will to do that as opposed to having to go through years and years making and procedures and processes and all the rest but that's a tough political will issue so maybe do the simple thing first and then do the right thing not quite I think a case could personally I think a case could be made for I'm struck by the fact that the carbon tax legislation that's been introduced in the House while probably a political non-starter this is the stark Larson bill is all of 17 pages and it's very simple it says a carbon tax will be levied on the fossil fuel content of carbon on various fuels how that revenue will be collected using extensions of the existing federal tax code how the money will be allocated and the provision for gradually increasing the taxation level if emission reduction targets are not left that can go into place immediately and I certainly resonate with what Dallas said on the federalism side this is the one thing that could be done it's an overstatement there are very few federalism issues the federal government sets the price the tax has the mechanisms in place creates enormous incentive systems throughout society to find ways to reduce the burden of the tax or transfer it somewhere else and again I would argue if you go back to ancient history the early 1990s it's the members of the EU that were moving in that direction that have achieved some of the larger gains independently of the trading mechanisms it's a good point to thank our panelists especially thank Dallas so we'll have a chance for more one-on-one discussion right outside in the atrium outside refreshments compliments of Dean Collins