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Legislation and regulation are but the first steps in protecting natural resources and the environment, and neither ensures compliance, enforcement, nor effective results. This panel convenes scholars who have been awarded RFF's Fellowships in Environmental Regulatory Implementation. Speakers will highlight lessons learned from several case studies, including use of performance and management standards, command and control approaches, and audit policy.

Introduction
Moderator: Molly K. Macauley, Senior Fellow, Resources for the Future

Panels:

Performance and Management Standards: Implications from Regulatory Implementation in the Cases of Heavy-Duty Diesel and Reducing Use of Toxics
Cary Coglianese, Edward B. Shils Professor of Law and professor of political science at the University of Pennsylvania; and founding director, Penn Program on Regulation

Smog Check: A Policymaking Odyssey
Doug Eisinger, director of Transportation Policy and Planning, Sonoma Technology Incorporated; and program manager, University of California-Davis/Caltrans Air Quality Project

Discovery and Disclosure: Examining the Impact of EPA's Audit Policy
Sarah Stafford, Verkuil Distinguished Associate Professor of Public Policy, Department of Economics, College of William and Mary

12:45 pm - 2:00 pm; A light buffet lunch will be available at 12:30 p.m.
Resources for the Future; 1616 P St. NW; Washington, DC 20036 www.RFF.org
Please RSVP by sending your contact details in an email to rffseminars@rff.org.

Resources For the Future Seminars are generally available as video webcasts shortly after the event. Check the website after May 8th.
http://www.rff.org/rff/Events/Legislation-and-Regulation-Arent-Enough.cfm

As the debate over the design of a federal greenhouse gas cap-and-trade program unfolds, the distribution (or allocation) of emission allowances will be one of the most difficult issues to resolve. The distributional implications of allocation decisions have long been appreciated. However, various proposals in Congress have made it increasingly clear that these decisions also could have a profound effect on how emissions are reduced under a cap-and-trade program, and could thereby have a substantial effect on the program’s societal cost.

This paper describes an important exception to the conventional wisdom that allocation decisions do not affect a cap-and-trade program’s societal cost. While this wisdom holds for many types of allocations, it does not apply to conditional allocations in which the number of allowances that a firm receives is conditioned on the firm’s future operational or investment decisions.

To demonstrate this point, this paper examines an allocation provision in the draft of the Lieberman-Warner Climate Security Act of 2008 that was reported out of the Senate Environment and Public Works Committee in December 2007 (the Lieberman-Warner bill). This provision, Section 3902, would distribute allowances to new fossil-fuel-fired power plants on the basis of their future output. In so doing, it would dramatically reduce, and in certain cases reverse, some of the most important emission reduction incentives that a cap-and-trade program would create.

Section 3902’s new entrant provision would counteract the incentive that a cap-and-trade program otherwise would create for firms to shift some investments in new electric generating capacity toward non-emitting renewable or nuclear plants. The provision’s effects would be so significant that, for several years, the Lieberman-Warner bill’s cap-and-trade program would actually create incentives for firms to invest in low-emitting fossil-fuel-fired plants instead of non-emitting renewable or nuclear plants. Section 3902’s new entrant provision also would reduce the marginal cost of generation from new fossil-fuel-fired plants relative to existing plants. As a result of this provision, electricity generation from some existing plants would be economically displaced by generation from new plants even in cases where the new plants have higher emission rates and fuel costs.

An examination of Section 3902’s effects highlights the need to carefully analyze the incentives that any conditional allocation provisions would create, regardless of whether those provisions are designed with the intention of creating particular incentives, or are instead designed to achieve certain distributional objectives. Otherwise, there is a real risk that much of the emission reduction measures achieved under a cap-and-trade program will be driven by allocation decisions made in the halls of Congress, rather than by the market-based incentives that a cap-and-trade program is intended to create. Such an outcome would invariably increase the cost of reducing U.S. greenhouse gas emissions.

by Judson Jaffe
AEI Center for Regulatory and Market Studies www.reg-markets.org
Regulatory Analysis 08-02; April, 2008
http://www.reg-markets.org/admin/authorpdfs/page.php?id=1459

The "Reg-Markets Center" is officially the AEI Center for Regulatory and Market Studies. It was founded by Bob Hahn in 2008 as the successor to the AEI-Brookings Joint Center. A primary aim of the Reg-Markets Center is to gain a deeper understanding of how markets, laws and regulation contribute to economic well-being.

Recent efforts to endogenize technological change in climate policy models demonstrate the importance of accounting for the opportunity cost of climate R&D investments. Because the social returns to R&D investments are typically higher than the social returns to other types of investment, any new climate mitigation R&D that comes at the expense of other R&D investment may dampen the overall gains from induced technological change. Unfortunately, there has been little empirical work to guide modelers as to the potential magnitude of such crowding out effects. This paper is a first attempt to address this question. In it, Richard Newell and I consider the private opportunity costs of climate R&D, asking whether an increase in climate R&D represents new R&D spending, or whether some (or all) of the additional climate R&D comes at the expense of other R&D.

by David C. Popp, Syracuse University

Seminar will be held at the EPA West Building 1301 Constitution Avenue, NW, Washington, DC, corner of 14th Street Room 4144 at 2PM. If you are not an EPA employee and would like to attend, send an e-mail to PASURKA.CARL@EPA.GOV at least two business days prior to the seminar. A teleconference connection (only audio) can be established for these seminars.

Previous 2008 Climate Economics Seminars (Working papers and slides available on website)

April 15, 2008
The Shape of Things to Come: Why is Climate Sensitivity So Unpredictable (and Who Cares Anyway)?
Gerard Roe (University of Washington)

Underlying all the benefit estimates of global climate change control are the climate's sensitivity to GHG increases; this presentation will explore what is currently known about this critical factor.

What kind of information from the climate science community is the most useful for policy makers, and which uncertainties matter most? Constraining climate sensitivity - the long-term increase in global mean temperature expected from the doubling of atmospheric carbon dioxide - has been one of the main benchmark goals of climate science. I will review the various disagreements over what future progress might be anticipated, as well as the debate about the extent to which reducing climate sensitivity even matters for any practical decisions on climate policy.

Uncertainties in projections of future climate change have not lessened substantially in past decades. Both models and observations yield broad probability distributions for climate sensitivity, with small but finite probabilities of very large increases. We show that the shape of these probability distributions is an inevitable and general consequence of the nature of the climate system. Further, we show that the breadth of the distribution and, in particular, the probability of large temperature increases are relatively insensitive to decreases in uncertainties associated with the underlying climate processes.

March 5, 2008
Incorporating Price Effects into Lifecycle Analysis
Mark Delucchi (Institute of Transportation Studies, U.C. Davis)

Professor Delucchi's talk (slides available on website) argued that no existing models of lifecycle carbon dioxide-equivalent greenhouse-gas (LC-CO2E-GHG) emissions from transportation fuels account for the interaction of policy, the production of new fuels, prices, production and consumption, and finally GHG emissions. In the real world, the production of biomass and biofuels and the substitution of biofuels for petroleum will affect the prices of a wide range of commodities, from gasoline and coal to fertilizer and steel. A change in the price of a commodity will affect the production and consumption of that commodity, of course, but also will affect the price and hence production and consumption of substitutes for and complements of the commodity, products derived from the commodity, and inputs used to make the commodity. So, for example, an increase in use of biofuels in the U. S. can lead to an increase in the use of home heating oil, via the effect of biofuel substitution for gasoline on oil prices. The increase in heating oil will be partly a substitution of oil for other sources of heat, and partly a net increase in heating. Both of these affect GHG emissions and climate change. A general equilibrium model of the world economy, including government sectors, is needed to trace out all of the relevant economic effects of a particular biofuel policy or assumed market outcome.

There are at least four different ways to combine life-cycle analysis (LCA) and general-equilibrium analysis: build a combined model from scratch; connect an existing LCA and an existing general equilibrium model in a meta-modeling framework; add technological detail, input-output linkages, and emission factors to an equilibrium model; or add price-production-GHG relationships to an LCA model. The focus of this talk will mainly be on the last alternative.

Working Paper related to seminar:
Delucchi, Mark A. (2005) Incorporating the Effect of Price Changes on CO2-Equivalent Emissions From Alternative-Fuel Lifecycles: Scoping the Issues. ITS-Davis.October 2005. Publication No. UCD-ITS-RR-05-19.
http://www.its.ucdavis.edu/publications/2005/UCD-ITS-RR-05-19.pdf

February 12, 2008
Estimating the Effect of Climate Change on Crop Yields and Farmland Values: The Importance of Extreme Temperatures
Wolfram Schlenker (Columbia University)

Prof. Schlenker summarized (slides available on website) a paper written with Anthony Fisher, Michael Hanemann, and Michael Roberts. The paper pairs a panel of yearly crop yields in the United States with a fine-scale weather data set that incorporates the whole distribution of temperatures between the minimum and maximum within each day and across all days in the growing season. Yields increase in temperature until about 29°C for corn, 30°C for soybeans, and 32°C for cotton, but temperatures above these thresholds become very harmful. The slope of the decline above the optimum is significantly steeper than the incline below it. This has strong implications for global warming which is predicted to increase the frequency of temperatures above the critical threshold that are harmful for yields. Area-weighted average yields given current growing regions are predicted to decrease by 31-43% under the slowest warming scenario and 67-79% under the most rapid warming scenario by the end of the century. There is limited potential for adaptation within a crop species as the same nonlinear and asymmetric relationship is found if we look only at the time series or cross-section, and the latter should pick up how farmers adapt to warmer climates.

A cross-sectional analysis of farmland values that accounts for an even wider set of adaptation possibilities gives comparable, robust impacts. Mean impacts range from a 27 decrease under the slow warming scenario to a 69 decrease under the fast warming scenario by the end of the century. The increased frequency of very hot temperatures is again responsible for the largest share of the predicted impacts.

January 22, 2007
Intergeneratonal Discounting
William Pizer (Resources for the Future)

Dr. Pizer discussed (slides available on website) the challenges of discounting benefits and costs of policies that occur over multiple generations. He is a recognized expert in the economics of energy and climate change. His remarks on intergenerational discounting focused on his 2003 analysis with Richard Newell of incorporating uncertainty about discount rates on estimates of the benefits of reducing greenhouse gases. This article, the abstract of which is provided below, was awarded the Petry Research Prize for the economics of Climate Change by the Association of Environmental and Resource Economists.

Article related to January 22 seminar:
Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?
Richard G. Newell and William A. Pizer
Journal of Environmental Economics and Management, Vol. 46, No. 1 (July, 2003), pp. 52-71.

Paper abstract:
The authors demonstrate that when the future path of the discount rate is uncertain and highly correlated, the distant future should be discounted at significantly lower rates than suggested by the current rate. They then use two centuries of US interest rate data to quantify this effect. Using both random walk and mean-reverting models, we compute the ‘‘certainty-equivalent rate’’ that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Under the random walk model they find that the certainty-equivalent rate falls continuously from 4% to 2% after 100 years, 1% after 200 years, and 0.5% after 300 years. At horizons of 400 years, the discounted value increases by a factor of over 40,000 relative to conventional discounting. Applied to climate change mitigation, they find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits.

U.S. Environmental Protection Agency www.EPA.gov
National Center for Environmental Eonomics (NCEE) http://yosemite.epa.gov/ee/epa/eed.nsf/webpages/homepage
http://yosemite.epa.gov/ee/epa/eed.nsf/Webpages/CurrentClimateSeminars.html