Banking on banking: does “when” flexibility mask the costs of stringent climate policy?
- 328 Downloads
Banking and borrowing emission allowances provide temporal flexibility in cap-and-trade systems, which can enhance the economic efficiency of environmental policy while adhering to the same cumulative emission budget. This paper investigates the role of temporal (“when”) flexibility from emission banking provisions under an economy-wide cap-and-trade policy in the USA. The current literature on meeting deep decarbonization targets almost exclusively assumes unlimited banking, which may bias policy recommendations and have important consequences for R&D prioritization and model development. Numerical experiments using the energy-economic model US Regional Energy, GHG, and Economy (US-REGEN) indicate that assumptions about banking materially impact cost and emission pathways in meeting long-term targets like 80% reductions by 2050 relative to 2005 levels. Given the stringency of long-run targets and convexity of marginal abatement costs, the cost-minimizing time path for mitigation with banking suggests that 2025 abatement should exceed the pledged level under the Paris Agreement (42% instead of 26–28%) to reduce future costs. Total policy costs are approximately 30% higher when banking is excluded; however, political economy barriers and uncertainty may limit the use of banking provisions despite their appeal on economic efficiency grounds. Banking on policy implementation with unlimited temporal flexibility may distort insights about the pace, extent, and economic impacts of future energy transitions associated with long-term abatement targets, especially for more stringent climate policies.
The authors wish to thank Geoffrey Blanford, Richard Richels, David Young, Marcus Alexander, and anonymous reviewers for their helpful suggestions. Any errors are solely the responsibility of the authors. The views expressed in this paper are those of the individual authors and do not necessarily reflect those of EPRI or its members.
- Bistline JE, Niemeyer V, Young D (2017) Understanding clean power plan choices in Kansas: options and uncertainties, EPRI technical report #3002009492. EPRI, Palo AltoGoogle Scholar
- Blanford GJ, Merrick JH, Bistline JE, Young D (2016) Simulating annual variation in load, wind, and solar by representative hour selection. Working paper available at http://www.epri.com/abstracts/Pages/ProductAbstract.aspx?ProductId=000000003002008653
- Bosetti V, Victor D (2011) Politics and economics of second-best regulation of greenhouse gases: the importance of regulatory credibility. Energy J 32(1)Google Scholar
- Electric Power Research Institute (2017) US-REGEN model documentation, EPRI technical update #3002010956. EPRI, Palo AltoGoogle Scholar
- Murray BC, Newell RG, Pizer WA (2009) Balancing cost and emissions certainty: an allowance reserve for cap-and-trade. Rev Environ Econ Policy 3(1):84–103. doi: 10.1093/reep/ren016
- National Research Council of the National Academies (2011) America’s climate choices. The National Academies Press, Washington, D.C. ISBN 13: 978-0-309-14585-5Google Scholar
- Nordhaus, W.D. (2002) “Modeling induced innovation in climate-change policy”. In: Grübler, Nakićenović, Nordhaus (ed) Technological Change and the Environment. 9:259–290Google Scholar
- Rose S, Petrusa J, Davis L (2013) PRISM 2.0: regional non-CO2 greenhouse gas abatement potential in the United States for 2010–2030, EPRI technical update #300201675. EPRI, Palo AltoGoogle Scholar
- U.S. Department of State (2016) Second biennial report of the United States of America: under the United Nations framework convention on climate change (Washington, D.C.)Google Scholar
- Young D, Niemeyer V, Bistline JE (2016) Understanding clean power plan choices in Michigan: options and uncertainties, EPRI technical report #3002009036. EPRI, Palo AltoGoogle Scholar