Academic journal article Chicago Fed Letter

Cost-Effective Carbon Restrictions-A Conference Summary

Academic journal article Chicago Fed Letter

Cost-Effective Carbon Restrictions-A Conference Summary

Article excerpt

On October 15, 2007, the Federal Reserve Bank of Chicago held a conference at its Detroit Branch to explore alternative ways of reducing carbon emissions. Conference participants analyzed market-based and technology-driven approaches to carbon emission reductions, as well as the costs and impacts of these options.

Last fall's Detroit meeting on reducing carbon emissions was timely as Congress is in the process of shaping carbon emission proposals and the media is highlighting carbon-related issues.1 After years of inactivity on this issue, the U.S. may finally be poised to regulate so-called greenhouse gases (GHGs). In April 2007, the Supreme Court ruled that the federal government has the authority to regulate GHG emissions, which most scientists believe accelerate the warming of the earth's atmosphere, causing disruptive and costly climate changes. Carbon dioxide (CO2) is the major source of such GHG emissions, making up 75 % to 80% of the total volume. The U.S. leads the world in the emission of carbon followed by China. In the near future, Congress is expected to consider bills to regulate GHGs. Meanwhile, state and local governments, as well as businesses and nonprofit organizations, are already acting to reduce GHGs or curb their growth.

The Midwest stake

According to William Testa, Federal Reserve Bank of Chicago, the Midwest states of Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, and Wisconsin have a keen interest in policies to mitigate carbon emissions. The Midwest produces more carbon per unit of output than the overall U.S. Moreover, the region's relative carbon intensity has been increasing. The Midwest's carbon emissions per unit of output were 17.8% above the nation's in 2001; they were 4.1% higher than the nation's in 1963. For this reason, the region could be affected unduly by costly approaches to carbon reduction.

Interestingly, it is not the Midwest economy's greater concentration in heavy industry that explains its greater carbon intensity-at least not directly. Figure 1 shows that in the Midwest, as in the nation overall, the electric power sector accounts for the largest share of carbon emissions-42.8% in the Midwest versus 38.4% for the nation in 2004.

Our electricity-related carbon emissions are higher than the nation's because midwestern power-producing facilities burn mostly coal, which is the most carbon-intensive among major fossil fuels. Power generation facilities in every Midwest state (save Illinois) burn coal to a greater degree than those of the nation as a whole-a 41% greater share as of May 2007. Illinois's lower carbon intensity derives from its use of nuclear facilities to generate electric power. Indiana and Ohio are especially dependent on coal to generate power.

The Midwest continues to specialize in motor vehicle production, and this is another sector that could potentially be affected by new carbon reduction policies. Midwest-domiciled automakers, especially the Detroit Three (Chrysler LLC, Ford Motor Co., and General Motors Corp.), have so far found it more difficult than other manufacturers to achieve corporate average fuel economy (CAFE) standards on their fleets of cars and light trucks.2

Sugandha Tuladhar, CRA International Inc., discussed how Michigan would be affected by various carbon restriction policies. He examined two potential policies: the Waxman Bill-labeled the stringent cap-and-trade policy-and the Bingaman Bill-labeled the moderate cap-and-trade policy because it includes a safety valve on the price of CO2. The Waxman Bill sets no price limits on CO2 and is therefore more stringent. The safety valve in the Bingaman Bill sets an initial ceiling price of CO2 at $10 per ton of emissions, and allows an increase in prices of 5% per annum in real terms. Both bills assume an initial allocation of allowances, availability of offsets, and use of alternative transportation fuels. The Waxman Bill has an emissions target of 40% below 2006 levels of emissions by 2030, while the Bingaman Bill aims to achieve a 15% reduction by 2030. …

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